Which book | stockbee

1/11/2008

Which book

One of the most often asked question by new traders is which book do I recommend. One of the problem new traders have is even if you find the best book to make money, you may not realize it at your current stage of market understanding. There has to be a sufficient market understanding before you can choose and freeze on a style of investing. The task is not made easy as books on investing offer range of advise which seems believable and plausible.

Most people also start their journey in to profitable trading from the wrong end. They start with charts and indicators. Charts and indicators are about tactics not strategy. If you have a basic proven strategy to make money based on what works in market then you use tactics to improve on it or time buy, sell decision. If you start your journey to trading profitability from the technical analysis endpoint you make it harder to reach your destination.

On a medium and longer term time horizon there are only three basic strategies which work growth investing, value investing and contrarian investing. In short to medium term investing (1 to 60 days) momentum based strategies work best. For a medium duration ( few weeks to few months) traders looking for big returns growth and contrarian strategies do better than value based strategies. In the long run (2-5 years plus holding periods) value based strategies are best. One of the great benefits of value investing is it is extremely tax efficient.

If you understand this basic framework, you will stop wasting time and effort on things with low probability of success. Once you get convinced that these are the only three basic apprpach you will use tactics like technical analysis, charts patterns to make these strategies work. Not the other way round. You will also not try and straddle styles.

If you are trying to grow a small account aggressively , you have not much choice but to choose growth/ momentum based strategies. So once you make a choice of fundamentally trading a growth or momentum strategy you look for a the best approach to make it profitable. If that is your chosen strategy then I can suggest just two books for you to make money.

24 Essential Lessons for Investment Success by William O'Neil
Out of all the books by O'Neil, this is the best and very practical. Many people try and find little success with CANSLIM and there is no shortage of people claiming it does not work. Which is like saying growth investing does not work.

One of the reason for that is CANSLIM approach is like the Russian matryoshka dolls. There are several rules within rules and most beginners do not understand the intricate set of rules and more importantly logic behind each of those small nuances involved. For that you have to read the book several times and try and understand these intricacies.

The American Association of Individual Investors has screens based on various methods. You will find CANSLIM performs amongst top strategies over long period of time. (even though their interpretation of CANSLIM is slightly faulty)

The other thing is the rules in CANSLIM are what worked for Mr O'Neil. So it has many of the things which are person specific. Your challenge is to understand the method and customise it for yourself and make it work for you. None of the rules in it are absolute. You have to take that as one possible template to trade and develop your own approach.
What is good about the book is it gives you a ready made template on how to trade growth stocks.

The Hedge fund edge by Mark Boucher

This is another book which offers you a complete template for trading growth stocks. It goes in to significant details about methodology. It gives a set of detailed rules for trading growth investing on both longer and shorter time frames. Again it gives you a complete ready to use trading template to integrate various aspects like overall economy, financial trends, technical trends , chart patterns etc in to one integrated approach . It basically builds on CANSLIM kind of methodology and finds a different way to reach profitability goal.
The trick again is to use the template and develop your own set of workable method.

Same thing applies to anyone trying to trade IBD 200, DT, EP or any other growth/ momentum method. You have to use my set of rules as just a template and develop your own approach. What worked for me may not work as it is for you.

5 comments:

baldmountain said...

I think everyone has their favorite trading book. For a long time mine has been: "Technical Analysis for the Trading Professional" by Constance Brown. It's pretty technical, and she has been criticized for holding back information in the book, but there is enough there so that with some work you can figure it out.

Mike said...

Pradeep, I want to bring your attention to TITN. Terrific fundanentals and went up today 32% on great earnings.

I was wondering if you would chase something like this now or wait and hope it comes back down. What is your strategy when a stock has a great earnings causing it to really fly on such news? if you ususally wait to buy after such a pop, is there some % retracement that you usually have in mind?

appreciate your thoughts

Pradeep Bonde said...

Not in this market unless you get in on day of earnings at open or before market open.

Mike said...

Pradeep, on your blog before you noted the following (read below your post) on how to trade earnings. I am confused as you appear to contradict yourself by saying TITN (up 30% on earnings announcement Friday, up about 500% in volume; it was not rallying prior to this earnings) should not be chased now due to market conditions but does not such huge pop from earnings warrant one buying more now as it could go much higher (given what you wrote below in your blog)?

Your blog noted the following re trading earnings (including when market is in bad condition). Thanks for your clarification:

Breakout: An earnings surprise on stock which has not rallied significantly will lead to breakout next day. Most of the time I will enter in the morning and add to position later if the volume climbs above average volume. Many times such stocks will gap up 5 to 300% on day of earnings and still make further moves of 20 to several hundred percent in next 3 to 12 months. I look to capture such moves. Most of these breakouts will have minor pullback at best and just go up for 2 to 6 weeks before having a reaction. So if you don't enter on the earnings day you will be just a observer.


How many opportunities: Even in bear markets you will find opportunities using this strategy. If you set up your system properly, you should find 20-25 opportunities like this in every earnings season. When market expectations are low, or market has had several months of correction, you will find 50 to 100 opportunities in an earning season.

Pradeep Bonde said...

The entire strategy of buying earnings is based on assumption you buy at open or pre market on earnings. If you are not in the stock on day of earnings breakout, it does not chase. So was TITN a buy on earnings , yes, provided you bought it at open or pre market.
If you read my earnings post , they clearly say one of the reason, I buy earnings which happened only after market close is because of that reason.