The Essentials of Trading is no $200, 600-page B-School text, but its writing style and format – yes, there’s homework – probably make this book a better fit for aspiring traders that thrive in a classroom structure: in this case, a self-directed course that tucks into a gym bag or bedside table drawer.
Author John Forman packs into these nine chapters the best of his students’ struggles and breakthroughs on their way to profit. But lest anyone feel a pre-finals cold sweat coming on, it’s important to stress the efficacy of this approach. After all, Essentials is meant for novice, do-it-yourself investors willing to put in the time to learn the ins and outs of more complex markets. Forman gets the reader quickly from theory to practice with his emphasis on journal keeping and his dozen or so assignments throughout the book, including calculating win/loss ratios and following detailed steps for several dry runs on a mock trading platform.
The theory portion of the book centers on psychology and risk-taking, understanding the mechanics of markets and the anatomy of a trade, plus determining what factors influence prices, and reading and analyzing price patterns.
Those who learn best by example can rest assured that the author’s experience isn’t exclusively academic, and neither is his book. Forman has readers begin with elementary steps like recording market reaction to major economic indicators, court decisions or merger announcements. Readers soon advance to building their own trading strategy: how much can they risk; when and for how long will they trade; what are their expectations? They’re next directed to develop a risk management plan: tackling stop-loss trades, hedging and calculating value at risk (VaR), which is loosely defined as a portfolio’s stress limit over a given time frame. Forman helps readers make sense of fundamental analysis, technical analysis and the blend of both in quantitative analysis.
In the final chapters, those soon to graduate to live trading develop and test at least three systems to find the best match to their strategy. In simpler terms, students are setting up a series of pre-determined rules: go long if/when …; exit long if/when …, etc. Determining trade size and measuring performance round out the final pages, while the appendixes offer sample systems of varying complexity.
Forman seems to hinge new traders’ success on their dedication to journaling and review about as much as he emphasizes practice trading. That’s well-meaning advice likely to resonate with anyone who’s ever tackled a new pursuit steeped in theory. At the same time, some readers, particularly those kept busy with their day job or a family, may feel overwhelmed to keep the kind of thorough diary entries that the author...