Diary of a Professional Commodity Trader: Lessons from 21 Weeks of Real Trading - Hardcover

Brandt, Peter L.

Hardcover

ISBN 10: 0470521457 ISBN 13: 9780470521458

Publisher: Wiley, 2011

Synopsis

"We've all read about the high rollers who go boom and bust, but this book is different. Packed with straightforward prose, practical knowledge and honest counsel, Diary of a Professional Commodity Trader delivers far more than the title promises. Peter Brandt methodically explains what no one has before: how a dedicated individual can trade for a living. If that is your destination, this is your ticket. "
- Robert Prechter, Elliott Wave International

"This book is insanely great. The refreshing clarity this book brings to the table is brilliant. I think this is an amazing, excellent book, one that could help a whole new generation of traders."
-Jack Sparrow, MercenaryTrader.com

"This is the most honest trading book of the last decade. Peter tracks recent trials and tribulations on his path to success dating back to the 1980s. He shares numerous insights into the emotional and technical challenges of trading, right down to his track record over the years. Peter candidly documents a recent trading period. His ultimate success reflects the importance of staying true to a process while still allowing flexibility to modify rules as market conditions change. Anyone desiring longevity in the business really needs to read this book."
- Linda Raschke, trader, President of LBRGroup, Inc., and co-author of the best selling book, Street Smarts-High Probability Short Term Trading Strategies.

"Almost every book about trading for a living is either fraudulent or boring (or both). This book is neither. Not only is it a good read for anyone seriously wanting to know what trading is really like, it is also very interesting, mostly due to its real-time, diary format. As someone who has done myself what he describes, I highly recommend it."
- Robert Zellner, Independent trader, former director of Chicago Mercantile Exchange and former CEO, Citicorp Futures Corp

"Trading is not what most people think it is, as you will find out in this real life experience from Peter Brandt, a well-seasoned trader. You will learn what he looks for in trades, what tells him to hop aboard and how to get out. Well worth reading!"
- Larry Williams, author and trader, www.ireallytrade.com

"Anyone interested in trading---and not just commodity trading---is going to cherish this book. In a world that tends to become intoxicated with "magic formulas" Peter Brandt provides the necessary sobering balance: the "secret," if there is any such thing, is in recognizing your basic human weaknesses and strengths and working with them, in the context of some relatively simple rules that are effective if you are persistent. The light that Brandt shines on the inner monologue of trading is of incalculable value. There are many ways to extract profits from the markets, but none of them matter if you can't control yourself---for that we need self recognition and self analysis: Brandt's detailed diary is like a great novel, revealing the inner life and character of a trader, revealing the kinds of inner understanding we all need if we hope to navigate an ultimately unknowable future. Traders would do well to try to become, as individuals, more like Peter Brandt."
- Lowell Miller President & CIO Miller/Howard Investments, Inc., author of The Single Best Investment

"Mr. Brandt takes the reader far beyond mere descriptions of classical trading patterns. His book offers insights, observations and practical information gleaned from over two decades of consistently successful trading performance. A must read for anyone wishing to enter the world of risk."
--Daniel Chesler, CMT, President, Chesler Analytics LLC

"Peter provides a fascinating real-world look at commodity trading. This book is a must read for anyone who contemplates being an effective trader. His exquisite use of charting techniques is spot on. And, of course we could not agree with him more regarding the importance of charts in the trader's perspective."
- Eero Pikat, President, Barchart.com, Inc.

"A great book for advanced and beginning traders! The professional trading insights that Peter shares can help traders speed up the progress of their own trading by light years."
- Glen Larson, President, TradeNavigator.com

A top trader takes you through the markets and revels how he succeeded
In Diary of a Professional Commodity Trader, Peter Brandt provides a play-by-play diary of his 2009 trading, offering an inside look at the difficult process and what it takes to excel at such a demanding endeavor.

A long-time trader, Brandt clearly explains his thinking as he searches for the right opportunities and executes trades for 21 weeks. And by utilizing a diary format, he reveals exactly what it's like to trade, communicating the uncertainty that surrounds every trade and the discipline required to make tough decisions in the face of losing money. Along the way, Brandt touches upon his philosophy on speculation, market analysis, trade identification and selection, risk management, and much more.

• Fully discloses the methods and rules the author has used to trade so successfully for so many years
• Each trade include charts, an analysis of the trade, and a play-by-play account of how the trade unfolds
• Brandt examines all his trades and keeps a running account of his profits and losses

Unlike most trading books, which tell people how to trade, this reliable guide will reveal the reality of this discipline and provide you with a firm understanding of what it takes to make it work.

Amazon Exclusive: Q&A with author Peter Brandt

Author Peter L. Brandt

To what do you attribute your long-term success as a trader?
The irony is that in real time, I never fully feel like I am trading successfully because I am always aiming for performance that is higher than I am attaining. I am generally my own worst critic and constantly set the bar higher than my last jump. The result is that it is difficult for me to crow about the “successes” of my trading career.

But, to the degree I have been consistently successful through the years, I believe it is due to three factors. First, I am obsessed with risk management. I spend more time and mental energy focusing on risk control protocols than on anything else. Managing losses and losing periods is my number one priority. If I can just tread water during the inevitable tough periods, sooner or later I will find myself caught in a favorable tide.

Second, my trading approach is overly simple by design. The result is that I know with as much certainty as is possible with a discretionary approach when there is a trade entry in my program. It does not mean that the trade will be profitable – only that the trade is there.

Third, I have tried to engage market speculation systematically, breaking down the process of trading into every conceivable component. What flows from this is an understanding of what components of trading are controllable and measurable and what components are uncontrollable. By the way, whether the next trade or series of trades will be profitable is not a controllable factor. Once a trader learns this -- it is then possible to remove ego from the equation.

Why do you think the majority of traders struggle?
It is not just the majority of traders who struggle – the reality is that ALL traders struggle, both professional traders and novice traders – but the struggles for each group are of a different variety. The struggles (perhaps the word “challenges” is a better description) of the professional trader are with minimizing asset volatility, handing the mental dimensions of drawdown periods and doing what he or she knows he must do to be successful (the upstream swim against human nature).

Novice traders struggle, at least for a couple of years, in the same way a dog struggles to catch its own tail – always chasing it, never catching it! The struggle comes from playing a game without knowing the rules.

More specifically, I think that most of the problems faced by novice traders originate from three sources. First, novice traders place a priority on finding winning trades rather than on managing losing trades. The difference between the two things is enormous. Novice traders bring to the markets an ego urge to be right on every trade. This often leads them on a never-ending search for a magic combination of technical indicators in order to be right 80% of the time.

Second, novice traders employ leverage that is dooming. Whereas professional traders seldom risk more than a few percent of capital on each trading event, novice traders may risk five, 10 or even 20 percent of trading capital on a trade.

Third, most novice traders have not determined exactly what a trading event is for them. If the practical definition and components of a trade are not clearly understood, then it is impossible to develop patience, discipline, trading processes, performance metrics and feedback loops. The exact process a trader employs can evolve and change over time, but there must be a definable starting point.

Unfortunately, the majority of novice traders run out of trading capital or hope before they figure out the rules of the game.

Why do you prefer pure price-based analysis versus technical indicators?
I need to give ample credit to those traders who successfully use technical indicators. I know and respect a number of traders who make heavy use of indicators.

But for me, I have no time for technical indicators for a number of reasons. Mainly, my problem is that technical indicators are nothing more than a derivative of price. When I can study price directly on a bar chart – and it is price that I must trade – then why would I want to study a derivative of price. For example, I trade gold – there is no market for trading the stochastic measures or relative strength index of gold.

Second, I am a minimalist. I want my trading plan to be a simple as possible. Indicators would have a way of complicating my trading plan.

Third – and not finally, because I could go on and on about this subject – reliance on technical indicators can be counter productive. For example, the most profitable bull markets are those that become and remain obscenely overbought. So, the traditional use of RSI and stochastics can predispose a trader to the wrong side of a massive price trend.

Again, I honor those traders who make money with technical indicators, but as a general rule I think the “indicator industry” is a sham.

Do you have strict rules for taking losses and profits?
Absolutely! Positively! Yes! Without Question! No doubt about it! At the time I enter a trade I know precisely what price (or set-up) will result in the trade being closed, for a profit or for a loss. To put a trade on without knowing these things is simply insane.

What advice would you give aspiring traders?
My initial advice would be to tell them to forget the idea. I would recommend against becoming a trader. Trading is hard work. I would suggest that they give their capital to a professional trader with a history of very small drawdowns.

But if they simply could not be dissuaded, then my advice would start with the following items:
1. It takes a minimum of two years to learn enough to put real skin into the game. Trade a simulated account in the meantime.
2. Don’t take specific trading advice from anyone under any circumstance.
3. Don’t take general advice on trading concepts or themes from anyone who cannot produce an actual track record of successful trading.
4. The overwhelming majority of books and seminars on trading are a deterrent to success trading.
5. No two successful traders trade the same way – and every successful trader has developed a style unique to his or her own personality, risk tolerance and skill sets.
6. The markets are a great teacher. Be prepared to confront character traits you didn’t know you had.
7. Your opponent to successful trading is not the markets nor other traders, but yourself.
8. Understand that there is no magic bullet – or holy grail. Successful trading is a result of hard work.
9. Have realistic expectations. Traders who think they can turn $10,000 into a million will likely fail. Most really successful traders average around 30% annually on proprietary funds.
10. If, after a year or two, you find that you are not enjoying the voyage, jump ship immediately.

About this title

About the Author

PETER L. BRANDT has been a full time professional commodity and foreign exchange trader for over thirty years. He has worked as a broker to large industrial clients, traded for his own account, and was one of the early pioneers in the commodity hedge fund arena. Along the way, Brandt published a highly regarded newsletter called The Factor, and also collaborated with Bruce Babcock Jr. to publish the highly acclaimed book, Trading Commodity Futures with Classical Chart Patterns. Primarily devoted to trading proprietary capital in commodity and forex markets, Brandt has achieved a lofty average annual rate of return of 68 percent during his career.
The author can be reached at plb.factor@gmail.com

From the Back Cover

Becoming a consistently successful trader is a tough job. It's a craft that requires extensive knowledge of the markets―involving a whole lot more than just finding the next great trading opportunity―and a process that addresses many aspects of both the market's, and your own, behavior.

Nobody understands this better than author and longtime trader Peter Brandt. During his thirty-plus years in this field, he has made every mistake possible and learned some major lessons along the way. He also developed a set of guidelines, rules, and practices―which he refers to as the Factor Trading Plan―that direct his trading decisions.

Now, in Diary of a Professional Commodity Trader, Brandt shares the experiences he has gained trading price charts over the years, and through a real-time journal―which spans an arbitrary time frame of 21 weeks (from December 2009 to April 2010)―skillfully shows how he goes about the difficult endeavor of trading the commodity and forex markets using classical charting principles.

Divided into four comprehensive parts, this personal and unique guide clearly reveals the uncertainty and emotions that surround trading and details an effective approach towards speculation that will give you an edge. Page by page, it:

• Offers a real-time, play-by-play account of Brandt's trading activities―the good, the bad, and the ugly―during his 21-week journey, and provides valuable insights into market analysis, trade identification and selection, and risk management
• Highlights the basic building blocks of the author's Factor Trading Plan and examines how his plan continues to evolve with the markets
• Emphasizes the central role risk management plays in market speculation―an even more important role than market analysis or trade selection
• Reveals trading as a fundamental battle to overcome your basic human emotions
• And much more

Unlike most books on this subject, which try to tell you how to trade, Diary of a Professional Commodity Trader offers a rare look at the realities of this discipline and provides you with a firm understanding of what it really takes to improve your performance over the long term.

From the Inside Flap

Praise for Diary of a Professional Commodity Trader

We've all read about the high rollers who go boom and bust, but this book is different. With straightforward prose, practical knowledge and honest counsel, Peter Brandt methodically explains what no one has before: how a dedicated individual can trade for a living. If that is your destination, this is your ticket.
--Robert Prechter, Elliott Wave International

This book is insanely great. The refreshing clarity this book brings to the table is brilliant. I think this is an amazing, excellent book, one that could help a whole new generation of traders.
--Jack Sparrow, MercenaryTrader.com

This is the most honest trading book of the last decade. Peter tracks recent trials and tribulations on his path to success dating back to the 1980s. He shares numerous insights into the emotional and technical challenges of trading, right down to his track record over the years. His ultimate success reflects the importance of staying true to a process while still allowing flexibility to modify rules as market conditions change. Anyone desiring longevity in the business really needs to read this book.
--Linda Raschke, trader, President of LBRGroup, Inc., and coauthor of the bestselling book, Street Smarts: High Probability Short Term Trading Strategies

Almost every book about trading for a living is either fraudulent or boring (or both). This book is neither. Not only is it a good read for anyone seriously wanting to know what trading is really like, it is also very interesting, mostly due to its real-time, diary format. As someone who has done myself what he describes, I highly recommend it.
--Robert Zellner, independent trader, former director of the Chicago Mercantile Exchange and former CEO, Citicorp Futures Corp.

Trading is not what most people think it is, as you will find out in this real-life experience from Peter Brandt, a well-seasoned trader. You will learn what he looks for in trades, what tells him to hop aboard and how to get out. Well worth reading!
--Larry Williams, author and trader, www.ireallytrade.com

Anyone interested in trading--and not just commodity trading--is going to cherish this book. Brandt's detailed diary is like a great novel, revealing the inner life and character of a trader, revealing the kinds of inner understanding we all need if we hope to navigate an ultimately unknowable future.?Traders would do well to try to become, as individuals, more like Peter Brandt.
--Lowell Miller, President and CIO, Miller/Howard Investments, Inc., author of The Single Best Investment

Insights, observations, and practical information gleaned from over two decades of consistently successful trading performance. A must-read for anyone wishing to enter the world of risk.
--Daniel Chesler, CMT, President, Chesler Analytics LLC

This book is a must-read for anyone who contemplates being an effective trader.? His exquisite use of charting techniques is spot on.
--Eero Pikat, President, Barchart.com Inc.

A great book for advanced and beginning traders! The professional trading insights that Peter shares can help traders speed up the progress of their own trading by light years.
--Glen Larson, President, TradeNavigator.com

Excerpt. © Reprinted by permission. All rights reserved.

Diary of a Professional Commodity Trader

Lessons from 21 Weeks of Real TradingBy Peter L. Brandt

John Wiley & Sons

Copyright © 2011 John Wiley & Sons, Ltd
All right reserved.
ISBN: 978-0-470-52145-8

Chapter One

The History and Theory of Classical Charting Principles

Speculators have used charts to make trading decisions for centuries. It is generally believed that candlestick charts in their earliest form were developed in the 18th century by a legendary Japanese rice trader named Homma Munehisa. Munehisa realized that there was a link between the price of rice and its supply-and-demand factors, but that market price was also driven by the emotions of market participants. The principles behind candlestick charts provided Munehisa a method to graphically view the prices over a period of time and gain an edge over his trading competitors. An edge is all that a speculator can ever expect.

In the United States, Charles Dow began charting stock market prices around 1900. The first exhaustive work on charting was published by Richard W. Schabacker (then the editor of Fortune magazine) in 1933. Under the title Technical Analysis and Stock Market Profits, Schabacker provided an organized and systematic framework for analyzing and understanding a field now known as "classical charting principles."

Schabacker believed that the stock market was highly manipulated by large operators who tended to act in concert. He observed that the activities of these large players could be detected on price charts showing the opening, high, low, and closing price for each trading session.

He further observed that prices, when plotted on a graph, were either in periods of consolidation (representing accumulation or distribution by the large operators) or sustained trends. These trends were known as periods of price "markup" or "markdown." Finally, Schabacker noted that periods of consolidation (as well as some trending periods) tended to display certain geometric formations—and that, depending on the geometry, the direction and magnitude of a future price trend could be predicted.

Schabacker then identified the form and nature of a number of these geometric patterns. These included such traditional patterns as:

* Head and shoulders (H&S) tops and bottoms

* Trend lines

* Channels

* Rounding patterns

* Double bottoms and tops

* Horns

* Symmetrical triangles

* Broadening triangles

* Right-angled triangles

* Diamonds

* Rectangles

The pioneering work of Schabacker was picked up in 1943 by Robert Edwards and John Magee in the book Technical Analysis of Stock Trends, commonly referred to as the bible of charting.

Edwards and Magee took Schabacker's understanding to the next level by specifying a number of trading rules and guidelines connected with the various chart patterns. Edwards and Magee made the attempt to systematize charting into trading protocols. Technical Analysis of Stock Trends has remained the standard reference book for more than three generations of market speculators who use charts in some manner for their trading decisions.

My Perspective of the Principles

As a trader, classical charting principles represent my primary means for making decisions. I maintained all of my charts by hand in the days before sophisticated computer programs and trading platforms. Now there are numerous computerized and online charting packages and trading platforms.

I continue to rely solely on high/low/close bar charts in daily, weekly, and monthly form. I pay no attention to the myriad of numerous indicators have been developed in the past 20 years, such as stochastics, moving averages, relative strength indicators (RSIs), Bollinger bands, and the like (although I do use the average directional movement index [ADX] to a very limited degree).

It is not that these methods of statistical manipulation are not useful for trading. But the various indicators are just that—statistical manipulations and derivatives of price. My attitude is that I trade price, so why not study price directly? I can't trade the RSI or moving average of soybeans. I can only trade soybeans.

I am not a critic of those who have successfully incorporated price derivatives into their trading algorithms. I am not a critic of anyone who can consistently outsmart the markets. But for me, price is what I trade, so price is what I study.

Three Limitations of the Principles

Three important limitations of classical charting should be understood by market operators who use charts or are considering the use of charts.

First, it is very easy to look at a chart and call the markets in hindsight. I have seen unending examples in books and promotional materials of charts marked up retroactively to make magnificent trends look like "easy money." Unfortunately, in order to emphasize some charting principles, this book may commit this very sin.

It is the dominant and gargantuan task of a chart trader to actually trade a market in real time in a manner even closely resembling how a market would have been traded in look-back mode. Significant and clear chart patterns that produce profitable trends are most often comprised of many small patterns that failed to materialize. Charts are organic entities that evolve over time, fooling traders repeatedly before yielding their real fruit.

Second, charts are trading tools and not useful for price forecasting. Over the years, I have been extremely amused by "chart book economists" who are constantly reinterpreting the fundamentals based on the latest twists and turns of chart patterns.

There is a huge difference between being short a market because of a chart pattern and being "bearish" on the fundamentals of a market because of the same chart pattern. Charts represent a trading tool—period. Any other use of charts will only lead to disappointment and often net trading losses. The idea that chart patterns are reliably predictive of future price behavior is foolhardy at best. Charts are a trading tool, not a forecasting tool.

As a trader who has used charts for market operations for 30 years, I believe I am permitted to make this statement. I am an advocate for charting—not a critic. But I am a critic of using charts in the wrong way. In my opinion, it is wrong-headed to use charts for making price forecasts, and especially for making economic predictions.

You may know trading advisory services that use charts to make predictions on the economy. They let you know when they are right. They make excuses or become silent when they are wrong. I think it is a much more honest position to just admit that I never know where any given market is going, whether or not the chart seems to be telling a story.

The third limitation is that emotions cannot be removed from the trading equation. It is impossible to study and interpret price charts separate from the emotional pull of fear, price, hope, and greed. So it is foolish to pretend that charts provide an unbiased means to understand price behavior. The bias of a trader is built into his chart analysis.

Summary

Classical charting principles provide a filter to understand market behavior and a framework for building an entire approach to market speculation. In the chapters to follow, I will display the construction of a comprehensive approach to market speculation using these charting principles—an approach I call the Factor Trading Plan. I will then proceed to apply the Factor Trading Plan, using classical charting principles as the foundation, to actual commodity and forex speculation for a period of about 21 weeks.

(Continues...)

Excerpted from Diary of a Professional Commodity Traderby Peter L. Brandt Copyright © 2011 by John Wiley & Sons, Ltd. Excerpted by permission of John Wiley & Sons. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Edition details

• Publisher: Wiley
• Publication date: 2011
• ISBN 10: 0470521457
• ISBN 13: 9780470521458
• Binding: Hardcover
• Language: English
• Edition number: 1
• Number of pages: 304