Several months ago I reviewed Nick’s book “Successful Stock Trading” in my blog. Meanwhile, I’ve been following his work online and listening to him on podcasts. He is from Australia and has 35 years of experience, he used to work at the trading floor of the Sydney Futures Exchange. He has always been a systematic trader and even though he started out trading commodity futures, Nick moved into equities few years later. “Unholy Grails” was published in 2012 and is about Nick’s way of thinking in the markets.
The book starts with an introduction to momentum type of investing and the main ideas behind it. The author makes a good point why it pays to consider going into cash in market downturns and how to participate in uptrends. This leads to the basic idea of positive expectancy, describing the importance of finding balance between win rate and average win/loss ratio. Nick does a good job explaining readers what to expect from trading the markets. I think most people have unrealistic expectations at first when starting out.
Next, Nick goes through the concept of portfolio construction with robustness and simplicity. Position sizing and risk management are the key elements here. The universe of stocks being traded will decide the volatility and drawdown depth. He introduces Monte Carlo analysis to check how the strategy would have done in different scenarios. The author explains some basic performance measures he likes to use: CAGR, MaxDD, Equity Curve, Market Exposure, Win/Loss Ratio, Number of Transactions, MAR Ratio, Time Window Analysis, Monthly Profit Table, Annual Standard Deviation, Sharpe Ratio, Scatter Plot.
The following paragraphs teach about different biases when testing a trading strategy, for example survivorship bias which could be one of the most important ones to look at. Another great tip is to use adjusted price data, so dividends or splits don’t cause price gaps that technically wouldn’t have an impact on trading signals. Commissions, slippage and liquidity are also something to consider in a backtest. Of course, necessary details about these things are further discussed in the book.
Section 2 has examples of trading strategies. The main goal here is to preserve capital in times of market stress but beat “buy and hold” in the long term, without discretion and fundamental analysis. Nick’s examples of strategies for breakouts and crossovers are long-only trend following systems which he measures with the same basic performance ratios discussed above. He shares tips on how to improve performance with additional filters and also runs Monte Carlo analysis on these strategies to show how different outcomes could have played out. The tests show well how one needs to choose a balance between return and maximum drawdown – the higher the returns, the deeper the drawdowns.
Section 3 includes real life examples of momentum investing at the time of writing this book, and how it had performed during 2006 – 2011 compared to the benchmark. This part ends with interviews with four professional momentum traders to give more proof to the concept.
Next comes section 4 about qualitative traits one needs to become a successful investor or trader. There is so much to learn, but action needs to be taken to see results. Experience is necessary and it takes time to develop. This part is basically about the psychology of a trader – something that many traders emphasize a lot and others not so much. I think that’s a very important part to read and think about. The book ends with common misconceptions.
I like Nick’s work and I think it’s a good book. However, bear in mind that I don’t recommend taking any readily available trading system from a public source to trade right off the bat. The strategies featured are quite basic and popular. I suggest to read this book if one needs ideas for momentum and trend following strategies. So the content should be used to generate and test one’s very own systems that are unique and understandable. For this purpose, it’s a great source of knowledge.Share this post