Posted on Sun 07 September 2014

Reading Live on the Margin

After a recent recommendation I read [cached]Live on the Margin, a book about following your dreams while paying for it by trading. It's mostly an introduction to short term trading, but starts out with an introduction to slacker lifestyle.


The principle is simple: You want to follow your dreams now, not wait for retirement when you are old. You have a bit of money, so how do you make it last longer while you travel the world? First step, figuring out the burn rate: How much money you actually need to spend to do so. Try to get it as low as possible to make your money last longer.

Second, what if you could actually make some money while traveling, no matter where you are? Enter trading. While long term investing is safe it only works if you have a lot of capital since the returns are quite low, so you have to take a more active approach and take more risk.

The authors introduce swing and fade trading to solve this, for both holding stocks only for a few days. They recommend picking a few stocks you have personal experience with - say because you use their products every time - so that you have a better chance of judging their actual value, then watching for opportunities in those stocks.

Fade Trading

They take a very technical approach to trading, their fundamental approach to fade trading (buy on a dip in stock price and sell when the stock rallies) is as follows: - use [cached]RSI (ratio of higher to lower closes) to identify when a stock is oversold (RSI < 30) - look for unexpected dips where the stock price touches the lower 3rd standard deviation [cached]Bollinger Band (these are simple the std deviations for the 20-day moving average) and there is no fundamental reason for it in the news - wait for a rally to the old price (and higher) to be confirmed by the next trading period (usually 1h intervals) closing between the 1st and 2nd BB - if all of the above have come to pass, buy the stock and use a stop-loss order at the low of the move to protect yourself - sell the first half when it moves up to reach the 20-day SMA and move up your stop-loss to the entry point of the trade - sell the second half when the price touches the upper 2nd bollinger band If the correction doesn't come quickly (2-3 days) it won't come, cut your loses and sell any position you are holding!

Over the next chapters they explain trading with Options instead of naked stocks to increase your leverage and limit your risk and describe a few advanced trading techniques (call spreads, strangles, etc). They finish with a chapter on investor psychology, the gist being: Try to be as rational as possible, awareness of your own [cached]cognitive biases will help you immensely. Most importantly don't get attached to your positions and make sure to decide when to cut your losses before you buy a stock.

My Opinion

All in all a very interesting book, the first part about slacking I definitely agree with. I'm not so sure about the trading part - yes, humans are very good at recognizing patters, but we are also very good at recognizing patterns that are not actually there. A lot of the technical trading, bollinger bands and all, seems to be mostly trying to predict future from past performance, something always fraught with peril in domains as random as the stock market (see [cached]Fooled by Randomness). In any case it provides a good introduction to the fundamentals of trading and explains more complicated derivatives like put options.

Tags: books, economics

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