Book Review: Alpha Trader by Brent Donnelly
Book Bit: Bits and pieces of books, reviews relevant to the age of Artificial Intelligence
Link to Book on Author’s Website
Overall Summary
"Alpha Trader" by Brent Donnelly is a thoughtful and meticulous dissection of the realities of trading. Written by a seasoned professional with over two decades of experience in the field, the book is both a reality check and a handbook for those interested in the complexities of trading.
The author shies away from promising outsized returns or secret formulae to beat the market, opting instead to educate readers on the rigorous discipline, informed strategy, and careful thinking needed for longevity in trading. Donnelly navigates the nuances of the market, from microstructure and narrative to technical analysis and risk management, presenting a comprehensive guide for any prospective trader.
Key Points
Self-Reflection and Trading Psychology: At the core of trading, according to Donnelly, is a deep understanding of one's thinking patterns. Contrary to popular belief, the perfect trader isn't necessarily a contrarian or a risk-taker, but someone who is conscientious, rational, and disciplined.
The Notion of a Negative Sum Game: Trading, Donnelly argues, is more often a negative sum game than a profitable venture. Success in trading requires a good strategy, and again rigorous discipline to be able to stick to that strategy, and constant attention to one's emotional state. The idea of a personality profile of an ideal investor is introduced, and some discussion pulling in psychology studies showing that certain aspects of our personality are more mutable than others, and most importantly contentiousness, which can increase markedly over one’s lifetime, seems to be the most sure path to creating better discipline and therefore possibly becoming a better trader.
The Role of Bias and Time: Donnelly illustrates how our inherent biases can distort our trading decisions, particularly under time pressure. He emphasizes the need for slower, deliberate thinking to offset these biases.
Understanding Microstructure and Narrative: Donnelly insists on a deep understanding of the specifics of the traded asset, the nature of the market, and the profile of its participants. It’s important to understand not only the exact class (e.g. commodity, stock, bond, currency, etc.), but also the subclass of what is being invested in, as well as who trades in that (retail, banking, corporate, hedge funds), and how they trade in it, in order to gain better insights into what certain kinds of activity showing up on charts might be. He also highlights the importance of understanding market narratives, which often drive trading prices more than the underlying realities. Market narratives are essentially hype curves that can be broken down into different stages, starting from a non-profitable discovery period that could last years before any movement occurs, to a mainstream rising price period, which might last far longer than one expected, out of line with the ground reality, leading to losses in attempts to short, and finally a loss or downward spiral period. Staying on top as an investor of course involves avoiding the downward periods (duh).
Importance of Technical Analysis: Technical analysis and pattern recognition, though not always successful, can be useful tools when applied judiciously. Some basic pattern tools such as Rising Wedge, Dojis, and Moving Averages are discussed, but it seems that they are fairly useless unless coupled with the other tactics discussed in the book, that they are not generalizable tools to predict but rather visualizations to help one think (which can sometimes be misleading). Other pattern discovery and recognition strategies are discussed which involve playing around with the time domain and other points of data, including data that may be cleaned from non-asset price and volume sources, such as trader commitments, for example the CFTC Commitments of Traders Index, as sentiment, which could be polling or could be some sort of data gathered from the, “outside world.” Some examples of this include The American Association of Individual Investors Sentiment Survey, The CNN Fear and Greed Index, and the paid Jake Bernstein Daily Sentiment Index.
Importance of Risk Management: Additionally, risk management and goal setting are crucial elements of a successful trading strategy. Risk management is the practice of treating one’s trading practice as a business, with monthly, quarterly and yearly arbitrary reporting periods and only re-investing based upon profits gained over an artificial time period.
The Need for Discipline: The importance of discipline cannot be overstated, according to Donnelly. He stresses the importance of maintaining a trading journal, setting stop-loss rules, and using structured formats to improve discipline.
While I was somewhat disappointed in the book’s lack of mathematical structure and detail, I think that’s just the nature of the author being a highly skilled trader who understand that mathematics are actually important, but doesn’t necessarily have a massive mathematical background themself. They use more simple tricks and advise that these are typically what has worked from them, which is fair. After all, mathematical generalization in any topic is extremely difficult, so I should probably not have gone into this expecting some ground breaking modeling research - one would likely have to peruse Google Scholar for months or build something oneself to get a real gem.
In conclusion, "Alpha Trader" provides a comprehensive and detailed guide to professional trading, emphasizing the importance of disciplined strategies, understanding market dynamics, and managing emotional and cognitive biases. Donnelly's insights are invaluable for both newcomers to trading and seasoned professionals looking to refine their strategies.
My Editorialization as a Reader
My interest in reading this book was not to try to learn how to be a better investor, which I think is a much broader question not suitable for this book review, because it could involve not only investing in financial products but perhaps Real Estate, physical goods, one’s career path or a myriad of other investments. Investing might reasonably be considered a field of thought that may integrate financial products along with a nearly infinite number of financial decisions that one could make throughout one’s life. My interest was pure curiosity. Could I become a more professional entrepreneur by actively looking at my career as being a better trader?
Having started and run several small businesses, I have been left with the feeling that the real goal of an entrepreneur in our modern age is not merely to set up a career and an income stream for oneself, but to build an asset class which can be converted into a financial product, ideally with the highest amount of reliability or rating possible. The 2010’s and now 2020’s are steeped in an age of, “hustle culture.” I’m not sure I understand what the goal of hustle culture is other than to be good at performing the grind itself, almost as a personal, self-improvement conviction. “Striking it big,” has been around since at least the Gold Rush of ‘49 in America. The propaganda around being an entrepreneur in the late 1990’s and 2000’s seemed to be more focused on creating jobs, building a new technological era, a sort of Ayn-Randian view of the world, that is to say, putting entrepreneurial activity on a pedestal because it’s the main way to drive society forward. This speaks to me quite a bit more on from the cultural-religious environment I grew up in, meaning that we should aspire more for, “creating value for others.” I now see the 90’s zeitgeist on entrepreneurship to be just as messed up as the 2010’s hustle-bro culture, but somehow it speaks to me more, perhaps because I am one of the many flies that this particular honey trap was designed for.
So if I still want to pursue an entrepreneurial career, which I do, I’m left with the conclusion that I should not actually read any books directly written about entrepreneurship, startups or business at all, but rather books, “around,” the topic in an attempt to gain new perspectives and enhance my skills. I have a sort of sinking feeling that books and writings written and labeled with the hashtag, “entrepreneur,” or, “startup” or, “small business,” have some sort of malignant purpose behind them, that is, to somehow reduce or commodify the audience, because there is much more profitability in entrepreneurial disinformation with objective of lowering potential sale values of companies, or selling services to startups, than there is in just writing purely toward helping the entrepreneur out of the goodness of one’s heart. In other words, the best advice and thoughts I have heard typically hasn’t been through mining blog posts on startups, but either from advice I paid for from an accountant or lawyer, or something uttered out-of-hand by an actual experienced entrepreneur in a particular industry.
Now all that being said, let’s keep in mind that, “trading,” does not necessarily equate to stock trading, which would be the main colloquial meaning of the word trading in most people’s minds. First off, there are many different types of markets that could involve financial products apart from United States regulated stocks, e.g. currency trading, commodities, bonds, etc. There might also be niche financial markets that could be heavily risky and not follow efficient market hypothesis very closely such as Pink Sheets, Cryptocurrency, Low Regulated Developing Nations’ Stocks, or whatever other less-regulated or unregulated products which might be. So if you’re engaged in buying social media ads for example, or trying to sell tickets or subscriptions, you are participating in a market activity, which might on a small level, have a tangential relation to trading, particularly with some of the advice that Donnelly gives with respect to knowing a market, understanding microstructure, really getting into the nitty-gritty details and simply keeping a high discipline.
From that perspective, I would rate the book five stars. I am not sure if it would actually make a good trader in financial markets. Honestly, the book seems to argue against getting involved in trading at all, unless you really want to become a professional trader. However this does not mean that the book can’t serve a great purpose in helping how you might think about other professional activities.