I haven’t reviewed a book since my graduate school days when I was looking to add bullet points to my curriculum vitae. I was recently asked by Andrew Abraham to review his book, “The trend following bible: How professionals compound wealth & manage risk.” This struck me as being odd as I’m not a trend trader. However, after reading the book I see that it is filled with solid psychological aspects of trading; particularly as it pertains to trend traders.
I’ve worked with trend traders over the years that used the CAN SLIM methodology, Donchian channels, price envelopes, Bollinger bands, etc. in their trading. The one conclusion I drew from each of them was that trend trading can be one of the most difficult systems to make money in the markets. Not because of the chosen vehicle or methodology but because it takes extreme discipline to be successful.
As a trend trader you can take several back-to-back trades and lose on them all. As Andrew points out in his book, “Drawdowns are the bane of trading. When you are profitable, you do not think of these inevitable losses. When the losses mount, however, the doubts increase. I couldn’t agree more. The most important aspect of my work is helping traders with their discipline. Discipline is such a key aspect of success in the markets yet it is also one that is overlooked by so many.
One example where discipline is needed is in managing risk. Believing in and following your risk management is an ingredient for success in the markets. Andrew devotes a whole chapter in his book discussing some traditional ways in which to manage risk. Some examples are risk per trade, risk per sector, margin to equity, calculating your risk to ruin (if you’ve never calculated your risk to ruin you should. It’s an eye opening experience), etc. In theory all the examples he gives are good. However, the unknown variable in all the examples is individual discipline. The best designed risk management tool is useless if not used with discipline.
Towards the end of the book Andrew shares his trading journals of two accounts he trades. In the chapter he breaks down the trades and gives some insight into his thinking. I like this process of going over trades after they’ve been closed. Journal review isn’t sexy, but it’s where longevity is found in the financial markets. As Andrew points out, he’s been trading the same system for years with some tweaks or “filters” added along the way. No doubt this process of Andrew’s has contributed to his longevity and success.
Overall the book provides basic trend trading information along with Andrew’s approach to this widely known strategy. I think the title is a bit misleading though. With that, I think the most important aspect of the book is one in which Andrew points out early on– trading is difficult. Losing is part of the game, especially with trend trading. Manage risk with extreme discipline if you want to be successful, regardless of your approach.
DISCLOSURES: I was given the book for free and I’ve linked the image above to Amazon with my affiliate ID.