Book Reviews, Trading

Book Review of Winning Edge Trading by Ned Gandevani, PhD

The full title of this book is “Winning Edge Trading: Successful and Profitable Short- and Long-Term Systems and Strategies” by Ned Gandevani, PhD.

The book is structured into a few sections, which I would classify into 3 main parts. The 1st part of the book (about ~100 out of ~200 pages) goes through general information about the markets, types of strategies (e.g. buy and hold, trading), different asset classes (e.g. ETFs, Futures), and trading tools (e.g. fundamental analysis, technical analysis). The meat of book comes in the 2nd part when the Winning Edge Trading System is introduced (~50 pages). The 3rd part of the book talks about investment psychology and assessing your trading personality (~50 pages). Readers or experienced traders who are interested mainly in the meat, can skip straight to Chapter 9.

The system presented in the book appears to be a relatively simple system, utilizing RSI and DPO divergence for entry, and potentially exit, signals. I like this because it shows that a trading system does not need to be complex to be profitable.

One of the areas that I think can be made more specific is in the exit rules. Gandevani presented many choices for exit triggers (e.g. fibonacci, trendline breaks, MA crossovers, divergence, etc.), but to test the performance for a particular system, there needs to be specific choices or rules for the exit triggers. Those are currently not clearly specified in the book. From the book, I gather that the author is also operating a service which provides trading signals for subscribers. That may explain why some of the ‘secret sauce’ is not fully disclosed.

One interesting thing I got from this book is the derivation of the Fibonacci numbers 38.2% and 61.8%. I had not come across that before, so it was interesting when I read that.

Open Interest and Volume

  • Volume
    • Volume measures the intensity or pressure behind a price trend.
    • If price is falling and we see volume increases as well, we could expect more sell-off.
    • If at a pivotal low price point, volume increases as market rises, we may ascertain that the prevailing trend is reversing rather than continuing.
  • Open Interest
    • Open interest is the aggregate number of outstanding contracts that are held by market participants at the end of each day.
    • Open interest measures the flow of money into the futures market.
    • If open interest increases, new traders have entered the market, which could sustain or continue the prevailing trend.
    • If open interest decreases, market participants are liquidating their positions. This could mean the prevailing trend is near its end and the market could reverse.

Fibonacci Retracements

  • Sequence: (b-a), a, b, (a+b)
  • (b-a) / (a+b) converges to 0.236
  • a / (a+b) converges to 0.382
  • b / (a+b) converges to 0.618
  • (a+b) / b converges to 1.618
  • 50% is not a Fibonacci ratio, 76.4% is (1 – 0.236), but it is not a Fibonacci ratio.
  • Some people also use 78.6% (square root of 0.618).
  • For extensions, 1.272 is the square root of 1.618.
  • Many securities, after making sustained moves in either an upward or downward direction, eventually retrace to levels that are consistent with the percentages gotten through such calculation of Fibonacci price retracement numbers — 23.6%, 38.2%, 50%, 61.8%, 76.4%, 100%.

Winning Edge Trading System – Market Model

  • The market is dynamic, nonlinear, complex system
    • According to chaos theory, a complex system exhibits simple behavior, whereas a simple system exhibits complex behavior.
    • Since the market displays a simple behavior, a sound but simple system could provide better solutions.
    • A successful system should be simple and objective rather than complex and ambiguous.
  • The market goes through periods of expansion and contraction.
  • Fear is stronger than greed and hope.
    • The market seems to fall 3 times faster than it rises. You should be cognizant of this trend and develop your trading system accordingly.
    • If your trading system treats downside sell-off and upside rally equally and with the same variable values, you could see some imbalances in performance between your long and short positions.
    • For example, your stop-loss might be too small for long positions, since the market may take more time to move up and stay range-bound, forming support for an upside move.
    • If you exit your short positions with the same indicator or signal that you use for long positions, you may cover your short positions prematurely and miss a great deal when prices fall and ultimately miss profits.
  • The market exhibits habitual patterns that are depicted by its dynamic cyclical moves.
  • The market moves in trends
    • Major trends: 5 – 20 years
    • Intermediate trends: 3 – 6 weeks
    • Short-term or minor trends: Shorter time trends within a major and intermediate trend.
  • The longer timeframe trend has precedence over short timeframe trends
    • According to Chaos theory, there is an underlying order in the market or any other dynamic nonlinear system.
    • A smaller timeframe may appear random in contrast with a longer-period trend.

Winning Edge Trading System – Mechanics

  • Entry Signals
    • Long signal (when both conditions are true)
      • Bullish divergence between de-trended price oscillator (DPO) and the security price bars (i.e. DPO trends up while price bars trend down or flat).
      • RSI crossed below the 30%, or oversold, boundary (usually triggers just before the divergence, i.e. at the first turning point low of both DPO and price bars).
    • Short signal
      • Bearish divergence between DPO and the security price bars.
      • Crossover of RSI above the overbought, or 70%, boundary.
  • Exit Signals (for long entry, converse for short)
    • New reversal: When a new short signal is issued.
    • One confirmation: Either DPO bearish divergence or RSI crossing above 70% overbought boundary. DPO crossing the zero line may also indicate the end of the move.
    • Moving average: When the price crosses over the 50-day or 200-day moving average.
    • Fibonacci: Exit or scale out at the key retracement levels (38.2%, 50%, 61.8%).
  • Protective Stops
    • Money stop: Decide on a fixed % loss where you have to cut. This should be more than the estimated volatility over the period.
    • Technical stop: Use crossover of a trendline or moving average.

Application to Different Trading Timeframes

  • Day trading E-mini S&P Futures
    • 1-, 2-, 3-, 5-, or 10-min chart.
    • DPO length: 4
    • RSI length: 14
    • Fast MA: 9 (5 for Nasdaq NQ)
    • Slow MA: 18 (12 for Nasdaq NQ)
    • Exit long when the fast MA crosses below the slow MA.
    • Money stop = 2 points below the lower low (i.e. the 2nd pivot point in the bullish divergence) for long, or 2 points above the higher high for short.
  • Swing trading S&P Futures
    • 30-min chart
    • Exit at trendline breaks. Also look at support/resistance, RSI turning points, and DPO crossing zero-line.
    • Money stop of 3-5 points below the lower low price level in the buy signal setup (i.e the 2nd pivot low), or stop at importance support/resistance levels.
  • Position trading Russell 100 Index Futures
    • Daily chart
    • Use technical stops like trendline breaks.

Investment Psychology

  • It is futile for traders to spend so much time and energy trying to change who they are. We should identify our strong points as well as limitations and use them as a guide to make proper selections for our trading method and style.
  • Trading Personality Profile Test
    • Based on the Five-Factor Model (FFM) of personality traits (OCEAN)
      • Openness
      • Conscientiousness
      • Extroversion
      • Agreeableness
      • Neuroticism
    • High O and high N scores, both of which could creates hurdles in trading performance.
    • If your E score is high, you should surround yourself with other people and traders in a trading room.
    • If your E score is low, you might not want to trade among other traders.




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