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In the Jan/Feb edition of Your Trading Edge magazine I have an interview with Henry Carstens, who is doing excellent work helping demystify the complex world of trading system testing and development.

Carstens develops and trades systems through his company, Vertical Solutions, and has recently begun trading other people’s money. He is developing a growing reputation as an insightful teacher of systems development and testing. His ‘Introduction to Testing Trading Ideas’, which is available at www.verticalsolutions.com, is an excellent outline.

Topics I discuss with Henry include:

- Working for Victor Niederhoffer
- Developing an hypothesis of a potential trading edge
- Testing potential edges
- The pitfalls of systems testing
- Automated versus discretionary trading
- How to handle changes in the market

The magazine can be bought in pdf version here

Kevin Marder at the Gilmo Report sometimes shoots through his market reports to me. They are usually excellent reading. He called the start of the new bull market well and even had insights into its true nature — ie don’t expect perfect set-ups after such a severe bear market.

The Gilmo Report is run by Gil Morales, who was a former trader for William O’Neil. Their stuff is good because it combines hard-core practical trading experience with broader macro perspectives.

Marder’s latest report is particularly interesting. Here are a few points I took out of it:

* Marder says the market is showing signs of weakness – six distribution days in October, hitting new highs on light volume, a narrowing of breadth with a shift to larger caps and a decline in new highs.

* He says this bull market hasn’t been fueled by growth stocks, rather by companies with ‘meat and potato’ products. “In many cases, these stocks do not possess sparkling fundamentals or innovative products or services, as much as they offer the value crowd the ability to buy stocks that had been severely bludgeoned in the bear market,” he said. “As a result, for the growth stock specialist, it is still a challenge to find recession-resistant candidates expected to grow earnings by 25%+ in ’10, let alone those considered institutional quality.”

* Marder expects “basic resource issues” – steels, ores, papers, chemicals, etc – to take over leadership of the market and continue where they left off in 2007. They will …

For some reason 2009 has been a particularly tough year. As I tell my wife, it’s been our ‘annus horribilis’ – to steal Queen Elizabeth’s description of a year when nothing seems to go right.

One of the positives of the year has been my increased engagement with Acceptance and Commitment Therapy (ACT) which is a relatively new method of psychology that could have a number of implications for traders.

ACT is based on the premise that suffering – including mental illness – is normal, and the greatest damage is done by trying to control or cover up suffering.

At first glance it seems a bit airy fairy. But from my experience a) it works, and b) it is a wise, compassionate psychology.

ACT can be broken down into several areas. But underpinning it all is the acceptance of the human condition: we are inherently designed – largely through how our brains are wired – to suffer; whether its pain, depression, anxiety etc.

Our natural response to suffering is to try and control it. That can be through drinking, drugs, eating, or whatever. Conventional psychology also appeals to our controlling natures by suggesting methods to control/get rid of unpleasant thoughts and emotions by challenging them.

Unfortunately, these attempts at control methods actually make our situation worse. Drinking to get rid of depression, for example, works in the short term, but exacerbates it over the long run. Research suggests that trying to suppress thoughts can make them occur more frequently.

Anxiety, for example, is a natural emotion …

I was shocked to read on Charles Kirk’s blog that trading coach and psychologist Ari Kiev had died.

I interviewed him just a few months ago.

He was very generous with his time and concluded our interview by offering to help any readers in Australia who wanted to email him with questions.

I liked Ari’s work because he emphasised the need to set an ambitious goal, then accept the discomfort and anxiety of operating in ‘the gap’ — the space separating where we are now and our stated goal.

I suppose that’s the essence of a good life. Setting yourself goals along valued paths and accepting the challenge of meeting them.

The New York Times carried this obituary.

I have an interview with trend following advocate Michael Covel in the November/December edition of Your Trading Edge magazine.

Michael talks about his new film, ‘Broke: The New American Dream’, which looks at the global financial crisis. He also outlines the key principles of a trend following system, discusses some of the trend following characters he’s met, plus gives his opinion on whether the ‘turtle’ rules still work.

For international readers, a pdf version of the interview can be purchased here.

Pdf versions of my past interviews with the likes of Ari Kiev, Gil Morales, Alex Elder, Brett Steenbarger, Dan Zanger and Charles Kirk can be purchased here.

My latest interview for Your Trading Edge magazine is with Dr Alexander Elder. Alex talks about his personal trading, plus examples of winning trades including going long GM and shorting O’Reilly Automotive (ORLY). He also discusses the characteristics of winning traders and other important steps to success including record keeping and proper risk management.

The interview can be read by international readers by purchasing a pdf version here

I have an interview with William O’Neil disciple Gil Morales in the latest issue of Your Trading Edge magazine. From January 1998 to December 2005, Gil recorded an amazing 10,904% gain in his personal portfolio using O’Neil’s CANSLIM method. He also co-authored with O’Neil the book “How to Make Money Selling Stocks Short”.

In the interview Gil talks about rarely discussed topics, including:

- What it was like to manage real money for William O’Neil
- The ‘big stock’ concept
- The importance of looking for ‘re-breakouts’
- Details of his 2005 Apple trade
- Short sale examples: Deere & Co, Amercia Online and Monsanto
- The ‘punchbowl of death’ (POD) short pattern
- The most important market timing tool

Gil now has is own money management operation and publishes the Gilmo report at www.gilmoreport.com.

Back issues of YTE can now be purchased in pdf form here.

Past interviews also include Dan Zanger, Brett Steenbarger, Ari Kiev and Charles Kirk

I have an interview with Charles Kirk in the May/June edition of Your Trading Edge magazine.

Charles, who blogs at www.kirkreport.com, talks extensively about how he’s managed to do what many traders dream about — trade for a living.

He also provided excellent examples of real trades he’s made, including buying General Electric (GE) when oversold in March and going long Telecommunications System (TSYS) when it pulled back in a strong uptrend.

You can read the interview by getting back copies of the edition here.

I’ve had a few weeks off, including a week of light duties, then a week at the beach. Even though it’s winter in Australia, the water on North Stradbroke Island where we holidayed was warm enough to swim in. We also managed to see some humpback whales off the coast as they migrate north to the Great Barrier Reef to calve.

It’s hard taking breaks with a young family and work commitments. But they’re absolutely vital to sustain high levels of performance. I was pretty run down. But now I’ve come back refreshed with my motivation much improved.

When I arrived back my copy of Dr Brett Steenbarger’s book The Daily Trading Coach had arrived early from Amazon (it hasn’t hit the book stores in Australia yet as far as I can tell). It was a pleasant surprise and I’ve already studied several chapters, which I’ll write about later.

I’ve been reading the draft volumes of one of my favourite economists, Deirdre McCloskey. She is writing a four-volume tome on bourgeois virtues (basically middle class, commercial, merchant virtues). McCloskey attributes the industrial revolution – and the amazing economic growth it spawned – to business life of the bourgeoisie suddenly becoming respectable in the 1800s.

The basis of the bourgeois life is innovation. McCloskey’s work makes a lot of reference to Joseph Schumpeter, the Austrian-born economist. Schumpeter theorized that the entrepreneur is the central player in capitalist economies; their innovations drive relentless growth and also create the business cycle.

Schumpeter coined the well-known phrase ‘creative destruction’: entrepreneurs innovate and create new products and enterprises. That spawns imitators and eventually booms. The destruction comes both when the boom busts, but also the destructive impact of innovation on existing businesses.

What has this got to do with trading?

It got me thinking that aggressive-growth/momentum traders are essentially riders of the gales of creative destruction.

The goal is to seek out innovation; to buy entrepreneurial companies that are growing rapidly and changing people’s lives; companies that have created innovative new products and services. Google is a prime example; it is creating new products, but they are also destroying old ones like newspapers.

We can identify the innovators by accelerating growth in earnings and sales. Genuinely successful innovators are producing sales and are not just speculative like most biotechs, tech companies and mining explorers. The fact that something big is happening shows up in their …