Taking a little pause from work on the book here today, and I thought I would write a long-overdue blog post here to kind of update you on what’s been happening in my world, and how the book is shaping up.

I started writing 30 days ago, and will probably cross the 100,000 word mark today. I had no idea how long this project would take when I started, but the original plan was to deliver the manuscript to Wiley maybe by the end of the year, more likely in spring of 2012. I decided to try to push that ahead, and have pretty much been doing nothing except writing for the past month—8+ hours a day and hitting at least 3,000 words a day. In addition, I continue to write another 1,000 or so a day for Waverly Advisors… I had also originally intended to blog regularly while writing the book, but there’s honestly nothing left. After 4,000 – 6,000 words a day I’m pretty much tapped out! More than a few friends have suggested that this work pace is not healthy, but, remember, I was a formally trained composer (music) before becoming a trader. This is not my first rodeo with the creative process; I have worked many months for many hours a day on the minute details of a piece of music… this is really no different.  I expect to have the draft done by the middle of next month, which I think is a pretty good pace.

For those of you who are interested in writing, I am doing a couple other things that might be interesting. One, I’m drinking a lot more! (That’s a little bit of a joke…) Two, I am carving time out every day to read some writing by the handful of writers who I have always felt really keep me honest. The list of who those are would probably surprise you (and it’s not important anyway), but I do think that reading is a key part of writing.  If you’re trying to write and it feels stale or you get stuck, pull out some writers whose work you really respect.  Don’t try to emulate, just absorb.

I’m pleased to report that the book is developing well, and I have been able to incorporate many of the suggestions I got from some of you guys on one of my previous posts. It has gone a slightly different direction that I expected at first. My initial thought was to write a book that would lead a trader from the beginner stage to advanced, but this is a case where your feedback to my question was very helpful. Someone told me basically not to write a beginner’s book unless it would be so good that it was the last beginner’s book ever needed. Solid advice, and so I decided to apologetically write a very advanced book that does a deep dive into a lot of the minutiae of trading.

The target audience for this book is the professional trader, or the developing trader who has made a serious commitment to becoming a professional. This is not a book about market math, and it is not a book for system traders. It is a book that aims to help you develop intuition about market patterns, grounded in a firm foundation of a statistical understanding of the fundamental elements that drive market structure and price action.

A core idea of the book is that the biggest dangers traders face is that they are trading without actually having an edge in the market. If that is true, you’re screwed. Discipline, money management, good psychology, execution, etc. all will not help and in fact may hurt you. For instance, if you spend a lot of time doing positive thinking and working to become more aggressive on your entries, but your entries don’t actually have an edge, you’re just going to lose money faster. You cannot win this game without having an edge.

I also spend quite a bit of time looking at and thinking about risk. For instance, one of my claims is that the “risk” in risk/reward is actually mislabeled… if you’re trading with an edge, it’s not even actually risk but a regular and somewhat predictable expense. (Again, if you’re not trading with an edge, you’re screwed.)

So how do you find an edge, and perhaps more importantly how do you know you have one? That is the subject of the first part of the book in which I share a number of fairly in-depth quantitative techniques that you can apply to market data. I present several case studies that will challenge your beliefs about a lot of things, but the whole point of the section is to show you what does work. I end this section with quantitative studies that support the trade setups I will develop later in the book. (I also am going to present a huge appendix with in-depth statistical studies on a wide range of indicators and market conditions. I know everyone reading this is expecting me to say that all of that stuff is garbage, but you’ll be surprised. You’ll also be surprised at the differences I find between stocks, futures and forex markets… might have some influence on what markets you try to trade.) It is also worth mentioning that the math used in this section is actually pretty simple. If you can count, do basic arithmetic, and understand what an average is, you have everything you need to understand this section.

The second part of the book is an in-depth look at market structure. I drill into trends and trading ranges, and even more importantly the transitions between the two. (So few books do this.) This is a huge and complex subject. Trading is not simple, but I have tried to simply things as much as possible. Actually, I have been guided by the quote attributed (probably falsely?) to Einstein: that everything should be made as simple as possible and not one bit simpler. I’m sure I will have a lot of cleaning up to do in the edits, but I think I have a good start toward this. I have never seen this amount of detail in print, and I have tried very hard to make it all useful.

The third part of the book presents nine (yes nine) actual trade setups that I have used for years. These are simple setups for the most part, but I look at them from setup to trigger to trade management and even provide further reading resources for some of them. I am going to include a large section of trades I actually made, most of which were published in my Waverly Advisors morning note. (There are few things I hate more than theoretical woulda-coulda-shoulda trade analysis and I won’t do it. The real value to the reader comes, I think, from seeing actual trades with discussion about the thought process behind them.) In addition, I have a lot of losing trades. I haven’t figured out the magic of never having losers (actually… I have… I had a period of over four months where I short-term traded index products actively and had a 95% win rate. I did not make money over that period of time if you’re curious. If you can’t see how that’s possible, think a little deeper.) My book will probably be the only book that shows more losing trades than winners. You , dear reader, do not need to see 10 examples of where I bought the low of a pullback and sold the high of the move. That’s easy when we get lucky and it happens. What you need to see are many examples where the pattern did not play out exactly according to the playbook, or failed altogether.

I’ll try to post another blog next week with some more information, and once the draft is done (hopefully in another 30 days) I will share some more ideas and hopefully we can have a good discussion in this forum.  I realize I have dropped off the face of the Earth, but you can still read my thoughts on markets in my morning notes (I have been a little lucky there recently, which I’ll take because it happens so rarely!) Once this draft is done I’ll get back to tweeting and blogging a big more actively.

Have a good weekend.