Alpha Trader: The Mindset, Methodology and Mathematics of Professional Trading

514 Pages·2021·5.49 MB·english

by  Brent Donnelly

HERE IS WHAT SOME FINANCE HEAVYWEIGHTS HAVE TO SAY
ABOUT ALPHA TRADER.
I couldn’t put this book down! Brent has done an amazing job at capturing the
challenges that traders face on a daily basis and how best to navigate today’s
markets. It is an essential read for anyone who is interested in managing money
and the behavioral psychology behind those who “make the market!” Brent shows
himself to be as skillful an author as he has been one of the leading players in
global foreign exchange. Well done!
—Ben Melkman,
founder and CIO of Light Sky Macro
Brent has been on my must-read list for years. This book is no exception.
ALPHA TRADER is an instant trading classic.
— John Mauldin,
president of Mauldin Economics
Brent is a smart, balanced and hyper-pragmatic trader. I have known and worked
with him for years, and his constant search for new paradigms is what sets him
apart. ALPHA TRADER is a very, very valuable book which may save young
(and old) traders from significant emotional (and monetary) pain.
— Jens Nordvig,
world-renowned currency strategist,
economist and founder of Exante Data
Alpha Trader is one of the most intuitive books about applied trading psychology
and rational behavior. It is a masterpiece that puts you in control of your
trading.
—Saed Abukarsh,
partner at Ark Capital Management (Dubai)
Brent’s book is an honest assessment of what is required to be successful in the
markets. Successful traders have a process that is not canned or rigid... Because
markets are not. If you are serious about making it as a full-time trader, ALPHA
TRADER is the book you need to read. It’s an honest take on what you will need
to do and expect to make it like a pro.
—Dave Floyd,
founder of the Aspen Trading Group
Brent has been trading for 20 years and you should listen to anyone who has been
trading that long. Over the course of a 20-year career, a trader will experience at
least 50 major panics, crashes, and dislocations. Having the wrong exposure to
one of these means the end of your career. Trading isn’t about getting rich; it’s
about staying alive.
— Jared Dillian,
publisher of the Daily Dirtnap
and regular Bloomberg contributor

Copyright © 2021 by Brent Donnelly
All rights reserved. No part of this book may be reproduced or used in any
manner without written permission of the copyright holder. It is fine to use
excerpts if you are reviewing the book.
First edition 2021
Editing: Stephen K. Donnelly
Cover design: Emir Orucevic
Interior layout: KUHN Design Group
Author photo: Christine Donnelly
ISBN 978-1-7367398-0-8 (hardcover)
ISBN 978-1-7367398-1-5 (softcover)
ISBN 978-17367398-3-9 (ebook)
For more information go to: www.brentdonnelly.com
This book is dedicated to
the small bird who carries us all on her back.
CONTENTS
Foreword by Dr. Ben Hunt
A quick story
Introduction
PART ONE : WHY DO SOME TRADERS SUCCEED, BUT MOST
FAIL?
Chapter 1: Know yourself
Good traders are introspective and self-aware
Chapter 2: If it was easy, it wouldn’t pay so well
Research shows success in trading is difficult to achieve and sustain
Chapter 3: Understanding success
Success and high performance in the world outside of trading
Chapter 4: So you’re saying there’s a chance?
Why some traders succeed but most fail
PART TWO : THE ALPHA TRADER MINDSET
Chapter 5: Level up
The traits and habits you need to succeed
Chapter 6: Kryptonite
Bad behavior, poor discipline, sloppy thinking, and leaks
Chapter 7: Smart people do stupid things
Rational, unbiased trading
PART THREE : METHODOLOGY AND MATHEMATICS
Chapter 8: Understand microstructure
Step one towards becoming an expert in your market
Chapter 9: Understand narrative
Step two towards becoming an expert in your market
Chapter 10: Understand technicals, sentiment and positioning
Step three towards becoming an expert in your market
Chapter 11: You feeling lucky, punk?
Data collection, risk management and variance
Chapter 12: Bringing it all together
The lifecycle of a trade, from idea to execution to exit
PART FOUR : ADAPTATION AND ATTITUDE
Chapter 14: Adapt or die
Stay flexible and achieve long-term trading success
Chapter 15: Thank God it’s Monday!
It is impossible to succeed without the right attitude
Conclusion
One last story
Coda
Acknowledgements
Appendix A: Further Reading
Appendix B: 21 ways to succeed at trading and 13 ways to fail
Index
FOREWORD
I
f you’re reading this foreword, you’re probably considering whether or not to
buy this book. You also probably have a professional or semi-professional
connection to financial markets. Maybe you already work on a trading desk.
Maybe you work in sales at one of those too-big-to-fail outfits and trade in
your personal account. Maybe you don’t currently work in the financial
industry at all, but you’ve been spending a lot of hours on Robinhood and
you’re thinking about taking your involvement “to the next level”, whatever
that means to you. In any event, you’re reading this foreword for clues as to
whether this book will make you a better trader. Whether it will help you make
more money.
It will.
Why will Alpha Trader help you become a better trader? Not because it tells
you WHAT to think as a successful trader. Not because it gives you
instructions on trading this or trading that. No, no, no. It’s because Alpha
Trader teaches you HOW to think as a successful trader. And that’s what makes
all the difference. It’s the only thing that makes a difference, in every game that
we humans play.
Here, I’ll give you an example of what I mean.
If you’re not a serious chess player, you’ve never heard of Aron
Nimzowitsch. If you are a serious chess player, you undoubtedly have a dog-
eared copy of his groundbreaking book – My System – first published in 1925.
What was so revolutionary about Nimzowitsch’s book? It wasn’t a collection
of openings. It wasn’t a list of moves and countermoves that you should
memorize. It wasn’t a manual full of instructions. No, no, no. Nimzowitsch’s
book doesn’t tell you what to think about chess. It teaches you how to think
about chess. How to think about position. How to think about the flow of the
game. How to think about risk-taking and aggression. How to think about
edge and strategic dynamics. Sounds pretty dry, right? Not in the least. My
System is written with wit, with a point of view. My System is chock-full of
examples and illustrations, but presented as annotated stories of personal
experience, not constructed applications of pure theory.
These are the same topics covered in Alpha Trader – position, flow, risk-
taking, edge, strategic dynamics – all amplified by Brent Donnelly’s keen
understanding of the pervasive role of variance and chance, the crucial
difference that makes the game of markets so much more difficult than the
game of chess.
This is the same format and style of Alpha Trader – wit, a point of view,
annotated personal experiences – all in service to illuminating a frame of
thought rather than rote instruction.
I think that Alpha Trader and Brent Donnelly are to the game of markets
what My System and Aron Nimzowitsch are to the game of chess. Truly
revolutionary. Truly useful. Books and authors that will change forever HOW
you think about playing their games with mastery.
But wait, there’s more.
Yes, Alpha Trader will help all you professional and semi-professional and
professional-wannabe traders become better traders. This book will help you
make more money. You should buy this book and you should read it cover to
cover.
And then you should give this book to your partner or your father or your daughter or
your close friend … someone who has never traded a day in their life, someone who has no
professional or semi-professional connection to financial markets whatsoever … and ask
them to read this book. Please.
Because Alpha Trader won’t only make you a better trader. It won’t only
help you make more money from trading. It will make you a better player of
games.
Back in 1988, Iain M. Banks wrote a book titled The Player of Games, part of
a wonderful series of science fiction novels that describe The Culture, a super-
advanced galactic civilization. In this book, The Culture sends a representative
to negotiate with a less advanced civilization where everyone’s social and
political status is determined by how well they play a very complicated game.
The Culture’s representative enters the global tournament himself, and despite
only a few years to study a game that all of the inhabitants of this civilization
spend their lives playing, he manages (spoiler alert!) to win the game. How?
Because anyone can master the rules, even the intricacies of the rules, of any
game. There’s nothing special in that. There’s no edge. What IS special,
however, and where there IS edge comes in the very personal and very human
understanding of position, informational flow, variance, risk-taking and
strategic dynamics that shape ALL games.