Book Reviews | Mar 01 2012
By Rudi Filapek-Vandyck
Why would you buy a stock for which the price is going down? Don't you know that all companies which ultimately disappear in shame from the share market have one key characteristic in common: their share price starts trending down?
In Unholy Grails, chartist Nick Radge tries to counter the argument of value investors and other trading and investment techniques by starting from the assumption it is always better to pick a stock that is at the very least moving up in price. It's called Momentum Trading (or Momentum Investing with a longer term horizon) and it doesn't take too much imagination to see why this particular type of approach has regained popularity in the post-GFC world. Investors have seen a lot of companies exiting through the back door and many more companies have suffered a savage de-rating.
Especially the latter group, which today includes media, healthcare, retailers, property, manufacturers, insurers and financials -in other words: the majority of the share market- would have generated quite a lot of interest, initially, as share prices fell to all-time lows, only to continue falling to much lower price levels. Taking a momentum approach can keep investors and traders at arm's length from these value traps, while also assisting in picking the ones that have much better odds for moving higher (and thus generating positive returns).
Radge doesn't spend much time on this aspect in his book (apart from some mentions when interviewing real life momentum traders), but most software programs designed to help traders find suitable opportunities are based on that same base principle; better to join in when the underlying momentum appears positive and longer lasting. In Unholy Grails, Radge draws a parallel with hitch-hiking. As a hitch-hiker, you don't really know when the next car will stop, or where it will take you, but you'll know it from the moment it stops beside you. That, explains Radge, is all one needs to understand about Momentum Trading. You ride the "momentum" for as long and for as far as it lasts.
Unholy Grails explains the ins and the outs, with practical insights and common sense comments and observations. It is both an introduction as a practical guideline.There are example strategies and interviews with real-life momentum traders and investors. Some of these might surprise you. Radge takes the time to dismiss any "silver bullet" euphoria. Buying stocks in an uptrend might make all the sense of the world, in theory, in practice the real test will come once a string of losing trades will occur. And they will. Because momentum trading requires momentum, sometimes it's simply best to sit and wait on the sidelines. Can you cope with being patient?
For the skeptics (apparently there are many of them), Unholy Grails even tackles the most common critiques and misconceptions about momentum strategies. Readers who pay attention to detail will notice FNArena is sometimes mentioned as a data source. Two thumbs up for a commendable effort.
Disclosure: Nick Radge is Head of Research and Trading at The Chartist and a regular contributor to FNArena's Technicals section.
Unholy Grails. A New Road to Wealth, published by Radge Publishing is available in selected book stores from this month onwards. Copies can also be ordered online via The Chartist website. FNArena is currently offering Unholy Grails as a bonus to new subscribers who join and take up a twelve months subscription.
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