Oct 11

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Book Review : Bird Watching in Lion Country by Dirk Du Toit

I had been meaning to read this safari styled forex trading book for sometime, only if to understand the reasons for the rather unusual title. It was worth the wait!

Dirk talks alot of fresh air when it comes to Forex Trading; if you have been trading a while then you will surely resonate with many of his views and experiences trading forex. The version I read was written in 2004, so pretty much up to date too. A little of Dirks’s bio….

Dirk du Toit hails from sunny South Africa, where he was born in 1963. He currently lives in the Jacaranda City – Pretoria, capital of
SA. His two daughters Danielle and Embeth and his wife Charlotte, a professor in econometrics, put up with him as best they can. After Dirk completed his MA degree at the University of Pretoria, he became a financial advisor in 1991. Since 1998 Dirk has earned his living in the global financial markets – an experience which he says is more nerve racking than rock climbing without a rope and more fun than a birthday when you’re six. Initially he focused on equities and bonds, traded on margin. But the lure of forex was too much and Dirk made the change from a successful bond trader to a successful forex trader. While sitting around waiting for profits to materialize Dirk founded DayForex (www.dayforex.com) in 2001, in order to help others also to sit around and wait for profits to materialize. These days DayForex focuses also on sitting around and waiting for profits to materialize on investors managed forex accounts. As chief trader and mentor Dirk does all the sitting, only interrupting himself to take profits. Now for all the worthy stuff: Dirk completed the International Capital Markets Qualification at the Securities Institute of London in 1999; he is an Associate of the Financial Planning Institute of South Africa and he is the Chairman of the Forex Investment Association which helps regulate the forex industry in South Africa. When he has time between all the sitting around he speaks very well, especially in front of audiences, and tosses off articles on forex investment or write books. This is his second book (and if his wife has anything to do with it, his last). His first, An Introduction to the Foreign Exchange Market is a formal study guide for financial markets students in South Africa. If you think sitting around, waiting for forex profits to materialize, is not a bad way to make money, then this book just may be for you.

How to Build a Bomb: You really need to understand the market to make money, not just being able to describe it; but know it. Also, he believes one of the main reasons is a lack of understanding of the role that randomness plays in trading. That is evident in much of the literature concerning the financial markets where it is often simply glossed over. The radical changes caused by the availability of real-time information are also not properly discounted, especially in “new” markets such as the retail spot forex market.

He is extremly scathing (and I agree) of the myth surrounding non-discretionary trading. That in some way we can make money by just following some simple indicators or EA. He insists traders find mentors, have a business plan and a strategy. Dirk has his ” 4×1 Strategy” which is built around the 1 Currency x 1 lot x 1 direction x 1% Rules. He uses his Median Trading methodology to implement 4×1 – more about that later.

What I liked most about his trading style was his 4×1 Strategy :

One currency : Concentrate on one currency. Get to know it. Don’t jump back and forth.
One lot : Low gearing. Small position size.
One direction : Trade in the direction of the “fundamental” trend. Be disciplined and patient.
One Percent (1%) : Understand profit – what it is and when to take money off the table

I have taken some of his 4×1 strategy and started to narrow my focus on one Currency (well 3 USD major Crosses) as opposed to some of the Minor stuff I used to look at. It helps me “do the detail” work on building trend lines and Key Prices on my charts.

He also has no time for any timeframe charting less than 30mins…..he says all of this data is too random to draw any meaningful trading ideas from. I cannot disagree totally with this assertion; since I moved to 30min charts my profitability has improved no end.

So why is the book called Bird Watching in Lion Country ? An excerpt from the book here kind of explains it :

Imagine a man bird watching, strolling through the bush on a fine summer’s day, enjoying the sunshine. On his walk he sees an object sticking out of a bush. It’s about a meter in length and two inches in diameter. The man is curious and moves closer. What could it be? Still curious he moves even closer and picks it up. The object turns out to be a tail, and attached to the other end of the tail is the
rest of the lion. Many traders play with fire without knowing it. They are full of curiosity but their biggest problem is that they look without seeing. They are literal. What’s that sticking out of the bush, I think I’ll give it a yank and see what happens. This is a different way
of saying that they do not really understand the market they are in and are forced to take chances. They cannot paint an accurate picture of the currency market. This is not easy for unlike many other markets the currency market has no headquarters, no CEO, no employees like a company that issues stocks. But that does not mean that it is not real. It is, you’ll know that once you’ve lost money in it. the difference between the winners and the losers is that the winners take the time and the effort to walk around the bush. The losers just pick up the tail and hope for the best. Don’t pick something up if you don’t know what it is. That’s risky. Yet you will be amazed by how many people do just
that. They are rewarded by an unpleasant mauling, and often it is fatal

I also like the way he describes perspective. The winners and loser again :

The losers are easy to recognize. They are the guys standing on the shoulder of the highway looking at the cars right in front of them with binoculars. Except they don’t know that it’s a highway and that these hurtling objects are cars. That’s because they’ve got tunnel vision. What do they see? It’s something moving fast, but what exactly it is is hard to say. It is all a bit of a blur. What do they hear? A lot of noise. In
currency trading parlance they are looking at a too short time frame, trying to pick the intra day direction of the market by looking at one, five, ten, or fifteen-minute price changes. Now, say the cars slow down. The close-up watchers start to get excited. They can
almost make out a shape. Just as they start to see an outline the cars speed up again. Faster, slower, faster slower, noise, noise, noise. They are starting to get edgy and make the fatal mistake of thinking the closer they get the better they’ll see. All that happens is that the objects appear to move faster. So they move even closer adjusting the focus but the focus doesn’t work precisely because they are too close. They keep moving forward, desperate for a glimpse. And then – Whump! Another hitand-run on the currency highway of death. This edging towards destruction is often accompanied by higher gearing (the closer you are to the market the more you can see, right?) and tighter stop losses. All that it does is hasten the inevitable end. If you are standing back it may seem obvious and easy to point out the mistakes. Close up, and it’s very difficult. The loser has a too small picture. He has his face pressed to the glass but can see nothing of the world passing him by. He is the guy who picks up the lion’s tail. Contrast that with the winners. There are only a few of them spread across the top of
a hill set well back from the highway. Because the winners are further away from the highway, the cars appear to be traveling slower, at a comfortable speed. They have no trouble distinguishing one from the other. There is less noise. The winners can see the bottlenecks, and predict with greater accuracy whether this particular traffic jam is serious or not (ie, is this price going to speed up, slow down, reverse?).
Everything is in focus. Because they have distance and perspective they are in a better position to make good trading decisions. The winners differ from the losers in that their perspective of the market is more suitable to their strategy and expectations.

He goes on to talk about the forex market, leverage, risk management and lots of other technical parts of  trading…..none of it unique to Dirks book but any forex trading book would be lost without it.

A summary of his pre-trading edges :

1. Goal setting – being realistic. What do you want out of trading? Are you using discretionary funds or is your livelihood at stake? There is enough pressure in trading as it is.

2. Trading is a business and business requires a business plan. My trading system is my business plan in which I have identified my goals and the steps I need to take to realise those goals.

3. My discretion and my common sense are great advantages. I do not trust my system absolutely. I remain sceptical, testing and improving my system all the time.

4. Knowing that the market is not fully knowable because it reflects ongoing events that are often unpredictable I do not waste my time worrying about things I have no power over.

5. I know that negative results exceed positive results in their affect on me and consequently I minimise my exposure to such bad influences.

6. There is an element of randomness in the market place that requires me to think in probabilities. Because I back the long term trend I can ignore the occurrence of random events and wait for consistent results. Thinking in probabilities is a skill I can choose to acquire

So I raced through his book enjoing every bit of it until……….I got to his trading methodology The Median system. Dirk’s approach is to understand that prices only move within a range from a “median” price. If prices stray to far from this median then they will revert to the median. All well and good whilst the market is ranging……try to apply this strategy to EURUSD for the past 30days and it makes no sense to me. Once he got onto his quadrants he lost me a bit further, all of a sudden his chart looked no easier to see than one with several ema’s a macd. I am sure if you join Dirk’s mentor program and school, all will be revealed.

Either way great read for the most part.

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