Anatomy of $SPY on First Trading Day of the Month by Kora Reddy

Summary

Empirical traders who like Lawrence Chan’s quantitative analysis of trading systems at his daytradingbias.com will like this book enough to keep it handy. Kora Reddy has done us daytraders a great service by showing what makes trading systems tick. Success comes not in blindly following systems but in understanding how and why those systems work. Such knowledge comes through hard work. All in all, this is one of the best trading books of the last decade and, despite its peccadilloes, one of the best all-time daytrading books period. Active SPY traders who buy it and then let it collect dust will be doing so at their own risk!

Review

Some of the best books ever written have been short. Good writers keep their thin paperback The Elements of Style close by their desks, because everyone sometimes needs a reminder; and the even smaller How to Lie with Statistics is to this day a delightful green paperback that can start one on the path towards thinking critically.

In terms of trading, there have been few books written in the last ten years that could be considered as even very good. Kora Reddy’s second book, Anatomy of $SPY on First Trading Day of the Month, is only 73 pages long, and this time he did not even bother finding a publisher. Perhaps it is because going through an editor and publisher—sometimes a major hassle–might have taken him away from his paststat.com website, a treasure trove for quantitative traders. Nevertheless, this book is one of the best short books ever written about day trading. As one who trades ES, the futures equivalent of the SPX, day in and day out, I am grateful to have found this gem of a book.

The idea that significant price trends can take place in American stock markets at the beginning of a month goes back decades. Reddy’s take on the concept is brilliantly simple. After demonstrating that, yes, buying the close of one month and selling at the close of the first trading day of the next month has been slightly profitable since at least 2000, Reddy looks at this tiny edge from many angles. In other words, he extensively splices the edge so readers can see what makes it tick–the ANATOMY of a winning system.

Reddy shows that one should not merely just mechanically and mindlessly follow the system month after month. Rather, he shows that in some conditions, the system would have been a money loser. In other conditions, the profit factor has been well over 2.

What I like about the book the most is that I see no evidence of curve fitting. There is no fluff in the book either (although there are plenty of misspellings, errors in syntax, and other signs of a total lack of editorial oversight). The conclusion briefly restates the best conditions for the strategy. Without giving away too much of the content, I will say that Reddy demonstrates that moving averages DO count (if the previous month’s close is higher than the 200 and 50 day sma but lower than the 5 day sma, one should probably get to work on trading), as does seasonality.

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