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So You Want To Be a Trader? (reading list 3/3)

This is the third post in a series. Please read part 1 and part 2 first.

So if you’ve gotten this far you see the title of this series maybe should have been So You Really Want to be a Trader? I don’t mean to be intimidating or to set a bar too high, but the reality is that this is a ultracompetitive business. Very few self-directed individual traders will succeed, so why not give yourself the best chance possible?

Everything up to this point has laid a foundation. Now it is time to turn to some books that focus specifically on trading.

Market-specific Education

General knowledge:  Alexander Elder’s Trading for a Living: Psychology, Trading Tactics, Money Management is one of the best-selling trading book of all time, and with good reason.  There is no other book that covers the subjects of trading psychology, technical analysis, and specific trading techniques as clearly as Dr Elder does.  If you can only read one book, it probably should be this one.

Technical Analysis:  Most books on this subject, frankly, are full of garbage.  Too many books rely on untested claims from previous books, and many of those that include research use incomplete or poorly constructed studies. If I was hiring or training traders I would demand that they have cover-to-cover knowledge of Schwager on Futures: Technical Analysis – Jack Schwager and would frankly prefer that they not be familiar with any of the other common books on the subject. (Even though the book was written specifically for futures markets, it applies equally well to stocks and currencies.) Edwards and Magee, and any books on Elliott Wave and Gann theory are deliberately excluded from this list. I also cannot help but plug my book here, as this is specifically why i wrote it:  The Art and Science of Technical Analysis: Market Structure, Price Action and Trading Strategies is unique in the trading literature. It addresses the theoretical support behind price patterns and technical trading, shows many examples of actual patterns with emphasis on trade and risk management, and then considers the psychological issues of applying these patterns in actual trading.

Applied Statistics:   So, now you have a good grasp of math and statistics and need to begin to think about how to apply those to the market.  My forthcoming book will also address this subject in considerable depth, but Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals – David Aronson gives another valuable perspective.  (Also, this book contains the clearest and most succinct explanation of inferential statistics I have ever seen in print.  Exceptionally well done.)  Some people may take issues with the specific trading signals that Professor Aronson tested in the last part of the book, but that in no way compromises the importance of the message or the clarity of his writing.

Options:  A good grasp of options is essential for all traders, whether you trade options or not.  In particular, understanding options pricing (how volatility, time, etc play into the premium) and the potential payoffs that can be structured give insights that extend into other areas of trading.  Option Volatility & Pricing: Advanced Trading Strategies and Techniques – Sheldon Natenberg is standard and absolutely required reading, while Options Trading: The Hidden Reality – Charles Cottle provides a good next step.  The Cottle book, in particular, deals with very practical issues of trading like execution and adjusting positions dynamically.

Trading Psychology:  There are many good books on psychology, but developing traders should make sure they actually have an edge in the market before focusing too much energy on psychology and performance issues.  If you don’t have that edge, all the psychology in the world is not going to help.  Brett Steenbarger’s books, in particular Enhancing Trader Performance: Proven Strategies From the Cutting Edge of Trading Psychology or The Psychology of Trading: Tools and Techniques for Minding the Markets are fantastic.  Mark Douglas’s Trading in the Zone: Master the Market with Confidence, Discipline and a Winning Attitude is a classic, for good reason.  The late Ari Kiev’s Trading to Win: The Psychology of Mastering the Markets is written with a slightly more institutional focus, but it includes some excellent insights that are relevant to any trader in any setting.

As you have time…

And here are a few more, without specific comments.  They wouldn’t be here if I didn’t think they were important, but they could wait until after you have absorbed most of the preceding books. These cover a wide range of subjects and styles, so do some research and see if they are interesting / relevant to you.

Practical Speculation – Victor Niederhoffer
The Alchemy of Finance (Wiley Investment Classics)   – George Soros
Trader Vic: Methods of a Wall Street Master, Trader Vic II: Principles of Professional Speculation by Victor Sperandeo
The Misbehavior of Markets: A Fractal View of Financial Turbulence – Benoit Mandelbroit
The Hedge Fund Edge: Maximum Profit/Minimum Risk Global Trend Trading Strategies – Mark Boucher
Street Smarts: High Probability Short-Term Trading Strategies – Raschke and Connors
Analysis of Financial Time Series – Tsay

Knowledge alone will not make you a successful trader; you must also develop the skills of trading (which are primarily psychological), but, without a firm background, your chances of success are much smaller. A two-year program of education, covering the topics in these posts, would give aspiring traders a much stronger foundation and better chance of eventually becoming a successful trader.

( I also want to give a shout out to my friend Jordan Terry – Founder & Managing Director, Stone Street Advisors LLC. We kicked some of the ideas for accounting, valuation, and economics texts back and forth a few times before settling on the recommendations here. Thanks, Jordan.)

AdamHGrimes

Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.

This Post Has 15 Comments

  2. Xing 10/08/2011

    shame on you! MARKET WIZARDS I&II + STOCK MARKET WIZARDS

    1. Adam Grimes 10/08/2011

      Hi Xing. It was not a mistake I omitted those books. They are fun reads, and they were inspirational to me at different points in my struggle. I also have been fortunate to have known quite a few of the people profiled in those books, so I can certainly say I have tremendous respect for the traders profiled. There are good lessons in those books, but you see my list is from a significantly different perspective. (and obviously my list is a highly opinionated list anyway!)

      Thanks for your note.

      1. Salvator 10/20/2011

        As I was reading the article,I was expecting to see these three books as well.I am currently reading the first one,and I believe it gives a great insight into the mentality of traders..

  3. Abejorro Negro 10/09/2011

    Interesting – you did not point out specifically to Money Management or Position Sizing. When I read Van Tharp’s book “Trade Your Way To Financial Freedom” it was a real eye opener and I never ever entered a position w/o a stop loss nor with inappropriate position size.
    As you said, this is highly opinionated and I don’t want to kick off a discussion on why this and that not, but just one last suggestion: Peter Brandt wrote a nice book which is kept very simple and shows his approach of analyzing the trades in the context of his long-term statistics and showing his trading notes during 5 months – the eye opener was that he had a poor hit rate during those times and still came up positive by cutting short losses and sticking to his approach. Did not see anything sincere in other books before.
    Anyway, great suggestions, thanks a lot.

  4. H.H. 10/10/2011

    A new and good book on the psychology bit is The Inner Voice of Trading by Michal Martin. Highly recommended. Not as long-winded as Steenbarger and just as good imo.

  9. fs 10/18/2011

    Thanks Adam, your 3 posts just made me realize that I potentially have a shot at becoming a real trader and that I already have most of the necessary foundational knowledge.

    1. Adam 10/18/2011

      thank you… glad it was useful and gave you some ideas. remember, this is background knowledge… the actual applied knowledge of trading may seem very simple at times (“buy here, sell here”), but getting to that point is a long, hard road. Like everything meaningful, it must be done in small steps that incrementally build toward something huge.

  10. Rodolfo 10/22/2011

    Hi Adam. Thank you SO MUCH for this list, you don’t how much it means to me. I don’t care if it takes me 2 yrs to read all the books in this list to be able to have a solid foundation and thus increasing my chances on becoming a successful trader, although the sooner the better of course. Thank you for taking your time to write such an in depth and detailed list and for sharing it with us. I appreciate all your help. Good luck with your new book!

  11. Emogenekeesler1994 12/11/2011

    this is a supergreat list, thank u adam!

  12. D. Carter 09/04/2012

    I ordered the book by Schwager on T/A based on your recommendation. I see it was written in 95. Is there any chance that the information is dated?

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