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.
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.)