Below are some of the books that have had the greatest impact on my trading life and personal life. A few are specifically focused on trading, while others are focused on the mental qualities that will indirectly affect/help your trading and investing.
The longer I trade, and the longer I spend on this planet, the more everything seems interconnected. I mean that in a logical sense; the practices and activities I do outside of trading show up in my trading, and the qualities I foster in trading–such as discipline, patience and attempted logical analysis–all show up in my endeavors outside trading. Trading has become a vessel for developing qualities I want to develop anyway.
In order to stay sharp in the markets, work needs to be put in outside trading to develop personal qualities which aid trading. With that in mind, here are the books which have had the greatest impact on my life, and directly or indirectly on my trading.
Think Differently To Trade Differently
First off, the books that have helped my trading the most aren’t actually trading books. They are books that showed me how to think differently than other people. If most people lose money when trading, then it is probably a good idea to think differently than most people out there. We don’t know how to think differently unless we stretch our minds, dig deeper, look at numbers behind headlines and truths behind statistics. Some of my favorite books on this topic are:
Thinking in Bets by poker legend Annie Duke. Part statistics, part psychology, all practical, this book is an easy and enjoyable read. It is packed with information for making decisions when we don’t have all the facts…like in trading, or in almost any personal situation we face. We first need to recognize we don’t have all the facts, or the information we have may be wrong, but then we still need to be able to act. Essentially, almost everything we do is a bet and can be thought of as one. This book shows us how to make better bets.
The Freakanomics series by Steven Levitt and Stephen Dubner includes the bestsellers: Freakanomics, Super Freakanomics, Think Like a Freak and When to Rob a Bank. All are a worth a read. Each chapter in the books approach a topic from an angle not typically covered. The books basically teach you how to look at the world in a different way, and looking at things in a different way can help your trading.
There are lot of books out there like Freakanomics, that break down how we think and force us to question it. Sway, The Irresistible Pull of Irrational Behavior (Ori and Rom Brafman) is another great one.
The Culture of Fear (Barry Glassner) was another one I found interesting, as it dissects the statistics behind the headlines. As traders, it is our job to dig into what is really going on and separate fact from fiction. Of course, that isn’t always easy. Especially when we don’t know what to look for, which is where books like this can help. Reading books that offer different viewpoints allow us to learn different ways of analyzing things.
One of the key things we need to learn is how numbers can be manipulated. A Drunkard’s Walk: How Randomness Rules Our Lives (Leonard Mlodinow) is an easy read on statistics. A basic knowledge of statistics will allow you to categorize most of what people/media say as rubbish, leaving you more time to focus on what isn’t rubbish. And we are all prone to spouting unverified rubbish sometimes. Another highly entertaining (and even easier) read is How to Lie With Statistics (Darrell Huff), which has been a bestseller since 1954.
What fools us isn’t always statistics, though. There are a whole host of psychological quirks, that we all have, that can pop up at inopportune times causing trading disasters. The Art of Thinking Clearly (Rolf Debelli) provides short chapters on 99 psychological quirks that are impacting our decisions without us even knowing it (most of the time).
Knowing how to think differently, or knowing some of our psychological pitfalls, doesn’t mean we will automatically be better traders, but it is a good start.
The Socionomic Theory of Finance (Robert Prechter) This is one of those books that will change the way you see the world. Socionomics is based on the theory that social trends and social mood drive stocks markets and the economy. This the opposite of the reactionary approach the news portrays. The news make it seem like recessions and stock market declines make investors and business people cautious. In fact, it is cautious business people and investors that cause recessions and stock market declines. Stock markets simply don’t decline when everyone wants to buy. They only decline once people become cautious, wary, and more prone to selling. That is the basic idea, but it goes much deeper than that.
So much of economic theory is based on the reactionary model, which means many investors are not viewing market information in the correct light. These investors, and people in general, are likely to be wrong at the exact time they feel most right. The book reveals an alternative way of viewing financial markets, the world, and social trends. This alternative view is to separate ourselves from the herd mentality, think independently, and be able to see when the herd is heading for a cliff.
The books is also interesting because it shows how many commonly held market beliefs are simply not true. If you get nothing else from this book, and whether you agree with it or not, you will at least come away a better idea of what actually drives prices and markets.
Accepting the Radical (Ronna Smithrim and Christopher Oliphant) makes us take a deep honest look at ourselves and our actions. It doesn’t coddle you, and forces you to face the sometimes brutal truth about what you need to do to gain control of your life (and indirectly, your trading).
It is so powerful, because like an onion, there are always so many excuses and lies we tell ourselves which need to be exposed and peeled back in order to reach a point of maturity and responsibility. Trading requires maturity and responsibility. We need to be able to let go to and realize what is within our control, and what isn’t. Trying to control the uncontrollable, and not taking responsibility for what is within our control, are prime causes of high stress levels, feeling lost and poor (trading and life) decisions.
Playing Ball on Running Water (David K. Reynolds): I would summarize this book as simply a guide to “doing what needs to be done.” The concept is so simple, and yet we fail to follow through on it most days. We stress about things when we could simply confront the situation and be done with it. We let chores go undone, and abandon plans in the middle of them, all while providing ourselves with excuses for why we aren’t doing it.
This book provides lots of insights and examples for how to focus, cut through the excuses and simply do what needs to be done. Trading requires focus, discipline and being able to act without hesitation when conditions call for it. This book will help develop those qualities
You will likely have to find Playing Ball on Running Water used, as it is no longer being printed.
Trading Psychology Books
Trading in the Zone (Mark Douglas) is a must read for any experienced trader who is going through a rough patch or questioning themselves. I say “experienced trader” because this book doesn’t provide any strategies or trading information. It is pretty much only on psychology and the ups and downs that occur when traders go from too arrogant (big winning streak) to a total loss of confidence (losing streak). The book provides some helpful resources, and sometimes just reading a book that “understands” what you are going through will let you know that tough times are normal and you can get through them.
Reminiscences of a Stock Operator: I have read this book about once a year since I first heard about it when I began trading in 2005. It won’t provide you with a strategy for producing instant profits, but it will give you a very good idea of the personal obstacles you can expect to face as a trader. Trading is mostly mental, and it took me–as well as the character in the book–a number of years and hardships to realize that. This book is sprinkled with trading psychology wisdom which can help you prepare for, and understand, the mental battles you’ll face.
The book is a thoroughly engaging tale about a trader, based on legendary trader Jesse Livermore, which provides some new insight every time it is read.
Beyond Greed and Fear (Hersh Shefrin) is a behavioral finance book. The author looks at common trading problems, and then looks at ways to address these issues. I nabbed a few points from the books that I found really interesting, and have tried to monitor those tendencies within myself. As with all books, take what you can from it and leave the rest. Some parts of this book are very “academic” with little application to most people’s trading or investing. That said, it is still worth the read, and a great reminder that even while reading it is important to maintain perspective–continue to think for yourself.
Trading and Investing Books
If you can learn to think for yourself, you don’t need to read a lot of trading or investing books. I actually read very few. The ones I have included below are there because they provide something different than what is available everywhere else, or are good resources on a topic you should know about.
How to Make Money in Stocks (William O’Neil): A book with an incredible amount of trading information. Based on his research of the top performing stocks over the last 100 years, O’Neil lays out the fundamental and technical setups that have occurred in most of those big winners. Packed with charts, this book is loaded with tidbits that will likely aid your trading, whether or not you choose to adopt his exact strategy. The basics of the trading method he outlines are covered in The CAN SLIM Investing Method article. O’Neil also wrote The Successful Investor. While there is a lot of overlap with How to Make Money in Stocks, this is another great little book packed with ideas on trading momentum stocks with improving fundamentals. There is some different information in this book, though, so it is recommended as well. Reading the two books, one after the other, will help solidify concepts and make you more familiar with the techniques of the strategy.
Think and Trade Like a Champion and Trade Like a Stock Market Wizard by Mark Minervini. A former trading champion shares his strategy in Trade Like a Stock Market Wizard, and then adds more details about the strategy as well provides guidance on how to think like a winning trader in Think and Trade Like a Champion. Both books are great reads, filled with usable information. Minervini focuses on stocks with a lot of price momentum, keeping risk small and profits larger with a favorable reward:risk ratio. Also discussed is the effort and commitment it takes to learn a method and become a successful trader. Throughout these books I found myself nodding my head, saying “Yes!, Yes!” as he articulately lays out what it takes to be successful…and how to get there.
Invest Like a Guru (Charlie Tian) – Packed with insights from some of the world’s best investors, this books breaks it all down and provides a few steps to follow to find good companies trading at a fair price (value investing). Lots of stats and charts are provided, showing how various strategies or methods have actually worked, when they tend to work the best (or not work). Essentially, this book is a condensed version of some of the other well known investing books by Buffett and Lynch.
The Market Wizards series (Jack Schwager) includes Market Wizards, The New Market Wizards and Hedge Fund Wizards. All are worth reading as they provide different perspectives on how successful traders trade. There are many different ways to trade, that work! And of course, there are many ways to trade that don’t work. You get to read about the trials and successes of a bunch of different traders. You get to see that the path isn’t easy, but that it is possible.
Warren Buffett and the Interpretation of Financial Statements (Mary Buffett): Well, if you plan to do any longer-term trading/investing, being able to read financial statements is a good skill to have. It doesn’t have to be complicated though. This little book breaks down each line of a financial statement, tells you what it is, and what to look for (according to Warren). Utilize Warren’s insights, or don’t, but at least you will know a little more about reading financial statements.
You Can Be a Stock Market Genius (Joel Greenblatt): The author of this book was a successful hedge fund manger, and in this book he lays out some of the “secret hiding places of stock market profits.” This is definitely a book for the more experienced investor looking for ways to ramp up portfolios profits with special situation investments–mergers, spin-offs and rights offerings, to name a few. The same author also wrote the popular The Little Book That Beats the Market (based on the “Magic Formula“)…another worthwhile read for the DIY investor.
Similar to the Market Wizards series, Market Masters (Robin Speziale) is a book of interviews with a number of Canada’s top hedge fund traders. The incredible diversity of strategies is mind-blowing. You aren’t going to learn everything about a trader’s strategy from an interview, but it does give you a really good idea of where you may want to do some more research, especially if you are just starting out and trying to find a strategy that suits you.
The Black Swan (Nassim Taleb) looks at how improbable events–with huge impact– shape our lives…and why most people are blind to seeing these events before they occur. And they do occur, regularly, in different ways across the globe. In this book you learn a bit about a lot of different fields, but mainly (for the trader) you learn to keep the worst case or alternative views in the back of your mind. You learn that there is money to be made in low probability events, and there is a lot of risk when everyone believes nothing can go wrong. Also recommended are Nassim Taleb’s other books: Fooled by Randomness and Antifragile.
Final Word on The Best Investing and Trading Books
There are many great books out there, and this is not a definitive list. Yet, for whatever reason, these books have had the most noticeable impact on me. They are direct and don’t beat around the bush, which I respect. Feel free to share others in the comments, along with why you like it.
Most of these books are about learning to think better, or to think for ourselves…which is the real goal. That means that we should continue thinking for ourselves even while we read. Don’t dismiss concepts out of hand, but don’t accept them as fact right away either. In a number of these books there things I disagree with, but they are still great books and have a lot to offer. As discussed, there are many different ways to trade, so we take what we can use and leave the rest, all the while forming our own trading style.
You will only get out of these books what you put in. Whether it is the psychological challenges of trading, or fine-tuning a strategy, trading takes a lot of hard work. Reading a book (or two, or many) is just the start of the endeavor.
By Cory Mitchell, CMT
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