Trading Tips

What trading books do the pros read?

A poster on Trade2Win asked the following question recently:

So everywhere I look I see the same recommended books: [easyazon-link asin=”0471770884″]Reminiscences of a Stock Operator[/easyazon-link], [easyazon-link asin=”1118273052″]Market Wizards[/easyazon-link], [easyazon-link asin=”1592803377″]New Market Wizards[/easyazon-link], [easyazon-link asin=”0735201447″]Trading in the Zone[/easyazon-link], [easyazon-link asin=”007147871X”]Trade Your Way to Financial Freedom[/easyazon-link], [easyazon-link asin=”0471592242″]Trading for a Living[/easyazon-link], etc etc etc, you all know the rest…

…but I was wondering what books do professionals read?

Of course I’d add [easyazon-link asin=”047179063X”]The Essentials of Trading[/easyazon-link] to that list. 🙂

I’d also suggest looking at the list of books recommended by the contributors to my Trading FAQs book. You can see my own Top 5 Trading Books as well.

In response to the question, though, I’d make two points.

First, the poster wanted to get inside the head of trading professionals. Really, that’s the whole point of the Market Wizards books. If you want to know how they think, read that series.

Second, think about the sort of stuff a professional in any area would read. By the time you’ve become an experienced pro in any field you have already done the vast majority of the important reading you’ll do specifically related to your work. At a certain level of development you reach the point where you don’t really get all that much out of books anymore. Books are not generally written for the masters, but rather for the newbies and intermediate level learners.

At the pro level it’s about experience and keeping up with developments in the industry. This generally means doing and getting information from news and periodical type publications. And when you do need to learn something new within the field, it comes from more direct, specific sources. It tends not to include books, unless you’re looking to expand your knowledge into a new area.

I read a lot myself, but when I read books about trading the focus is more on judging the book for sharing with readers of this blog, my newsletter, etc. via my trading book reviews. The related books that I read for my own sake tend to be more economics and history oriented, reflecting some of my personal interests.

I’m interested to hear what other experienced traders have to say on the subject, though.

Trading Tips

Ten of the leading trader mistakes

Jim Wyckoff has a good article out which looks at the causes of trader failure.

  1. Failure to have a trading plan in place before a trade is executed.
  2. Inadequate trading assets or improper money management.
  3. Expectations that are too high, too soon.
  4. Failure to use protective stops.
  5. Lack of “patience” and “discipline.”
  6. Trading against the trend–or trying to pick tops and bottoms in markets.
  7. Letting losing positions ride too long.
  8. “Over-trading.”
  9. Failure to accept complete responsibility for your own actions.
  10. Not getting a bigger-picture perspective on a market.

I think this is a very good list. I dedicated a considerable amount of my book (and by extension my course) to developing a good trading plan, and many aspects of Jim’s list tie in with the things I talked about there. I have written previously on the subject of “protective stops“, so I won’t go into that again here. You can also see my recent post about traders letting losers run too long.

For me, #9 may be the biggest one of them all – at least for some people. Too many traders want to blame poor performance on someone else.

I will contend with Jim on the trading with/against the trend in #6 as there are systems that do quite well operating in a counter-trend (often called mean reversion) fashion. That, though, is different from trying to pick tops and bottoms, which usually ends in disaster.

Trading Tips

From the data: One reason traders struggle

Over the last couple of weeks I’ve been working with the forex trader data I’m going to be using in my PhD research. I included some of the figures I’d pulled out in one of my recent newsletters, but I thought I’d share some additional stuff here.

I’ve pull the following set of numbers on trades which include USD pairs (no crosses), of which my data contains over 2 million records.

Winners: 1,280,459
Average Profit: $60.03
Average Pip Profit: 28.20

Losers: 752,614
Average Loss: $105.14
Average Pip Profit: 63.88

Notice there are many more winners than losers. They represent 63% of all trades. These are retail traders, so it just goes to show that you don’t want to get too crazy about looking to trade against the collective.

Notice also that the average loss is about 75% higher than the average profit. That completely offsets the 63% win rate and results in a negative overall expectancy for the group.

It must be noted, however, that that average loss appears to be due to holding on to losers too long rather than risking too much money. Notice how the average loss in pip terms is more than double the average gain. Traders actually had lower pip values on their losing trades than on the winning ones (on average). They just held on too long.

Here is the problem is for most traders. They are quick to take profits and slow to take losses. This is referred to as the Disposition Effect in Behavioral Finance research.

Much more analysis of the data needs to be done, but these results are very interesting nevertheless.

Trading Tips

Tips to keep the trading fires burning

Mike Bellafiore at SMB offered up a quintet of suggestions for traders the other day. They were aimed at traders who find themselves struggling with the motivation, or could be viewed as ways to help avoid that happening. Here’s his list:

1) Make sure you take some time off.

2) Do things outside of work so that you do not value yourself from your trading. Trading is the game we play. It is not who we are.

3) Be grateful for the privilege of trading. It really is so cool that we get to do this for a living. Be thankful for this opportunity, no matter how short or long.

4) Stop judging your trading by your PnL. For example that trader on our desk had a better month than the prior though he did not make more money. He worked on his sizing. There was less opportunity this month than the prior so comparable results are an improvement. He gained another month of experience.

5) It is ok to fail. How is Oprah doing with OWN? Remember that Michael Jordon commercial about all his failures before triumph. Oh man if you only knew how many stupid mistakes I make every week as a trader. Failure is a blessing to learn.

Now it must be noted that Mike very much looks at things from the perspective of an active day trader. That’s pretty obvious in #3. That doesn’t mean the same ideas aren’t useful for someone who only trades part-time. They definitely are. We all need to take a break from the markets from time to time. We all need to realize we are not defined by our trading. We all need to realize that mistakes and losing trades are part of the process and that we shouldn’t be looking at what others are doing to determine our success (which is something that get’s talked about in Trading FAQs).

Trading Tips

Trader Psychology is NOT the most important thing

I came across a post on the FXStreet site with the following statement:

“The majority of trading success comes from the mental side of trading not the strategy…”

The article then goes on to say that psychology is 85% of the equation of trading success, with money management coming in at 10% and strategy at only 5%. I reject this completely.

To explain my own position (as I also did in a recent online panel discussion), which is one I share with Dr. Brett Steenbarger, who literally wrote the book on trading psychology ([easyazon-link asin=”0471267619″]The Psychology of Trading[/easyazon-link]), let me ask these questions.

If you don’t have a positive expectancy system, does your mental state matter?

If you don’t have the risk management side of things right, will it make any difference how strong your discipline is?

The answer to both questions is “No”.

Trading completely without emotion seems to be the ideal many folks are aiming for in their trading. You could turn yourself into a robot (or program a robot to trade your system), but that’s not going to turn a losing system into a winning one or overcome poor risk management.

It takes all three elements to be a successful trader. If you’re missing any of the three legs of that tripod, it won’t stand up. Psychology does become the thing you spend the most time on once you have a good system and risk management strategy, but that doesn’t make it more important.

Reader Questions Answered Trading Tips

More practice means faster trader development

There’s a post on the Kirk Report blog in which a new trader asks about how he should allocate his time. To paraphrase:

In your opinion, how should I properly prioritize my time between reading and learning versus actual practicing (time spent on simulator) to gain the skills I need as quickly as possible?

There are a couple of key points I think are worth speaking to here, both in terms of stuff talked about in the post and from my own point of view.

First, it’s important to shift into “doing” as quickly as is reasonably possible. Early on you have to spend a lot of time learning by reading, etc. to get the foundational information required. To learn how to trade, though, you actually have to do trading activities. When I say “trading activities” I mean all of the stuff that goes into trading. That includes market analysis, trading system research, and of course taking and managing positions. As in the blog post, I think time spent in the markets should be a large multiple of time spent learning about them.

The second thing I would say is that it’s not enough to do simulation or demo trading. As I’ve written before, to really get the full effect you need to trade real money, not paper money. Obviously, I’m not talking about putting a lot of money in the market or taking big risks. My point is that demo/simulated trading is very different between the ears than trading with money actually at risk.

The last observation is the more you can practice, the faster you will see gains in your trading skills. This is obvious, but it speaks to a certain point. Someone who only has an hour a day to devote to trader development is at a disadvantage to someone who has 8 hours. Using a simulator, though, creates an opportunity to increase “trade” frequency. It also allows you to work through all kinds of different market conditions, not just those present during your learning period.

To that end, I’d like to hear from readers about what good simulators they have come across. If there’s one you think is good, leave a comment below.

Trading Book Reviews

Book Review: The Option Trader’s Workbook

[easyazon-link asin=”0132101351″][/easyazon-link]I have had [easyazon-link asin=”0132101351″]The Option Trader’s Workbook[/easyazon-link] by Jeff Augen sitting in my to-be-review pile for a little while now. I’d have gotten to it sooner, but for some reason I’ve not been reading as much of late. This is not my first read of a book my this author. Unfortunately, I didn’t think much of one of his other titles (Trading Realities). This one I found a bit more useful.

Workbook is the key term in the title of this book. It is a basically a collection of problem-solving exercises. The author lays out a scenario and asks a question, with the solution provided right there. There are hundreds of them, some simple and some complex. As such, it may not be the best point to start for someone just getting going in their options education, but it definitely has potential value for something with at least a bit of a foundation who’s looking to apply that knowledge. Not only do the scenarios and questions ensure a good working knowledge of options, they also will get readers thinking about options applications in ways they probably would not have done otherwise.

This isn’t the type of text you’ll just read through. If you’re willing to do the work to go through the problems, though, you could get a lot out this workbook.

Make sure to check out all my trading book reviews.