The Nine Books That Every Trader Should Read
(…Even If They Subscribe to a Forex Signal Provider)
Being a trader is a lifelong learning experience and one of the best ways to get informed about the world of trading is to read books on this topic. Below we list some of our favourite books that shaped our trading careers and we feel confident that they will help you become a better and well-informed trader, not to mention they are quite enjoyable and entertaining to read.
This is a basic guide for every trader who is just getting started with forex trading written in a style and format that is easy to understand. In our view far too many people rush into forex trading without proper understanding of what it is that they’re getting into and one of the reasons why that is is that brokers make it very easy to open an account in as little time as possible to get you started in trading. The fact is the vast majority of traders would be much better off by actually spending some time getting acquainted with the mechanics of the forex market before putting on their first trade. Will this For Dummies trading guide provide you with an edge that will give you instant profits? Absolutely not, but what it will give you is the basic nuts and bolts of what trading forex entails and the kinds of pitfalls you should anticipate when you start to trade. Before you can develop your edge, and keep in mind, there’s a very good chance that you never will (it’s OK, that is why you might consider subscribing to a good forex signal service to help you trade), you have to learn how to avoid a plethora of possible errors that we face when we trade.
If you are not aware what kind of issues you might face when trading forex, and there are quite a few, then this guide is highly recommended. This book will give you a good introduction to developing a proper trading plan, something that every trader should have, along with good risk management practices designed to keep you out of trouble. Moreover, it will also provide you with a good background on the fundamental data that impact the forex market and are the main source of its volatility. The fundamental aspects of trading may be boring to many novice traders, but if you don’t grasp them you will have a very difficult time learning to trade profitably in the long term. Lastly, pretty much everything that is in this book can be sourced for free on the internet, but if you value your time and you’re just getting started then this is as good a place to start your forex trading education as any.
Without any reservation we highly recommend every book in the Market Wizards series, which by now are uniformly considered to be classics that all traders should read, and even re-read, at some point in their careers. Being a trader himself, Schwager has a knack for delivering extremely engaging and in-depth conversations with some of the world’s best traders. Not to put too fine a point on it, but the stories are fascinating and extremely insightful in terms of what it takes to succeed in the markets on a long-term basis. The broad lessons that can be derived from the book are that traders must be extremely disciplined with respect to their methodology, whatever that methodology may happen to be. Secondly, risk management and capital preservation are critical components of a sound trading methodology, and there are many stories in the book that wonderfully demonstrate what kind of disasters can happen when we do not pay attention to this aspect of trading. Most of the traders featured have blown up multiple accounts before they learned these concepts for good, and if there is any grand lesson here, it is that it is impossible to succeed if you do not master proper risk management strategies.
Most of the traders who are featured in Market Wizards will attest that you only learn by consistently eliminating errors in every aspect of trading, and then by ultimately developing your own style that suits your personality and temperament. In fact, one of the most fascinating aspects of this book is seeing how a lot of these traders drastically differ from each other in terms of how they approach trading. In our view this underlines the fact that at the end of the day every trader must find a style that is in sync with their personality and emotional and psychological profile. Without question this can be a very difficult process, and in some cases very expensive from the financial standpoint. This may be an abstract concept at first, but after reading these books one will quickly see that there is more to trading than just spotting good technical opportunities on a chart. The confessions of the various psychological and intellectual battles these traders faced are eye-opening, and it is probably the key reason why these books have stood the test of time so well, because they are as applicable now as they were back when the original Market Wizards came out in 1989.
Here at ClearEdgeFX we are big fans of anything written by Nassim N. Taleb, not only because it is profound and entertaining to read, but also because it is so relevant to what we do on an every-day basis. In our view all of Taleb’s books are required reading because they consistently provide a refreshing lens through which we can perceive the world. It is worth remembering that Taleb himself was a professional trader who made a fortune during the 1987 crash profiting from an event that, in theory, was not supposed to happen as many experts often are prone to think. The concept of The Black Swan is that the absence of evidence is not evidence of absence, and in a world that is frequently punctuated by events that supposedly had no chance of happening yet still happened, it is imperative to take Taleb’s advice seriously. Just because you’ve never seen a black swan does not mean that it does not exist. If we take a look the history of the financial markets we will quickly see that this is an environment particularly vulnerable to events that are of extreme nature. This can be both, positive and negative, although as traders we must be particularly mindful of the cataclysmic consequences that we can face should we find ourselves on the other side of an event that is negative.
There is no shortage of all kinds of black swans in forex trading, and a great example of this is the Swiss central bank’s unpegging of the franc in January of 2015 where in a matter of seconds the franc dropped over 3,000 pips. That was an unprecendent move that destroyed accounts of many traders and hedge funds, and on top of that, it even put of out of business several brokers who did not have enough capital to withstand a market event of this magnitude. Even if you did find yourself on the right side of that trade it is possible that your broker may have cancelled your trade. As forex traders we need to be aware of these types of risks because we speculate using leverage. Although there are many benefits to using leverage, there also are grave risks involved when a black swan event strikes to a degree never encountered before. And remember, there always is a new event that has never been encountered before. Taleb’s book in some ways can be frightening because it will make you wonder what will be the next big black swan that currently may appear to be unthinkable and supposedly impossible to occur. Whenever you hear someone say that something cannot happen because it has not happened before, pay close attention because that in itself is a sign that it will likely happen at some point. We as humans have the fatal flaw of underestimating risks in many aspects of our lives and Taleb’s fascinating book wonderfully weaves the story of how foolish we can be in this respect.
One of the most critical aspects of trading is the psychological strength that is required to consistently beat the market, and not surprisingly this is an area where just about every trader, even the successful ones, can struggle. As traders we suffer a myriad of psychological barriers that keep us from winning in the market on a consistent basis. There are times when traders are too excited to enter trades and there are times when they are too fearful to pull the trigger. Some stubbornly insist on winning every trade refusing to close out a losing position, potentially taking the risk of completely ruining their account, all as a result of this one psychological flaw of refusing to take small losses. There is no way of getting around it, developing the proper mindset and discipline is fundamental to becoming a professional trader who can survive the markets in the long term.
Not without reason then Trading in the Zone is considered to be an all-time classic by many professional traders who were greatly helped by the book’s approach to solving the various mental challenges traders encounter. One of the most illuminating insights that Mark Douglas revealed in this book is that the outcome of any individual trade is completely irrelevant, and as such, traders should learn to disassociate themselves from any individual trade and instead focus on thinking in probabilities. What that means is that you have to learn how to let your edge play out over the course of many trades, even if it means that you have to endure a losing streak that will make you uncomfortable. That is where most traders are vulnerable because very few are able to tolerate more than a few losing trades, even if the system that they are using is actually profitable. Even when presented with a winning strategy some traders still cannot trade it, such is the psychological paradox of forex trading. If you continue to experience any kind of psychological problems we highly recommend to read this book. In our view it is easily one of the most useful guides for improving the necessary mental skills required to be a successful trader.
If you enjoyed reading The Black Swan then without question you should go ahead and pick up Fooled By Randomness, which was published prior to The Black Swan, and was the first title in the Incerto series. In this book Taleb wonderfully explores the phenomena of randomness and how it affects our lives in every respect. More importantly he deeply underlines the human proclivity toward explaining random events that really have no causal basis. According to Taleb, we tend to look for patterns that ‘explain’ things after the fact even though the patterns themselves had no bearing on the events that took place. Moreover, one of the biggest perceptual flaws that we have is that we tend to ascribe successes to our skills and blame failures on events beyond our control. Being aware of this issue is important for every forex trader because, particularly in this business, it is easy to assume that one is an accomplished trader after a good run of profitable trades that may have been nothing but a sequence of random events that fool us into thinking that we are great at what we do.
Given the sheer size of how many people engage in trading there is a very good chance of some traders producing extraordinary results due to sheer luck, as hard as that may be difficult to imagine and accept, especially if you happen to be one of these successful traders. Imagine the following scenario where we have 1,000 forex traders trading for a year. After a year we have 500 traders who are profitable, and after two years 200 who remain profitable. So far so good, now, five years later we are down to 63 who still are profitable from the original cohort of 1,000. At this point, if you are one of the 63 traders you’d probably think that you are really good, and that forex trading is not as hard as everyone makes it out to be. Yet, if we continue with this excercise after ten years only two traders will remain profitable with everyone else going out of business.
The critical insight that Taleb provides is that a lot of what passes for every day statistics is subject to a severe survivorship bias. For each of the years that remaining group of traders traded one could calculate the average performance for that group as a whole, yet this statistic would be misleading because it would not include all the traders that kept dropping off and were no longer in business. So, why is this relevant to you? Well, you need to be aware that as much as you think you are a great trader it is possible that at the end of the day all that you are doing is taking advantage of a particular set of market conditions that are responsible for your performance, and as soon as those conditions change you may find yourself in a difficult struggle to stay in this business. Now, to be clear, there is nothing wrong with exploiting particular market conditions to your advantage (many traders can’t even do that so they would probably be much better off with subscribing to a reputable forex signals provider) as long as you are aware of that. Without question randomness is a fascinating topic to ponder, and the way Taleb explains these concepts will surely change the way you perceive the world around you and how it relates to your trading.
For one reason or another this book has not received as much attention as it deserves and no doubt our short review will not give it justice, nevertheless we think that it is important to include it on our list as a worthwhile title to read. What we really like about this book is that it is not just a collection of patterns, but more like an in-depth analysis of the nature of markets, how they operate, and how to actually profit from trading. One of the ideas that the author presents is that for the vast majority of time markets tend to be balanced, and it is only when they do become temporarily unbalanced that we have an opportunity to take advantage of this condition. This is an important insight, because quite too often traders have the tendency to be in the market without any indication of who is prevailing in at that moment (ie. buyers vs. sellers). Being able to recognize the current market structure and apply its patterns consistently is what might give you an edge to succeed in the long term. Obviously this is not easy to achieve, and the author is on the record that it generally takes about five years before one becomes a proficient trader. Another great thing about this book is that the author also provides an excellent tutorial on risk management and how critical it is to one’s chances of becoming a professional trader. All in all, this is an excellent book by someone who is not trying to sell any seminars, but instead shares the details of his journey of becoming a trader and is very generous and honest with his observations on all things trading.
It seems like there are two types of forex traders in the world: those who trade with indicators and those who prefer clean charts free of any distractions provided by oscillators, moving averages and so forth. As much as we like pure price action trading we are of the view that at the end of the day all that matters is whether you successfully apply any method with good risk management, with or without indicators, that you actually enjoy trading. That said, we do agree that way too often novice traders spend way too much time being attracted to indicators instead of actually analyzing what the price is doing on their chart. It is just far too tempting to put indicators on the chart thinking they will do the work for us. If you fall into this group, and are wondering what price action trading is all about, then Naked Forex is an excellent guide that will show you how to trade by relying only on the price on your chart. The authors provide a meticulous overview of what kind of patterns (and when) one should look for to trade in this style. The book contains lots of great insights and tips on how to draw support and resistance zones and how to pinpoint high-probability trades from various candlestick patterns. Price action trading has become very popular in the past few years, and from our experience pretty much all successful traders apply some form of price action trading, even when they apply indicators to confirm their trades.
One cannot underline enough the impact of human psychology and how it affects our decision-making, particularly so when it comes to trading and investing. This concise guide takes readers on a quick journey outlining the various pitfalls we face and how to overcome them. Some of the topics that the author covers include loss aversion, confirmation bias, overconfidence, hindsight bias, overoptimism, anchoring and many others. The important thing to remember is that these psychological flaws are inherent to human nature, and as such, if we engage in trading or investing we must not only become aware of this but also find ways to minimize their impact on our decision-making. Obviously emotionally impaired decision-making will lead to negative results, and this little guide is as good a start as any in learning how to overcome these obstacles that all traders face at some point.
If you have never heard of Long Term Capital Management (LTCM) and the fascinating story behind its collapse then this book is required reading because it entails just about everything that was mentioned in the books listed above. In the 1990s LTCM was the biggest and most famous hedge fund in the world run by two Nobel Prize winners, a former central banker, and a team of highly experienced bond traders poached from Solomon Brothers. Together they designed a formula designed to profit from volatility that was deemed to be virtually bullet proof. And for a while it was, turning $1 billion into $4.5 billion in merely five years, only to completely collapse over the course of a few months in the summer and fall of 1998 threatening the overall stability of the entire financial system. The key themes that emerged from this debacle is that statistical models are not applicable in financial markets and that is because financial markets are subject to black swans that inherently are impossible to model (see the Taleb books above). In this case, the unlikely event that served as the catalyst for LTCM’s downfall was the Russian debt crisis that reverberated across the world markets that summer. With a 30:1 leverage and massive exposure to various derivatives the $4.5 billion in equity was wiped out in a matter of weeks without anyone expecting it to happen so suddenly, especially that the fund had only one losing month during the previous four years (and the loss was barely 3%). This story is a perfect reminder that even under the best of circumstances and a great track record it is very easy to lose sight of how dangerous markets can be. The founders of the fund became extremely confident that nothing could possibly go wrong, yet everything that could go wrong did go wrong, and it happened at a blinding speed. When Genius Failed is an important book with sober lessons for anyone who has anything to do with financial markets.