On My Trading Bookshelf

With all of those Christmas gift book tokens — do they still have them? — burning a hole in your pocket, you might be thinking about ‘investing’ in some trading and / or investment books. I’ve read many such books, and written a few, but only a handful have retained pride of place on my trading bookshelf as lasting inspiration. They are:

How I Made $2 Million in the Stock Market

Not me, you understand, although I have been known to make an embarrassingly impressive 3000% return within six months. No, this is the title of a book written by dancer-turned-trader Nicolas Darvas and it’s all the more impressive because he made this ‘fortune’ several decades ago when $2m really was a fortune.

Along with his other book “Wall Street: The Other Las Vegas”, this was the first book that convinced me that trading is mainly (if not wholly) about price action. Whatever the long-term prognosis predicted by the fundamentals, in the short term the price can go anywhere… and probably will; except that there may be patterns of price behaviour. The main pattern that Darvas utilised was one of an upwards breakout, although he didn’t call it that. He called it his “box theory”.

Whether the exact Darvas method would work as well now as it worked then is a matter for debate, but it doesn’t matter. The story itself is interesting and inspirational.

Reminiscences of a Stock Operator

Actually this one isn’t on my bookshelf, but I’ve borrowed it a few times from my local library. This absolute classic is supposed to have been written by legendary trader Jesse Livermore masquerading as Edwin Lefevre. It’s a roller coaster story — he went bust several times, and shot himself in the end — as well as a good source of trading ideas. I don’t mean a good source of stock ideas, since many of the stocks he traded no longer exit. I mean it’s full of pearls of trading wisdom like:

‘Of all the speculative blunders there are few greater than trying to average a losing game.  Always sell what shows you a loss and keep what shows you a profit.’

and

“The big money is made by the sittin’ and the waitin’ – not the thinking”

There are several more books about Jesse Livermore, and at least one more written by him: “How to Trade Stocks”. But for me, “Reminiscences of a Stock Operator” is the original and still the best.

Trade Your Way to Financial Freedom

Financial freedom means different things to different people. To some it means having £1m or more in ready cash. To others, like me, it means being able to exist on the combined incomes from my trading (when it works), writing and other publishing activities so that I no longer have to do a “proper job” — but this “lifestyle” also means keeping outgoings to an absolute minimum.

Whether Van K. Tharp’s book “Trade Your Way to Financial Freedom” will allow you to do just that, who can say? But this is one of the best books on the market that covers the often overlooked topics of money management, risk management, and position sizing. It’s the first book that really made me aware of those topics, and made me realise that trading and investment returns are not merely a result of clever stock picking. You’ve got to “stay in the game” long enough to realise your trading edge… if you have one.

Trend Following

Whereas I see myself as more of a “trend leader” (not in the fashion sense) rather than a “trend follower”, because I try to catch equities before a sustained trend begins, the book “Trend Following” by Michael Covel taught me how important it is to hold on to positions while a trend is in force — rather than selling out prematurely on a profit target.

The book teaches a reactive approach to trading, on the basis that we can react to what has just happened better than we can predict what will happen next. I kinda agree, and my catching of falling knives is in fact more reactive (the price just fell massively, so it’s cheaper than before) than it is predictive.

It is interesting to see the “real life” results towards the end of the book, which illustrate how trend followers can accumulate quite substantial draw-downs like me as they get whipsawed in and out; before ultimately riding the jackpot trend.

The Zurich Axioms

I quite like “The Zurich Axioms” by Max Gunther, even though I don’t agree with all of the axioms.

The “axioms” are the “rules of speculative play” supposedly practised in Swiss banking and speculative circles, and they include:

ON RISK: Always play for meaningful stakes

The rationale here is that “If you bet with $100 and you double your money, you’re still poor.” but I don’t entirely agree with this one because it seems contrary to prudent position sizing.

ON HOPE: When the ship starts to sink, don’t pay. Jump!

I most certainly agree with this one, which is why I think that stop orders are one of the most important weapons in the armoury of every trader.

So this little book is a mixed bag, but it provides a lot of food for thought in the context of treating trading as a betting or gambling endeavour rather than an investment endeavour.

Don’t Just Sit There, Read Something!

Thinking about it, they do still do book tokens, so you might have some left over from Christmas. Or maybe you received them in the form of Amazon gift vouchers? You might even have been gifted one of those new-fangled Kindle reading devices and you’re wondering which trading books are worthy of populating it. Maybe you’re just a voracious reader like me.

Whichever way it is, I think you could do much worse than investing in the trading books I’ve highlighted in this above.

Tony Loton is a private trader, and author of the book “Stop Orders” published by Harriman House.

Tags: trading books