While I intend to take a closer look at these trading books
further down the road, right now I’d like to point out the tremendous value to
be found in books that aren’t explicitly about trading. So, this week, I present to you the list of
Non-Trading Trading Books. I will
provide a brief description of the book, its relation to the trading game, and
then offer some relevant quotes and what they mean for traders.
Letters From A Stoic
by Seneca
Seneca was a Roman Stoic Philosopher. “Letters From a Stoic” is a collection of
essays disguised as letters to a friend of Seneca’s. One of the main themes in the book is the
importance of dealing with uncertainty and things outside of your control with
a dispassionate attitude. Adopting this
sort of attitude can seriously help one in trading. After all, once you put on a trade, what
happens is out of your control. The only
thing that you do control is your reaction.
Aside from the near-explicit trading lessons to be found, there is a lot
to learn about how to live, which also affects how one trades.
“Halt before every
good which Chance brings to you, in a spirit of doubt and fear; for it is the
dumb animals and fish that are deceived by tempting hopes.”
Trading Translation: Hope kills traders. Be wary of easily gotten gains.
“Our lack of
confidence is not the result of difficulty.
The difficulty comes from our lack of confidence.”
Trading Translation: Confidence is absolutely key to
trading well, but don’t forget to balance it with humility.
Deep Survival by
Laurence Gonzales
This is one of my top five favorite books of all time. Gonzales looks at some extreme situations in
which people had to survive – being stranded at sea, stuck in a jungle after a
plane crash, lost in the wilderness. He
then figures out why they survived. How
did they think differently from those who perished? What traits did the survivors have? Trading in the financial markets throws the
participant into what is basically an electronic wilderness. When real money is on the line, how you think
and deal with yourself is what will separate the winner from the loser. Having
the “survivor personality” is absolutely critical to success in trading. I have read this book a few times and it
never ceases to amaze me how much Gonzales’ perspective applies to
trading. A few quotes to show what I
mean:
“There are things you
can’t control, so you’d better know how you’re going to react to them.”
Trading Translation: You can’t control what happens
when you are in a trade, so be ready to react to any possible scenario.
“…they displayed that
quality which is perhaps the only one which may be said with certainty to make
for success, self-control.”
Trading Translation: Can the importance of
self-control in trading ever really be stressed enough?
“Stress causes most people to focus narrowly on the things that they consider most important, and it may be the wrong thing.”
Trading Translation:
If you are in a losing trade and the market is moving against you, your
brain is going to focus on information that you want to see; information that
confirms that you are correct. You
should actually be looking for information that is saying that you are
incorrect instead!
“In nature [or the
markets], adaptation is important; the plan is not. It’s a Zen thing. We must plan.
But we must be able to let go of the plan, too.”
Trading Translation: Planning every day is important
so you know how you will handle different scenarios. But plans can quickly be invalidated in
trading, so you need to be able to forget your original plan and come up with a
new one.
The I Ching or Book
of Changes by Brian Browne Walker
The I Ching is a classic Chinese text that was believed to
be written between 475-221 BCE. To use
the I Ching properly, you are supposed to throw specific Chinese coins to come
to some sort of answer. However, the
text alone provides a lot of lessons that can be learned and applied to trading.
“A challenge lies
ahead. Ready yourself by deepening the
stillness within. Anxious anticipation
only weakens your abilities.”
Trading Translation: Every day that a trader wakes up, he faces the
challenge of a new trading day where it is impossible to know what is going to
happen. Having feelings of anxiety is a
common experience. This quote is one
that I try to keep in mind at the beginning of the day to keep things in
perspective.
“Recognize the
beginnings of improper action. The
superior person corrects herself while it is still easy to do so.”
Trading Translation: After I have a couple of bad trades in a row,
I know that my vision of the market is probably not objective anymore. Instead of continuing to press my trades, it
is always a better idea to recognize my flawed judgment and correct it.
“The superior person
avoids making excuses. Recognize errors,
correct them, and there will be no misfortune.”
Trading Translation: Trading is a business in which the participant
is 100 percent responsible for his or her results. It is never the fault of the market that the
trader lost money, and if the trader believes otherwise, that trader will never
learn from their mistakes.
Thinking Fast and
Slow by Daniel Kahneman
This is a pretty popular book that takes a look at how our
brains work. One of the main themes is
that we can much more easily spot the mistakes of others than we can our
own. Kahneman also discusses what he
calls “System 1” and “System 2.” System
2 is in charge of self-control while System 1 is more impulsive. This is all rooted in evolutionary
biology. Knowing how we think can help
us to work around innate biases that might have adverse effects on our trading
decisions.
“The best we can do is
a compromise: learn to recognize situations in which mistakes are likely and
try harder to avoid significant mistakes when the stakes are high. The premise of this book is that it is easier
to recognize other people’s mistakes than our own.”
Trading Translation: The stakes are always high in
trading so working to avoid mistakes is always necessary. And what about the idea that it is easier to
recognize other people’s mistakes than our own?
Mistakes any traders make are lessons for the smart trader to take into
the future. I believe the savvy,
experienced trader can see other traders making mistakes in the market and then
exploit them to advantage.
“The conclusion is
straightforward: self-control requires attention and effort.”
Trading Translation: I don’t think most people see
self-control as the biological process that it really is. It is not something that you either have or
you don’t. It is something you can build
and in order to use it properly, you need to be eating well, sleeping well, and
exercising. These things all help to
maintain a healthy lifestyle and energy levels, which directly influences
success in trading.
“…effortful mental
activity appears to be especially expensive in the currency of glucose. When you are actively involved in difficult
cognitive reasoning or engaged in a task that requires self-control, your blood
glucose level drops. The bold
implication of this idea is that the effects of ego depletion could be undone
by ingesting glucose, and [this hypothesis has been confirmed in several
experiment].”
Trading Translation: Your brain craves glucose as a result
of effortful thinking, so eat more bananas when trading. Seriously though, keeping your energy status
in mind is important so you can know if your discipline may not be where it
needs to be. Thinking takes energy!
“Another remarkable
discovery is the powerful effect of mood…They [experimenters] found that
putting the participants in a good mood before the test by having them think happy
thoughts more than doubled accuracy. An
even more striking result is that unhappy subjects were completely incapable of
performing the intuitive task accurately…when we are uncomfortable and unhappy,
we lose touch with our intuition.”
Trading Translation: Having a positive attitude is
necessary when trading. You need to have
confidence to be able to rely on your intuition.
I could keep pulling quotes from this book for hours, but I
strongly suggest you read it yourself.
The Inner Game of
Golf by W. Timothy Gallwey
The title is pretty self-explanatory but, just to be clear,
this book is about the mental part of golf.
The concepts apply to trading with incredible accuracy, so I will let
the quotes do the talking.
“…slow-motion
videotapes revealed that the best golfers do a great deal that is individual or
unique and that there are relatively few constants in the swings of the pros.”
Trading Translation: The same can be said about great
traders. They all have a method and
style that is unique to them. Tiger
Woods can’t teach you your unique swing; although he can probably give you some
good tips. Likewise, Paul Tudor Jones
can’t teach you how to trade using his style either; he can only offer general
tips, one of which would probably be to figure out your own style.
“I concluded that the
walk between shots is one of the most critical parts of the game.”
Trading Translation: Waiting between trades is
difficult. It takes a lot of
patience. Patience with the right mind
set. You can’t overthink and you need to
be prepared for whatever happens. You
have to keep your thoughts positive so you remain confident in your ability to
make correct decisions.
“Doubt is the
fundamental cause of error in sports. It
is self-doubt that causes the skier to tighten…”
Trading Translation: Self-doubt also causes the
trader’s “vision” to narrow until the only things visible are the objects of
fear. The result is that the trader
often gets what he or she fears most.
The Talent Code by
Daniel Coyle
“Practice makes perfect” should be replaced with “Practice
makes myelin,” according to Daniel Coyle.
This may sound like a self-help book, but it is all about the chemistry
of the brain and it is the most fascinating book I’ve read in years. Essentially, repetitive action (practice)
causes myelin to wrap around the nerve fibers that are firing as you are
performing a specific action. Myelin
insulates the nerve fibers causing them to fire faster and faster. This is exactly what skill is on the chemical
level. Myelin is something that has
scientists very excited right now and reading this book will give you a whole
new perspective on whatever it is you do.
“You will become very
clever through your mistakes.”
Trading Translation: Mistakes are truly a beautiful
thing because they are really arrows pointing to what you need to improve
on. This is as true in trading as
anywhere else.
“We think of effortless
performance as desirable, but it’s really a terrible way to learn.”
Trading Translation: Struggle is the best way to
learn anything worth the effort. Without
struggle, your brain is literally not making the connections that it needs to
make to enhance your skill.
“’Things that appear
to be obstacles turn out to be desirable in the long haul,’ Bjork said. ‘One
real encounter, even for a few seconds, is far more useful than several hundred
observations.’”
Trading Translation: Watching the markets may be a
good way to learn about how they work, but experience is what really counts.
This book is worth a book (or maybe just a blog post) on its
implications when it comes to trading.
The above books are all much better read as a whole rather
than a few select quotes. Hopefully the
sampled quotes will provide the evidence needed to understand that these books
do carry valuable trading lessons.
A lot of new traders start off by figuring out ways to
analyze the markets. What I think is far
more important than that is learning how to analyze yourself. The trading environment is very unique and
our innate traits set us up for failure from the get-go. Having every possible advantage is necessary
to succeed in this business. At one
point it was thought that mind and body are separate, but now it is scientific
fact that they both influence each other dramatically. So while the above list may not directly
address trading, they address an important aspect of it: you.
