The Essential Non-Trading Trading Books

There is so much trading literature available that sifting through all of it to find value can be a daunting task.  There are some classics such as the “Market Wizards” series,” Reminiscences of a Stock Operator,” and “Pit Bull.”  There are also some newer books which I think are great like “Hedge Fund Market Wizards,” “Traders at Work,” or “Market Mind Games.” 

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.