The Greatest Myth About Trading

Elementary school can be a brutal place if you are not careful.  It’s not so much the possibility of being bullied, shunned, or made fun of as much as it is the fear of being “branded.”

Yes, this is the place where if you didn’t play your cards right, you could end up with a nickname that would scar you for life.

Enjoy your grilled cheese sandwich a little too much at lunch one day, well guess what….your new name is “cheese.”  You might as well just get it tattooed on your forehead because it is going to follow you wherever you go for at least the next 20 years.

This nightmare scenario became a reality for a guy I knew named Chris Stevens.  To be honest, Chris wasn’t really a friend of mine.  In LinkedIn terms he would have been considered a “2nd degree contact,” meaning I was acquainted with him, but really only hung out with him because one of my good friends was friends with him too.

Back in the 70’s they had this weird annual event called the Presidential Fitness Council Test, where elementary school kids would be tested to see how many push-ups, pull-ups, and “line straddles” they could do.  Arnold Schwarzenegger was even Chairman of the Council for a while.

The winners in each grade would get a medal and a certificate signed by the President. There were always a couple of pre-pubescent über-athletes at each school that took it seriously, but most of the kids just sleepwalked through the process, doing enough of each exercise to be deemed respectable.

The test started out okay for Chris.  He got through the line straddles with a decent score and was able to post a reasonable amount of pull-ups.  But it all fell apart at the push-up mat.  He did seven.  Seven measly push-ups.  I still can’t figure it out to this day.  He wasn’t a weak or scrawny kid, but for some reason that was all he did…..seven.

I’m not a religious guy, but I will swear on a stack of Pumping Iron DVD’s that I never heard anyone call him “Chris” again after that.  He was simply known as “Seven.”

There was no committee meeting to decide it.  No decree from on high.  Just an instinctual understanding from all those who knew him that this numerical scarlet letter was to be his new and permanent moniker.

The transition through intermediate and high school did nothing to erase its hold.  Just like with Norm on Cheers, in any room he walked into, the occupants would simultaneously raise their heads and shout “Seven!”  And eventually, in some twisted linguistic derivation, the nickname ultimately just ended up morphing into “Sev!”

Sev was a solid guy, but not too smart and the one thing I remember about him (besides the push-ups), was how on one 4th of July he tried to pull a stunt that would have made the Jackass crew shudder.

We all had few packs of firecrackers, and like any normal young male pyromaniacs we were trying to see what the “coolest” thing we could do with them was.   One guy threw some in a hole, another put a few in a tin can, and still another chucked a whole lit pack into the air at once.

Sev thought he could do everybody one better, and decided he was going to light one and drop it in the gas tank of a car.  Like I said, Sev was not the brightest guy, and since I am actually writing this post you can infer that his plan did not work out, but it was one of the riskiest things I ever saw anybody do.

Risk is something that most people associate with trading.  In fact, to the public at large, you are often likely to get the response, “isn’t that risky,” when you tell them that you trade for a living.  However, I think that is one of the biggest myths about trading, and I assert that trading is no more risky than most other jobs.

When I ran my own business, on the first of each month, the moment I woke up I was 60K in the hole.  That meant that in order to just “keep the lights on” I had to generate 60K in revenue each month, even before taking a dime out for myself.  And every month that I decided to keep my company going, I had to take the risk that I would not meet my nut.

Trading has no operational costs (or very minimal ones), which makes the decision to pursue the endeavor a relatively risk free one.

“Yeah, but where else do you have the possibility of losing more money than you started the day with,” is the lame rebuttal I often hear.  Really…?  These people obviously have never run a business.   If one of my employees damaged a client’s merchandise or backed a truck into a parked car I could easily lose more money than I started the day with.

Trading has no operational risk.  No employee is going to hurt his back and jack your workman’s comp rates up.  No douche from OSHA  is going to unexpectedly show up at your office and tell you that you are not in compliance with a new law passed the previous week and are on the hook for a large fine.  And you are not going to have a piece of equipment go south on you that you have to drain your bank account to replace.

But that is only for business owners right? What if you do the “dance” by getting a four-year degree and going to work for a solid blue chip company?  Well in some ways that is one of the riskiest things you can do.  Now you have turned over the fate of your continued employment to some mid-level management asshats or fair weather board of directors. Take a look at how many people took that “safe” path to corporate security and got tossed out on their ear when the economy imploded in 2008.

Trading has no asshat risk.  Nobody will even come into your trading room and tell you that you are being downsized, or that the macrame conglomerate you work for is going out of business after 75 years because the board of directors couldn’t resist getting involved in arbitraging high risk CDO’s.

At the end of the day, trading is one of the rare businesses where only you decide the amount of risk you are willing to take.

The reason that most people go off the rails and blow their account out is not because there is any outsized risk associated with trading, but because the barriers to entry are so low, they are able to jump in feet first without really knowing what they are doing (or they are a seasoned pro who lets their ego get the best of them).

Being a pro football QB is risky.  Being a firefighter is risky.  Being a jet fighter pilot is risky. But the average Joe can’t just jump into those positions without a shitload of training and without attaining a high level of competency.  And thus the risk is less for a Tom Brady, for a fire Captain, and for a Top Gun pilot.

Trading gets a bad rap due to the “Sydney or the bush” portrayal it has received in pop culture and OWS type propaganda.  It’s perception has been “Gekkoized.”  But in reality it may be one of the safest professions if you do it properly and make the choice to keep your ego in check.

20 Books Every Trader Should Know About

A question I get asked on a regular basis by those interested in trading is, “what books do you recommend?” Perhaps you came to this article thinking the same thing?

Well, you’re in luck because I’ve spent the last 30 years – and a ton of money – buying and reading every trading and investing book out there so you don’t have to. This list represents the best of those books, the ones I can, with no reservations, 100% recommend – except of course for those at the end that I’ve declared are “avoids.”

As with every list, there will be disagreements.

“Why is that book on the list?”

“Why isn’t that book on the list?”

Because it’s my list, so shut up!

But seriously, I’ve picked 20 books that stood out for me as a trader that were a #valueadd for one reason or another.  That doesn’t even have to mean that they are about trading.  For example, the “General Interest” section is made up of books that appeal to a trader’s mindset.

I hope you find this list of value, and if you do, please pass it on to someone who will appreciate it.

Update:

Since I first wrote this post, hundreds, if not thousands of books on trading and the stock market have been published. Most of them are real bad.

But a select few are so good they deserve a place on this list, so I have added this updated section.

Technical Analysis Using Multiple Timeframes – Brian Shannon is one of the original trader/bloggers and his book has been a reference companion that I go back to time and time again.

The way he illustrates the power and simplicity of using multiple time frames in a trading methodology will make you shake your head and wonder why you’ve been making things so complicated.

A must have addition to any comprehensive trader’s library.

Trading Options: Using Technical Analysis to Design Winning Trades – Greg Harmon is a friend and a good guy, but that doesn’t mean I’d put his book on this list if it didn’t deserve it. I can’t say enough about this book.

Don’t let the “options” part of the title fool you. This is a book that teaches you step by step how to identify trade candidates and create a methodical plan to take advantage of them – both with and without options.

If I could only recommend one book on trading, this would be the one.

The Next Apple: How to Own The Best Performing Stocks In Any Given Year – From the book’s description;

This is not a book about the company or the stock Apple. This is a book about finding the next Apple or at least finding hundreds of “mini-Apples.”

$10,000 invested in Apple in 2003 is worth $1,500,000 today.

Ivan is a great trader and master at finding hot momentum stocks. He does a great job in this book showing you how you can find stocks that have the ability to become the next Apple, aka, big winner.

Abnormal Returns: Winning Strategies from the Frontlines of the Investment Blogosphere – Tadas Viskanta has spent the last 10 years on a daily quest to find the most interesting, compelling, and informative financial and stock market content. This has made him an expert curator of investment ideas and strategies, the best of which he lays out in this book.

From active trading to ETFs and global investing, Tadas covers it all in a smart, thoughtful way, with a smooth style that is both easy and enjoyable to read.

The Market Wizards Series – Chances are, you’ll find these books on the shelf of any serious trader. They are without a doubt the most comprehensive collection of interviews with superstar traders ever published (Market Wizards,  The New Market Wizards, Stock Market Wizards, and Hedge Fund Wizards).

However, their dirty little secret is that although they capture perfectly a moment in time, they are extremely dated and will give you almost no insight into today’s markets or how to trade them.

Their contemporary value is showing how even the greatest traders initially struggled and often blew up (repeatedly) before becoming successful.

They are like benign candy, enjoyable to consume, but won’t help or hurt you.

Stan Weinstein’s Secrets For Profiting in Bull and Bear Markets – This book was the first to quantify one of the most important concepts in trading; the four stages in which stocks move, which are the basing, advancing, topping, and declining stages.

Despite the fact that the cover of this book has not been updated since it was published in 1988, stage analysis is still relevant today.

How to Make Money In Stocks: A Winning System in Good Times and Bad – As an unnamed trader friend of mine recently said, all you need to do is review the charts in the first 150 pages of this book and you will be good to go.

These charts, along with O’Neil’s annotations give you a great foundation to understand the patterns stocks form before they go on massive runs.

Reminiscences of a Stock Operator –  Tough call on this book, only because I don’t think it is the Rosetta Stone of trading books that it is often described as.

The language is dated and colloquial, which though strange, is actually part of its charm. There are definitely some foundational lessons for trading in this book, but you as the reader have to do the historical conversion in your head from venues like “bucket shops” to today’s market.

How I Made $2,000,000 in the Stock Market –  This book should really be called, “How I Made$18,000,000 (adjusted for inflation) in the stock market,” because that is how much it would be in today’s dollars.

That would be phenomenal for anybody, but for someone who did it while traveling the globe, in a pre-internet, computer, iPad, Smart phone world……while working as a professional dancer? Well, that is just epic.

His “Darvas Box” system, though crude and in need of adjustment to factor in today’s HFT, is still a foundation of a solid trading style/discipline.

Trading Education:

The Stock Twits Edge: 40 Actionable Trade Set-Ups from Real Market Pros –  Okay, before you accuse me of trying to kiss the ass of the folks at StockTwits, let me just tell you that I’ve been recommending this book publicly forever.

This is the book I wish existed when I started trading 30 years ago.

It is the “Market Wizards” for the retail trader, and more importantly, each chapter is written by someone who currently has an active presence on social media.  Plus it’s the only place you will ever see @The_Real_Fly write two whole pages without saying “fuck!”

The Trading Book: A Complete Solution to Mastering Technical Analysis and Trading Psychology – I like Anne-Marie, but if she had asked me if it was a wise choice to add another trading book to the world, I would have advised against it.

And I would have been wrong.

I was amazed at the scope of material that this book was able to cover in such a meaningful way. Anne-Marie’s economical (and often humorous) style takes you right to the core of each concept, doing away with irrelevant and superfluous information.

I don’t think it is hyperbole to say this is an instant classic for the beginning/intermediate trader.

Japanese Candlestick Charting Techniques –  There are a lot of books out these on candlestick charting, but almost all of them are derivative of Nisson’s tome.  This book does a great job explaining the basic concepts as well as the most relevant patterns related to candlestick charting.

Unless you really need to know about the “three-drunk-salarymen-rolled-by-the-hooker-in-the-Shinjuku-train-station” pattern, this book is all you will ever need for candlesticks.

Trade Your Way to Financial Freedom –  Yes the title is cheesy and sounds like something from a late-night infomercial, but this book has one of the best overviews of the different types of methodologies you can use to make money in the markets.

More importantly, it shows you how to go about formulating a methodology for trading in the markets.  The information on risk and position sizing alone makes this book worthwhile.

Psychology:

The Disciplined Trader  & Trading In The Zone –  These are the definitive books on trading psychology.  I know traders who went from perpetual losers to consistent winners after reading these books.  The way Douglas climbs into the psyche of a trader is scary and there is a good chance you will wonder aloud how he managed to plant the hidden camera and microphones in your office to take notes on your trading deficiencies.

Real World Trading:

Pit Bull: Lessons from Wall Street’s Champion Day Trader – Extremely dated, but still the only full auto-biography (I believe) of a “Market Wizard.”

It is a look into the mind and process of an extremely disciplined trader who is still putting up crushing numbers to this day.

One Good Trade: Inside the Highly Competitive World of Proprietary Trading – If you want to know what it’s like trading in the real world of a prop firm, this is the book.  But even more so, this book shows you how to focus on process instead profits to become a successful trader.

There are a number of great trading lessons in this book, all wrapped around relatable stories (kinda like this blog).

General Interest:

The 50 Best (and Worst) Business Deals of All Time –  This book is like eating a piece of candy – you will enjoy it so much and will be sad when done.

Clocking in at under 200 pages, it gives concise, informative, and fascinating insights into some well-known, and some not so well-known business successes and failures.

The chapter about the ABA’s settlement with the “Spirits of St. Louis” alone is worth the price of admission.

Backstage Wall Street: An Insider’s Guide to Knowing Who to Trust, Who to Run From, and How to Maximize Your Investments –  Sure, once again you can accuse me of kissing ass to a heavyweight financial blogger, but really, if you have read Josh’s blog for any amount of time, you know he’s the real deal.

This book pulls no punches and will probably be looked back upon years from now as the clarion call against the entrenched Wall Street establishment instead of those Occupy Wall Street douchebags.

Mean Business: How I Save Bad Companies and Make Good Companies Great –  Dunlap made his name as a “turn-around” specialist for near-death companies, and this book chronicles some of his most famous successes.

I get that Dunlap’s career ended in shareholder actions, SEC investigations, and his banning from ever running a public company again, but just because Michael Jackson’s final few albums sucked doesn’t mean that “Off the Wall” and “Thriller” weren’t masterpieces.

Dunlap was an asshole to be sure, but often times an asshole is what is needed, and his excesses in restructuring were merely a response to the bloated corporate excesses of the times.

It’s hard to fool guys like Kerry Packer, Sir James Goldsmith, and the principles at KKR who used Dunlap as their secret weapon, so “Chainsaw” Al must have been doing something right at some point.

The New Financial Capitalists: KKR and the Creation of Corporate Value – Every time I re-read this book I get financial wood.  Love them or hate them, KKR changed the way M&A was done and left an imprint on corporate financing that is still felt today.

It is hard to forget in the wake of the 2008 credit crisis that KKR was always responsible – and almost always successful – in using debt and leverage to save failing companies and create or unlock value for shareholders and their investors.

This is an authorized biography of the company but done in a truly objective fashion and it highlights how the key to a successful KKR deal is not so much about the money (or debt) they brought to the table, but the wealth of managerial talent they brought to their target companies.

Avoids:

Trading For A Living: Psychology, Trading Tactics, Money Management  – This is the gateway book that every new trader seems to come through on the road to trading, but  I have to say, I have never been a fan of Dr. Elder.

It stems for my suspicion that he makes (and has always made) more money from writing about trading and putting on overpriced seminars about trading than he has from actually trading.  In this book he espouses a multiple time frame method  that is rudimentary at best and his nod to trading psychology is done better and in more depth by Douglas.

The only interesting aspect of this book is his explanation of how trading is NOT a zero sum game, but that is really only worthy of a blog post at most.

The Education of a Speculator –  I have a friend who not only is a 100x better trader than I could ever hope to be, but is a connoisseur of art and literature, and even surfs. He is also a friend of the author, Victor Niederhoffer, and thinks highly of him.

That is why it pains me to say that “Education…” is probably one of the worst written books that I have ever read.  It would be better titled, “Let Me Tell You What A Great Squash Player I Am.”  And even though I am sure there was meant to be some subtext in his narcissistic stories that relate to trading, it is written in such a purposefully exclusionary way that you can’t find it.  Since I am part of the “chattering classes” it is probably that

It would be better titled, “Let Me Tell You What A Great Squash Player I Am.”

And even though I am sure there was meant to be some subtext in his narcissistic stories that relate to trading, it is written in such a purposefully exclusionary way that you can’t find it.

Since I am part of the “chattering classes” it’s probably that Niederhoffer, a true intellect, is just writing above my level. But unless you are picking this book up on the way to your Nobel Prize luncheon, it’s probably best to just skip it.

Hey, don’t forget to check out my book Trading: The Best Of The Best – Top Trading Tips For Our Times destined to be on this top 20 list someday.

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How You Will Know That You Are Truly A Trader.

Assassinations.  Acts of war.  Man’s capacity to visit death and destruction upon his fellow-man. These are the originating events that spark that age-old question used to mark a moment in time, “Do you remember where you were when…..?”

For my grandparents and parents generation it was Pearl Harbor and JFK respectively. For my generation it’s 9-11.  With my kids generation I’m pretty sure it will be the day they discover that Justin Bieber is in fact a zombie cyborg, sent to this planet by an evil alien race in order to hypnotize us through musical pablum, before starting the invasion where they will rightly lay us to waste.

But life is also full of many other memorable though less dramatic events, and the way in which we remember them varies from person to person.

For example, my wife remembers places and events by the food associated with them; a typical conversation between her and I will often go like this….

“Hey honey, do you remember that cool little restaurant we went to up in Los Angeles for our anniversary?”

“Hmmmm…..no I don’t really recall the place.”

“C’mon, you remember!  It was where they had the great view of the ocean?”

“Yeah…um…its not really ringing a bell.”

“I can’t believe you don’t remember. There was a five alarm fire in the gunpowder factory right across the street during our meal!”

“You know…..I am just not good at remembering things like that.”

“But it was that place where a bunch of movie stars were eating, and I got into a fist-fight with Brad Pitt after I yelled ‘Salt sucked!’ at Angelina?”

“…..It’s just uh…nah,…. not getting it.”

“You had the grilled Chilean sea bass with mango salsa…..!”

“OHHHHH….That place!”

It’s my belief that one of the criteria for truly calling yourself a trader is not related to what your job is or even if you make money in the markets, but your ability to always have an answer to the question; “What was your position when…….?”

And I don’t just mean during macro events like when the market dropped 23% in one day back in October of 87′.  That doesn’t count because it was on every mainstream TV newscast as well as the front page of newspapers across the world.  Even my mother knew her portfolio got crushed that day (I told her not to fade Paul Tudor Jones).

No, I am talking about when you say to someone “flash crash,” and they instantaneously reply, “short 500 shares of $AAPL, covered one point from the low tick of the day.”

Or say, “short sale ban on financials?”  And faster than a HFT algo comes the response, “long out of the money $ICE calls.  Fucking suweeetttt…..!!!”

Traders are, in the very best “Bill Murray in Stripes” sense, “mutants…and there is something very, very wrong with us,” that these positions are forever tattooed on our cerebral cortex.

Wife’s birthday……”uh, give me a minute.”

First time you got really drunk…….”must have been that one summer…..?”

First time you had sex……..”yeah probably around June of my senior year!”

First time you had sex without actually being drunk………”uh, that’s a tough one.”

Day Buffett announced he took a stake in $GS…….”Long S&P index options, and day traded the shit out of $SKF.”

I can tell you exactly what position I had on October 17th, 1996.  I was long 1000 shares of $OO (Oakley Sunglasses).  I can also tell you what time I woke up that morning, what I had for breakfast, what I did most of the day, and what time I went to bed that night.  That day is burned into my brain because it was the day that $RAYS (formerly Sunglass Hut) decided they were closing a number of their stores.  This would cut into Oakley’s sales, and the stock dropped 25% while my account lost 50% of its value.  And here is where it gets weird.

For over 15 years I didn’t tell that story to anybody; not because I was ashamed or embarrassed about it, but because nobody couldn’t relate to it.  My friends and family aren’t traders, and although they could understand it in an “oh, you lost money” type of way, they just wouldn’t get it in a “yes I’ve read all the Market Wizards books three times” type of way.

But then a magical moment happened.

I was out at the Trader’s Expo in Vegas last October and was having a drink after the day was through.  I struck up a conversation with the gentleman seated next to me at the bar, who happened to be in town attending the expo as well.  As the drinks went down and the night went on, we began to trade “war stories” about our trading over the years, and I brought up my $OO trade.

Suddenly time stood still.  His gaze met mine and as if a thousand drops of glycerin were placed in them, his eyes began to water. The lights in the casino dimmed and one lone spotlight shown down on us.  His lips began to tremble and his voice began to quake as he uttered the cathartic words….

“I was long $OO on that day too……”

In this moment I had found a soul-mate. Someone who without speaking a word knew my long suppressed pain.  Someone I wanted to take into my arms, rub with baby oil, and cradle in my arms in the most heterosexual way possible.  A trader.

The other criteria for calling yourself a trader is when you become completely and pathologically fluent in symbol-speak. When you inner dialogue, even away from the markets, automatically begins to use the three or four letter, capitalized, abbreviated language of the markets.

This weekend I went shopping with the family at $TGT and $COST and I couldn’t believe they had better prices on flat screens than $BBY.  After that we had lunch at $MCD and then went back home where right away the kids started fighting over the $AAPL iPad.  I just said “screw it” and started watching Breaking Bad on $NFLX.

You think I am kidding right?  Well let me tell you how this trait manifested itself not too long ago.

After being together for 16 years my wife and I finally have our “mall” strategy down pat. She hates the stores I like, and I hate the stores she likes, so after years of getting her to first bring her cell phone, then actually turn it on, and finally taking it off of “silent” mode, we are now able to split up and then call each other when ready to meet.

We headed to our respective stores and after a while I decide to check out the Nike store on the other side of the mall.  So I send her a text to let her know she can find me there when she is done with her shopping. Almost 30 minutes goes by as I am engrossed in all the cool workout shoes and clothes that I will never buy or use, and then finally I wander out into the mall atrium area…..and there she is….steaming mad.

“What’s the problem,”  I say.

“Well to start with, I tried to call you three times and you didn’t answer.”  (Turns out it was me who had the phone on “silent” mode by mistake this time. D’oh).

“Yeah, but you knew where I was because I texted you,” I said.

“Really?” she annoyingly replied.  “Cause I have no idea what this is supposed to mean……”

With that she turned her phone screen towards me to show the message that I had sent her.

It read, “I am heading down to the $NKE store.”

I looked up at her, and although the husband in me gave a sheepish look, the trader in me was grinning from ear to ear.