Books - Trading, Investing and the Financial Markets
Because it provides an in-depth understanding (with no scientific or mathematical background required - there are practically no equations in the book) of why it is that even apparently rational and deterministic systems cannot be forecast with accuracy or confidence (which is not to say that probabilities cannot be determined).
Paradoxically, the internalisation of this understanding is confidence-building: it is very reassuring, in my view, to realise that while you are taking out positions in the market without any certainty that they are going to turn out well, the same applies to all of the people against whom you are trading however large and poweful their organisations and however sophisticated their analysis and forecasting techniques.
As is made clear elsewhere in this site, I regard the formulation of a consistent and disciplined approach to risk-management as being the single most important element of a trading strategy: this book provides the intellectual framework justifying that view.
The other reason for reading this book is that it is a fascinating story, extremely well told.
If you are only going to read one book during the next year, this should be it..
Trading for a living by Alexander Elder is next : Clear and concise tour of Technical Analysis, Trading and Money-Management techniques. Common-sense approach very much in line with my own thinking.
Technical Analysis of Stock Trends by Edwards and Magee. This is the classic: first published in 1948. Not much has been invented since (apart, of course, from the proliferation of technical indicators). Full of charts from the 1920's, 30's and 40's. The patterns are still the same.
Elliott Wave Principle: Key to Market Behavior by Robert Prechter & Frost. This is the book on the Elliott Wave Principle, which is deeply flawed but very useful.
Why flawed? - Because it postulates, in effect, that the universe (including in particular the markets) is both deterministic and governed by the Fibonnacci series (1, 1, 2, 3, 5, 8, 13, 21, 34 etc.) and resulting golden ratio (.382 / .618 / 1.618 etc.). This is patently absurd, even if the golden ratio is easy on the eye (artists tend to put horizons 38.2% from the top or bottom of their pictures) and it turns up frequently in nature and history (snail-shells, rings of petals on flowers, the pyramids etc. etc.)
Why very useful? - because it really does describe the manner in which the markets tend to act (main trends in at least 5 sub-divided waves, corrections in three or more etc.). Elliott-Wave patterns (when they are clear) can be helpful in determining trading entry and stop levels. All traders should be familiar with their interpretation if only because so many other market participants watch them.
Whatever one's view of the messianic tone of the presentation, this book contains the clearest explanation of the principles involved and is therefore a must read.
More books on the Elliott Wave Principle (some of them tremendously expensive !) :
The Futures Game? Who Wins? Who Loses? Why? by Teweles & Jones : Excellent critical analysis of all the mainstream approaches to trading the markets (Technical and Fundamental). Includes discussion of probabilities, effects of pyramiding etc. Highly recommended.
The Alchemy of Finance: Reading the Mind of the Market by George Soros : Explains his theory of market reflexivity and consequent approach to trading opportunity identification. In essence, markets get locked into trends due to one or more parameters being fixed (at least temporarily) with inevitable results on others - eg if the government of a high-inflation country becomes credibly serious about getting it under control the currency must appreciate (because interest rates will be fixed at rates higher than they would otherwise be to squeeze inflation out of the system, making the currency more attractive, and the market's worry about devaluation will be removed). The trade's attraction is enhanced as high-interest currencies can be bought forward at a discount. This is what Paul Volker did to the US $. There are numerous examples in the book. If you are going to incorporate Fundamental Analysis into your trading, this approach needs to be studied.
Liar's Poker by Michael Lewis is a very funny (and informative) memoire about life as a Salomon Bros. bond salesman. Includes numerous stories about trading / derivatives exploits and practises. Publication pre-dated the scandals in which the firm became embroiled prior to Buffet's intervention. Take this book on vacation - if you don't laugh out loud at least once, you have no sense of humour.
Market Wizards by Jack Schwager : Highly recommended (by everyone) - you have probably already read this book (?). Interviews with numerous very successful traders about their approach to and philosophy of trading. Includes both Fundamental and Technical traders. The one thing they all have in common (obviously) is a disciplined approach to risk management. There is also a sequel - New Market Wizards, which is basically more of the same, (see author link). Mr Schwager is an excellent writer. His other books on both technical and Fundamental analysis have received excellent reviews. He formed Wizard Trading and attracted investment capital on the basis of the reputation gained from his writing. The fund lost 12% in 1997 according to "Futures Magazine". Maybe you can know too much . . .
Technical Analysis of the Futures Markets: A Comprehensive Guide to Trading Methods & Applications by John J. Murphy is frequently referred to as the Technical Analysis "Bible" : Includes comprehensive information on all the popular techniques, clearly explained. He has followed-up with a separate book on Inter-Market trading and a "Study Guide" (Click the author link for details).
For more Market-related books, take a look at the available book-lists resulting from searches on the following key-words: