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Books For Professional Traders

  
  Education
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Yes ,List from our Library 

Note that the literature listed below can easily be found in book stores or via the internet.

TRADING Psychology

The following books and articles target some of the core psychological obstacles that traders face every day and techniques to maximize their trading performance. This is an extremely important part of the reading list, in my opinion.

  • “The Mental Edge: Maximize Your Sports Potential with the Mind-Body Connection” – Kenneth Baum“How Successful People Practice” – James Clear (www.jamesclear.com)
    • I’m a big believer in visualization techniques and the contribution it can make to trading success.  I first used visualization during my years playing hockey.
  • “Zen and the Art of Management” – Financial Times, September 16, 2013
  • “Good To Great” – Jim Collins
    • The book is centered on how companies can go from a position of mediocre to greatness.  Many of the concepts are readily applicable to the trading business and to building yourself into an elite trader.

All the books of Dr. Ari Kiev.:

  • “Trading to Win: The Psychology of Mastering the Markets”
  • “Trading in the Zone: Maximizing Performance with Focus and Discipline”
  • “The Psychology of Risk: Mastering Market Uncertainty”
  • “The Mental Strategies of Top Traders: the Psychological Determinants of Trading Success”
  • “Hedge Fund Masters: How top Hedge Funds Set Goals, Overcome Barriers and Achieve Peak Performance”
  • “Mastering Trading Stress: Strategies for Maximizing Performance”
    • Prior to his passing, I had been organizing a conference with Dr. Kiev.  He revolutionized the hedge fund industry in terms of trader performance

(more…)

Biases That Cause You To Make Mistakes

  
  Education
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You are your own worst enemy.

Those are the six most important words in investing. Shady financial advisors and incompetent CEOs don’t harm your returns a fraction of the amount your own behavior does.

Here are 15 cognitive biases that cause people to do dumb things with their money.

1. Normalcy bias
Assuming that because something has never happened before, it won’t (or can’t) happen in the future. Everything that has ever happened in history was “unprecedented” at one time. The Great Depression. The crash of 1987. Enron. Wall Street bailouts. All of these events had never happened… until they did. When Warren Buffett announced he was looking for candidates to replace him at Berkshire Hathaway, he said he needed “someone genetically programmed to recognize and avoid serious risks, including those never before encountered.“ Someone who understands normalcy bias, in other words.

2. Dunning-Kruger effect
Being so bad at a task that you lack the capacity to realize how bad you are. Markus Glaser and Martin Weber of the University of Mannheim showed that investors who earn the lowest returns are the worst at judging their own returns. They had literally no idea how bad they were. “The correlation between self-ratings and actual performance is not distinguishable from zero” they wrote.

3. Attentional bias
Falsely thinking two events are correlated when they are random, but you just happen to be paying more attention to them. After stocks plunged 4% in November 1991, Investor’s Business Daily blamed a failed biotech bill in the House of Representatives, while The Financial Times blamed geopolitical tension in Russia. The “cause” of the crash was whatever the editor happened to be paying attention to that day.

4. Bandwagon effect
Believing something is true only because other people think it is. Whether politicians or stocks, people like being associated with things that are winning, so winners build momentum not because they deserve it, but because they’re winning. This is the foundation of all asset bubbles. (more…)

John Taylor On A Schizophrenic Europe – A Must Read

  
  Education
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John Taylor’s most brilliant letter to date.

MARKET INSIGHT REPORT
Schizophrenic Europe
June 10, 2010
By John R. Taylor, Jr.
Chief Investment Officer

Managing an investment portfolio in Europe can put you on the fast track to a mental asylum. Only a playwright like Luigi Pirandello, who lived with a schizophrenic wife and wrote plays like Henry IV with its multiple levels of reality, could cope with the financial landscape in today’s Europe. Unfortunately, with the powerful political elite so committed to the EMU process, which they see as critical to the survival of the European Union, these economic distortions will only become more severe. Eventually it will either end badly, as in Henry IV with violence and death, or well, as in a crucible-like reordering and re-characterization of the European nation states. I expect to be writing about this fascinating process for the rest of my life – and I hope to live a long time.

Differences within the Eurozone are extreme. Ireland saw its nominal GDP drop by 10.2% last year, a decline similar to those experienced in the Great Depression, while the German economy recently grew at a nominal rate above 3%. An independent economist calculated that the value of the euro would have to be $0.31 to balance Greece’s international position, and the number for Spain was $0.34, while Germany could effectively compete in the international marketplace with a euro over $1.80. Despite the ECB pegging the refinancing rate at 1.00%, two-year benchmark government rates for Germany are way below that at 0.48%, but way above it at 7.91% for Greece, Ireland 3.37%, and 3.20% for Spain. Ireland has been living with annual deflation for the last 16 months, while German lawmakers are worried about inflation. These differences have become more dramatic in the past few months and most independent observers forecast that trend to continue. By any economist’s measure this is not an optimal currency zone. But the economists are not in charge, the politicians are, and these politicians have spent their entire careers following their conception of the European currency. Their reputations and the European myth depend on the survival of the euro, and those who doubt its viability are enemies who deserve to be ground into dust. There is one overarching problem that the defenders of the euro cannot overcome: in its current form, the euro’s survival is economically impossible. Prior to the Greek crisis, the market did not understand this, but now it does. And you cannot put the genie back in the bottle.

If part of the euro is worth $1.80 and another part is worth $0.31, how do you value this currency today, while it’s still in one piece? That is the crux of the matter. The uncertainty around this issue is what has caused billions of euros to flee into the security of the Swiss franc. The Swiss authorities have intervened, buying so many euros that their reserves expanded by 45% of their GDP since the start of this year. Despite that massive intervention, the Swiss franc has climbed by 10% against the euro since mid-December. There is no sign of change. As the politicians are completely in control, the schizophrenic euro could go on for years with the economic dislocations becoming more and more intense. Little explosions are likely. Certainly, the Swiss are in a terrible position (see Switzerland Surrounded Again, April 29, 2010) as the euros will keep flowing in. The Swiss franc might gain another 10%, destroying its export base, but the Swiss could change the rules to protect themselves. Although the European political elites are totally committed to the euro, the man on the street is different. The European political peace is a compromise between entrenched elites and the highly entitled masses first formulated by Bismarck over 120 years ago. The withdrawal of those entitlements in order to save the euro could easily upset this historic deal. If those in power continue to ignore the needs of the people, neither the euro nor the current political structure will survive in its current form.

Fascinating Insights From Nobel Prize-Winner Robert Shiller

  
Analysis, Education
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On why so many experts missed the 2008 financial crisis: “Experts have always missed big events like this. If you look at the record of statistical forecasting models, they tend to get to the recession when it’s starting to come. A casual observer might start to worry about it. Forecasting it years out, they don’t get; in particular, if you look at the Great Depression of the 1930s, nobody forecasted that. Zero. Nobody. Now there were, of course, some guys who were saying the stock market is overpriced and it would come down, but if you look at what they said, did that mean a depression is coming? A decade-long depression? That was never said.”

On short-term thinking: “I think that there’s too much faith in analysis of short-term data. You see some pattern, and you can do a statistical test and prove that will prove that it is significant or passes the smell test to a statistician. But the problem is, the world is always changing. It’s not a stable thing. The underlying human parameters may be stable, but you can see that there is institutional and cultural evolution, and it’s not something that you can quantify.”

Cost of Mistakes

  
  Education
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Overconfidence is a very serious problem, but you probably don’t think it affects you. That’s the tricky thing with overconfidence: the people who are most overconfident are the ones least likely to recognize it. We tend to think of it as someone else’s problem.

When it comes to investing, however, we all have a problem.

As we become more and more confident we become willing to take on more and more risk. Why? We start seeing risky behavior as, well, less risky. But the reality is that as the level of overconfidence increases, the cost of our mistakes increase as well. (more…)

FEAR

  
  Education
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There is nothing to fear except fear itself…’so said FDR when talking about America’s policies for exiting the great depression. Of all the known negative emotions that affect trading, I would argue that Fear is the most pervasive, and potentially the most destructicve. 

Even that other emotion we are always warned about – Greed can be alternatively described as ‘the fear of missing out’ and so it’s very essence is derived from fear. Frustration too is essentially born from fear as is Boredom, these being two other potentially harmful emotions that can afflict traders.

Fear in trading comes from the fear of a losing trade/losing run and the loss of money/not being right. This fear of losing stems from operating in an environment of uncertainty where the result is not known in advance. This uncertainty though does not have to result in fear per say.

The human brain is not naturally wired for trading in it’s evolutionary development. It takes years of practice and development for someone to re-train their brain to accept uncertainty and manage it. This is the necessary acquiring of the psychological skills required to trade successfully. Essentially when it is more natural to hope we fear and when it is more natural to fear – we hope….in trading we have to do the opposite. Add to this the technical skill requirement of having to be right at the right time as being right at the wrong time is still a losing trade, and it is not hard to see that a process has to be undertaken to train our brains from a fear based outlook of uncertainty to a risk management outlook toward it. (more…)

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