How do I define a great book? When there is enough insight that results in a change of behavior. And believe me, you’ll find enough insight on this book.
Put it on other words, there is the trader I used to be before and another trader (I like to think I am) after reading this book. It completely changed the way I saw the market for good.
This book teaches you how to go about thinking probabilistically. This is more important than you might think. Let me give you one example: what happens when you go long on any currency pair?
Most trader tend to ignore all the evidence against their trade, like: other traders going short, an important resistance level that is just above your entry, a double top pattern, etc. Well, almost all traders do. I stopped doing it after reading this book.
Once you stop blocking this information, you make yourself available to all the information “available” at the market. You can cut losses short, get out of a trade if you are long and there is a resistance level close to your entry, etc.
The book is a “fictional” biography of Jesse Livermore, a stock trader that started his trading career at the beginning of the last century at a very early age.
The writer of the book really catches your attention as Livingston (the fictional character) makes millions, but then he makes a mistake and loses millions. He regroups, came back with a few thousands, makes millions again, makes another mistake, and loses them again.
If no one told you this book was written in the 1920’s you wouldn’t know.
This is why I’m surprised that a trader back in the 1920’s makes the exact same mistakes traders make in 2011, 90 years after: we still average down, get out too soon, hold on losers too long, etc. Then why is this book still relevant? Because human nature, we act today in the same way we acted 100 years ago.
This book has nothing to do with trading the Forex market or any other market, but it can give you some much insight about how we, human beings make our day to day decisions (including trading decisions).
I have an economics background, and one of the main economic theories (probably the most important one) states that we make rational decisions, based on the information that we have at the moment. The same theory governs what happens on the financial markets, or any other market: supply and demand.
What would you think if I tell you that this theory is all wrong? Well, after you read this book you realize that we not only make irrational decisions, we act sistematically irrational. The author performs real life experiments to state these points about this, and let me tell you, he is right: we are all irrational.
And this also relates to trading any financial market. We like to think we make rational trading decisions, but in fact, most of the time we make irrational trading decisions.
Turn on your TV and put on your favorite news channel after a sharp move on the market, a currency pair, etc. Wait, you don’t have to go that far, just go to Bloomberg or Reuters and you’ll always see an explanation of the “sharp move” it happened because the traders and investors took profits, traders and investors digesting the new info on the global crisis, etc.
All these news sites and channels play the past prophets. This information would be useful ahead of time, unfortunately no one knows how traders and investors are going to react. This is what hits book deeps in.
Should we blame the news channel or news sites about this? Of course not, this is just the way that we are wired, we need an explanation of everything.
Picture this scenario: I just caught a cold!!! Ahh must be because I got my feet wet earlier today. But the reality is that not every time you get your feet wet you get sick! But you just need a reason for it. See what I’m talking about?
These two books will help you see the market in a different way, I promise. Click on the images to see my reviews:
If you already read them, what did you think about them? If you haven’t go to the bookstore or amazon and get them now!
These are some of the trading books that I have on my shelf, and I think you should have them too, and read them of course :)
Some way or the other they have shaped the way I approach and trade the market (click on the image to see my review):