Trading is this weird sport where everyone plays it, yet there aren't really any standard curriculums, and there are tons of scammers who charge subscriptions to Discord groups or emailing lists, claiming to net you that few hundred dollars profit.
Who can we trust? How do we know what works? We don't, but in general, we trust ourselves to a large degree. Therefore, I've curated a curriculum of sorts where you can self-learn and combine what you see in the real world through readings, Twitter, etc., with your own trading experience and thoughts.
The goal here is to give you an objective foundation for knowledge in the trading world, sort of like taking an undergraduate major in trading.
As always, books will have their goods and bads, outdated quips and legendary quotes. It's up to you to choose how you read these books and pick out what you think is useful or not for your trading needs.
Most people who enter wallstreet have some sort of education in Finance or Economics. If you don't, it is absolutely imperative that you have at least an introduction to some of the basic principles that dictate the economy and the market. For example, when you hear news or read an article in finance, how do you know you're interpreting it correctly? Learning the foundations are another way of "learning the speak" of people who trade and invest. The goal of these readings are to help with understanding capital markets, monetary policy, and investment theory.
- Basic Investing by Bill Ackman: Great breakdown of how companies work, how to value them, and what to look for in investing. This video covers 80% of "how to become rich" books
- Accounting: This is a free and really well-written book with examples. Your goal here is to learn how to read balance sheets from financial reports that companies post during earnings.
- You should definitely try to read some balance sheets from earnings for some companies. It may not really make sense at first, or seem boring. But what you want to develop is, "is this a good or bad balance sheet for this company"? Which cannot be answered easily, because it depends on macro environment, what type of company, industry, strategy, etc. It may be good to get a sense of "good" vs. "bad" companies by looking at well-established companies vs. recently IPO'd or notoriously crappy companies. There should be some patterns.
- Macroeconomics
- How the Economic Machine Works by Ray Dalio: Outstanding introduction to economic cycles, and how the economy works at a high level.
- Macroeconomics by Mankiw: Good theoretical derivations and equations, supplemented with economic theory explanations and case studies.
- Statistics:
- Statistics by David Freeman: Very good conceptual introduction to statistics. Light on equations and more heavy on conversation and intuition.
- Capital Asset Pricing
Before we start trading, we should have a primer about what it's like to be in the business. We want to learn some psychology here, some foundational skills, and just get an idea of what distinguishes good and bad traders.
- Most Important Thing by Howard Marks: Some good mindset things to remember
- One Up on Wall Street by Peter Lynch: The idea of "boomer" investing and fundamentals. Really encourages you to do your DD (due diligence).
- More Than You Know: Behavioral Theory in the context of financial markets
- The Theory of Poker by David Sklansky: Poker is probably the best game to quickly learn about how EV (expected value) works and how to manage risk.
- The Signal and the Noise by Nate Silver: There is a lot of data in the world, but what is useful and what is not?
- Superforecasting by Phillip E. Tetlock: Why are some people better at predicting the future than others?
- Nassim Nicholas Taleb's books about how people fail to evaluate unlikely events and probability in general. Great for giving a framework of thinking in terms of what bets to take and how to take them. The books in his Incerto Series are all good, but you only really have to read a few of them to get most of his ideas. The books you can choose from:
- Fooled by Randomness: There is a theme with this and Silver's Book about Signal and Noise. We have so much data these days that it's easy to overextrapolate or think we are better at something that we aren't...
- The Black Swan: Taleb argues that predicting the future is impossible, and we should dip our toes in asymmetric opportunities, i.e. downside is limited but upside is infinite and can be extreme.
- Antifragile: Things That Gain from Disorder
- Skin in the Game: Hidden Asymmetries in Daily Life
Here, we start to learn what trading looks like IRL, tips from experts, and get a scan of whether or not you 1. have and edge and 2. want to trade at all.
- The Market Wizard Series by Jack D. Schwager. These books tell you about real life trades and give you insight about how people actually make money. These books are half motivational, half insights into trading techniques. There are a few takeaways from the books that are important, one of which being that in order to become a successful trader, you have to find your own system that suits you. This means nobody can tell you how you should trade -- you have to figure it yourself!
- Reminiscences of a Stock Operator: This is a classic text about a trader in the early 1900s who made and blew his fortune many times trading. A central theme of the book is that "whatever mistakes have been made in the market, will be made again" a la history repeats itself style. This book has been touted by many great traders such as Paul Tudor Jones for giving good insight into what it's like to lose money, and how to keep your composure even at the worst times of your trading career.
- Ed Thorp: A Man for ALl Markets: Ed Thorp is insane. He's one of the biggest brain person that is still emotionally capable. Every paragraph in this book feels like a well-calculated result from Mr. Thorp.
Now that you know what it's like to trade, we need to learn more about the system that works for you. Since it's so person-dependent on developing your trading strategy, you might have to go through a few of these books (like I did), but it's generally good to get a scan of what's out there. The goal is to eventually find something you really like and get good at it.
Technical trading relies mostly on past price action to predict future price action. The thesis here is that price data represents the culmination of all human psychology, fundamental factors, macro, context, etc., so we can focus on those to determine what the future price will be. Obviously, the thesis is unlikely to be entirely true, but if you can use it when it is true enough, you can make certain trades work for you.
- Technical Analysis of the Financial Markets by John J. Murphy. The TLDR of whether or not TA works is -- it works when it does. Not very helpful, right? TA is hard to prove that it works, because it requires very specific setups and complex reasons for it to work for certain traders, but aside from that, it's useful just to learn how trading systems generally work, how market price and other indicators can tell you the market psychology, and also learn the lingo of many traders on the street.
- Big Debt Crises by Ray Dalio: What are archetypical bubbles and depressions like, why do they happen, and how have they happened in the past? By studying these past economic crises, can we detect when it will happen again, and prepare ourselves better for the next downturn?
- Basics of Edge Extraction by
therobotjames: This is a great introduction to what Quant traders are trying to do, e.g. stat arb, backtesting, market patterns, trade execution. If you are wondering what an "edge" is, this is the video for you. Also you can check out James's website here, and he has an active Twitter (X) account as well.
Even though there's no straightforward answer to what you should be trading, you should have an idea of what the options are after reading the material listed above. In addition, even if it's not clear how you should trade, there's a very simple test for determining if you should trade:
Do I have an edge?
If you believe you have an idea for a trade that will net you money, then that is something worth pursuing. If what you're doing is not tested, pure speculation, etc., then you don't have an edge.
- Webb-site: If you want to see what due diligence looks like, this website has some great articles from David Michael Webb, a legendary investor who also cares about activism (or apparently so)
- Value Investors Club: This is the famous site where Michael Burry posted his subprime mortgage trade. You will find lots of due diligence done here. As a free member, you can view posts 6 months or so after they are published. NOTE: Just because you read something that seems reasonable, does not mean you should follow it. Remember, the process is more important than the result of the article.
- While absorbing a lot of information can be useful, more information != better trading. In fact, if you get really deep into certain subjects, like economic modeling and predicting prices, you might be in the hogwash of academic nonsense, a la Taleb. So, a good way to figure out if your trading system is working, is if you are seeing more green than red on your PnL chart.
- Which brings us to our second point. You should always have some sort of protection against black swans. Obviously they are unlikely and when it happens it is too late. But becoming a turkey is the last thing you want to do.
- A less extreme example of a turkey is "blowing up your account," which is usually anything more than a 50% decline. Remember, if your account goes down by 50%, you need a 100% return to get back to break even.
- Trading is hard. If you think it's easy and your name is not Ken Griffin, then I would double check your ego.