Best trading books

1. Mastering The Trade (by John Carter)

This is the book that inspired me to take trading very seriously. In a way I was very lucky, because had I not come across Carter’s book early in my trading career, I may have well ended up blowing my trading account within months.

John Carter lucidly explains the psychological and tactical challenges that face a trader. What makes this book unique and enjoyable are three things: firstly that it contains several chapters on different high probability trading strategies; secondly that each chapter gives numerous real examples of how the strategy actually works and; thirdly and most importantly, precise entry and exit rules for each strategy including how to protect yourself against risk if you are wrong.

It is not necessary for traders to employ every strategy documented in this book. I personally have adopted one of them and it has since become part of my daily trading routine (more on that in upcoming posts).

What I really love about this book is Carter’s passion for trading. I admire the way he religiously carries out each trade in accordance to his rules and not based on impulse or whim.

This book is not for the beginner. Although, the advice given in the chapters on psychology and risk is absolutely crucial for everyone.

2. Market Wizards & The New Market Wizards (by Jack. D. Schwager)

These two books are a gem whether you are a beginner or an advanced trader. Each chapter is an interview with one of the world’s top traders. It is very easy to read – even a 12 years old could make sense of it.

The personal stories and insights of each individual trader is simply fascinating to read. I won’t spoil any surprises here. One of my favourites from the book is Linda Raschke, one of the few female professional traders out there. Her comment that while we can be good at predicting the direction of a move (up or down), but not so good at predicting the magnitudeof the move (how far a market will move), is a very significant one which has helped me a lot in my own trading.

What I found interesting about this book when I first read it was how some of the world’s best traders have experienced losses in their own trading on a scale that is unimaginable. Readers will also notice that different traders will often disagree on a number of issues.

The major downside with this book is that whilst the traders give very valuable insights to their style of trading, no actual specifics are given as to exactly how they trade. Also, the interviews pre-date the technological age of the internet and widely available charting and trading softwares. Having said that, this book is a must for everyone who wants to learn how real traders think.

3. Volatile Markets Made Easy (by Guy Cohen)

This book is an ideal starter for anyone who wants to grapple with the intricate but lucrative world of options and volatile markets. One reason I am recommending this book above all the other books on options, is that its author, Guy Cohen, is an expert not just in options but very adept at being able to explain how to trade options to the ordinary person.

The first few chapters cover the basics of technical analysis and breakout patterns. Where it gets really interesting (for me) is when he talks about “straddles”.  This is a strategy whereby you can potentially make money no matter which direction the market moves, up or down.

Guy Cohen does not seek to confuse the reader and he does an excellent job of clarifying what can be quite a complex topic. I definitely recommend it.

4. Technical Analysis of the Financial Markets (by John J. Murphy)

This book is the definitive guide to the world of technical analysis (analysis of charts). Fans of fundamental analysis (or “fundamentalist” as we like to call them) will probably scoff at the mere mention of technicals and charts, dismissing it as reading “tea leaves” and not serious trading. Don’t pay any attention. I don’t know of any serious professional trader who does not use some form of technical analysis.

John Murphy does a seriously good job of demonstrating how to analyse charts for the beginner traders. Trendlines, patterns, moving averages are all covered here. You can also check out his brilliant free charting service on StockCharts.com.

5. Trading In The Zone (by Mark Douglas)

If you haven’t started trading yet and you want to save yourself months of anguish and frustration, then do yourself a favour and read this book.

Trading in the Zone is not a book about “strategies” or “systems”. It is about something much more important. Any trader will tell you that 95% of trading is psychology. It is not the trading system that is important, as much as how your own mind will work against you when you do trade.

The most important concepts discussed in this book are: consistency and uncertainty. You need to be consistent in your trading method and you need to have an unshakeable belief in uncertainty – that in the markets anything can happen. Once you accept that, you can give up on the emotions that imprison your mind and learn to be a better trader.

Book : Four Rules for Buying Calls and Puts

By: Thomas DeMark

The following is an excerpt from Thomas DeMark's DeMark on Day Trading Options

Rule No. 1: Buy calls when the overall market is down; buy puts when the overall market is up.

By and large, when the stock market rallies, most stocks rally, and when the stock market decline, most stocks perform likewise. The extent of this movement can easily be measured by observing stock indices. We recommend using the advance/decline index as a proxy for the overall market. However, if this is unavailable, one could also use the net price change of a comprehensive market average, such as the Standard and Poor's 500, New York Stock Exchange Composite, NASDAQ, or Dow Jones Average. For the overall market to rally, the majority of individual stocks must rally too. Sure there are days in which the market is rallying even though the number of advancing issues is less than the declining issues but this cannot last long if the stock market is to mount a sustainable advance. Similarly, on the downside, the market cannot undergo an extended decline unless the number of declining stocks outnumber the advancing stocks.

When the overall market trades lower, call option premiums typically decrease. Therefore, by requiring the market index to be down for the day at the time a call is purchased, the prospects for a decline in a call's premium are enhanced. Similarly, when the overall market trades higher, put option premiums typically decrease. Therefore, by requiring the advance/decline market index to be up for the day at the time a put is purchased, the prospects for a decline in a put's premium are enhanced similarly. Since most stocks rise and fall with the general market – with the possible exception of gold stocks – this provides a measure of much-needed discipline and helps prevent emotional, uncontrolled option buying.

Rule No 2: Buy calls when the industry group is down; buy puts when the industry group is up.

Just as most stocks move in phase with the market, most industry group components move in sync with their counterparts within their specific industry as well. Therefore, when one stock within an industry group is down, chances are the others are down as well. It's the exception when one component of an industry advances while all the other members decline, or vice versa, especially over an extended period of time. For example, situations can arise where a buyout occurs and the accumulation of one company's stock causes it to out-perform the others within the industry group. However, announcements such as these typically cause the other stocks within the same industry group to participate in the movement since the market's perception is that all companies within the group are likely acquisition candidates and their stocks are "in play," so to speak.

Rule No 3: Buy calls when the underlying security is down; buy puts when the underlying security is up.

In order to time the purchase of calls, we look for the price of the underlying security to be down relative to the previous trading day's close. If the stock's current market price is less than the previous day's close, most traders extrapolate that the downtrend will continue. It is also possible to relate the stock's current price with its opening price level to make this rule more stringent. Either relationship, that is, current price versus yesterday's close or current price versus the current day's open, can be applied or a combination of the two can be used to insure that the composite outlook for the market is perceived bearish by most traders.

In order to time the purchase of puts, we look for the price of the underlying security to be up relative to the previous trading day's close. If the stock's current market price is greater than the previous day's close, most traders extrapolate that the up trend will continue. It is also possible to relate the stock's current price with its opening price level to make the rule more stringent. Either relationship, that is, current price versus yesterday's close or current price versus the current day's open, can be applied or a combination of the two can be used to insure that the composite outlook for the market is perceived bullish by most traders.

Rule No. 4: Buy calls when the option is down; buy puts when the option is down.

Just as the previous series of rules required that specific relationships be fulfilled, so too must this prerequisite be met. In fact, of all rules listed, this requirement is singularly the most important. The option's price, be it a call or a put, must be less than the previous day's close. As an additional requirement, it may also be less than the current day's opening price level as well. Obviously, if an option's price is inevitably going to rally, it is smarter to buy as low as possible. Further, if the call or the put unexpectedly continues to decline to zero, then the loss incurred is nevertheless less than if one had chased the price upside and purchased the option when it was trading above the previous day's close.