There are dozens of books that have been published about trading, financial markets and how to profit in this industry. Some focus on human psychology and risk/reward analysis, while others examine historical trends as a means of gaining an understanding of market movement. Here, in Part 1, we will take a look at five of the most influential and useful books on the subject, some of the best books on crypto trading, to provide a starting point for further research.
Trading in the Zone: Mastering the Market with Confidence, Discipline and a Winning Attitude By Mark Douglas
This book has become a classic for new traders and is considered “the bible” of trading psychology. It is an absolute must-read for anyone interested in trading. First published in the year 2000 by Prentice Hall Press, Mark Douglas’ work uses human psychology as a lens to understand common mistakes made by novice traders and how to overcome them. While Douglas’ guide was written about traditional trading markets, the depth of his understanding of trading psychology makes it just as relevant to crypto markets.
Supposedly 95% of all traders fail to thrive and, in fact, the majority of new traders will leave after a few bad trades. What separates failure from success? Douglas argues that failure is due to faulty trading psychology and poor money management, and that through the lessons in his book, readers can move beyond their own hindrances and become successful traders.
Throughout Trading in the Zone, Douglas asserts that most missteps made by new traders can be traced back to applying an emotional understanding to market interactions. He argues that as human beings we are conditioned to have an emotional response to events—i.e. failure feels bad and success feels good. When we make a trade that doesn’t pan out as expected we often let our emotional response dictate our actions which can lead to clouded judgment and more mistakes.
Douglas points out that these missteps come from an illogical point of view. Since the market and its fluctuations are completely removed from any kind of human emotion, in order to trade effectively readers must gain an unemotional vantage point.
Learning Trading Fundamentals
Douglas lays out a schema to understand the market in a useful way he calls the “5 Truths”.
- Anything can happen
- You don’t need to know what is going to happen next in order to make money
- There is a random distribution between wins and losses for any given set of variables that define an edge
- An edge is nothing more than an indication of a higher probability of one thing happening over another
- Every moment in the market is unique
By accepting and utilizing Douglas’ “5 Truths” readers will be able to remove any sense of emotional attachment to their interactions with the market and become successful traders. He argues that traders must simply find their “edge”—a set of variables that puts the probabilistic outcome in your favor. This “edge” can come from an online guide, a book, or through analyzing trends and trial and error: it is simply a function that shifts the odds in your favor.
Understanding that no one knows what will come next specifically is key. It is only through a deeper analysis—your “edge”—that you can become successful by shifting the odds slightly in your favor over time. A casino works well as an analogy: the casino has no more idea what the next card turned over will be, however by understanding the deeper patterns of variables they are able to consistently win.
Trading in the Zone is a book that has earned its reputation as one of the most important books for any new trader through endorsements of many in the industry. While Douglas does wax philosophical, taking detours away from trading and delving into human psychology, it retains its position as useful, informative and required reading for anyone curious about crypto trading.
Technical Analysis of the Financial Markets: Study Guide By John J. Murphy
An update of his seminal work, Technical Analysis of the Futures Markets, John J. Murphy’s continued examination of the role of technical analysis in a day to day understanding of market factors is essential for novice traders and still useful to more experienced hands. The accompanying study guide provides useful tools to expand upon the chapters as well as guides and quizzes to facilitate a deeper understanding of the subject matter.
Published in 1999 by the New York Institute of Finance, Technical Analysis takes the diligence and thoroughness of his work on futures markets and expands them to all financial markets. While this book was published well before the blockchain revolution swept the world, the tools and ideas discussed can still be successfully applied to crypto markets.
Technical analysis (TA) is a way to explore financial markets by looking at previous trends, historical price charts and market statistics. The goal of this analysis is to use these past data sets to predict future market trends. Murphy recognizes the importance of these data sets, and lays out a means to understand the information through the use of different charts and graphs.
How To Read Charts
This book has over 400 charts that are used to illustrate all of his points and provide a solid introduction to technical analysis. Murphy, without being dry, outlines many of the different tools used in TA, including chart construction as well as introductions into trends and the building blocks of chart analysis.
He also discusses price patterns—continuation patterns and major reversal patterns—as well as analysis methods like moving averages, oscillators and other key indicators. While many of these concepts—including time cycles, money management, and trading strategies—are the subjects of entire books, Murphy’s book serves as an indispensable tool in gaining a basic understanding of TA.
Technical Analysis is not perfect. Some reviewers point out that Murphy, like so many authors, cherry-picks his examples to illustrate his points, however, this was done for the sake of simplicity and with the intent of fostering a basic understanding of concepts. There is also no doubt that this book is dated: Chapter 15 on Computers and Trading systems seems downright quaint relative to the advances made since publication. Despite these shortcomings, this Guide, along with the original text, are one of the best introductions to TA there is, and the fact that this book is still held in such high regard twenty years down the road is a testament to its continued viability.
Trend Following: How to Make a Fortune in Bull, Bear and Black Swan Markets By Michael Covels
This next book examines a different approach to trading. In the 5th edition of his book, published by Wiley in 2017, Michael Covels offers insights into the unique approach to trading known as trend following. While the name may imply simplicity, there are still some intricacies to this philosophy, all of which can be applied to crypto markets.
Within the financial industry, many investors attempt to analyze economic realities—supply & demand factors—that they feel influence and shape market values. These investors look to external factors like government policy, price-earnings ratios, economic projections, spreadsheet analysis, and gut feelings to help them decide when and what to buy and sell. Examples would be political unrest in the Middle East affecting the price of crude oil negatively, or speculation about slowing economic growth in the UK and the effect this would have on markets, or just the idea that some asset “will bounce back.”
Covel argues that at the heart of this fundamental analysis-based trading are stories—stories that we tell ourselves to create order out of chaos. Humans are creatures whose minds work based around the patterns of cause and effect, and Covel asserts that we will find these patterns even in places where they might not truly exist, like financial markets.
Following Crypto Trading Trends
Instead, Covel suggests that trend followers should use an initial risk rule in order to determine trading size at the outset of an investment, meaning that you know how much to buy or sell based on the money you have. Price changes will determine further investment while adverse movements will lead to an exit, regardless of any gut feelings or speculation based on factors other than price. Trend followers will never get in at the bottom and never get out at the top. Instead, they make their profits in the “meat”, or middle, of a market trend, whether up or down.
Covel argues that coming to terms with the fact that there are many things in life that are unknown—specifically the future—and that becoming comfortable with this fact is essential for a trend trader. There are too many externalities that get wrapped up in fundamental analysis muddying the waters. Instead, it is vital to focus on only 100% knowable data: the price. By looking at historical trends and prices in relation to current prices, and applying non-emotional sets of trading rules, often based around mathematical models of market behavior, trend followers are able to secure profits.
Covel uses historical precedents—the Dot Com Bubble and the Great Recession—to further illustrate his points. He also incorporates aspects of human psychology as well as interviews with leaders in the industry to provide an in-depth analysis of the trend following strategy. Covel makes a strong case that this strategy is useful for trading in all markets, including the crypto sphere. This book can be extremely helpful in developing an understanding of trends and how this can positively impact future trades.
Diary Of A Professional Commodity Trader By Peter Brandt
This book comes from a legend in the financial world. Peter Brandt, with over 40% compounded returns over his 40-year career, has been one of the most consistently successful traders in the industry. Published by Wiley, this book takes the reader into the day to day workings of a professional trader with Brandt sharing some of the strategies that have helped him remain successful despite changing markets, technological innovation, and fluctuating economies.
Over the course of 21 weeks, Brandt takes the reader through all aspects of trading, from emotional and psychological management to trade management, all without sensationalism or wild claims of overnight success. Throughout his book, Brandt, through clear and concise prose, emphasizes the importance of identifying a strategy and sticking with it.
Brandt’s focus on trade management over trade identification contradicts what many others in the industry consider the most important aspect of successful trading. Brandt asserts that rather than rushing from one trade to the next, constantly searching for a magic-bullet indicator that will let them pick all winners, solid risk management and consistency are the keys to success.
The Best Book For Understanding Crypto Trading?
Throughout Diary, Brandt argues that through keeping losses small, traders can achieve the longevity that will make them successful over time. It is important not to bet more than you can lose and wind up making one bad call that takes you out of the game permanently. He illustrates the real life effects of this strategy through his own track record. Brandt’s own personal success rate on individual trades is only 30%. This means that 70% of his trades are losers. However, despite this, he is able to remain successful in the long run due to his strict risk management: the hits he takes are small and the trades that do pay off make up for his losses.
This strategy requires self-control and patience, as Brandt states: “Successful trading is the process of doing certain things over and over again with discipline and patience. It is possible to be profitable over time even though the majority of trading events will be losers. ‘Process’ will trump the results of any given trade or series of trades.”
This is why Brandt emphasizes the importance of discipline. Having 75% loss on your trades is enough to scare most traders into dumping and finding a new job. Brandt argues that it is his faith in the process and sticking to the game plan that allow him to see past the individual ups and downs and recognize the larger patterns at play. It is this view and understanding of the big picture that have allowed him to prosper for 40 years in a field that has an unusually high turnover rate.
This book is a rare glimpse into the psychology and strategy of a certifiable legend of the financial world. The lessons in Diary are applicable in the real world across many different markets including crypto markets. His insights and concise language make this book a must-read for anyone interested in trading as a profession.
The Art of War By Sun Tzu
Dating from the 5th century B.C., The Art of War–attributed to the Chinese military strategist Sun Tzu–is a military treatise delivered in 13 chapters. Each chapter addresses a different aspect of battle and psychology. While it has long been studied by militaries around the world it has gained much attention in the business and financial world as well thanks to the applicability of its themes to operating a business. Magazines like Forbes have published articles about applying the principles to the business world.
The Art of War is an interesting book: at times poetic and enigmatic, at other times mundane and practical. Sun Tzu wrote this book to guide the strategy of ancient China’s military, but since the books deal more with overarching strategy of warfare than actual combat, it can be applied to almost every aspect of life.
A Different Perspective
Bulleted points like “Consider your enemy’s personality defects and use them to your advantage” have real-world applicability in almost any situation with an adversarial nature and can be especially useful in relation to business. While it’s a relatively short book—only 273 pages—the wisdom contained in The Art of War is deep and each line can be analyzed and dissected for meaning.
Beyond war and business, The Art of War contains lessons that everyone can benefit from. It can be returned to again and again, with new knowledge gleaned from each reading. It is required reading not only for business insiders and traders, but for anyone looking to expand their outlook and gain new knowledge about themselves and life. “The supreme art of war is to subdue the enemy without fighting”.
The Crypto Trading Books You Should Be Reading
These are only a few of the volumes of books that can help aspiring traders delve into the world of finance. All of these books can be applied to most markets, including cryptocurrencies, and provide essential knowledge to anyone interested in trading. There are many more helpful books on the subject out there, and in Part 2 we will look at five more, but these provide a solid foundation and are worth further examination.
Put your crypto trading knowledge into practice
Amazon. (2019). Trading in the Zone: Master the Market with Confidence, Discipline and a Winning Attitude. Retrieved from: https://www.amazon.com/Trading-Zone-Confidence-Discipline-Attitude/dp/0735201447
Amazon. (2019). Study Guide to Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications. Retrieved from: https://www.amazon.com/Study-Technical-Analysis-Financial-Markets-ebook/dp/B00BWVKHJK
Factor Research. (2016, April 1). About Peter L. Brandt. Retrieved form: https://www.peterlbrandt.com/about-us/
Trend Following. (2019). Market Success Means Surrender. Retrieved from: https://www.trendfollowing.com/Wikipedia. (2019, September 13). Sun Tzu. Retrieved from: https://en.wikipedia.org/wiki/Sun_Tzu