As part of your desire to learn more and improve as a trader, you have probably checked out some books on the subject. Some of them, like Market Wizards, are truly inspiring and excellent reads.

Maybe some of them have been helpful but most likely a lot of them were bad. Similarly, if you go to a bookstore or browse online, there are innumerable books about the markets and investing out there. How do you save yourself the precious time and effort and thereby avoid a bad read ? How do you find a trading book that’s useful and informative and will leave you better off for having read it? Come to think of it, why are most books about trading so bad?

The core of the problem is that people who possess a profound amount of trading knowledge have almost no incentive to share it. If you were a star like Paul Tudor Jones or Warren Buffett, then you would have no financial or business incentive to write about what you knew and had learned over the years. After all, your whole reputation is built upon being an expert, with skills that are far more developed than the average investor. If you were to divulge how you do these things, that would dent the aura of invincibility that you had carefully cultivated, deflating the mystique. You might also give your competitors insights that they could use to overtake you. Furthermore, if you’re a billionaire, then the potential sales for any book are hardly worth making the effort. So given that the most knowledgeable or insightful investors have little financial incentive to lay their thoughts down for all the world to see, who, in the financial community, would want to write a book and reveal “trade secrets” (pun intended)?

For journalists or professors, the financial incentives can certainly matter. For someone who heads a start-up hedge fund, they’ll want the press or “guru” status that can emanate from writing something intelligent about trading. Sometimes it’s a person who has been relatively obscure but wants to reach a new audience and get his name out there. Brett Steenbarger comes to mind in this regard when he published his first book, Psychology of Trading. It’s certainly the case that people can write books because of direct personal incentive.

However, most people who do end up writing excellent books about the markets do so because they get some emotional reward out of the whole exercise. They could be gratifying their own egos by seeing their name in the press; letting everyone see how smart they are; or they think that they’re helping the world. For instance, George Soros has been quite public that he wrote Alchemy of Finance and all of his subsequent works because it lets him indulge his desire to be a successful philosopher, something he’s always wanted to do. William J O’Neill wrote his books and publishes Investors’ Business Daily because he wants to help people chart a better financial future for themselves. Some renowned investors, like Martin Zweig, have written books to extol subtly their excellent returns and to explain how they did it.

It’s easy to take their motives skeptically. George Soros is not about to displace Immanuel Kant or Rene Descartes in the pantheon of great philosophers. Some people probably did write books just to let the public that they are that smart. They get their emotional need satisfied at the same time that the public gets a useful read about markets.

In these cases, their emotional gain is our overall gain as traders. For the most part, the best books written are indeed books written by the greatest investors, people like Soros, etc, who possess true mastery and insight into the subject—and who have no rational incentive to share it under typical circumstances. They certainly don’t need the money. In this case, their scratching of some subconscious itch is what allows to benefit. We can think of numerous examples. Let’s run through a few that fit these criteria:

•   Alchemy of Finance by George Soros
•   Reminiscences of A Stock Operator by Edwin Lefevre
•   How to Make Money in Stocks by  William J O’Neil
•   The Little Book That Beats the Market by Joel Greenblatt
•   Winning on Wall Street by Martin Zweig
•   Intelligent Investor by Ben Graham

There is one caveat to keep in mind. Oftentimes, an investor will write a long treatise about how they do things—and try to teach you to do things exactly like they do. There is a problem with this approach: you, the reader, are usually not exactly like them! Their strategy will obviously have to be grounded in solid fundamentals, such as having a discernible process for getting into trades; cutting losses and letting winners ride; and managing risk at the portfolio level. These are concepts that are universal to all successful approaches and strategies.

But several things may be suited only to their specific skill set and personalities. For instance, George Soros’s style is due to his ability to understand complex international political and economic trends combined with his instinct for market psychology. It may work for someone with his multilingual background in economics but not for everyone. Joel Greenblatt or Ben Graham are much more long-term, and their approaches involve a large amount of deep digging through company financials, an approach that is more suited for accountants and former equity research  analysts than for your typical day trader. William J O’Neill’s strategy makes heavy use of both fundamental information and technical chart patterns, which is perfect for someone with can assimilate it all but it may confuse and possibly overwhelm someone else.

With this in mind, you need to make sure that a book has one of two things going for it: that either it’s relevant directly to your personality type, or that it teaches enough general/universal principles that you can apply and adapt to yourself and your particular circumstances. Otherwise, you won’t learn anything that’s relevant for yourself.

I’ve said my piece about how the best books for traders are by well-known or very successful traders who are getting “something else” out of it. Of course, plenty of people who are not billion dollar hedge fund managers have written excellent work about the market. What distinguishes their writing ?

Typically, they have three things in common:

• they are comprehensive;
• they are applicable across trading styles and strategies;
• they offer a perspective that’s grounded in markets but has something additional to offer

This combination gives you  sufficient overview and learning experience while giving you enough to apply to your own particular circumstances. Here are some books in this vein that I would highlight, along with the “extra” perspective that they bring:

•   One Good Trade by Mike Bellafiore —  someone who trains traders for a living
•   Psychology of Trading by Brett Steenbarger
•   Daily Trading Coach by Brett Steenbarger
•   Enhancing Trader Performance by Brett Steenbarger — a well-respected psychologist who works with traders
•   Hedge Fund Masters by Ari Kiev —  a psychologist working with traders, plus interviews
•   Market Wizards by Jack Schwager
•   New Market Wizards by Jack Schwager
•   Hedge Fund Market Wizards by Jack Schwager — these three books are all interviews with well-known money managers

How do you tell if a work meets these criteria?

For comprehensive: look at the length of the book. It sounds trite, but something that’s less than 250 pages is rarely thorough enough to develop an idea in sufficient breadth and detail to be interesting.

For something that’s applicable across styles and strategies: Look at the description on the cover. If it says that it “teaches you his secrets” or “shows you his style”, then the book is probably just a recitation of his trading style that works for him. It will not be relevant across a variety of areas. If the description says that it’s about more general concepts, like psychology or risk management and that it’s “wide-ranging” and “all traders will benefit”, then get interested.

For a perspective that’s grounded in markets but has something else to offer: Look at the biography of the author. If it’s someone removed from risk-taking in the markets day-to-day, like a journalist, then it is less relevant. If the author is involved in markets day to day, either as a trader or working directly with traders, then it’s going to be more helpful. Then, look to see what else they are bringing to the table. In the case of Mike Bellafiore, he’s also bringing his whole experience in developing traders for peak performance, which is a huge contribution; Ari Kiev was a famous psychologist who worked directly with the traders at SAC for many years, so he knows what is useful for helping traders to get better. In each of these cases, you can see how they are bringing in highly relevant skills from outside of the markets.

Take it from someone who has read a lot of books about trading, both good and bad: you need to be able to filter out the garbage and savor the good stuff. What are your experiences with trading books? What have you found most relevant for finding good ones?

By Bruce Bower | E-mail: Bruce [at] howoftrading.com

Blog: www.howoftrading.com | Twitter: @HowOfTrading