I've learned a lot more useful knowledge from books than I have from days of reading internet forums. Or Twitter!
- Books are a great source of useful information
- They are often too long (blame the publisher).
- Some books are not even worth the time it takes to read.
- Knowing what we can learn from the most important books, and avoiding the ones that are mostly charlatanry, is valuable.
So what have we learned so far?
Clemmo's Canon of Trading
1. Clemmo's First Lemma
- Simple patterns like candlesticks, MA crosses, double tops/bottoms exist in market data but anticipate nothing; they are 'fool's gold'
- The market is a pattern-erasing machine; by the time we see something it's no longer useful
- Smart people want to 'figure things out' and find order in chaos; they get stuck down rabbit holes
- Pragmatic traders just want chaos and a method of dealing with it; one method is enough
Supporting Evidence:
- Mark Tier: Learn from the Greats. Forecasting doesn't work and diversification is neutering.
- Robert Shiller: Finance is a technology. Being very clever and good at maths are not by themselves enough to avoid making basic trading errors like staying out of a long-running bull market. Another way to say the same thing: there's more to trading than fundamental analysis.
- David Aronson: Common technical analysis methods, and simple strategies based on TA don't work.
- Nicholas Nassim Taleb: Randomness is tricksy. People are pattern-detecting machines even where none exist. The vast majority of traders and money managers are self-delusional. The rare event is where real profit lies.
- Al Brooks: When you see everything, you focus on nothing. You can make a living selling trading books as long as they are confusing enough and you repeat yourself often.
- Brent Penfold: Serious traders focus on price not indicators. Pragmatists use Dow theory, breakout, (inter)market, spread, volume and statistical analysis,
2. Clemmo's Second Lemma
- Momentum is real
- Markets have inertia; this cannot be obfuscated, distorted or manipulated beyond observation
- Trending markets tend to continue trending
- The trend is your (fair-weather) friend; use it but don't depend on it
- Avoid biases and trade what you see
Supporting Evidence:
- Jesse Lauriston Livermore: Wait for the market to react. Set some money aside. Buy rising instruments, and sell falling ones. A stock is never too expensive to rise or too cheap to fall. Complex charts and systems are suspect. Keep your own records and data.
- Nekritin&Walters: Patterns generally fail but the ones that don't fail ('Big Shadows') make use of 'big' candles, in other words momentum is the real signal.
- Omer&Lizotte: if price can move n pips it's more likely (than not) to move another n pips where n is limited to a reasonable daily range; that's because trends exist
- Laurent Bernut: rising floors and falling ceilings (not examined in this thread yet)
- Neiderhoffer & Osborne: A sequence of two moves in the same direction is more likely to be followed by a move in the same direction than by a reversal
- Jeff Cooper: A stock in motion tends to remain in motion.
3. Clemmo's Third Lemma
- Sensible Money Management is Critical
- There is much random and uncontrollable behaviour in market prices
- As a result we have to treat any system probabilistically and size positions logically
- Determine odds, payoffs and expectancy
- Use a money management system that dovetails with our trading system
- Define realistic expectations about the rate of returns, and monitor that rate
Supporting Evidence:
- Jesse Lauriston Livermore: The Great Plunger died broke or close to it. You can be a great trader and still lose the war if you don't manage your battles.
- Brent Penfold: Money Management is the key to survival. It is one of the three pillars of success along with methodology and psychology.
- Kirill Emerenko: Poor Money Management can take a positive expectancy system and ruin it. Kelly's formula is theoretically optimal.
4. Clemmo's Fourth Lemma
- Price is Cyclical
- Unfortunately this cyclicality seems to be difficult to forecast, if at all
- Using shifted/phased averages might offer some benefit in forecasting trends
Supporting Evidence:
- JM Hurst: The Profit Magic of Stock Transaction Timing - the 'FLD'. (not covered in the book club yet)
- Manesh Patel - the Ichimoku Kinko Hyo indicator seems to be able to avoid ranges better than any Moving Average
The next big questions: What about regression analysis, and its tools like envelopes, channels and bands? Is there anything useful in Elder or Ehlers many methods? What about investing? Is trading even worthwhile compared to investment profits?
Table of Contents
The Winning Investment Habits of Warren Buffett and George Soros by Mark Tier- B (good general advice)
Global Financial Markets Coursera Course by Robert J Shiller------------------------ B- (somewhat academic)
Fooled by Randomness by Nassim Nicholas Taleb------------------------------------- A- (entertaining and thoughtful if pessimistic)
Evidence-Based Technical Analysis by David Aronson--------------------------------- B+(educational but tiresome and ends with a whimper)
Predicting Price Action by Owens & Lizotte--------------------------------------------- B (short but sweet)
Reminiscences of a Stock Operator by Edwin Lefevre--------------------------------- A (absolutely essential)
Reading Price Charts Bar by Bar by Al Brooks----------------------------------------- D (more useful as a cautionary tale)
Naked Forex by Nekritin & Walters----------------------------------------------------- C+ (some good ideas marred by imprecision)
The Ultimate Handbook of Forex Trading Basics & Secrets by ForexHero------------ B- (more basics than secrets but a quick read)
Hedgehogging by Barton Biggs--------------------------------------------------------- B (entertaining like Market Wizards but less informative)
The Physics of Wall Street by James Weatherall -------------------------------------- B+ (good intro to history of econ modelling but modern examples are weaker)
High Probability Trading Strategies by Robert Miner ---------------------------------- C (makes promises it cannot keep)
The Universal Principles of Successful Trading by Brent Penfold --------------------- A (money management explained if not settled)
The Black Book of Forex Trading by Paul Langer -------------------------------------- C (not terrible, but far from great, just another trading book)
Making Money in Forex by Ryan O'Keefe ---------------------------------------------- D (one interesting idea does not a good trading book make)
Hit and Run Trading by Jeff Cooper ---------------------------------------------------- C+ (some promising ideas but barely scratches the surface)
Bird Watching in Lion Country by Dirk Du Toit----------------------------------------- D (some fresh ideas poorly detailed and almost unreadable)
Technical Analysis for the Trading Professional by Constance Brown ----------------- F (deliberately misleading. the goal is to sell books & courses)
The Art of Currency Trading by Brent Donnelly ---------------------------------------- A (vital reading for anyone using fundamental analysis)
Day & Swing Trading the Currency Market by Kathy Lien ----------------------------- B+ (a hefty data dump with somewhat less insight than data)
Trading with Ichimoku by Manesh Patel ------------------------------------------------ A- (despite all of its flaws this might actually reveal a useful TA tool)
The City: London and Global Power of Finance by Tony Norfield ---------------------- B (an analysis of British finance from a Marxist perspective, not about trading)
New Concepts in Technical Trading Systems by Welles Wilder ------------------------ B+ (a classic of tech. analysis that seems about as useful the rest of TA)
The Market Wizards (series) by Jack Schwager ---------------------------------------- A (indispensable classics, praised by industry giants)
Trading From Your Gut by Curtis Faith -------------------------------------------------- C (not neuroscience or even science, and not clearly useful)
The New Trading for a Living by Dr. Alexander Elder ---------------------------------- A- (some novel insights, lots of info and maybe even a useful system)
Trade Your Way to Financial Freedom by Van K. Tharp -------------------------------- (skipping it as the short summary here has everything you need to know IMO)
Please vote in the poll or suggest new books to add to the reading stack!