I Read 175 Books On Trading, Here's What Will Make You Rich

Key Concepts

• Trading Edge: A repeatable process that yields a positive expected value over time.
• Trend Following: A strategy that aims to capture the "meat of the move" by riding market trends until they reverse.
• Mean Reversion: A strategy based on the assumption that prices will return to their average; it involves buying pullbacks in uptrends and selling after a bounce.
• Systematic Trading: Using predefined, rule-based entry and exit criteria backed by historical backtesting.
• Risk Management: Techniques like position sizing and time-based stop-losses to prevent account ruin.
• Compound Interest: The long-term exponential growth of capital, which is the primary driver of wealth.

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1. The Foundation: Market Wizards by Jack Schwager

The author emphasizes that most trading books are theoretical and lack practical application. Market Wizards serves as a foundational text because it features interviews with successful traders who have verified track records.

• Key Lesson: You must possess an edge. Without an edge, even perfect discipline and risk management cannot overcome the "house advantage" (similar to a casino).
• Personality Fit: The author highlights Marty Schwarz, who failed as a fundamental trader but succeeded after switching to technical analysis, proving that traders must find a methodology that aligns with their personal psychology.

2. Trend Following: Principles and Application

The author cites Trend Following by Michael Covel to explain how hedge funds (e.g., Malvin Capital, Graham Capital) profit during market crashes.

• Four Principles of Trend Following:
  1. Diversification: Trade across various asset classes (currencies, indices, metals, energy, agriculture) to increase the probability of catching a trend.
  2. Risk Management: Risk only a small fraction (e.g., <1%) of capital per trade to survive the low win rate (approx. 40%).
  3. Trailing Stop-Loss: A mechanism to lock in gains as the market moves in your favor while providing "breathing room" to avoid premature exits.
  4. Follow the Price: Do not attempt to pick tops or bottoms; focus on capturing the "meat of the move."

3. Systematic Execution: Following the Trend by Andreas Clenow

While Trend Following provides the theory, Following the Trend provides the "recipe."

• Significance: This book provides a complete, rule-based trading system with backtested results.
• Performance: The author notes that trend following thrives during crises (e.g., 2000 Dot-com bubble, 2008 Financial Crisis, 2020 COVID-19, 2022 Russia-Ukraine war).
• Drawbacks: The strategy suffers during choppy, range-bound markets and can experience long periods of drawdown due to its low win rate.

4. Mean Reversion: Short-Term Trading Strategies That Work

To complement trend following, the author recommends Short-Term Trading Strategies That Work by Larry Connors and Caesar Alvarez.

• Methodology: Unlike trend following, mean reversion captures short-term swings. It involves buying oversold stocks in an uptrend and selling them after a quick bounce.
• Risk Management without Price-based Stops: The author notes that for mean reversion, price-based stop-losses often hurt performance. Instead, risk is managed via:
  • Position Sizing: Spreading capital across multiple stocks (e.g., 10 stocks at 10% each) so that one failure does not wipe out the account.
  • Time-based Stop-Loss: Exiting a trade if the expected bounce does not occur within a specific timeframe, freeing up capital for better opportunities.
• Synergy: Mean reversion and trend following are "Batman and Robin"—they perform well in different market conditions, leading to smoother equity curves.

5. Advanced Diversification: Automated Stock Trading Systems

Automated Stock Trading Systems by Lawrence Bentock is highlighted for teaching how to manage multiple systems simultaneously.

• Key Insight: Traders can diversify by strategy (trend vs. mean reversion), time frame (long-term vs. short-term), and market. The author currently manages 10 systems, while the book's author manages 55.

6. The Psychology of Wealth: The Psychology of Money

Morgan Housel’s The Psychology of Money is presented as the most critical book for long-term success.

• Case Study: Ronald Reed (a janitor who saved and invested) vs. Richard Fuscone (a wealthy Wall Street executive who went bankrupt).
• Core Argument: Financial success is a "soft skill." Behavior, frugality, and the patience to let compound interest work over decades are more important than complex trading strategies. The author notes that 97% of Warren Buffett’s wealth was accumulated after his 65th birthday.

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Synthesis and Conclusion

The author concludes that consistent profitability is not the result of genius, but of a structured approach:

1. Develop an Edge: Use data-backed, rule-based systems (Trend Following + Mean Reversion).
2. Manage Risk: Use position sizing and time-based stops to ensure longevity.
3. Maintain Discipline: Adhere to the rules regardless of market noise.
4. Compound: Allow time to work its magic.

The author’s success (343% return over 7 years) is attributed to combining these proven strategies and maintaining the psychological fortitude to stay invested through various market cycles.