Science of Trading

Some traders get too deep into the derivative concepts of the financial markets (e.g., chart patterns, complex indicators, Fibonacci and Gann levels, etc.) without understanding some fundamental basics of the trading – probabilities, mathematics, fractional money management, principles of economics and so on. Books presented here will help you to understand gain this important knowledge. With their help you’ll be able to tell a good trading system from a bad one and measure your trading parameters professionally.

The Black Swan by Nassim Taleb

The Black Swan or The Impact of the Highly Improbable is a second book for the common people by Nassim Nicholas Taleb, a famous crusher of the economic forecast theories. His first book — Fooled by Randomness — was a major success among both the laymen and the financial traders and has lead to many controversies among the latter. The Black Swan is his first book squared with a stronger emphasis on the effect of the low-probability events on everything we know in our life and in particular on the financial markets. It’s hard to overrate this book when recommending it to the traders. In my own opinion, traders shouldn’t even consider starting real account trading without first acquainting themselves with the ideas presented by Nassim Taleb. It’s also one of those cases when the great ideas are presented in a great wrapping — Taleb’s narrative style is fun, interesting and very enlightening.

Fooled by Randomness by Nassim Taleb

Fooled by Randomness or The Hidden Role of Chance in the Markets and in Life is a very interesting research book on randomness but it completely lacks the scientific terms or complexity. It’s a story told by the expert trader about the randomness itself, its effect on our life, on the markets and on our vision of the surrounding world. The randomness is one of the most important parts of the Forex market (and any other financial market out there). That’s why it’s very important for traders to see the probabilities right and be capable of measuring almost everything in terms of probability. This book can be of a great help to any trader and not only trader but almost anyone. Although it may look a bit “crazy”, it’s very easy to read and you’ll rarely need to reread paragraphs to understand them properly.

The Trading Game by Ryan Jones

The Trading Game is the new classics of the money management theory for the financial trading and investing. Ryan Jones starts off with showing some really evident examples of why the money management is so important in every activity that involves risk, then he continues with descriptions of some classic theories and techniques regarding application of the money management in the trading. Then he proceeds to explaining his own vision of the risk control and the reward-to-risk scheme, offering a completely new technique, which he calls Fixed Fractional and Fixed Ratio Trading methods. The main focus of the chapters, describing his methods, is on the proper relation between the risk, reward and the total trading account size.

Investment Performance Measurement by Bruce Feibel

Investment Performance Measurement is a book dedicated to the less popular part of every financial trading or investing process, known as the results analysis. When you have a strategy to use, the money management system to follow, all the necessary tools to trade and invest you go deep into the process. But each activity should have some results and these results should satisfy you somehow, and more than that — your should be able to tell the bad result from the good one, even when not everything is clear and can’t be measured by the exact numbers yet. This book describes and demonstrates the techniques that can be used to measure the investment or trading performance.

Preparing for the Worst by Hrishikesh D. Vinod and Derrick P. Reagle

Preparing for the Worst is a famous trading book almost entirely dedicated to the compensations of the downside risk if the financial trading. Like with many other trading books, this one was also written with the stock markets in mind, hence the important role of the portfolio analysis and weighing in the risk management system. In Forex trading portfolios usually don’t exist and can’t be a part of the risk management, but this book has a lot of information to offer to the currency traders. The authors of this book provide strictly probabilistic and statistical methods for analyzing the downside risks of the trading. Some good level of mathematics is required to understand the concepts presented in Preparing for the Worst, but Ph.D. is not necessary.

Trade Your Way to Financial Freedom by Van K. Tharp

Trade Your Way to Financial Freedom is one of my personal favorite trading books. From this book I’ve learned a lot about position sizing and trading system development. It’s definitely a must read book for almost every financial trader. You’ll learn how to effectively manage your risks and capital according to those risks. From this book you can learn about the expectancy orientated trading and even how to build a trading system that is based on the expectancy. The big part of this book is dedicated to the R-multiples — one of the best indicators of the trader’s money management. Trader’s psychology is also an important topic in some of the book’s chapters. Third part of Trade Your Way to Financial Freedom is about strategy building, entering and exiting the market and the position-sizing strategies.

Money Management by Dave Landry

Money Management — as its title obviously suggests, is a book about managing money and risks in the leveraged financial trading and investing. Dave Landry presents a rather short book composed of four main parts, each of them dedicated to one topic: Controlling Risks and Capturing Profits, Rules of the Road, Insights from the Pros, Pro Traders Share Their Lessons. Two advantages this book on money management has compared to other trading books on this topic — it is short (it’s really hard to cover such an extensive topic as money management in about 20 pages) and it’s based on experience of the real traders. Two last parts of the book are in the form of dialogs of the author and some professional financial trader. Money Management by Dave Landry is a good book to get the most important information on the money management before starting trading Forex for real.

The Mathematics of Money Management by Ralph Vince

The Mathematics of Money Management is one of the greatest books about the money management in trading. Like in many other fields, money management has two principal sides — psychological and mathematical. Psychological part is about putting the right amount of money at risk at a right time and why emotions tell you to do otherwise. Mathematical is about putting the right amount your funds at risk at a right time, and why statistics tell you to do so. This book is mostly about mathematics. It will give you a system to adhere in order to stop losing money where you shouldn’t lose anything. Even having a good market entry/exit strategy doesn’t guarantee that you will earn from trading; managing your money properly is very important in every kind of financial trading, that’s why I recommend this Forex book so much.

Buying and Selling Volatility by Connolly Kevin

Buying and Selling Volatility — a trading book that describes some really interesting type of trading — a volatility trading. It might be not very useful for Forex traders, because it involves the derivative trading (and it’s not very popular with Forex, spot trading is much more popular), but it will be interesting and useful to other traders and investors who don’t limit themselves to Forex only. Traditional financial trading consists of buying and selling certain instruments and closing the position when the price of the instruments reaches a desired profit level. All that such trader needs is the entry price and the exit price. The difference (positive or negative) is the trader’s profit or loss. Volatility trading offered by Connolly Kevin is different. Volatility trader buys or sells volatility through a complex system of hedged options and other derivative. The benefit of such method is that one can earn successfully on volatile markets without even paying attention to the entry and exit prices of the given instrument.