Among all the skills that traders require to be profitable in the markets, neither of them is as important as a trader’s mind.
Trading requires strict discipline, quick thinking, and the ability to prevent emotions to interfere with your trading decisions. The term “trading psychology” refers to all these skills combined.
While trading psychology can be learned by trial and error in the markets, reading other traders’ experiences is a much more cost-efficient approach.
One of the best ways to learn how other successful traders control their minds in trading is by reading books.
In the following article, we’ve compiled a list of our top 5 books on trading psychology that every trader should read.
#5 Reminiscences of a Stock Operator, Edwin Lefevre
Published in 1923, Reminiscences of a Stock Operator is still one of the most widely read investment books ever. This timeless tale tells a story about Jesse Livermore – perhaps the most legendary trader of the late 19th and early 20th century.
The book examines the strategies and practices of Jesse Livermore, who perhaps was one of the first to understand the concept of trends. With great discipline, Livermore learned how to take large risks to make enormous profits in the stock market, including during the Great Depression in the 1930s.
The book is a great read whether you’re a total beginner or a seasoned professional. It will teach you that is nothing new in Wall Street – the same methods that worked a hundred years ago are still applicable in today’s market.
Speculation is as old as the hills, and whatever happens in the market today has happened before and will happen again.
The book also goes on to discuss the importance of emotions in trading and the devastating effect that fears and hopes can have on your trading performance. When the market goes against you, you hope that it will reverse which leads to even larger losses down the road.
Similarly, when the market goes in your favour, you’re starting to feel fear that the market could reverse and take away your profits, which leads to closing profitable positions too soon.
Successful traders have to fight these two instincts. Instead of hoping they must fear, and instead of fearing they must hope.
Whether you’re a professional trader or just getting your feet wet, add this book to your read list.
#4 Trade the Trader, Quint Tatro
Quint Tatro is a hedge fund manager who always reminds us that when we’re trading stocks, we’re not just trading the actual companies behind the stocks.
Instead, we’re trading against the mass of traders and algos who take the other side of our trade. The main focus of those traders is to take the money away from your trading account. Somebody has to lose on the stock market in order for you to profit.
According to Tatro, the most common reason why most traders fail is that they don’t have a basic understanding of the markets. Most traders try to learn strategies and are looking for the holy grail in trading when in reality they should be learning to “read” the intentions of the other traders who’re trading against us.
Quint Tatro summarises trading psychology in the book very well by comparing day trading to playing chess. When playing chess, you’re not only playing your moves but also the moves of the player on the other side.
The book does a great job of explaining the process of how to outsmart the crowd in every single step. From picking the right stocks to trade to getting in and out of the stock at the psychological trigger points, i.e. the price-levels where you know the other side is likely to take action and reverse the price.
Trading against the crowd is often quite profitable, especially when the crowd is “dumb money”, i.e. speculative traders. Recognising the difference between smart and dumb money is another key point of the book, making it a must-read for anyone who’s interested in how to take advantage of market psychology.
#3 Trading in the Zone, Mark Douglas
While technicals and fundamentals are undoubtedly important in trading success, trading psychology is just as important. One of the best books to understand the importance of trading psychology and its impact on your success is Mark Douglas’ book “Trading in the Zone.”
Mark Douglas is an expert in trading psychology who coached traders around the world on how to master the psychological side of trading. In the book, he aims to help you with trading consistency and understanding the mindset of a successful trader, which he describes as the zone.
Just like a professional athlete, great traders aren’t born but made. World-class athletes follow a strict mental and physical discipline and practice the same routine for years in order to prepare for the Olympic Games. If you want to become the most successful trader on the Olymp, you’ll have to do the same.
When you’re trading in the zone, buy and sell execution should be like a muscle reflect without attached emotions.
In the book, Mark talks about how to trade systematically by leaving your emotions outside the door. The book will teach you how to manage your emotions, especially when it comes to managing fear – an emotion that often leads to hesitation when pulling the trigger and results in entering a trade either too early or close it too late.
Mark also tells us that we can’t let emotions interfere with our trading and have to take responsibility for whatever happens with our trades.
This book is a must-read for traders who want to understand the fundamental forces behind financial markets and the differences between the trader’s perspective and the market’s perspective.
#2 Come into My Trading Room, Dr. Elder Alexander
Elder Alexander is a professional trader, expert in technical analysis, and author of the bestseller Trading for a Living. In his new book Come into My Trading Room, Dr. Elder will teach you how to become a competent trader by understanding the underlying forces behind each price-move – mass psychology.
In his book, Dr. Elder teaches you three key aspects of the markets: Mind, Method, and Money. The first few chapters are dedicated to the Mind and explain that the key to winning is solely in your mind – it’s discipline. The book does a great job of explaining individual and mass psychology of the markets, how prices are set, how human behaviour tends to create the same price-patterns over and over again. The majority of traders are humans who are driven by emotions such as fear and greed.
If you understand the concept of mass psychology, it will become much easier to identify profitable trading opportunities and to predict the future actions of the masses behind the market.There’s also a step-by-step guide on how to control risk and manage money in the markets. Dr. Elder suggests to let winners run and to adjust your stop-loss levels as the markets go in your favour, locking profits along the way.
Besides trading psychology, Dr. Elder also covers proven analytical tools and systems that he uses to trade the markets. It’s a complete guide for beginners that helps them become successful traders who enter the market with confidence and exit with profits.
Although Come into My Trading Room covers trading psychology to a large part, it’s a complete guide to trading that helps you master the three Ms of trading – Mind, Method, and Money.
#1 Market Wizards, Jack D. Schwager
Written by Jack D. Schwager, Market Wizards summarizes interviews with top traders across most financial markets who share their secrets of success.
By reading the book, you’ll get a comprehensive insight into how successful traders amass tens of millions of dollars a year trading the markets. While each interviewed trader has a different story, all answers come down to the same essentials: solid methodology + mental attitude = success in trading.
Schwager breaks all the responses down into a set of guiding rules that you can use in your daily trading. Some of the traders interviewed in the book include Bruce Kovner, Paul Tudor Jones, Ed Seykota, Marty Schwartz, and more. According to Schwager, most traders fail because they chase trading without developing their own methodology. Almost their entire focus is on trade entry, completely neglecting the importance of trade exit and risk management.
If you’re interested in how to become a trading star in your own right, Market Wizards by Jack D. Schwager does a great job in explaining the winning attitudes of some of the world’s greatest traders.
So here they’re – Our top 5 picks on the topic of trading psychology. Don’t forget to apply those skills the next time you pull the trigger in the markets. Happy reading!