How to Learn Trading Properly, without Shortcuts or Scams

Trading is this weird sport where everyone plays it, yet there aren’t really any standard curriculums, and there are tons of scammers who charge subscriptions to Discord groups or emailing lists, claiming to net you that few hundred dollars profit.

Who can we trust? How do we know what works? We don’t, but in general, we trust ourselves to a large degree. Therefore, I’ve curated a curriculum of sorts where you can self-learn and combine what you see in the real world through readings, Twitter, etc., with your own trading experience and thoughts.

The goal here is to give you an objective foundation for knowledge in the trading world, sort of like taking an undergraduate major in trading.

As always, books will have their goods and bads, outdated quips and legendary quotes. It’s up to you to choose how you read these books and pick out what you think is useful or not for your trading needs.

Foundations

Most people who enter Wall Street have some sort of education in Finance or Economics. If you don’t, it is absolutely imperative that you have at least an introduction to some of the basic principles that dictate the economy and the market. For example, when you hear news or read an article in finance, how do you know you’re interpreting it correctly? Learning the foundations are another way of “learning the speak” of people who trade and invest. The goal of these readings are to help with understanding capital markets, monetary policy, and investment theory.

• Basic Investing by Bill Ackman: Great breakdown of how companies work, how to value them, and what to look for in investing. This video covers 80% of “how to become rich” books
• Accounting: This is a free and really well-written book with examples. Your goal here is to learn how to read balance sheets from financial reports that companies post during earnings.
• Macroeconomics:
  - How the Economic Machine Works by Ray Dalio: Outstanding introduction to economic cycles, and how the economy works at a high level.
  - Macroeconomics by Mankiw: Good theoretical derivations and equations, supplemented with economic theory explanations and case studies.
• Statistics:
  - Statistics by David Freeman: Very good conceptual introduction to statistics. Light on equations and more heavy on conversation and intuition.

Introductory

Before we start trading, we should have a primer about what it’s like to be in the business. We want to learn some psychology here, some foundational skills, and just get an idea of what distinguishes good and bad traders.

• Most Important Thing by Howard Marks: Some good mindset things to remember
• One Up on Wall Street by Peter Lynch: The idea of “boomer” investing and fundamentals. Really encourages you to do your DD (due diligence).
• More Than You Know: Behavioral Theory in the context of financial markets
• The Theory of Poker by David Sklansky: Poker is probably the best game to quickly learn about how EV (expected value) works and how to manage risk.
• The Signal and the Noise by Nate Silver: There is a lot of data in the world, but what is useful and what is not?
• Superforecasting by Phillip E. Tetlock: Why are some people better at predicting the future than others?
• Nassim Nicholas Taleb’s books about how people fail to evaluate unlikely events and probability in general. Great for giving a framework of thinking in terms of what bets to take and how to take them. The books in his Incerto Series are all good, but you only really have to read a few of them to get most of his ideas. The books you can choose from:
  - Fooled by Randomness: There is a theme with this and Silver’s Book about Signal and Noise. We have so much data these days that it’s easy to over-extrapolate or think we are better at something that we aren’t…
  - The Black Swan: Taleb argues that predicting the future is impossible, and we should dip our toes in asymmetric opportunities, i.e. downside is limited but upside is infinite and can be extreme.
  - Antifragile: Things That Gain from Disorder
  - Skin in the Game: Hidden Asymmetries in Daily Life

What is it like to trade?

Here, we start to learn what trading looks like IRL, tips from experts, and get a scan of whether or not you 1. have and edge and 2. want to trade at all.

• The Market Wizard Series by Jack D. Schwager. These books tell you about real life trades and give you insight about how people actually make money. These books are half motivational, half insights into trading techniques. There are a few takeaways from the books that are important, one of which being that in order to become a successful trader, you have to find your own system that suits you. This means nobody can tell you how you should trade — you have to figure it yourself!
  - Market Wizards
  - The New Market Wizards
  - Hedge Fund Market Wizards
  - Unknown Market Wizards
• Reminiscences of a Stock Operator: This is a classic text about a trader in the early 1900s who made and blew his fortune many times trading. A central theme of the book is that “whatever mistakes have been made in the market, will be made again” a la history repeats itself style. This book has been touted by many great traders such as Paul Tudor Jones for giving good insight into what it’s like to lose money, and how to keep your composure even at the worst times of your trading career. You don’t have to read this book cover to cover, because there are lots of historical artifacts that aren’t super relevant, but living through Livermore’s highs and lows gives good insights into how fast the game is, and the difficulties in staying on top in trading.

Core Concepts

Now that you know what it’s like to trade, we need to learn more about the system that works for you. Since it’s so person-dependent on developing your trading strategy, you might have to go through a few of these books (like I did), but it’s generally good to get a scan of what’s out there. The goal is to eventually find something you really like and get good at it.

Technicals

Technical trading relies mostly on past price action to predict future price action. The thesis here is that price data represents the culmination of all human psychology, fundamental factors, macro, context, etc., so we can focus on those to determine what the future price will be. Obviously, the thesis is unlikely to be entirely true, but if you can use it when it is true enough, you can make certain trades work for you.

• Technical Analysis of the Financial Markets by John J. Murphy. The TLDR of whether or not TA works is — it works when it does. Not very helpful, right? TA is hard to prove that it works, because it requires very specific setups and complex reasons for it to work for certain traders, but aside from that, it’s useful just to learn how trading systems generally work, how market price and other indicators can tell you the market psychology, and also learn the lingo of many traders on the street.

Macro

• Big Debt Crises by Ray Dalio: What are archetypical bubbles and depressions like, why do they happen, and how have they happened in the past? By studying these past economic crises, can we detect when it will happen again, and prepare ourselves better for the next downturn?

Beyond

By going through these books, you should be able to answer the questions:

• What do scams and non-legit trading look like?
• What are characteristics of great traders?
• If I were to trade, what approach would I take? (you might not know exactly, but at least weed out the approaches that don’t work)
• Do I have an edge in trading? (and corollary, should I be trading?)
• How do I limit my losses?

Good luck with your trading journey, and please manage your risk well.