There are more trading educators than traders.
There are also more trading books than trading educators.
By writing this article, I want to do my readers a small favour by saving them a lot of money on useless books supposedly containing the ultimate money formula. Instead, I will share the few good ones that are really worth reading.
I am assuming that if you are reading this article, you have been trading for some time. Therefore, if you have decided to spend money on a book, it is because you want to learn something that you don’t know already.
Consequently, I am only focusing on books that are suitable for those who are already experienced.
Most of the people writing books for traders don’t even have a trading account, and when comes to options or algo trading, they copy and paste equations at random from the internet.
All the books I have reviewed here come from authors that must meet two criteria. They must (1) have a great theoretical knowledge and (2) must have applied their theory successfully within a big institution.
Machine Trading: Ernest Chan
I know this author personally, and he is one of the brightest minds in the quant finance world. He was also the first to make algo trading easy enough for the non-professional but well-educated retail trader.
This is a book on quantitative trading, on stocks, derivatives, Forex and even Bitcoin.
He covers a wide array of strategies that range from factor models to artificial intelligence.
Thanks to the chapter on vector auto regression, I had an idea that later become one of my favourite strategies.
He explains with great clarity and simplicity, and thanks to the provided MATLAB code, you can try and test what he says in the book.
The only prerequisites for this book are basic programming and statistics.
The Second Leg Down: P. Krishan
Last year, I went to conference with a friend without knowing the topic or the speaker, but I had nothing better to do.
When I attend a talk and I like the content, toward the end, I look for papers or books written by the speaker.
In this case, in the middle of the conference, I had already bought his book on amazon.
P. Krishnan wrote a book for everyone. Some basic knowledge of finance is, of course, necessary, but he has made a complex topic accessible for most people.
The problem he tries to address is how to make money from a market crash and how to protect your portfolio from it.
He uses mostly options, but the book offers food for thought to traders and investors of any kind.
Although he provides scientific evidence for everything he says, the book is very easy to read, even for traders that have forgotten their high school math.
Like most successful people in finance, he focuses on how to limit losses in case something goes wrong, as opposed to beginners who immediately increase their risk after a short sequence of winning trades.
This book is extremely important for beginner traders because they can begin to understand how important it is to not be optimistic while investing money.
Even experienced professionals have a lot to learn from him.
Trading volatility: Colin Bennett
This is one of the few books on options trading that is worth reading, even for very experienced traders.
Everything is explained clearly and almost without math, which makes this book suitable for every trader, as long as they are passionate about options.
In three hundred pages, he goes from the basics of volatility trading to strategies on complex instrument, like VIX futures.
The focus on variance instead on volatility is unique in options trading books.
The part on exotic options could be skipped, unless you have access to OTC markets.
Toward the last chapters, I had the clear feeling that what he describes in his books is what he has come across many times in his everyday work.
His approach is very practical, and it appears that the strategies he describes are not just nicely and formally presented but are those that gave him better results, not just in the backtest but in real life.
Algorithmic and High Frequency Trading: José Penalva, Sebastian Jaimungal, and Álvaro Cartea
This book is at the end because, although it is an absolute masterpiece, it has a huge problem. It is extremely complex. Unless you have been working as a quant for many years, or you have a math degree, don’t even think about buying it.
Algo trading is a term that can be used to refer to many different types of trading strategies, as long as they are systematic, and there is no human intervention in the trading decision.
It can go from a simple, ruled-based trading system to hardcore math, like in this book.
The first part of the book, which covers market making and order flow, is not too difficult and could not be better explained.
The part on optimal execution is at the same level you would find at a quant finance conference in London. Very hard.
It gives you an insight, if you are really familiar with stochastic calculus, into what happens today inside sophisticated HFT firms or market makers.
If you want to lower the self-esteem of someone who claims to be an algo trader, just give him this book and he will face the hard truth.
Warning: There is a risk of loss in trading. It is the nature of commodity and securities trading that where there is the opportunity for profit, there is also the risk of loss. Commodity trading involves a certain degree of risk, and may not be suitable for all investors. Derivative transactions, including futures and forex, are complex and carry the risk of substantial losses. Past performance is not necessarily indicative of future results. Please read additional risk matters on our web site www.londontradinginstitute.com
It is important you understand all the risks involved with trading, and you should only trade with risk capital. This communication is intended for the sole use of the intended recipient and is for informational purposes only. It is not intended as investment advice, or an offer or solicitation for the purchase or sale of any financial instrument.