It’s common knowledge that when you want to become very good at something, you learn as much as you can about it - whether it be from books, people who’ve done it or any other resource you can find.  In school, we learn and study so that we can read, write, do math, etc.  When we choose a career, we study that field, and in some cases, we even have to pass special exams like the bar exam for lawyers or obtain certain certifications like a real estate license to become a real estate agent.

So why is that so few people learn about, let alone study, the stock markets before they invest much of their hard earned dollars?  This could be why so many people lose money in the stock markets.  The majority of people I’ve met have lost a good chunk of their money in the stock markets.  

Very few people have managed to consistently grow their money in a significant way.  These people are rare and what they do is rare.  Every single one of them has read  more than 20 stock books and some of them, as many as 100 or more.  These people have studied how the stock markets operate, how their emotions affect their decisions, the cycles, the patterns, and found their “edges” and “rules” which allow them to consistently make money.

The big lesson here is, if you want to increase your chances of success in the stock markets, follow in their footsteps, learn as much as you can before you invest too much of your hard-earned dollars.  Here are some of the best stock books recommended by these successful stock traders.

"Reminiscences of a Stock Operator" by Edwin Lefèvre

Although fictional, this book was thought to be based on the experiences of a legendary trader from the early 20th century named Jesse Livermore.  I found one of the most helpful things about this book is that it teaches you lessons from someone who made a living having to “survive and thrive” in the complex world of stock markets.  It’s like having a guru teach you the ropes - you get to gain insights and wisdom without having to make the same painful mistakes.  In my opinion, here’s what you’ll learn from this book:

Psychology and Discipline:

After a series of losses due to impulsive decisions driven by fear and greed, the main character realizes the necessity of maintaining a disciplined approach and keeping emotions in check.  The most important thing a trader can do is to have “rules” such as when they will enter and exit trades and with what % of their portfolio.  These “rules” will often prevent us from making rash decisions like entering a meme stock trade (e.g. GME) at its high because we have FOMO (fear of missing out) only to see it drop and not touch those highs again for months or even years.

Strategies and Adaptability:

For example, the main character recounts various instances where he adapts his trading strategies based on market conditions and new information. Whether it's shifting from long to short positions or changing his tactics in response to evolving trends, he demonstrates the importance of flexibility and adaptability in trading.  The markets go up and they go down.  We need to buy puts as well as calls and go long as well as short if we are to profit.  Also, the worst thing to do is to “get married to a position” and  to hold it, despite several indicators signaling that the trade isn’t working.  We have to be nimble and get in and out when it’s called for.  

Pitfalls and Risk Management:

The book highlights several instances where the main character faces significant losses due to over-leveraging or failing to properly assess risk. Through these experiences, he learns the importance of prudent risk management techniques such as position sizing, diversification, and setting stop-loss orders to limit potential losses.

Trials and Triumphs:

The main character shares stories of both successes and setbacks throughout his trading career. From making substantial profits on well-timed trades to enduring significant losses during market downturns, he experiences the full spectrum of highs and lows in the financial markets.  This just confirms for all of us that trading is unpredictable and no one, no matter how good, ever escapes experiencing losses.  The key is, minimize your losses (cut your losses fast) and maximize your gains (let your winners run) so that even if you have only a 50/50 win ratio n your trades, you are still profitable.  

"Trading for a Living" by Dr. Alexander Elder

This is by far one of my favorite books on trading.  It was recommended to me by Adam Mancini who is a well followed stock trader on X.   Whether you plan to trade full-time or not, Elder teaches technical analysis, psychology, and money management in an easy to understand way that is invaluable to anyone trading.  Here are some of the most important things I learned from this book.

How to Trade Gaps:

Elder reviews the various types of gaps (e.g. common, break-away, continuation, exhaustion, island reversal) and explains how to handle each one.  An example is exhaustion gaps.  These are attractive trading opportunities because they’re often followed by violent reversals.  Elder suggests selling short, putting a stop above the latest high and covering the day after prices fail to make new lows.  

Rules, Rules, Rules:

For those new to technical analysis, Elder reviews all the major technical indicators, explaining what they are and the “rules” for trading them.  For example, RSI (relative strength index) is a leading indicator for many individual as well as institutional traders.  Many use the 40 & 80 levels (oversold, overbought) in bull markets and the 20 & 60 levels in bear markets.  Elder recommends using a 5% rule for the past 4-6 months and then adjust this every 3 months.

Cycles:

Elder also touches upon cycles.  A good trader is aware of these cycles and takes them into account when making trades.  For example, within the US market, there is the 4 year presidential cycle in which the 2 years before the election year are typically bullish and the first 12-18 months post an election tend to be bearish.  Cycles are not 100% guaranteed, however, knowing them and using them concurrently with technical analysis might give you an edge on your trades and increase your “win rate”.

Triple Screen Trading System:

Despite all the trading books I’ve read, this triple screen system trading system that Elder developed is one of the most practical and useful I’ve seen.  He suggests deciding upon which timeframe you want to trade and then also looking at the longer time-frame (1 order of magnitude longer) and the shorter time-frame (1 order of magnitude shorter) in order to understand the full picture for your trade.  He likens the longer time-frame to a market tide, the intermediate time-frame (the one you’re trading) as a market wave.  Since a wave goes against the tide, if you are trading based on the daily chart and the weekly trend (tide) is up, the daily declines (waves) are your buy opportunities.  Therefore, you take only daily signals that point in the direction of the tide, in this case, only longs.  To fully understand this system and to see all of its details, I highly recommend checking out Elder’s book.

"Japanese Candlestick Charting" by Steve Nison

Candestick charting originated In 18th century Japan when Munehisa Homma, a rice dealer, began using candesticks to chart and predict the changes in the price of rice.  This book explains what  candlesticks are, the meaning of different candlestick formations, and how to use them to analyze price movements, identify trends, reversals, and other key market signals.  Whenever I  analyze a stock chart, my default is always with red and green candles.  I love candlesticks.  For me, it’s visually so much easier to see patterns, trends and to anticipate what the stock price might do next.  If you haven’t tried this, please check it out.  And if you like it, then learn how to use the candlesticks to better your trading.  For me, here are some of the most important insights from the book:

Candlestick Theory:

The book explores several useful theories that can help set up a trader for a high probability entry.  Here’s an example: after 8-10 new highs (candles, each making a higher high) without a meaningful correction, odds are strong a significant correction will unfold.

Longer Term Topping/Bottoming Patterns:

Rather than day trading or even short term swing trading, some traders want to long/short a stock for a longer time-frame.  This is perfect for those who don’t/can’t spend too many hours analyzing and trading.  In this case, knowing these longer terms patterns will better enable you to see when the best opportunity for a longer-term trade arises.  Look up “3 mountain top”, “3 river bottom”, “3 Budhha top” (H&S pattern), “Inverted 3 Budhha” for examples of some of these patterns.

Stars:

These have small real bodies that gap away from the large real body preceding it.  They signify a stalemate between bulls and bears.  I normally don’t trade long or short when I see these because there’s no real advantage.  I’d rather save my money and invest it when I see some candlesticks or patterns that have a higher probability of moving in a specific direction.  Stars, especially a doji star is a warning that the trend may be ending so one could be patient and see if that’s the case.  If it is and you are watching, you could hop onto the new trend perhaps more quickly than others.

"Master Day Trader Mindset" by Oliver Velez and Greg Capra

For those of you who want practical advice and strategies to develop your discipline, emotional resilience, and a winning mindset, this is a fantastic book.  Here are some of the best insights I got from this book:

Important statistics:

Knowing certain statistics will enable you to trade better.  For example, when should you trade?  This book explains that the best 3 month period to be fully invested is November to January due to late year tax planning and performance bonuses.  Go ahead and look at this 3 month period  for the last few decades, were they mostly up or down?  The book provides other stats such as the most bearish and bullish months being September and May respectively.

Discipline in Execution:

Successful traders adhere strictly to their trading plans, entering and exiting positions based on predetermined criteria rather than succumbing to impulsive decisions driven by fear or greed.  “Have a trading plan and stick to it.”

Emotional Resilience:

The market is volatile and it’s not uncommon to experience setbacks. Traders must learn to maintain composure during losing streaks and they can do this by focusing on the process vs. the outcome, managing risk effectively, and maintaining a positive mindset.  

Learn from Your Mistakes:

One of the book’s suggestions is to keep a “Journal of Losers” just so you can see which mistakes you keep making and can then pro-actively work to overcome them.  Some inspirational quotes from the book on losses:  

“Each loss you endure strengthens you for the next.  Every time you rise, you do so as a more enlightened soul.”

“Find the gem in each trading error”.

“We learn to win only after we learn all the ways to lose.”

Risk Management Techniques:

This is super important if you’re to protect your capital, minimize losses and “live to play another day” as they say. This book explains in detail, step-by-step, how to manage risk by setting stop-loss orders, diversifying your portfolio, and managing position sizes.

"The Complete Turtle Trader" by Michael W. Covel

This book goes to show how anyone can learn to trade successfully with a system and discipline.  Richard Dennis and William Eckhardt conducted an experiment where they trained a group of ordinary people, known as the "Turtles," to become successful traders using a systematic trend-following strategy.  In my opinion, here are 3 of the most important lessons from this book.

Systematic Approach:

One of the main reasons why many traders lose money is because they cannot control their emotions. So how do you solve for this?  You create a trading system for yourself so that you base your decisions on predefined criteria (e.g. clear entry and exit rules) rather than intuition or emotion.   This rules based approach to trading was what enabled the Turtles to improve their consistency and profitability, thereby becoming successful.

Trend Following: 

The key to the Turtle trading strategy was based on capturing trends in the market and riding them for as long as possible.  If you are trading against a trend (akin to going against the tide), it is much easier to lose money.  Therefore, it’s very important as a trader for you to identify the trend (is it up or down?) and trade accordingly.  You can use trend-following indicators like moving averages or trend channels. The Turtles waited for confirmed trend signals before they entered trades.  They also used trailing stop-loss orders to ride the trend for as long as possible while also protecting profits.

Risk Management and Position Sizing: 

The Turtles were taught strict risk management principles, including determining position size based on volatility and limiting the risk per trade to a small percentage of total capital.  This ensures that no single loss can significantly impact one’s overall capital, and also makes it easier to cut losses if your trade is not heading in the direction you expect.

"Market Wizards" by Jack D. Schwager

When learning anything, I like to learn from the best.  After-all, they must have tips and tricks they’ve garnered over the years that enable them to be super successful. I like this book because it’s a collection of interviews with some of the most successful traders of the 20th century.  It allows you to learn from their trading philosophies, strategies, and experiences.  Most importantly, it shows you that there isn’t just one way to trade successfully, there are many and you must find a style that suits you.  Many of these traders have very diverse approaches to trading which align with their strengths and personality.

Trading Mindset: 

Despite their diverse trading styles, one thing all of the traders had in common was their mindset. They had discipline, patience, and emotional control which helped them to navigate the inevitable ups and downs of the market with resilience.  For example, successful trading requires discipline to stick to a trading plan even when emotions are running high.  Sometimes you have to resist the urge to deviate from your trading strategy during periods of high market volatility, knowing that emotional decisions often lead to losses.

Diverse Strategies: 

In this book, you’ll meet traders with different trading styles and strategies, ranging from fundamental analysis to technical analysis, trend following to contrarian approaches  Yet, all of them are super successful, demonstrating that trading isn’t one size fits all.  For example, you might discover that you excel at technical analysis and prefer trend-following strategies over fundamental analysis. This self-awareness may lead you to more consistent and profitable trading results.  So next step - find a strategy that aligns with your personality, skills, and risk tolerance!

Risk Management: 

Many traders interviewed in this book stress the significance of risk management in trading. They discuss position sizing, setting stop-loss orders, and managing overall portfolio risk to preserve capital and mitigate losses.  Do you have position sizing rules?  Do you set stop-loss orders to limit potential losses on each trade?

"Beginner’s Guide to the Stock Market" by Matthew Kratter

If you are new to stock investing, this books provides a fairly complete introduction.   It covers the basics such as stock selection, portfolio diversification, risk management, mechanics of buying and selling stocks, understanding stock charts, and basic strategies.  One of my favorite quotes from this book is:

"Successful investing is not about being right all the time. It's about minimizing your losses and maximizing your gains over time."

Experienced traders will tell you that losses are a part of trading and are unavoidable. There’s no need to be right all the time, but the times you are right, let those trades ride, and the times you are wrong, cut those trades FAST!  Here’s some more excellent wisdom from the book:

The Power of Compound Interest:

Imagine there are two investors, one who starts investing early and another who delays. If both make $1,000 contributions each year, using compound interest at an annual interest rate of 10%, the early investor would have $35,949.73 after 15 years and the late investor would have $18,531.14 after 10 years.  Due to the compounding effect, it’s important to invest sooner rather than later.

Emotional Investing:

Do not let your  emotions dictate your investment decisions. For example, when markets suddenly plummet, as they sometimes do, some investors panic and sell at the bottom, only to miss out on the subsequent recovery.  For example, NVDA hit a high of $346 in November 2021, plummeted to $108 by October 2022 and then hit $502 by August 2023.

CONCLUSION

To become great at anything, we must put forth time and effort into studying it. Determine what areas you still need to work on to become a better trader and then find some good teachers or pick up some good books. If you never give up and you continue to work at learning and getting better, you’ll eventually reach your goals. I hope this article and the books in it help you on your journey.