Trading stocks is certainly one of the easiest ways to jump into modern financial markets. Unfortunately, without preparation, it is also one of the easiest ways to throw money you’ve worked hard for and diligently saved right out the window.
Reading the best stock trading books is the quickest way to limit your exposure to this risk, and the modern market participant has access to TONS of stock trading books. But which ones to choose? It could literally take more than a lifetime to read every book available, so what criteria should a student of trading use to determine their reading list? There are several classes of stock trading book you’ll want to have in your library:
- General stock trading theory – should explain in some detail the mechanics of stock ownership, as well as covering multiple trading models (everything from value investing to technical analysis). A good example of this class of trading book is Trade Your Way to Financial Freedom, by Van K. Tharp.
- Stock trading as a business – in this class of books, you’ll generally be exposed to some trading methodology, but their bigger goal is to cover the operational concerns of a stock trader. In other words, these books will help you put together a comprehensive trading plan that goes well beyond the simple choosing and buying of stocks. When reading these books, pay special attention to the topic of money management. One excellent example is Come Into My Trading Room, by Dr. Alexander Elder.
- Trading technique – this is usually where the nascent stock trader will gravitate first, and is where the bulk of stock trading books reside. Here you’ll find innumerable trading strategies and techniques: fundamental analysis, reversal patterns, pullback formations, candlestick charting and more. Some of the best examples here are Dave Landry’s 10 Best Swing Trading Patterns and Strategies, by Dave Landry; Short Term Trading Patterns that Work, by Larry Connors and Cesar Alvarez; and the New Science of Technical Analysis, by Thomas R. DeMark.
This third class of trading book is where you really need to practice some discernment, because each of these books will tell you they have the keys to the kingdom of money. Some of them are really quite good, but if you start working with their advice before you have the first two classes of book read and digested, you will get hurt. Guaranteed. Any systematic approach to the markets will have periods of underperformance: if you don’t have a plan in place to run your trading like a real business, you’ll lose money.
After you’ve read your books, but before you dive into trading for real, spend some time paper trading. Your broker will have a system in place for you to make practice trades; use that to try out all the things you’ve learned. Only after you’ve been making fake money consistently for a while should you even think about laying down real currency.
Above all, as you progress into the trading arena, stay timid. It will keep you in the game, let you keep more of your money, and ultimately take even more money home.