I'll start this thread with some books I can highly recommend:
great stories, quotes and insights
great read - chapter 1 starts with...
Markets
If one believes in a random universe, a strong case can be made for the fact that any sort of technical analysis and trading tactics are in fact quite useless. Under this scenario, random and unpredictable price movements makes research, analysis, and market timing an exercise in futility, and relegates any kind of strategy (other than buy-and-hold) to a game of chance, not skill. As Burton Malkiel famously noted, "A blindfolded monkey throwing darts at the financial pages of a newspaper can select a portfolio that will do just as well as one carefully selected by the experts". This market view is supported by the fact that the vast majority of mutual funds fail to beat the broader market year after year, and history shows us that the ten best-performing funds in any one year will drop to the bottom of the pack in the following two to four years, meaning that a manager''s outperformance is largely the product of luck, like a gambler''s short-term winning streak. Simply put, there is no way to consistently beat the market.
Needless to say, this view of things does not sit well with Wall Street, which preaches that research, analysis, and relying on expertise are the keys to investing (and their business model!). Assuming that we can draw a similar parallel to other markets, then why bother trading? Why spend so much time researching the market and analyzing prices when we could just as simply close our eyes and buy or sell?
Thankfully for traders, although the random walk theory paints a strong case against mutual funds, it is not entirely bullet-proof. Investors consistently fall prey to fear, envy, overconfidence, faddism, and other recognizably human imperfections that make markets not only inefficient but predictably inefficient. In the short run, recognizable patterns are indeed visible in the stock market. Bubbles are created, and then burst. If the DOW goes up one week, it is more likely to go up the next week. In the long run all of these moves smooth themselves out, but in the short run, predicting and trading these constant adjustments can actually make for quite a profitable proposition. Through research and analysis we can visually identify these inefficiencies and market anomalies in charts, and then trade their expected outcomes. The point in trading is therefore not to forecast the future events themselves, but rather to predict and profit from their consequences instead.
The day the financial community realized exactly how imperfect a science it practices was 19 October 1987. On this "Black Monday" US stock markets managed to drop an incredible 22.6% for no apparent reason, which proved especially shocking to the brilliant mathematical minds that had spent their academic careers solving most of the puzzles surrounding proper pricing and valuation. By the late 1980s it seemed that markets had finally been "figured out" and trading was no longer the realm of risk-hungry cowboys as technology quickly came to replace the gut in pricing (and trading) decisions. Yet in light of all this, the world''s biggest and most sophisticated market still managed to shed nearly one-quarter of its value in one day and on no news, putting into question even the most basic financial assumptions. By noon of that day, IBM''s stock stopped trading in the face of only sell orders; literally no one wanted to buy. If a stock is only worth as much as someone is willing to pay for it, did this mean that IBM''s stock was, at least for the time being, worthless? What exactly was going on? How could we call the market rational and efficient, let alone figured out?
The fact that this event now seems as distant as the stock market crash of 1929 is evidence of just how much we have moved forward, yet many of the underlying reasons behind the crash are still around today and the trading lessons behind these underline the major differences from what we may call the "academic" view of markets and the trader''s view.
excellent for the psychological aspects of trading (the importance of truly thinking in probabilities and not just paying lip service to it) - however it is repetitive and contains lots of needless waffle.
'just started this (expensive new, but got a copy on eBay for 6 quid):
next up:
