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11 Classic Trading Books That Inspire New Ideas


Warren Buffett is an example of someone who recognises the importance of reading. It’s been said that he spends 80% of his day reading and thinking and can read up to 600 – 1,000 pages a day.

As a system trader it is also important to read and to keep on top of new developments in the industry. However, doing so is difficult because of the vast amount of information that is produced daily. 

Books, articles, academic papers, financial reports and statements – there is a never-ending glut of information to consume.

But it’s not just new information that can be consumed. In fact, old information has a special place for system traders because it allows us to test old trading ideas with new data.

The Advantage Of Old Trading Books

Old trading books are not always worth reading. Often, the ideas within them are outdated and the markets have moved on enough to make them a worthless read.jesse livermore classic trading book

However, old trading books do have one advantage. They provide trading ideas that can be tested on clean, out-of-sample data.

For an example, consider two hypothetical books.

One is the latest trading book to hit the shelves which details a cutting edge investment strategy which records 30% annual returns between 2010 – 2017.

The other is an old trading book from 2003 which shows a simple technical analysis strategy that now seems outdated.

While the new book could be an interesting read and could in the future become a classic trading book, the results suffer from limitations because there is no live data to verify them.

If the book is based on prior research, there is also the possibility of data snooping – using previous good results to influence the direction of new research. Whatever verification is shown, the reader cannot be sure that the results are unbiased or that they will persist into the future.

Of course, the same can be said for the old trading book for when it was first released. However, 14 years on, we now have lots of real out-of-sample data with which to see how the strategy performed.

With that said, here is a list of old and classic trading books that might provide some inspiration for new trading ideas:

Old & Classic Trading Books

Reminiscences of a Stock Operator (1923)

The classic story of Jesse Livermore which was first published in 1923. Of course, there are no statistics shown in this book but still plenty of ideas to work with.

The Orginal Market Wizards (1993)

Another classic trading book that needs to be read if you are just starting out. The book includes plenty of interviews with system traders, particularly trend followers.

Street Smarts (1996)

Street Smarts is a classic trading book from the 1990s by Linda Raschke and Larry Connors. The book contains 20 strategies that can be updated for modern times and tested on more recent data.

How To Make Money In Stocks (2009)

I had a feeling this book was originally published earlier than 2009 but can’t be sure. It’s a good book of ideas for trading stocks. William O’Neill popularised his CANSLIM strategy in this book.

The Research Driven Investor (2000)

This book from Timothy Hayes contains some interesting ideas that can be used for developing market timing models. One model called ‘Trader’s Buy List’ was shown to produce a 43.1% annual return between 1993 – 2000. It would interesting to see if those results have continued in recent times.

Short-Term Strategies That Work (2008)

This book from Larry Connors and Cesar Alvarez contains a number of back-tested strategies that can be easily coded and then applied to more recent data. It includes simple mean reversion strategies such as those based on RSI and full statistics are shown.

High Probability ETF Trading (2009)

Another book from the Connors team. This one details rules and back-test results for a number of mean reversion strategies on ETFs. 20 popular ETFs are used and results span 1993-2009. I have tested some of these and found decent results.

Technical Analysis Of The Financial Markets (1999)

This is a classic trading book and investment text that contains more technical analysis patterns than any other book of its time. Lots of ideas for testing patterns can come from this book although many will be difficult to code.

Secrets For Profiting In Bull And Bear Markets (1988)

A popular trading book from the 1980s, this one has some ideas on indicators and trading techniques that can be translated across timeframes and markets. Many of the stocks shown in the book no longer exist – a good lesson for system traders about survivorship-bias.

The Battle For Stock Market Profits (1971)

Truthfully I don’t know much about this book but it’s old and I’ve heard it helped inspire some of the ideas in William O’Neill’s book already mentioned above.

Smarter Trading (1995)

Perry Kaufman is the author of another classic trading book called ‘Trading Systems And Methods’. This is one of his older books that details an original trading model. It would be interesting to see it applied to more recent data.

A Word Of Caution

Although these classic trading books can provide some useful nuggets of inspiration it is important to be careful when interpreting the results. Often, the rules are not well defined and results are not analysed to such a high standard as with newer books.

As an example, I took some ideas from the book ‘High Probability ETF Trading’ shown above which was published in May 2009.

This book contains some good ideas for ETFs and reveals back-test statistics up to 2009. However, the results are misleading for a variety of reasons.

No Commissions

The first problem with the strategies shown in the book is that they do not include any from of transaction cost to account for commissions or slippage. It is not possible to trade in ETFs without incurring some type of cost so an accurate test should account for this.

Look-Ahead Bias

The second issue with the strategies in the book is that nearly all of them suffer from the problem of look-ahead bias. That is, they make entries based on future information that is unavailable at the time of the trade.

A clear example of this is with a strategy called RSI 25. This strategy enters a long position on the close when the RSI(4) indicator closes under 25.

The problem is that the RSI(4) indicator is calculated using the closing price of the ETF. We cannot know what the RSI(4) value is until the ETF has closed. Therefore we cannot reasonably be expected to be able to trade at the close price because we will not have received the trade signal.

The best that we can hope for is to be able to trade at the next available price which is typically the next day open.

Use Of Limit Orders

Another potential problem that is revealed in the book is the use of limit orders when back-testing on end-of-day data.

Maybe it was different in 2008 but these days it is difficult to use limit orders with end-of-day stock data due to the fragmentation of stock exchanges. These strategies are best back-tested using intraday data such as one-minute bars.

As a result, the strategies from the book that are implemented with limit orders are likely not realistic to current market conditions and are likely to exaggerate performance.

Good Ideas From Old Information

I decided to code up a few of the strategies in the book above and test them, first between 1993 – 2009 (as in the book) and then out-of-sample (after the publication date) between 2009 – 2017.

I was able to replicate results in the book almost exactly using Amibroker and data from Norgate.

After adjusting for the problems of look-ahead bias and lack of commissions, I found that the ideas in the book performed slightly worse in the back-test than shown in the book.

When I tested on the out-of-sample data I was pleasantly surprised. The results were not as good as presented in the book but they were significantly better than buy and hold returns. This is after adjusting for the problem of look-ahead bias.

It seems that good ideas really can be found in old information.

Do you have any old trading books not listed here? Let us know in the comments.

Comments (4)

Great post Joe! Thanks for sharing. I love those old trading books that have stood the test of time. I’m familiar with most of the ones you’ve listed but there are a few that sound like they’re worth a read. Appreciate you mentioning some of the deficiencies with the reported results as well.

Thanks Jay.

Long Term Secrets To Short Term Trading by Larry Williams is a beauty too.

Yes, that’s another good one.

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