5 Trading Psychology Books You Must Read If You’re Serious About Trading

Did you know that the statistics say that over 90 percent of traders lose money?

Some even say that the failure rate is closer to 99 percent.

So what’s the difference between winning traders and losing traders?

Some people say that it’s because winning traders have “secret” trading strategies.

But that’s definitely not true.

Here’s why…

If you’ve heard of the turtle traders, then you should know that they were all taught the same trading systems and strategies.

These were the same trading systems and strategies that Richard Dennis and William Eckhardt used to make millions in the markets.

However, not all the turtle traders were profitable.

So thinking that winning traders have “secret” trading strategies that others don’t, is a myth.

Another good example is when I was a prop trader for 4+ years.

During that time, I have seen many traders come and go.

Most didn’t even last a year.

Yet we were all taught the same trading strategy by the prop firm.

So why is it that some traders were profitable, and some weren’t?

The answer…

The trader’s psychology.

You see, while trading strategies can be taught, it comes down to the trader’s psychology to be able to execute those strategies.

Yes, a winning trading strategy is important…

But without a “winning psychology”, the trading strategy would be useless.

So if you want to have a chance at succeeding in trading…

Then you need to work on your trading psychology as much as you work on finding trading strategies, if not more.

Over the years I’ve read many books on trading psychology.

But there are a few that really changed the way I traded and helped me become a better trader…

And I want to share them with you in this post.

So in this post, I’ll share with you 5 of the best trading psychology books that have helped me tremendously over the years when I was a prop trader and now as an independent trader.

1) Market Wizards

There is a saying that goes:

“Success leaves clues.”

That means if you want to be successful, then learn from others who have been successful.

And that’s where the Market Wizards book series by Jack Schwager comes in.

There are a total of 4 books in the Market Wizards series:

• Market Wizards
• New Market Wizards
• Stock Market Wizards
• Hedge Fund Market Wizards

All the books consist of interviews with the top traders in the world.

This book has been tremendously helpful for me in my trading journey, especially when I started trading more than a decade ago in 2006.

What I absolutely love about this book is that Jack Schwager got these traders to share what’s going on in their minds when they trade.

This is extremely invaluable because when you get into the minds of these top traders, it can give you insight into how you should be trading as well.

I remember when I just started as a prop trader, I would sit beside some of the senior traders and just watch them trade.

Then after they got out of each trade, I would ask them questions like:

“What did you see to make you enter the trade?”

“When you were in the trade, what was on your mind?”

“How do you decide when it’s time to get out of your trade?”

“Why did you enter here and not there?”

“Why did you choose to exit your trade at this level and not there?”

“What are some of the considerations you have before entering into a trade?”

This accelerated my learning curve and helped me do well at the prop firm.

And that’s why I love the Market Wizards series because I can get valuable insights into top traders I otherwise wouldn’t be able to get access to.

And so what I’ve done is list some of my favorite quotes below from the book that has really helped me in my trading, and I’m sure it will help you as well.

Here are two quotes from William Eckhardt:

“If a trader doesn’t know why he’s losing, then it’s hopeless unless he can find out what he’s doing wrong. In the case of the trader who knows what he’s doing wrong, my advice is deceptively simple: He should stop doing what he is doing wrong. If he can’t change his behavior, this type of person should consider becoming a dogmatic trader.”

“Don’t think about what the market’s going to do; you have absolutely no control over that. Think about what you’re going to do if it gets there.”

Here is a quote from Gil Blake and is a response when he was asked why do traders lose:

“First of all, most traders don’t have a winning strategy. Second, even among those traders who do, many don’t follow strategy.”

Here is a quote from Robert Krausz on the subconscious mind’s role in trading:

“It’s your subconscious mind that prevents you from taking correct action in the market. The problem will persist until you convince the subconscious in a very direct manner that the new methodology is valid and that it has to forget about the old methodology.”

And when he was asked what are the key characteristics of a winning trader, he said:

“Persistence, patience, and a willingness to take risks.”

Here is a quote from Michael Steinhardt when he was asked what he thought are the elements of good trading:

“Good trading is a peculiar balance between the conviction to follow your ideas and the flexibility to recognize when you have made a mistake.”

And this my favorite quote on risk management by Marty Schwartz who is a trading legend:

“Learn to take losses. The most important thing in making money is not letting your losses get out of hand. Also, don’t increase your position size until you have doubled or tripled your capital. Most people make the mistake of increasing their bets as soon as they start making money. That is a quick way to get wiped out.”

If you’re new to trading, this advice applies even more so to you because managing risk is at the bottom of the list for many new traders.

So heed Marty’s advice.

After all, in 9 out of 10 trading championships he entered, he made more money than all the other contestants combined.

He knows what he’s talking about.

2)Trade Your Way to Financial Freedom

The next trading psychology book is written by Dr. Van K. Tharp who is a professional coach for traders and investors.

Don’t be fooled by the bombastic title of this book because it has played a pivotal role for many traders…

And it has really helped me understand how to approach risk in trading.

Before this book came along, traders would talk about profit and loss in terms of X dollars or X ticks/pips/cents.

For example, traders would say, “I made $500 on this trade.” or “I made 200 pips on this trade.”

But after this book was released, traders now talk about it in R-Multiples.

For example, “I made 3R on this trade.” or “I made a total of 20R this month.”

This is a concept taught in the book and it’s about seeing profit and loss not in terms of value, but rather in terms of each unit of risk.

So if you risk $100 per trade, then $100 would be your 1R.

And if you risk $500 per trade, then your $500 would be your 1R.

When you categorize risk this way, you can be objective.

The goal of your trading system is to get as many Rs as you can.

For example, if you ask a trader how much he made today and he says $2,000…

You would have no context of whether $2,000 is good or not.

From a dollar perspective, making $2,000 in a day is certainly considered good.

But if you found out that he risked $5,000 on each trade, you’d realize that his profit was only 0.4R.

This means that his $2,000 profit could easily be wiped out with just one losing trade, and he’d be down $3,000.

Furthermore, if you talk about profit and loss in dollar terms, it could affect the trader’s emotions and performance.

For example, when I was at the prop firm, I had a colleague who had finally been profitable after losing for two months in a row.

That meant that he hadn’t gotten paid for two months.

This really affected him because he was the sole breadwinner of his family and he was starting to feel the pressure.

So when he was finally profitable in the third month, his trading psychology changed.

At that point in time, there was still another two weeks to the end of the month.

As prop traders, we are required to trade every single day.

But because he had already made some profits, he was afraid of losing it and not getting paid for another month.

And so he didn’t want to risk that and decided to trade small for the rest of the month.

Also, whenever there were any trade opportunities, he would talk himself out of it for fear of losing money.

And when he was in a profitable trade, he would get out too soon as he feared the market would turn against him.

Although he did make a profit for that month and go paid…

His performance was no longer at his best because he couldn’t be objective in his trading anymore.

Hence it’s important to not see risk in terms of dollar value but in R-Multiples.

This way you can be objective about your risk and not let it affect your trading decisions.

The other concept that the book teaches on is Trading Expectancy.

Expectancy is the average amount your trading system expects to make or lose per trade.

To calculate the Expectancy of your trading system, there are 3 factors you need to know:

• Win/Loss Percentage
• Average Won Per Winning Trade
• Average Loss Per Losing Trade

Here’s the formula to calculate Expectancy:

(Percentage Win x Average Won) – (Percentage Lose x Average Loss)

Now, this is very important to understand because new traders have the misconception that in order to be profitable, they need to have a high winning percentage.

But that’s not true at all because you can still win even if you have a winning percentage of 20 percent.

For example, let’s use 5R as your Average Won and 1R as your Average Loss to calculate your Expectancy:

(20% x 5R) – (80% x 1R) = 0.2R

What this means is that on average, you will expect to make 0.2R per trade.

So if your 1R is $100, then you will expect to make an average of $20 per trade.

And if your 1R is $500, then you will expect to make an average of $100 per trade.

As you can see, even if your trading system only wins 20 percent of the time, you still can be profitable.

So if you want to learn how to build a profitable trading system and manage your risk properly, then you must read this book.

3)Trading in the Zone

The next trading psychology book is Trading in the Zone by Mark Douglas.

This is a must-read for all traders because it tells of the importance of thinking in probabilities.

Thinking in probabilities means to accept that there will be losing trades and winning trades.

However, you won’t know which of the trades are going to be winners or losers.

That’s why he stresses the importance of being mechanical in your trading.

That means you do not second-guess your trades whenever you have a valid trade signal.

One of the problems I’ve seen with many new traders, including new prop traders who just got into the firm, is being fearful of loss.

For example, when you have hit your Stop Loss many times in a row, you start to doubt yourself and your trading strategy.

So when the next trading signal comes, instead of mechanically taking the trade, you start to think of different reasons why the trade will not work out.

That’s what happens with many new traders.

And the problem is because they do not know what percentage of the time they win, the percentage of the time they lose, and the longest losing streak of their trading system.

And because of that, they cannot think in probabilities.

In this book, Mark Douglas references the casino business model with regards to thinking in probabilities.

For example, casinos make money day after day, year after year, without fail.

And the reason is that they let their probabilities play out for them in the long run.

They aren’t worried if they lose two, three or even ten bets in a row.

That’s because they know in the long run, they will be profitable because they have an edge.

And what that basically means is that the casino games are already designed to win right from the start.

Let’s take for example the game of Roulette.

In the European Roulette Wheel, there is a total of 37 numbers on the wheel.

18 black, 18 red, and 1 green.

The payout to bet black or red is 1:1.

That means if you bet $100 on red and you win, your payout is $100 (on top of your original $100).

The misconception that many people have about this bet is that it’s a 50 percent chance of a win.

But the truth is that it’s less than 50 percent because of the green “zero” on the wheel.

So the win percentage is only 18 / 37 = 48.6 percent (rounded to the nearest two decimals).

What this means is that 48.65 percent of the time you will win $100.

And 51.35 percent of the time you will lose $100.

Let’s now calculate your Expectancy with this input:

(48.65% x $100) – (51.35% x $100) = -$2.70

This means that on average you are losing $2.70 each time you bet.

Now, you may get lucky and win 3 times in a row and make a profit of $300.

But the casino knows that if you stay and continue to play long enough, the probability will play out and you will lose.

That is why the casino isn’t concerned if you win a few times.

They know that in the long run, they will be profitable.

And that’s how you want to approach your trading as well.

In the book, Mark Douglas states that having a probabilistic mindset accept 5 fundamental truths:

1. Anything can happen.
2. You don’t need to know what is going to happen next to make money.
3. There is a random distribution between wins and losses for any given set of variables that define an edge.
4. An edge is nothing more than an indication of a higher probability of one thing happening over another.
5. Every moment in the market is unique

When you adopt this thinking, your trading will improve by leaps and bounds.

Finally, there’s an exercise that he encourages traders to do and that is to essentially treat your trades as a test.

That means once you have defined your trading strategy, just take 20 trades mechanically.

Doesn’t matter if you win or lose.

Use that 20 trades as a sample size to understand your trading strategy and write down its wins and losses.

What percentage of the time does it win and lose?

How much does it make on average when you win?

How much does it lose on average per loss?

What is the longest losing streak?

When you understand your trading strategy well enough, you will be able to trade confidently and have an edge like the casinos.

4) Enhancing Trader Performance

The next trading psychology book is by far the most advanced of all the books on trading I’ve read.

It is written by Dr. Brett Steenbarger and this book details the experiences he had when he was working in trading firms to help traders improve their performance.

I bought this book the day I joined the prop firm as I was determined to succeed as a prop trader.

If you’re absolutely serious about trading, then you definitely must read this book.

I must warn you, this is not for the half-hearted trader.

This is for the really serious trader who absolutely wants to make trading his career.

In this book, Dr. Brett Steenbarger details his work with professional traders.

Whenever a trader isn’t doing well, he would sit down with the trader to find out what the problem is.

And he would really go into detail to find out about his trading, and how to improve the trader’s performance.

I would even go the distance and say it’s like he is like a detective investigating into everything about the trader’s trades, emotions, and thoughts.

Here are just some of the things he would go into:

• The number of trades taken and the size of trades each day.
• The sequencing of winning and losing days.
• The number of winning, losing, and scratched trades and the size of trade for winners, losers, and scratches.
• The number of long and short trades.
• The number of profitable and unprofitable trades
• The ratio of the size traded as a function of Long versus Short positions.
• The average holding times for positions broken down by winning, losing, and scratched trades.
• A walkthrough of the trades and what the trader was thinking and feeling before, during and after the trade.
• Detailed metrics of the trader’s performance day by day.

And I’ve only just touched the surface.

In his book, he would share case studies on the traders he has worked with and how their performance improved after working with him.

I remembered after reading this book, I got extremely excited because I couldn’t wait to put all the things he taught in the book into practice.

In the prop firm I was at, you don’t get your own trading account when you’re a new trader.

That means you don’t get any profit-sharing yet.

At the start, you will only trade on the company’s account with a very small size.

It’s only when you have proven you’re consistently profitable, then you would be able to get your own trading account and a profit share.

And according to my senior traders then, it would take an average of 6 months to get your own trading account.

But I wanted to get my account faster than that and I was very determined to do so.

So I started applying everything I learned in this book.

I would record my trades each day without fail…

And after the trading day, I would stay back and analyze every single trade.

I even journaled my thoughts and feelings before, during and after every trade I took.

I took a really serious approach to my trading back then.

The result?

Of the other guys that I came into the prop firm with, I was the first of my batch to get my trading account.

And I did it in just three months.

When you get your own account, you start with a very small trading size.

Only when you are consistently profitable, then the boss will increase your size based on your performance.

Within another few more months, I was trading at the same size as some of the senior traders in the firm.

And I credit a big part of this achievement to this book for helping me get there.

So if you’re really hardcore and serious about making trading your profession, then you need to read this book.

I can’t recommend this book highly enough.

5) The Daily Trading Coach

 

This next trading psychology book is also by Dr. Brett Steenbarger.

I love the idea of this book because it encourages you to read a lesson each day.

If you ask me to compare Enhancing Trader Performance with The Daily Trading Coach, I’d say that Enhancing Trader Performance is more for professional traders who trade for a living, and The Daily Trading Coach is more for retail traders.

Now, of course, you should read both books.

But if you absolutely had to pick one book, then it comes down to whether you intend to make trading a profession, or just a side income.

With this book, you can use it to get a trading psychology tip each day to manage your mindset and emotions when you trade the markets.

One of the biggest battles traders have to face each day, apart from trading the markets, is to manage a flurry of emotions during the trading day.

Traders go through a plethora of emotions when trading.

It’s human to tend to want to celebrate when you win…

And it’s normal to feel down and negative when you lose.

But it’s not what you want to do when it comes to trading.

These are the emotions you want to get rid of when trading because it doesn’t serve you well.

There’s a saying that goes:

“Good trading is boring.”

And if you noticed, the common theme from the books I’ve shared in this post is to trade the markets without emotions.

One way to trade without emotions is to see yourself as executing the trades mechanically as though someone hired you to do so.

In fact, I’ve read somewhere in a book before that a trader had hired someone to execute his trades for him because he was too emotional when trading.

He didn’t have the discipline and emotional control to execute his own trading strategy and so he decided to hire someone just to execute the trades for him.

And he paid that person just for executing trades.

When he did that, he was profitable again.

But when he decided to give a profit-share to the person executing his trades…

Suddenly he was unprofitable again because that person started to get emotionally involved in the trades…

And couldn’t execute the trading strategy objectively.

This shows that when money is on the line, we start to behave very differently.

And that’s why trading psychology is paramount to success in trading.

With this book, you can have daily reminders on the important things to focus on as you face the trading day.

Conclusion

While there are many more books on trading psychology, these 5 books that I’ve shared here are in my opinion, the best 5 books to start with.

If you want to improve your trading performance, then stop searching for the “Holy Grail” trading system and read these books instead.

Many new traders spend the bulk of their time searching for the best trading strategy thinking that it’s what they need to be profitable.

However, just like in the case of the turtle traders, they may come across a winning trading system but still can’t be profitable.

That’s because to be profitable in trading for the long-term requires you to have the right trading psychology.

And these books will help you with that.

So instead of searching for more trading strategies, go to your nearest bookstore or library to start reading these 5 books today.

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