The Best Trading Psychology Books

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Trading psychology refers to the emotional and mental state of traders. Regardless of how much trading knowledge you have, it’s little to no help without the right mentality. This mentality can be fostered only through practice and a good understanding of trading psychology. In this article, I’m going to share some of the best books on trading psychology.

To learn the required discipline often takes longer than learning any other aspect of trading. You must fully understand yourself in order to do it, as well as undo some of the habits that plague all traders, at least when they first begin. This also means learning decision-making skills, the discipline to pass good trades for better ones, and the ability to manage fear and greed—the two emotions that most significantly influence trading behavior.

This field isn’t simply about maintaining a positive state of mind but also about understanding the psychology of the market itself. This includes the collective emotions and behaviors of other traders.

With that said, you’ll want to pick up at least a few of the books on this list. There are some incredibly useful pieces of wisdom to be found throughout. Sometimes, the advice sounds simple, and yet it can radically improve your trading performance when you apply it correctly.

“Trading in the Zone: Master the Market with Confidence, Discipline, and a Winning Attitude” by Mark Douglas (2001)

Trading in the Zone: Master the Market with Confidence, Discipline and a Winning Attitude

We can’t have a good list of trading psychology books without this one. Mark Douglas’ “Trading in the Zone” is maybe the most-known work in the world of trading psychology. Douglas focuses on belief systems and mental attitudes, and does an exceptional job of outlining some of the things that you have to practice in order to establish consistency.

This book focuses on the idea of ‘thinking in probabilities’. Douglas’ philosophy is that each trade is just an individual instance, and that a winning mindset accepts the randomness of these individual trades. This teaches traders to remove the weight of emotional attachments to an individual trade, and instead focus on the long-term success.

Douglas writes, “The best traders aren’t afraid. They aren’t afraid because they have developed attitudes that give them the greatest degree of mental flexibility to flow in and out of trades based on what the market is telling them about the possibilities from its perspective. At the same time, they completely accept the risk inherently involved in being a participant.”

Having read this book multiple times, I highly recommend it. I don’t agree with everything he says, but I know the importance of having the right mindset. The effect it can have on your mentality as a trader may be the single biggest change you implement, to turn your money-wasting hobby into a profitable endeavor.

“The Psychology of Trading: Tools and Techniques for Minding the Markets” by Brett N. Steenbarger (2002)

The Psychology of Trading: Tools and Techniques for Minding the Markets

The more you learn about trading psychology, the more you will come across this name. Brett N. Steenbarger is one of the most prominent and well-respected figures when it comes to trading psychology books. Check out his blog when you’re done here, seriously.

One of the distinguishing aspects of “The Psychology of Trading” is its use of vivid case studies. These case studies are built from the author’s experience as a psychologist. Steenbarger also discusses how emotions such as fear and excitement can influence one’s trading decisions and provides practical techniques to overcome these issues.

Steenbarger writes, “Biofeedback and meditation can be viewed as tools for building the legs of attention, concentration, patience, mindfulness, and quiet, calm satisfaction. Through repeated biofeedback work, we can become quite good at invoking the zone, but we also train ourselves to function well in that zone. If we cannot generate well-being without drama, we will gravitate toward drama. That, over time, will be hazardous to ouremotional health and our trading wealth. Well-being training enables us to extract energy from situations that we cannot control.”

Some readers find that the book can be slightly heavy on psychological jargon, making it a bit challenging for those without a background in psychology. I don’t find it difficult after having explored concepts of trading psychology for years, but it may be a bit deep for a first time reader. I would say that you should simply press on, because this is one of the authors you will get the most benefit from spending time on.

“Trade Mindfully: Achieve Your Optimum Trading Performance with Mindfulness and Cutting Edge Psychology” by Gary Dayton (2014)

Trade Mindfully: Achieve Your Optimum Trading Performance with Mindfulness and Cutting-Edge Psychology (Wiley Trading)

Like Steenbarger, Dayton is both a psychologist and a trader. His book “Trade Mindfully” introduces traders to the concept of mindfulness, a meditative practice that has its roots in Buddhism and has been widely applied to various aspects of modern life, including trading. I agree that mindfulness can help traders deal with the inherent uncertainty and emotional pressure of the markets. I believe it is the most determining factor when comparing traders.

Dayton does a pretty good job of bringing together traditional trading concepts, evidence-based psychology, and mindfulness. The key argument is that embracing mindfulness and the acceptance of ‘in-the-moment’ experiences can drastically improve trading performance.

“What happens to you when you become afraid or have another strong emotion? Pause a moment and think about this. Again, it helps to be clear on what we confront. If we can clarify the signs and symptoms of fear, not only do we understand better what it is we are dealing with, but we put ourselves into a position where we can recognize it early on. We have a much better chance of doing something constructive about it as it is just beginning to arise; we have less chance to act positively when we are already hijacked by it.”

Dayton leans towards the abstract side of trading psychology, so if mindfulness doesn’t appeal to you, that’s bad news. The good news is you’re probably just not yet in a place to appreciate it, but you can get there. However, if you are, I highly recommend taking it seriously and getting all you can from this book.

“Market Mind Games: A Radical Psychology of Investing, Trading and Risk” by Denise Shull (2012)

Market Mind Games: Profiting from the New Psychology of Risk, Uncertainty, and the Convergence of Trading with Investing

In “Market Mind Games,” Denise Shull brings a touch of neuroscience to the table. As both a neuropsychologist and a seasoned trader, Shull adds the depth and precision of clinical psychology to an often vague domain of trading psychology.

Shull’s book is interesting because of its emphasis on the role of feelings in trading decisions. You may have heard that traders need to learn to trade without emotions, which isn’t completely accurate. While emotions can definitely be counterproductive, by causing us to make decisions that we hadn’t planned to make, it’s not realistic to eliminate them entirely.

Shull believes that understanding one’s emotional states and responses is the key. It’s not just about taming emotions; it’s about understanding and harnessing them to one’s advantage.

Focusing on feelings isn’t easy for everyone. A lot of traders have math backgrounds, and want to turn this sophisticated field into a pure statistical However, “Market Mind Games” is not without its drawbacks. Some readers might find Shull’s heavy focus on emotions and feelings challenging to digest, especially if they’re accustomed to more traditional, analytical approaches to trading.

“Thinking, Fast and Slow” by Daniel Kahneman (2011)

Thinking, Fast and Slow

Daniel Kahneman, a Nobel laureate, shares his two system theory in this book “Thinking, Fast and Slow.” If not apparent from the title, there are two systems, where the first is fast and intuitive, and the second is slow and deliberative. Although the book isn’t directly about trading psychology, its insights are enormously useful for traders, as the financial markets often require both rapid, instinctive decisions (System 1) and slower, more analytical thinking (System 2).

Kahneman explores cognitive biases, heuristics, and fallacies, which can lead even the most experienced traders astray. By understanding these mental pitfalls, traders can better safeguard their decisions from the inherent biases that cloud human judgment. The book’s breadth and depth make it a unique addition to the trading psychology literature, offering rigorous scientific insights in a remarkably accessible way.

One of Kahneman’s memorable quotes is: “The illusion that we understand the past fosters overconfidence in our ability to predict the future.” While simple in its message, this is a potentially controversial theme. Technical analysis is predicated on using historical patterns to react correctly to current market behavior.

However, the way I read it, and the way I think it should be read, is not that we need to doubt our technical analysis. Rather, we need to remove any naïve approach to it. We should manage our confidence first and foremost, and this will allow us to apply our trading methodology more consistently.

“Come Into My Trading Room: A Complete Guide to Trading” by Alexander Elder (2002)

Come Into My Trading Room: A Complete Guide to Trading

Alexander Elder’s “Come Into My Trading Room” is a highly respected book among traders worldwide. Elder is known for his “3 M’s” concept, in which the M’s refer to Mind, Method, and Money. This book expands upon this concept while walking you through every aspect of trading. Elder includes preparation, risk management, record-keeping, and, of course, the psychology of trading.

Elder provides some insightful tips on emotional self-management and trader discipline. Traders learn to treat their trading as a business. While trading is often thought of as similar to a game or gambling, it is not quite the former. Good trading is certainly not the latter. Instead, it’s more like a business, where your job is to make good decisions with your money, in the best interest of sustaining and growing the business.

He also introduces the concept of the ‘Triple Screen Trading System’, which combines trend-following and counter-trend techniques, aiming to increase the accuracy of trade decisions.

However, the book does have its criticisms. Some find the information to be a bit basic, especially if you’re already familiar with the fundamentals of trading. While Elder touches on trading psychology, he doesn’t delve as deeply into it.

“The Little Book of Behavioral Investing: How not to be your own worst enemy” by James Montier (2010)

The Little Book of Behavioral Investing reminds you of who’s standing in your way on the path to success. Today, James Montier is a well-respected global equity strategist and member of GMO’s asset allocation team. His deep understanding of behavioral finance shines throughout the book.

The book delivers practical guidance on how to resist the most common psychological biases that lead to poor investment decisions: overconfidence, anchoring, confirmation bias, and loss aversion. Montier presents the most influential research on behavioral finance in an understandable way, and often uses humor to help.

In contrast to many trading psychology books that focus solely on mindset, Montier goes a step further. He provides actionable advice on how to incorporate a proper understanding of our biases into an actual trading strategy. He offers a variety of behavioral finance tools and techniques that can be directly applied to improve trading decision-making.

One limitation of the book, however, is that it focuses primarily on long-term investing rather than short-term trading. This means that the advice may not always be applicable to day traders. If you know your technical analysis, you know that the time frame doesn’t make much of a difference. And if you’re more interested in long-term investment rather than speculation and aggressive growth, this might be a good sign for you.

Also, Montier’s approach is scientifically grounded and tested, but some might find the academic nature of the discussions a bit dry. Hopefully the humor works for you. Considering this is a professional who is still quite involved in the trading world, his wisdom will surely be appreciated.

“Pit Bull: Lessons from Wall Street’s Champion Day Trader” by Martin Schwartz (1999)

Pit Bull: Lessons from Wall Street's Champion Day Trader

Schwartz, also known as ‘Buzzy,’ is a Wall Street veteran and a winner of the U.S. Investing Championship in 1984. “Pit Bull: Lessons from Wall Street’s Champion Day Trader” is a compelling read that is essentially his trading autobiography. Packed with stories of his experiences on Wall Street, follow his journey from financial analyst to successful independent trader.

The book gives readers an unfiltered view of the intensity, excitement, and pressure of professional trading. Not unlike Market Wizards, it provides inspiration to the competitive and ambitious day trader. Perhaps that’s because Marty Schwartz is one of the original Market Wizards success stories. Schwartz’s tale is as much about resilience and determination as it is about trading, and he openly discusses his struggles with stress and the mental toll of the trading profession.

In this book, you get to examine Schwartz’s trading strategies, techniques, successes, and failures, with a focus on his philosophy of “taking losses promptly.”

However, this book may fall short in a few ways. It’s a bit lacking in terms of structured, systematic trading advice. While Schwartz shares several unique experiences and insights, it’s not a step-by-step guide or specific strategies for trading success. It’s probably more in line with books like Market Wizards, albeit a lot deeper in some regards.

Conclusion

The importance of trading psychology can’t be overstated. It’s often said that trading is 90% psychological. The best trading strategy and an extensive knowledge of market conditions isn’t enough. You may find consistent success to still be elusive and frustrating. Poor emotional control, impulsive decisions, or lack of discipline are rampant among lesser traders.

Use these books, and your own experience, to develop yourself further. Understanding and mastering trading psychology will help you stay focused and calm under pressure. Trading successfully is similar to being a professional athlete or performer. Always keep your confidence in check. You need it to actually place the trades, but you mustn’t let it get out of hand.

It’s for good reason that a significant portion of trading education is dedicated to the understanding and improvement of trading psychology. If there’s a book or work you would like to see added to this list, let me know. Otherwise, feel free to look into some other books on the following topics:

Fundamental Analysis Books

Technical Analysis Books

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