My favorite books for traders using technical analysis

The subtitle is The Untold Story of the Scientific Betting System that Beat the Casinos and Wall Street. This book is an easy-to-read narrative of the intersection of the grimy underbelly of betting--with high-minded math. It reminds you that trading is not conducted in a clean little bubble. Technical analysis can give you an edge, but trading is still engaging in battle with opposing forces; strategy and tactics can count as much as building an elegant technical system. 

Your opponent on the trading battlefield will try to trick you, like a general in real warfare. He may keep selling and selling after you have bought, triggering a sell signal in your trading system. He is hunting for your sell signal. The mechanical response is to sell—your system says sell, and you should follow your system. To exit a position when the market goes against you is named a stop, and everyone should always use a stop. Stops are a function of the market action you see on the chart, but they are also a reflection of your capital at risk. Here’s the hard part—the other guy is hunting for your stops. You know he is hunting for your stop. He knows you know he is hunting for your stop. This is now a game.

Famous trader Victor Neiderhoffer said he didn’t use stops because the market would go hunting for them. He’s right—stop-hunters abound. But it’s a lousy excuse not to use stops and Niederhoffer went out of business several times. (His book Education of a Speculator is not on my top 5 list but it’s a good book.) Many top traders like Niederhoffer are also experts at games—squash, fencing, chess. 

Not to sell when your technical signals dictate is to risk catastrophic loss. But you suspect that stop-hunter is bullying you into selling. This is infuriating and gets the blood up. It also means your sell signal is incorrect because this is not a normally functioning market on which your trading signals are based, but a temporarily deranged one because of the stop hunters. 

You need gaming rules to outfox the trickster. What is the stop hunter seeking? A lower price to buy. So give it to him. Execute your sell order but re-enter after he starts buying again. In my own trading, I have Rule 3: re-enter in the same direction after your original entry gets hit the second time on the way back up. If your stop was on the small side and your profit target is bigger, you will end up with a net gain. Taking a loss needs to become normal, routine, and not a pause for panic. It’s not taking losses that is bad—it’s taking losses bigger than you can afford and that are not offset by gains. 

Bottom line, we all need to remember the other guy is out to get your money. When studying charts, it’s hard to keep that in mind. The Poundstone book opens up that gaming world, and it’s a world in its own right.

Trading Systems is an encyclopedia of all the technical ideas ever devised and the trading methods associated with the technical ideas and how those methods can be used to manage risk. Like any encyclopedia, this book has far more information and insight than you can possibly absorb in a single sitting—or 50. Kaufman presents thorny math subjects with the math (if you can stomach it) and also in prose for those of us less-gifted. When I read some headline or assertion about a market that strikes me as absurd, I head straight for Kaufman to find out what he says about it. This usually ends in a reference to another author who has studied the topic in deep detail—Kaufman names just about every chart guru that ever developed anything worth knowing. I also consult Kaufman when I think I see something on a chart and want to know what it is and how I can perhaps use it. 

We sometimes think patterns like a double top or a triangle are old-fashioned and not useful, but Bulkowksi not only demonstrates but proves otherwise. He set the standard for how technical analysis should be presented—with hard facts about how a pattern is identified, how well it works on specific securities over time, its gain/loss ratio, and other data. And he provides updates on his website. Bulkowski has also done simillar work on swing trading and candlesticks. I like Bulkowski’s work because he uses the scientific approach of forming a hypothesis, testing and re-testing it, and honestly reporting whether a hypothesis is valid (or to what extent it can be trusted).

You may have noticed that hardly anyone uses simple lines on a chart anymore—everyone uses candlesticks. When I was revising my own book, the technical advisor recommended just deleting the part about different types of standard bars and presenting only candlesticks. What’s so likable about Bigalow’s work is his total clarity, in the book and also on his website. He identifies the candles you need the most, shows you what they look like, applies them in real cases, and tells you the outcomes. Not only are the charts as clear as can be, so is his prose.

This book is a classic and the best of the many books written by traders describing trading situations and what they did to conquer the market. Sperandeo delivers concise, specific definitions of how he defines and uses trends with some of the clearest charts you will ever see. I find myself going back to some of the same pages over the years in which he discusses how to tell if a trend is undergoing a correction or is an authentic reversal.