No Recipe, No Omelet—Be Prepared to Learn

Trading is an extremely curious activity in one sense. Would you attempt to perform a tonsillectomy on a friend tomorrow morning, having had no previous medical training at all? Extremely unlikely, I’d say. Would you care to
try to compete in the Daytona 500 next year? Not to worry, even if you’d like to, NASCAR very prudently wouldn’t let you anywhere near the track without substantial prior experience, and no racing team would even return your calls.

Absent thorough legal training, would you consider attempting to plead a case before the Supreme Court, or even before a local magistrate?Barring the occasional egomaniac or psychotic, no one would attempt any of these activities. Yet, some tens or hundreds of thousands of people every year enter the world of trading with the same lack of training and experience.They plunk down some capital and away they go, dollar signs in their eyes.

Well, I’ll be happy to take their money, but this is purely unreasonable on their part. Trading isn’t the most complex activity in the world by a long chalk, but trading profitably in a consistent and disciplined fashion, from scratch and without any experience, is just a trifle more difficult than most activities requiring specific skills. Granted, there are so-called natural traders.

There are natural plumbers, too, and natural athletes and people with green thumbs who can grow anything. I’m delighted at these folks’ abilities, and more than a little envious, wish I had them, any of them. All of these naturals, though, are a tiny minority of the set of people engaged in their respective activities. For the rest of us, acquiring knowledge and experience about an activity is essential before we can rationally expect to succeed at the activity.

If I were to want to re-wire the circuitry in my house by myself, I’ll guarantee you that I’d acquire every book on practical applications of the principles of electricity that I could find. And, you bet your sweet ol’ grandma that I’d bend the ear of every electrician who would give me the time of day. Why? A priori, and absent learning about the subject at hand, and in the best case obtaining a good deal of practice at it, I know that I don’t know how to succeed, how to do it right, or even how to do it in a marginally acceptable fashion.

The would-be instant trader, however—and I’ve met hundreds, and likely so have you—doesn’t ordinarily hold this view. They’ll say something like, “Hey, I’m a successful lawyer (or pediatrician, or professional athlete, or businessman), I know what it takes to make a buck!” They ignore or forget how they came to be successful in their own field—through study, practice,and experience—and they assume their future success in trading because of their success in their own field.

Oops. When they turn to trading, they have exactly one advantage, namely, that there is no one right way to turn a profit in trading, and they might get lucky. This advantage doesn’t help them much, though. This is philosophically a very interesting topic.After all, have you ever met a successful trader who believes he’d also be a successful beekeeper or doctor or, for that matter, a successful chef, just by purchasing a toque and an apron, snapping his fingers, and saying, “Shazam! Now I’m a chef!”? I can’t think of a single one, can you?

The would-be instant trader will do what he likes. Perhaps he will discover his information and experience deficit in his own time. Traders, meaning specifically you and I, will continue to study our craft. Out of nothing less than pure self-interest, I try to find something worthwhile about trading or markets to look at and to learn from every week (it’s tempting to say every day, but that would be an exaggeration in fact). In short, read!

It would be silly in the extreme for me to try to name exactly which books to read in order to improve your trading. You’d be entirely within your rights to tell me to get stuffed. You and I are unlikely to have the same strategic views about markets or the same preferences as to markets in which to trade, and that’s fine. I would, however, like to suggest several works that have improved my profitability significantly.

On the subject of options, the world’s most popular writer (and with very good reason) is Larry McMillan. Get out the stone tablets and your engraving tools right now. Thou shalt acquire the current edition of Options as a Strategic Investment (NYIF, 2002) if thy wish is to prosper in options trading, no matter thy strategies. His other major book-length work, McMillan on Options (Wiley, 1996) should definitely be on your bookshelf, too. If the traders on the exchange floors swear by a certain book, I know I want to read it. Sheldon Natenberg’s Options Volatility and Pricing (Irwin–McGraw-Hill, 1997) is one such book.