Resources for Trader Development

Trader Construction Kit

Trader Construction Kit was written as a response to a decade and a half of inquiries from frustrated junior colleagues, analysts, risk managers and support staff seeking the best book to learn how markets worked and how to develop the skills necessary to make the move onto the trading desk. Trader Construction Kit features chapters on:
• What it Means to be a Trader
• How Markets Function
• Fundamental Analysis
• Technical Analysis
• Understanding Volatility
• Understanding Risk
• Developing a Cohesive Market View
• Directional Trading Strategies
• Spread Trading Strategies
• Option Trading Strategies
• Quantitative Trading Strategies
• Evaluating Trades & Creating a Trading Plan
• Trading Mechanics
• Managing Positions & Portfolios
• Pricing & Hedging Structured Transactions
• Navigating the Corporate Culture
• An appendix covering data science and programming basics for traders.

For more information, please see:

https://www.traderconstructionkit.com

If you have questions or would like to request an academic or media review copy, please email:

info@traderconstructionkit.com

Videos

Charlie DiFrancesca was the subject of the book Charlie D that I summarize in the Recommended Books section below. This is the video of his famous 1989 speech that I consider to be the best primer on the mechanics of transacting in a market. Obviously, a bit dated and pit-centric, but a must-watch for any serious student of the markets. Video courtesy of Trading Pit History on YouTube. The language is a little rough at times, though, so beware. Best content starts around the 5:15 mark.

Billion Dollar Day is a 1985 BBC 2 documentary that follows three currency traders as they navigate the markets for a day. Of particular interest is the segment featuring the London-based trader from Barclays that starts at the 9:30 mark. It is an excellent example of the unique challenges of institutional market making.

Movies & Television Shows

Industry (2020) - A new HBO series that follows a group of trainees that attempt to survive at a London bank. HBO page

Traders (1996-2000) A series about traders at a Canadian bank that is somehow 8.4/10 on IMDB. Viewable on Amazon Video

Trading Places (1983) - IMDb page

Rogue Trader (1999) - IMDb page

Wall Street (1987) - IMDb page

Pi (1998) - IMDb page

Enron: The Smartest Guys in the Room (2005) - IMDb page

Margin Call (2011) - IMDb page

The Big Short (2015) - IMDb page

Rollover (1981) - IMDb page

Floored (2009) - IMDb page

Ghost Exchange (2013) - IMDb page

Websites, Blogs & Podcasts

Corey Hoffstein has a truly excellent podcast called Flirting With Models where he conducts in-depth, practical interviews with elite traders. Highly recommended.

The Chat With Traders podcast series by Aaron Fifield offers excellent long-form interviews with industry-leading traders from a variety of markets and disciplines. The Library page also features a good list of trading-related books. https://chatwithtraders.com

The JP Morgan Center for Commodities at the University of Colorado publishes the Global Commodities Applied Research Digest, which can be found here: http://www.jpmcc-gcard.com

Author Po Bronson has the first chapter of his amazing book Bombardiers (review below in Books) available to read for free on his website, which can be found at: https://pobronson.com/index_bombardiers.htm

The Trader Construction Kit website, the main resource for all things related to the book. https://www.traderconstructionkit.com

A Wikipedia page with a surprisingly comprehensive list of option greek risks: https://en.wikipedia.org/wiki/Greeks_(finance)

Nassim Taleb’s website. https://www.fooledbyrandomness.com

A lengthy blog post on Python for Trading on the Quantinsti website: https://blog.quantinsti.com/python-trading/

Papers & Articles

Rubano, Joel, A Comparison of Current Academic and Industry Pedagogies for Developing Traders (October 23, 2017). Available at SSRN: https://ssrn.com/abstract=3057447 or http://dx.doi.org/10.2139/ssrn.3057447

The Read section of the Trader Construction Kit website, which features the guide How To Get a Trading Job, a series of excerpts from the book, and the introduction and complete first chapter for free preview. https://www.traderconstructionkit.com/read

A direct link to the How to Get a Trading Job paper on the Trader Construction Kit website: https://www.traderconstructionkit.com/tck-guide-how-to-get-a-trading-job

Simulation-based learning using the RIT market simulator and RIT decision cases. An extremely detailed 2019 paper by authors Kevin Mak (Stanford) and Thomas H. McCurdy (University of Toronto) on the Rotman Interactive Trader simulation engine and its features. An excellent look at what is probably the state of the art in academic trading simulation.

The first chapter of Marcos López de Prado’s book is available at SSRN. Here is the citation, complete with link to read: López de Prado, Marcos, Advances in Financial Machine Learning (Chapter 1) (January 18, 2018). Advances in Financial Machine Learning, Wiley, 1st Edition (2018); ISBN: 978-1-119-48208-6. Available at SSRN: https://ssrn.com/abstract=3104847

Marcos López de Prado’s excellent paper on The 10 Reasons Most Machine Learning Funds Fail. López de Prado, Marcos, The 10 Reasons Most Machine Learning Funds Fail (January 27, 2018). Journal of Portfolio Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3104816

The Bitcoin Whitepaper, Satoshi Nakamoto’s original work that started the crypto craze can be found here: https://bitcoin.org/bitcoin.pdf

Books

Liar’s Poker: Rising Through the Wreckage on Wall Street by Michael Lewis

Liar’s Poker has probably set more people on the path to the trading desk than any other book (it  certainly did, in my case). Liar’s Pokeris Michael Lewis’ first-hand account of his time on the New York and London bond trading floors at the legendary Wall Street bank Salomon Brothers in the late 1980s. It is by far the most accessible book on trading, providing a clear, accurate (if slightly dated) perspective on how bank trading floors operate and the types of people that inhabit them. It is also extremely funny. Liar’s Poker is a must-read, particularly for those not currently in the industry or who are unfamiliar with how trading desks function.

Recommended for: GENERAL TRADING, BANKS, BONDS, TRADING FLOOR CULTURE

Bombardiers by Po Bronson

Bombardiers is the fictional account of a group of bond salesmen at the San Francisco office of a global investment bank in the 1990s that are pushed to, and in some cases past, the breaking point by the stresses of the job. Bombardiers most accurately captures the frenetic feel and surreal insanity of a modern trading floor, and does so while managing to be funnier than Michael Lewis’ Liar’s Poker. You can read the first chapter on the author’s website here.

Recommended for: GENERAL TRADING, BANKS, BONDS, TRADING FLOOR CULTURE

Metal Men: How Marc Rich Defrauded the Country, Evaded the Law, and Became the World’s Most Sought-After Corporate Criminal by A. Craig Copetas

Metal Men is a relatively unknown book (which used to be all-but impossible to find) that offers a view into the rarely-seen world of commodity merchants operating in an early-stage physical market. The book takes place during the advent of the spot crude oil market in the 1960s and 70s, and offers a wealth of anecdotal information about illiquid, physical trading that is unavailable from any other source. Aspiring traders would do well to take note and apply the lessons to their job search, as developing markets offer some of the best conditions for job creation and rapid advancement, as well as presenting the smallest hill to climb in terms of the established knowledge base. 

Recommended for: GENERAL TRADING, MERCHANTS, COMMODITIES, TRADING FLOOR CULTURE

When Genius Failed: The Rise and Fall of Long-Term Capital Management by Roger Lowenstein

In the early 1990’s Long Term Capital Management was home to the most incandescently brilliant collection of bankers and traders ever assembled, deploying state-of-the-art trading technology to generate eye-popping returns and basking in the adulation and envy of pretty much, well, everyone. Then suddenly, impossibly, the firm imploded during a tumultuous six week period in 1994. Lowenstein’s book is a detailed account of the disaster, and a fascinating tale of hubris and poor risk management by a group of individuals that could have, and indeed shouldhave, known much better. 

Recommended for: GENERAL TRADING, HEDGE FUNDS, QUANTITATIVE TRADING

Rogue Trader by Nick Leeson

Rogue Trader is the autobiographical story of how Nick Leeson singlehandedly lost $1.4B via a series of ever-larger unauthorized speculative positions while running the Singapore trading operations of Barings Bank from 1992 to 1995. Though it is sometimes criticized as being an overly self-serving interpretation of events, it is worth reading as an examination of how pressure to perform can lead a seemingly normal, relatively grounded individual into a destructive spiral of fraud and illegal activity. It is also an interesting case study of how much an organization can collectively delude itself, ignore common sense, and bend its own rules to accommodate a star employee operating what appears to be an extremely profitable business.

Recommended for: GENERAL TRADING, BANKS, FUTURES

Options, Futures, and Other Derivatives by John C. Hull

It is difficult to overstate the importance of Hull’s Options, Futures and Other Derivatives, which is ironic, considering that it is generally referred to as “the bible” of the financial markets. Recently updated in a 10th edition, it is a big, imposing book that has evolved and expanded its scope considerably with each successive iteration. Option trading has a large and extremely complex body of theory, and can be an extremely daunting subject for the uninitiated. Trader Construction Kit presents an introduction to the basics of the options market, standard valuation models, Greek risk measurements, and provides a dynamic hedging example…and even that relatively condensed coverage necessitated by far the largest and most complicated chapter of the book. Hull’s text provides the most complete coverage of the topic available, and offers a clear, comprehensive treatment of the mathematics underlying derivative pricing models and the resulting risk metrics. It should be considered mandatory reading for prospective practitioners, particularly those interested in option-centric careers in derivative trading, transaction structuring, and complex deal origination. This is doubly true for a trader contemplating a customer-facing role at a bank, merchant, or asset management firm, where it is almost impossible to price and hedge deal flow without a solid understanding of option fundamentals.

Recommended for: TEXTBOOK, OPTIONS, QUANTITATIVE

Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications by John J. Murphy

Technical analysis is the study of chart patterns as a window into market sentiment and trader psychology, and is an extremely polarizing concept in the industry. Some practitioners flatly refuse to acknowledge its predictive utility, while others exclusively employ pattern-based analysis of the market to generate trading strategies. I make the argument in Trader Construction Kitthat a hybrid approach incorporating both fundamental and technical information sources is maximally effective, employing technical analysis to refine the trader’s view and provide perspective on the potential magnitude and direction of price responses to the evolution of the fundamental landscape. Technical analysis has an extremely large body of theory, ranging from simple graphical tools to exotic, complex interpretation systems. I believe that the basic trend and pattern analysis techniques can be applied to any liquid product, regardless of market, and therefore have the most predictive utility. Murphy’s Technical Analysisis thebenchmark resource for understanding the core concepts of trend, support, resistance, and pattern analysis. The main value in Murphy’s text resides in chapters 4 through 6, where he discusses the basic patterns common to all markets and gives clear, concise interpretations as to why they occur, their significance, and the implications for future price movements. Murphy’s book is also a worthwhile read for those who do not ever intend to employ technical analysis, but who will most certainly share the market with traders that are. 

Recommended for: TEXTBOOK, TECHNICAL ANALYSIS

Dynamic Hedging: Managing Vanilla and Exotic Options by Nassim Nicholas Taleb

Back in the dark ages, risk management was an obscure mathematical discipline exclusively practiced by bespectacled corporate drones and the sorts of people who once excelled at competitively reciting the digits of Pi. Traders did not practice risk management, they practiced risk taking. They also generally worked in a pit, settled disputes with their fists, and had very little use for more than two decimal places. This all changed in 1997 with the publication of Nassim Taleb’s groundbreaking text, Dynamic Hedging. Dynamic Hedging offered the first glimpse of Taleb’s pragmatic approach to trading risk management, in which market-facing practitioners must understand the limitations and idiosyncratic nuances of the tools and techniques they deploy, lest they be destroyed by ignorance or misplaced confidence. Be warned, Taleb asks a lot of his reader, presenting high-level information at great velocity, frequently with little preamble. Prospective readers should consider a warm up lap through Hull’s Options, Futures and Other Derivatives to refresh their understanding of the basics of option theory and derivative math before attempting Dynamic Hedging. 

Recommended for: TEXTBOOK, OPTIONS, DERIVATIVES

Reminiscences of a Stock Operator by Edwin Lefèvre

Every list of the best trading books must contain Edwin Lefèvre’s Reminiscences of a Stock Operator. Reminiscences is a fictional work that somehow manages to incorporate literally every significant trading principle into the boom and bust cycles of the protagonist’s story arc, all without feeling contrived or sounding like textbook. Reminiscences of a Stock Operator was published in 1923, and it is impossible to fully appreciate how revolutionary it must have been in its time. One caution for prospective readers, since as a work of fiction it is not as heavy-handedly pedagogical as a pure textbook, it is possible to inadvertently skim over valuable information. Take the time to give Reminiscences of a Stock Operator your full attention, it is well worth it. 

Recommended for: GENERAL TRADING, EQUITIES, TECHNIQUE DEVELOPMENT

Market Wizards: Interviews with Top Traders by Jack D. Schwager

The New Market Wizards: Conversations with America’s Top Traders by Jack D. Schwager

Jack Schwager’s Market Wizards and New Market Wizards books are a series of interviews the author conducted with a group of elite commodity, foreign exchange and bond traders. In my opinion, they are critical books for novice traders to read, preferably early in their career. Neophyte traders are frequently told that there is a “correct” way to approach a particular market. This is not true. Every trader must develop a style that compliments (and leverages) their unique individual strengths, and Schwager’s books are the best possible proof of this theorem. All manner of personalities and trading styles are on display, the common denominator being that each interview subject has developed a method of observing and interacting with the market that makes sense to them. The reader is free to compare and contrast different methodologies, a particularly useful exercise for young traders who are still evolving their own approach to the market. There is a tremendous amount of practical information on offer, and the interviews with Bill Lipschutz, Stanley Druckenmiller, Paul Tudor Jones, and James Rodgers are well worth the price of admission.  

Recommended for: GENERAL TRADING, MARKETS, TECHNIQUE DEVELOPMENT

Charlie D. The Story of the Legendary Bond Trader by William D. Falloon

Fallon’s Charlie D is a somewhat obscure biography of bond trader Charlie DiFrancesca, who in the late 1980s was the largest independent trader in the Treasury pits (a mantle later passed to Tom Baldwin, one of the interview subjects in Schwager’s Market Wizards). Charlie D’s life story is interesting, to be sure, but the real value in the book lies in Fallon’s transcription of a videotaped presentation DiFrancesca gave in 1989 to members of the Chicago Board of Trade. It is possibly the most valuable 30 pages I have ever read on the technique of trading. Though Charlie D is describing a somewhat dated, very pit-centric method of interacting with other traders, the basic concepts of evaluating a market, acting with decisive intent when transacting, and learning to be disciplined when taking profits and losses are as critical now as they were then. 

Recommended for: GENERAL TRADING, BONDS, FUTURES, TECHNIQUE DEVELOPMENT

Every Hand Revealed by Gus Hansen

I argue in Trader Construction Kit that playing medium to high-stakes no-limit poker is the best possible method of learning to take trading risk, short of actually sitting on a desk. Gus Hansen’s Every Hand Revealed presents a unique opportunity to look over the shoulder of a world-class poker player as he plays through five days of a major tournament. Hansen took detailed notes on each of the 329 hands he participated in during the tournament, including his risk/reward assessment, strategy, mid-hand decisions, and the ultimate profit or loss. The reader is able to follow along as Hansen works through 329 decisions under uncertainty, and in so doing provides a unique perspective on the cumulative effects and path dependence of trading/risk management decisions. It is fascinating to observe how Hansen’s decision calculus on the 190th hand (for example) is impacted by the considerations immediately relevant to the 190th risk/reward scenario andthe cumulative information gained and psychological wear & tear accrued from hands 1 through 189. This is something not generally touched on in theoretical literature, but is very much a part of trading in the real world. Trading decisions are not isolated events that occur in a pristine intellectual vacuum, and every trader must find a constructive way to manage the ongoing process of operating in the market.

Recommended for: POKER, TECHNIQUE DEVELOPMENT

MORE BOOKS

• Bollinger on Bollinger Bands by John Bollinger

• The Education of a Speculator by Victor Niederhoffer

• Elliott Wave Principle: Key to Market behavior by Robert R. Prechter, Jr. and A.J. Frost

• The Smartest Guys In The Room: The Amazing Rise and Scandalous Fall of Enron by Bethany McLean and Peter Elkind

• Extraordinary Popular Delusions and The Madness of Crowds by Charles Mackay

• Fiasco: The Inside Story of a Wall Street Trader by Frank Partnoy

• Flash Boys: A Wall Street Revolt by Michael Lewis

• Hedge Hogs: The Cowboy Traders Behind Wall Street’s Largest Hedge Fund Disaster by Barbara T. Dreyfuss

• Japanese Candlestick Charting Techniques by Steve Nison

• Merchants of Grain: The Power and Profits of the Five Giant Companies at the Center of the World’s Food Supply by Dan Morgan

• The Complete Guide to Option Pricing Formulas by Espen Gaarder Haug

• Options Markets by John C. Cox and Mark Rubinstein

• Option Volatility & Pricing: Advanced Strategies and Techniques by Sheldon Natenberg

• Pit Bull: Lessons from Wall Street’s Champion Day Trader by Martin Schwartz

• Short by Cortright McMeel

• The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb

• The Bonfire of the Vanities by Tom Wolfe

• The Buy Side: A Wall Street Trader’s Tale of Spectacular Excess by Turney Duff

• The Money Bazaar: Inside the Trillion-Dollar World of Currency Trading by Andrew Krieger

• The Psychology of Technical Analysis: Profiting from Crowd Behavior and the Dynamics of Price by Tony Plummer

• The Psychology of Trading by Brett N. Steenbarger

• The Vandal’s Crown: How Rebel Currency Traders Overthrew The World’s Central Banks by Gregory J. Millman

• Traders Guns and Money: Knowns and Unknowns in the Dazzling World of Derivatives by Satyajit Das

• Trading Natural Gas: Cash, Futures, Options and Swaps by Fletcher J. Sturm

• Value at Risk: The New Benchmark for Managing Financial Risk, 3rd Edition by Philippe Jorion

Poker Books:

• Doyle Brunson’s Super System: A Course in Power Poker by Doyle Brunson and Chip Reese

• The Biggest Game in Town by Al Alvarez

• The Psychology of Poker by Alan N. Schoonmaker

• The Theory of Poker: A Professional Poker Player Teaches You How To Think Like One by David Sklansky

Data Science / Programming Books:

• An Introduction to Statistical Learning by Gareth James, Daniela Witten, Trevor Hastie, Robert Tibshirani

• Data Science for Business by Foster Provost and Tom Fawcett

• Big Data and Machine Learning in Quantitative Investment by Tony Guida

• A Quantitative Primer on Investments with R by Dale W.R. Rosenthal

• Advances in Financial Machine Learning by Marcos López de Prado. First chapter available to read on SSRN. Citation and link: López de Prado, Marcos, Advances in Financial Machine Learning (Chapter 1) (January 18, 2018). Advances in Financial Machine Learning, Wiley, 1st Edition (2018); ISBN: 978-1-119-48208-6. Available at SSRN: https://ssrn.com/abstract=3104847

• Python for Finance 2nd Edition by Yves Hilpisch

• Python for Data Analysis by Wes McKinney