Every decision is a trade. Learn to think about the ones you should do - and the ones you shouldn’t.
Trading books generally break down into two categories: the ones which claim to teach you how to make money trading, and the memoir-style books recounting scandals and bad behavior. But the former don't have profitable trades to teach; if they did they'd keep those trades to themselves. And the latter are frequently entertaining, but they don't leave you with much you can apply in your own life. The Laws of Trading is different.
All of our relationships and decisions involve trading at some level. This is a book about decision-making through the lens of a professional prop trader. For years, behavioral and cognitive scientists have shown us how human decision-making is flawed and biased. But how do you learn to avoid these problems in day-to-day decisions where you have to react in real-time? What are the important things to think about and to act on? The world needs a book by a prop trader who has lived, breathed and taught trading for a living, drawing upon years of insights on the trading floor in real markets, good and bad, whether going sideways, crashing, or bubbling over. If you can master the decision-making skills needed to profitably trade in modern markets, you can master decision-making in all walks of life. This book will teach you exactly those skills.
- Introduces, develops, and applies one law per chapter, making it easy not only to remember useful concepts, but also to have them at the ready in any situation.
- Shows you how to find and think about the “special edge” of your organization, and yourself.
- Teaches you how to handle the interaction of people with artificially intelligent (AI) machines that make decisions, a skill that is rapidly becoming essential in the AI-driven economy of the future.
- Includes a "bonus" digital ancillary, an Excel spreadsheet with various worked examples that expand on the scenarios described in the book.
Do you need to make rational decisions in a competitive environment? Almost everyone does. This book will teach you the tools that let you do your job better.
Table of Contents
Acknowledgments vii
Foreword ix
Aaron Brown
Introduction xiii
Chapter 1 Motivation 1
Know why you are doing a trade before you trade 1
Chapter 2 Adverse Selection 21
You’re never happy with the amount you traded 22
Chapter 3 Risk 41
Take only the risks you’re being paid to take Hedge the others 41
Chapter 4 Liquidity 71
Put on a risk using the most liquid instrument for that risk 72
Chapter 5 Edge 93
If you can’t explain your edge in five minutes, you don’t have a very good one 95
Chapter 6 Models 115
The model expresses the edge 115
Chapter 7 Costs and Capacity 141
If you think your costs are negligible relative to your edge, you’re wrong about at least one of them 142
Chapter 8 Possibility 167
Just because something has never happened doesn’t mean it can’t 171
Chapter 9 Alignment 197
Working to align everyone’s interests is time well spent 198
Chapter 10 Technology 217
If you don’t master technology and data, you’re losing to someone who does 220
Chapter 11 Adaptation 239
If you’re not getting better, you’re getting worse 240
Notes 261
Index 271
