I'm not a trader, or an exchange, but I've been forced to get very, very intimate with the technological plumbing of both, and I've interviewed many of their developers, and you'll find the architects of match engines, order routing systems, and clearing backends recommending this book just as much as I do.
It is exceedingly well written, too.
Investing strategy? Stick with Malkiel, like everyone here is (and is going to) recommend.
Another suggestion: you can download the recordings of Schiller's Yale Financial Markets class from iTunes (and from Yale); I listened to it on the way to/from a client in the suburbs for a couple weeks and enjoyed it, particularly the guest speakers.
Edit: one more thing: with a startup, the opportunity cost is likely your biggest expense. With trading, you risk losing the money you put in, which, combined with the time, could really amount to something.
I guess the question is: where is the parallel to startups, where a small group can do well? Also: is it possible to do well without basically making a job out of it? Otherwise, perhaps it's best to avoid the whole thing: a few ETF's and forget about them, and concentrate on doing something you have an edge at.
It is one of the rare books where the marketing blurb is actually a valid description: "...a comprehensive resource for readers with a background in science and technology who want to transfer their skills to the financial industry."
Instead of further praising it myself, I'll copy a reader review from amazon that describes how I feel about it: "Rarely a book with a title as ambitious as "Complete Guide" fulfills its promise. This book does. Big time. It is written for quantitative professionals (current and prospective) and gives a bird-view account of all types of activities available to them in a typical Wall Street firm. The author cleverly avoids pitfalls of the books of this genre. The book is general enough to cover various settings, but not too general to become useless. It is detailed enough to provide relevant information, but not too detailed to become a software manual or a textbook. The text educates without being annoying and entertains without being lightweight. Hopefully, readers will appreciate consistency and appropriateness of the book's style. The author avoids over-fragmentation and "bulletization": the book consists of 20 chapters without any further subdivisions. It makes for much smoother reading undistracted by unnecessary subheadings. After finishing the book one can only marvel at the author's efficiency, wondering how he could cram so much useful and interesting information in just 600 pages. "
Kuznetsov also includes a great commented bibliography for further reading. I know many of the books therein, as well as their competitors, and I can say his are good recommendations (at least, I would have picked the same in most cases and found a lot of good reads there too).
I'd also recommend reading Nassim Taleb's books Fooled By Randomness and The Black Swan (info at his website http://fooledbyrandomness.com/) along with one he recommends:
What I Learned Losing a Million Dollars
Those will all teach you what not to do, which is just as, if not more important in investing and trading than what to do.
What do either of these books teach you about trading, other than "never forget that shit happens, because your mind will do everything it can to convince that it won't?"
- FBR and TBS are both for lay audiences. Taleb has hashed out his ideas in numerous academic papers posted on http://SSRN.com as well.
- Taleb's ideas have not yet been refuted by academia either, as confirmed by the late, renowned statistician David Freedman (http://en.wikipedia.org/wiki/David_A._Freedman_(statistician...) b/f he died recently.
- Can it be both flawed and a tautology?
- In investing and trading, knowing what not to do is often easier and more valuable than knowing what to do. All three books I referenced are all about that, though Taleb's are more on a philosophical level than What I Learned.
- You get more out of Taleb's books if you also read the stuff he references in his bibliographies, from What I Learned..., to Mandelbrot's (Mis)behavior of Markets (understanding Black Swans in terms of fractal randomness gives it a whole new meaning), to Taleb's first book on trading Dynamic Hedging (where he basically explains his extremely technical trading strategy to hedge and exploit the shit that happens in markets), to the stuff on SSRN.
- Most books on trading (or any other kind of advice these days) can be said to overdevelop a single topic or idea. Partly to pad pages, but also partly to drive home the message to the lowest common denominator of their audience. If you're the type that can speed read through the whole thing in a few hours, try not to hold that against them if the content is good.
- If his ideas are relatively simple, why does the whole world keep fucking them up? Both the financial crisis and the BP oil spill can be examined from Taleb's framework. Why have governments not realized how fundamental these ideas are and 'robustified' society against 'shit happening'? (these are all rhetorical questions, I know the answers) Someone needs to keep driving them home till we all grok that robustness + redundancy > optimization in many areas.
- Nobody in academia, government, or media took him seriously for a long time, even with a Wharton MBA and 99th percentile track record in trading. He said he had to get a PhD to help get his message across. That his ideas may now seem obvious is probably a 'hindsight is 20/20' thing.
While I'm at it, I'll just throw in a link for the OP to his good Edge article - The Fourth Quadrant: A Map of the Limits of Statistics. http://www.edge.org/3rd_culture/taleb08/taleb08_index.html
PS - Do you really find his writing 'impenetrable'? I think it's perfectly clear. Or did you mean something else?
This starts right after the author finishes recounting how he lost his $1.6M fortune and seat on the Chicago Mercantile Exchange back in the mid 80s:
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It was a painful realization to discover that I wasn't a trader. I didn't have the patience or mechanical skills to be a successful floor trader, nor the consistency to be a successful upstairs trader. If I was going to learn how to make money trading, I was going to have to find out how others had done it. I went and read the books and articles about, and interviews with, sucessful market professionals. I studied the best investors and traders from Wall Street and La Salle Street: Peter Lynch, Bernard Baruch, Jim Rogers, Paul Tudor Jones, Richard Dennis and many more. After all, when you're sick you want to consult the best doctors, and when you're in trouble you want the advice of the best lawyers. So, I consulted what the successful pro's had to say about making money in the markets. If I could figure out how they did it, I could still pull off getting rich again. And this time I would keep the money.
Below is some of the advice the pros offered for making money.
Advice and Dissent:
'I haven't met a rich technician.' - Jim Rogers
'I always laugh at people who say, 'I've never met a rich technician.' I love that! It is such an arrogant, nonsensical response. I used fundamentals for nine years and then got rich as a technician.' - Marty Schwartz
'Diversify your investments.' - John Templeton
'Diversification is a hedge for ignorance.' - William O'Neil
'Concentrate your investments.' - Warren Buffet
Averaging a Loss:
'You have to understand the business of a company you have invested in, or you will not know whether to buy more if it goes down.' - Peter Lynch
'Averaging down is an amateur strategy that can produce serious losses.' - William O'Neil
'Don't try to buy at the bottom or sell at the top.' - Bernard Baruch
'Maybe the trend is your friend for a few minutes in Chicago, but for the most part it is rarely a way to get rich.' - Jim Rogers
'I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all the money by catching the trends in the middle. Well, for twelve years I have often missing the meat in the middle, but I have caught a lot of bottoms and tops.' - Paul Tudor Jones
Spreading Up:
'When you're not sure what is going to happen in the market it is wise to protect yourself by going short in something you think is overvalued.' - Roy Neuberger
'Whether I am bullish or bearish, I always try to have both long and short positions - just in case I'm wrong.' - Jim Rogers
'I have tried being long a stock and short a stock in the same industry, but generally found it to be unsuccessful.' - Michael Steinhardt
'Many traders have the idea that when they are in a commodity (or stock), and it starts to decline, they can hedge and protect themselves, that is, short some other commodity (or stock) and make up the loss. There is no greater mistake than this.' - W.D. Gann
I had expected there might be some subtle differences among the pros. After all, some were stock market moguls, while others traded options or futures contracts. But didn't these guys agree on anything? Based on the examples above, they sounded more like members of a debate team trying to score points against each other.
I had to find out how the pros made money in the markets. I had to learn the secret that all of them must know. But if the pros couldn't agree on how to make money, how was I going to learn their secret? And then it began to occur to me: there was no secret. They didn't all do the same thing to make money. What one guy said not to do, another guy said you should do. Why didn't they agree? I mean, here was a group of individuals who had collectively taken billions of dollars out of the markets and kept it. Weren't they all doing at least a few things the same when they made their money? And if the first guy hadn't lost, why didn't the second guy?
If imitating the pros was supposed to make you rich and not imitating them was supposed to make you poor, then each one of these guys should have lost all his money because none of them imitated each other. They all should be flat broke b/c they very often did things opposite of each other. It finally occurred to me that maybe studying losses was more important than searching for some Holy Grail to making money. So I started reading through all the material on the pros again and noted what they had to say about losses.
Losses:
'My basic advice is don't lose money.' - Jim Rogers
'I'm more concerned about controlling the downside. Learn to take the losses. The most important thing in making money is not letting your losses get out of hand.' - Marty Schwartz
'I'm always thinking about losing money as opposed to making money. Don't focus on making money; focus on protecting what you have.' - Paul Tudor Jones
'One investor's two rules of investing: 1. Never lose money. 2. Never forget rule #1.' - Warren Buffet
'The majority of unskilled investors stubbornly hold onto their losses when the losses are small and reasonable. They could get out cheaply, but being emotionally involved and human, they keep waiting and hoping until their loss gets much bigger and costs them dearly.' - William O'Neil
'Learn how to take losses quickly and cleanly. Don't expect to be right all the time. If you have a mistake, cut your loss as quickly as possible.' - Bernard Baruch
Now I was getting somewhere. Why was I trying to learn the secret to making money when it could be done in so many different ways? I knew something about how to make money, I had made a million dollars in the market. But I didn't know anything about how not to lose. The pros could all make money in contradictory ways because they all knew how to control their losses. While one person's method was making money, another person with an opposite approach would be losing - if the second person was in the market. And that's just it; the second person wouldn't be in the market. He'd be on the sidelines with a nominal loss. The pros consider it their primary responsibility to not lose money.
The moral of course is that just as there is more than one way to deal blackjack, there is more than one way to make money in the markets. Obviously, there is no secret way to make money because because the pros have done it using very different, often contradictory, approaches. Learning how not to lose money is more important than learning how to make money. Unfortunately, the pros didn't explain how to go about acquiring this skill. So I decided to study loss in general, and my losses in particular, to see if I could determine the root causes of losing money in the markets. As I said at the very beginning of this book, I may not be wise, but I am now very smart. I eventually did learn from my mistakes.
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At the beginning of the book he said, "Smart people learn from their mistakes. Wise people learn from others' mistakes". The rest of the book is an examination of the psychological and emotional reasons for the distorting biases, poor judgement, and bad decisions that lead to loss and failure, as well as a strategy for avoiding that.
Anyone can notice the successful investment decisions after the fact: buying Apple Inc on March 6, 2009 at $83.50 or selling BP on January 19, 2010 at $62.30. No stock or mutual fund can beat the market, each year, over twenty years. Neither can you.
What you can do is not beat yourself. Within the nuts and bolts of a portfolio, some trades may cost you dearly in terms of capital gains tax. Lopsided distribution of your investments in too few asset classes will also wreck havoc. Avoid these mistakes and you can greatly improve your rate of return.
<another_shameless_plug> I run the investment website http://blog.realized-app.com and companion web app for getting these decisions right. </another_shameless_plug>
For example, say you start trading with $100, have a bad day and take a 50% loss, and are down to $50. What % gain do you need to get back $100?
Not 50%, as many new investors answer without thinking. To get from $50 back to $100 requires a 100% gain.
If you only a 25% loss down to $75, you need a 33% gain to get from $75 back to $100.
If you took a 75% loss to $25, you need a 300% gain to get back to $100.
Given the loss, the odds of getting the gains required to break even are not good.
Avoiding losses is a huge part of making money trading, which is why I particularly like both What I Learned and Taleb's stuff.
http://www.amazon.com/Liars-Poker-Rising-Through-Wreckage/dp...
As for "what questions to ask for", start with the clear and explicit: "who's expecting to make money...? And how do they expect to make it?" This will lead you to interest rates and bond coupons, dividends, etc... But make certain you understand the math.
The Predictors (Thomas Bass)
Market Wizards (there's a series)
When Genius Failed
Pit Bull (Marty Schwartz)
Rigged (Mezrich)
Liar's Poker
Reminiscences of a Stock Operator
In terms of learning finance or trading, you have to learn that thing in a spiral (like with programming). Unless you're superhuman. In which case, by all means, pick up: Fabozzi for bonds, Ross for equities (Corporate Finance is the name of his book, but he's known for inventing APT, a key model in equity portfolios -- so unlike a lot of people, he does have a pretty clear sense of authority) and Hull for options/derivatives, etc.
But remember -- that one thing that is very much alive in the markets is the invisible hand and specialization. There are even fewer generalists than there are among professional programmers, etc. Most highly successful people can summarize their trade by highlighting 1/2 of a sentence in some textbook. (If they have experience, they might also be able to tell you how 40% in that textbook relates to or is in some ways similar to that 1/2 of a sentence.)
So it's kinda like that, imho. Good luck. And as I think you mention in one of your recent posts about being a millionaire, leverage your strengths, etc. If it becomes a very large interest, probably the most efficient thing is to go to a prop shop or a large firm and learn from the source.
I made some changes late last night, and messed up when I pushed them to the server.
It's fixed.
http://python.mirocommunity.org/video/1531/pycon-2010-python...
Doing a search for "Panel data" yields some interesting courses.
MIT's OCW and Apple U should also have lots of material.
As far as books go, I've been recommended "Lords of Finance" "Too Big to Fail" and "My Life as a Quant".
2. Always define how much you're comfortable losing before trading. (time frames for entering/exiting trades helps too) The more you adhere to this the better you can control emotion-based trade decisions, and that equals money in this game.
for options 1) cboe.com has the best online education around (free too).. including video cast and other media
2) option training: dan sheridan: http://www.sheridanmentoring.com/ , mark: http://www.option911.com/ both Dan and mark used to work w/ the najarien brother's in their huge market making firm on the CBOE.. both know their stuff backwords and forwards
The only thing I know about Dan Zanger was when he was featured in one of the trading magazines many years ago, in an article discussing his feat. He accomplished it during the 90s tech boom, when you couldn't lose money even if you tried. No idea what he did after that.
I would suggest reading up on the national market structure, and reading "Inside the Black Box" by Narang for a good overview of how automated trading is structured.
I do this for a living, if you want to talk more just google my name
After that:
If you want to invest on fundamentals go for both of Graham&Dodd (aka the bible) and Seth Klarman's margin of safety (http://www.my10000dollars.com/MS.pdf).
For technical/quant trading both Trading+Exchanges and Volatility Trading are good books to read. Then look up some of the articles on wilmott.com and papers about things like Universal Portfolios or Neural Networks for trading on places like CiteSeer. Poking around Interactive Brokers' documentation isn't a bad idea either.
Hope this helps!
Start of with a book by Peter Lynch - Probably "One up Wall Street". He's a legendary investor. After that, go a bit more broad - "A Random Walk Down Wall Street". After you're done with that, try learning about fundamental and technical analysis. They are 2 very different things, but are the basis for valuation/pricing.
When you're done with that, you'll know more than most.
Turn on CNBC while you're working at your computer. Make note of any unfamiliar words or phrases and Google them throughout the day.
Do this for several months and you'll be surprised at what you're learning.
Basically they take John Madden/Dick Vitale announcing style (but not the substance) and apply it to market news. You might learn a few terms from them, but I'm convinced CNBC exists for no other reason than to lure the next marks and suckers into the market, intentionally misinform them, hype them up, and then get kickbacks from the sharks and traders who take their money.
Bloomberg is much higher quality.
http://news.ycombinator.com/item?id=1241165
I would start by reading The Intelligent Investor by Ben Graham. If you like it, then move on to Margin of Safety by Seth Klarman. (I have a value investing bias.)