Fooled by Randomness by Nassim Nicholas Taleb

Fooled by Randomness by Nassim Nicholas Taleb is one of the most important books for traders. You need to read through this book and understand what the author is saying about risk and the expression of risk before you start trading.

One thing that is confusing for new traders (for all traders but especially new traders) is that the expression of risk can be deceptive. For example, a system that has an over 80% win/loss ratio can be a losing strategy if not managed correctly.

I have shown through back testing that the Gap Fade strategy has an over 80% win/loss ratio but it is possible to go through a 6 month losing period with this strategy. At the end of the 6 month period you are back to square one (i.e. your account is back at break even) and you have "wasted" 6 months of trading to get nowhere.

The back testing of this strategy also showed that the best stop management approach was to not use stops which is NOT recommended for any type of trading and so makes this raw/hypothetical very risky.

Nassim Nicholas Taleb explains very well in this book the differences between deceptively expressed risks and how statistics can be easily manipulated to fool you into believing one risk profile that is not the actual risk profile.

Read, and most importantly, understand this book before you start trading. Then once you understand the way that risk can be expressed you will be better armed than 90% of the traders out there to assess the risks that you face each time you place a trade on the table.

I have read this book and completely agree with you. The part of the book that woke me up was when he was talking about Spa and the healing waters for arthritis and that stats showed that in fact you were more likely to get arthritis from going to Spa and soaking in the waters than getting a cure for it.

I read it when it first came out but I do not remember the story about the Spa. I just went to look for the book in my trader library but I discovered that it is not there but I know where it is. I lent it to a friend and I have still not go it back. A bit of free advice: Do not lend your important books to anyone.

Another important rule is to keep all of the useful books within an arms reach or at the very minimum a swivel of the chair. If you have to get up to get to something then it's less likely that you will do so.

I remember reading this bit of advice before the Internet became prominent and I now think that it may be less important because a lot of information can be found with a quick search and on a personal note I often type in and keep useful bits of information either on line or in my computer for faster reference. Of course this doesn't help if the computer's broken or I can't get online.

Arms reach - good idea!! I am always getting up to fetch books.

Great book!