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Favorite Books on Finance, Investment, and Trading Strategies

These books have been influential in our thinking about trading and system development, serve as good general references for relevant statistical and forecasting methods, or provide clues and the raw materials that can lead to successful trading systems.
Market Models, by Carol Alexander Market Models - A Guide to Financial Data Analysis
by Carol Alexander 
Chapters: 1. Understanding volatility and correlation. 2. Implied volatility and correlation. 3. Moving average models. 4. GARCH models. 5. Forecasting Volatility and Correlation. 6. Principle component analysis. 7. Covariance matrices. 8. Risk measurement in factor models. 9. Value-at-risk. 10. Modelling non-normal returns. 11. Time series models. 12. Cointegration. 13. Forecasting high-frequency data. Technical appendices: A1. Linear Regression. A2. Statistical inference. A3. Residual analysis. A4. Data problems. A5. Prediction. A6. Maximum likelihood methods.
The Predictors, by Thomas Bass The Predictors
by Thomas Bass 
How A Band of Maverick Physicists Used Chaos Theory to Trade their Way to a Fortune on Wall Street. - An engaging story centered around two physicists who leave academia (for a while) to focus on how predict financial market moves. It delivers many useful trading insights in the bargain.
Streetwise, by Peter L. Bernstein and Frank J. Fabozzi Streetwise - The Best of the Journal of Portfolio Management
by Peter L. Bernstein and Frank J. Fabozzi 
Selected chapters: The dividend puzzle (Fischer Black, Winter 1976); The capital asset pricing model and the market model (Barr Rosenberg, Winter 1981); Factors in New York stock exchange security returns, 1931-1979 (William F. Sharpe, Summer 1982); What hath MPT wrought: Which risks reap rewards? (Robert D. Arnott, Fall 1983); Persuasive evidence of market inefficiency (Barr Rosenberg, Kenneth Reid, and Ronald Lanstein, Spring 1985); What moves stock prices? (David M. Cutler, James M. Poterba, and Lawrence Summers, (Spring 1989). The complexity of the stock market (Bruce I. Jacobs and Kenneth N. Levy, Fall 1989). Beta and return (Fischer Black, Fall 1993). Performance evaluation and benchmark errors (Richard Roll, Summer 1980). The trouble with performance measurement (Robert Ferguson, Spring 1986). How to detect skill in management performance (Mark Kritzman, Winter 1986).
The Intelligent Asset Allocator, by William Bernstein The Intelligent Asset Allocator - How to Build Your Portfolio to Maximize Returns and Minimize Risk
by William Bernstein 
If you could only read one investment book in your life, this is the one it should be! We trade with discretionary funds but invest long-term by following the time-honored asset allocation methods described in this book. Perhaps the most important lesson that would have saved many when the 1990s bubble burst is how historically, by allocating only 20 percent to bonds instead of stocks, risk is substantially reduced with only a modest reduction in expected returns.
The Econometrics of Financial Markets, by John Campbell, Andrew W. Lo, and A. Craig MacKinlay The Econometrics of Financial Markets
by John Campbell, Andrew W. Lo, and A. Craig MacKinlay 
Trading with Oscillators , by Mark Etzkorn Trading with Oscillators - Pinpointing Market Extremes - Theory and Practice
by Mark Etzkorn 
The important message of this book is that while oscillators such as stochastics are appealing in that their premise is to buy low and sell high (and who can disagree with that!), relying on oscillators alone in a trading strategy is far too risky. Rather, oscillators should be used in conjunction with other trading methods to discern the trend of the market.
Active Portfolio Management, by Richard C. Grinold, Ronald N. Kahn Active Portfolio Management - A Quantitative Approach for Producing Superior Returns...
by Richard C. Grinold, Ronald N. Kahn  
...and Selecting Superior Returns and Controlling Risk
Smarter Trading, by Perry J. Kaufman Smarter Trading - Improving Performance in Changing Markets
by Perry J. Kaufman 
This book discusses the problems inherent in trend following trading strategies based on standard types of moving averages, e.g. whipsaws and giving up too much of large gains. It introduces Kaufman's Adaptive Moving Average (AMA) which automatically increases the "speed" of the moving average as market volatility increases. Kaufman demonstrates how profit taking can improve trading system performance, while using stop-loss orders can destroy the profitablity of a system. Thus a book about trend following ends up making points more associated with contrarian trading.
Puzzles of Finance, by Mark Kritzman Puzzles of Finance - Six Practical Problems and Their Remarkable Solutions
by Mark Kritzman 
This small book is loaded with insights to make better financial decisions. Much of what passes as common sense investment rules of thumb contain logical falacies or violate certain principles of financial mathematics and risk management. This book sets it straight, being clear to show the assumptions under that make the arguments hold together. Chapters: 1. Siegel's paradox; 2. Likelihood of loss; 3. Time diversification; 4. Why the expected return is not to be expected; 5. Half the stocks all the time or all the stocks half the time; 6. The irrelevance of expected return for option valuation; Primer: 7. Financial concepts and quantitative methods.
A Non-Random Walk Down Wall Street, by Andrew Lo and Craig MacKinlay A Non-Random Walk Down Wall Street
by Andrew Lo and Craig MacKinlay 
Chapters: 1. Introduction. 2. Stock market prices do not follow random walks: Evidence from a simple specification test. 3. The size and power of the variance ratio test in finite samples: A Monte Carlo investigation. 4. An econometric analysis of nonsynchronous trading. 5. When are contrarian profits due to stock market overreaction? 6. Long-term memory in stock market prices. 7. Multifactor models do not explain deviations from the CAPM. 8. Data-snooping biases in tests of financial asset pricing models. 9. Maximizing predictability in the stock and bond markets. 10. An ordered probit analysis of transaction stock prices. 11. Index-futures arbitrage and the behavior of stock index futures prices. 12. Order imbalances and stock price movements on October 19 and 20, 1987.
When Genius Failed, by Roger Lowenstein When Genius Failed - The Rise and Fall of Long Term Capital Management
by Roger Lowenstein 
On September 23, 1998, the boardroom of the New York Fed was a tense place. Around the table sat the heads of every major Wall Street bank, the chairman of the New York Stock Exchange, and representatives from numerous European banks, each of whom had been summoned to discuss a highly unusual prospect: rescuing what had, until then, been the envy of them all, the extraordinarily successful bond-trading firm of Long-Term Capital Management. Roger Lowenstein's When Genius Failed is the gripping story of the Fed's unprecedented move, the incredible heights reached by LTCM, and the firm's eventual dramatic demise. --S. Ketchum (
Option Volatility and Pricing, by Sheldon Natenberg Option Volatility and Pricing - Advanced Trading Strategies and Techniques
by Sheldon Natenberg 
Chapters: 1. The language of options. 2. Elementary strategies. 3. Introduction to theoretical pricing models. 4. Volatility. 5. Using an option's theoretical value. 5. Option values and changing market conditions. 7. Introduction to spreading. 8. Volatility spreads. 9. Risk considerations. 10. Bull and bear spreads. 11. Option arbitrage. 12. Early excercise of American options. 13. Hedging with options. 14. Volatility revisited. 15. Stock and index futures and options. 16. Intermarket spreading. 17. Position analysis. 18. Models and the real world. Appendices: A. A glossary of option and related terminology. B. The mathematics of option pricing. C. Characteristics of volatility spreads. D. What's the right stragegy? E. Synthetic and arbitrage relationships. F. Recommended reading.
Market Wizards, by Jack Schwager Market Wizards
by Jack Schwager 
The New Market Wizards, by Jack Schwager The New Market Wizards - Conversations With Americas Top Traders
by Jack Schwager 
Includes a chapter on turtle trading and an interview with original turtle trader William Eckhardt.
Inefficient Markets, by Andre Shleifer Inefficient Markets - An Introduction to Behavioral Finance
by Andre Shleifer 
Fooled by Randomness, by Nassim Nicholas Taleb Fooled by Randomness - The Role of Chance in Markets and Life
by Nassim Nicholas Taleb