The Laws of Trading: A Trader's Guide to Better Decision-Making for Everyone

by Agustin Lebron

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 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. 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. 

Genres: Finance, Business, Nonfiction, Psychology, Money, Philosophy, Economics

304 pages, Hardcover

Published June 18, 2019

Reviews

[Imran Ahmed · Rating 3 out of 5]

Readers looking to improve their stock / FX trading strategies will be disappointed by LeBron's otherwise decent book. Despite the title, LeBron's book is more a generalist almost philosophical work and not specific to trading.

Despite all of the above, it's a well written book. The author interlaces the work with relevant examples. And it makes the reader reflect - not so much on trading but life in general.

With a less misleading title and targeted at a more appropriate demographic the book deserves four stars. The Laws of Trading is only recommended for readers with a philosophical bent. It's not for everyone.

[Franta · Rating 5 out of 5]

This is one of the best books about decision making, mental models, and risk management for (smart) people without any background in trading/finance.
It should be a bestseller as the application of it would help anyone make more money whatever they do.
Right now it is a kind of a hidden gem, which gives me an edge over people that did not find it yet...

[Jad Malaeb]

I find it difficult to rate trading books.

I have not enjoyed most books I've read on trading; the content is often dull and impractical, and the worst are scams. Good traders know this. Adam Grimes says "No book will make you into a trader" and Marios Stamatoudis says "The best trading books are the ones you write yourself." I agree with both of these statements, and the more I read the more I agree with them.

This book is different though.

First, the author is explicit about what to expect from this book: "This book will not teach you specific trades that make money, nor will it teach you how to create such trades, at least not directly," he says in the opening pages. And of course it wouldn't - why would anyone share their edge? That's the great irony of trading books: they purport to teach you to become profitable when they cannot provide the explicit instructions that help you do that. It's as if you picked up a cooking book and instead of a recipe and instructions you got a 300-page research manual about the origin of beef and how spices are transported to your grocery store. What's left for the literature are three categories: (#1) general truisms that may or may not be useful to you, (#2) trading psychology, and (#3) expositions on trading indicators. The 2nd and 3rd are the worst kinds of books to read (from an entertainment perspective) although they may occasionally provide insight.

Second, this book was entertaining, informative and thought-provoking, even though it probably didn't have much of the practicality I like (as discussed, this is a domain-wide problem). The author is obviously intelligent, experienced and honest about the realities of trading. The 11 laws provided are good guidance for any trader, although not all were immediately relevant to me. The ones that stood out to me were:

Chapter 1 - Motivation

Knowing yourself and why you trade is really important. If you're trading to get a sense of adrenaline in your life, you've lost before you've sat at your desk. The issue is self-knowledge is difficult. It takes honest reflection to know yourself, and honest reflection requires asking uncomfortable questions. It often requires reconfiguring beliefs, adjusting behaviors or realizing a divide between reality and perception. This is not for the feint of heart - all growth requires self-destruction.

Chapter 5 - Edge

My favorite chapter. The author provides the best definition of edge I've heard: "Edge is what you understand and can act upon that the marginal trader either doesn't understand or can't act upon." There are a few insights in this sentence. First, edge comes from not just knowing something that someone else doesn't but being able to act on that information. The next time you ask why you have edge, this framework will be useful in getting correct answers. Second, the comparison is between you and the marginal trader. Many people, myself included, underestimate the skill of the marginal performer. Since they're active, it must mean that they are at least somewhat profitable, and to get to 'somewhat profitable' is already a massive achievement requiring the absorption and application of a lot of knowledge. THIS is the person you are competing against, not the GME Ape (although you occasionally trade against them too).

Chapter 11 - Adaptation

Comparing the participants of financial markets to living beings driven by the laws of evolution is not a new idea to me. Andrew Lo has written an awesome book about this called The Adaptive Market Hypothesis. But this is still one of the most valuable perspectives to have about financial markets. The rules of evolution dictates that only the best adapted survive long-term. Adaptation is a continuous process. Hence, 'if you're not getting better, you are getting worse.' Luckily for us, our genes automatically adapt to our environment from the progeny of those who survive, but the adaptation must be deliberate in financial markets - you must actively make yourself get better, or you won't be on top for long.

[Tony WANG · Rating 5 out of 5]

Don't be fooled by the rather cliche and dodgy title of the book! This book is extremely practical and useful IMO. And I think I just found a hidden gem of a book about behaviour finance, social sciences, psychology and life in general. At the point of writing, I have read close to a hundred trading/investing books, I think this is without a doubt one of the most underrated/undiscovered book about trading from my collections.

"From buying a new car to finding a new job, the principles behind good trading teach us how to make better decisions in all sorts of situations."

"Understanding the world of trading, and how to think about it, provides a valuable set of mental tools that have far-reaching applications."

"In the same way that competitive sports appeal to the more athletic among us, trading appeals to the intellectually competitive. Being able to win at trading implies, in the popular imagination, having a sharp mind, good instincts, and a strong desire to win. The world of trading provides a compelling arena in which to test one’s wits."

"... “knowing why” can be fraught with danger and self-deception because of who “you” is. Thus, the first way in which we should think about the rule (Rule No. 1 - Motivation; Know why you are doing a trade before you trade.) is less as a rule about trading and more as a rule about self-awareness."

"The most important knowledge is self-knowledge. Be aware of your tendencies, your flaws, your blind spots, as well as your strengths."

"Adverse selection rules (Rule 2 - You're never happy with the amount you traded.) the world of trading. You’ll never be truly happy with the trades you did. The best you can do is to be mildly unhappy and accept that this is a fundamental aspect of the job."

"The act of trading is the act of taking risk. The job of a trader is to judiciously select the risks that will yield profit."

"... thinking of these things (Rule #3 Risk - Take only the risks you're being paid to take. Hedge the others) in the context of risk and hedging helps you clarify and focus your behaviour in a way that more general "good advice" typically doesn't. Thinking like a trader lets you understand the why behind common suggestions and advice."

"Considering risks clearly and dispassionately, like a good trader, lets you put in place preparations and hedges to mitigate their effect when they happen."


In summary, this book is very well-written and referenced. Highly recommended for everyone even for non market participants.

[Benjamin Schneider · Rating 4 out of 5]

Less a guide to how to trade, more a tour of the associated worldview. I've encountered much of this already over the years by way of economics, listening to interviews with people with a finance background, and "general online exposure". This is the most concise summary of this kind of reasoning and the associated mental models I've seen so far — recommended reading. Even if you keep your money in a cheap broad index fund, as you probably should and which reading this will make you more likely to.

[Robert · Rating 5 out of 5]

The Laws of Trading is a wonderful book on applied decision-making. Lebron extracts 11 laws from his trading career at Jane Street (one of the sharpest shops out there) and describes their importance for real-world decision-making, for example: the adverse selection that occurs in hiring, the liquidity risk that occurs in gym contracts, and the importance of incentive alignment in workplaces. I really liked an idea from Aaron Brown in the foreword: these “laws” are not laws in the sense of Newton’s Laws, rather they are Laws of the Jungle. They arise because of competition – “everything contrary to them no longer exists”.

The book is deceptively simple – 11 neat laws in plain English – but it is a deliberate simplicity that is evidently the result of deep philosophical thinking from the author, like the simple katana that takes years of expert craftsmanship to forge. There are many layers to each of the ideas. Even for the topics I thought I understood (perhaps especially for those topics), Lebron provided a new looking-glass.

Given that many of the ideas originate from trading, the reader would benefit from some prior interest in finance and trading; perhaps The Scout Mindset: Why Some People See Things Clearly and Others Don't would be more suitable as a book on general decision-making. That said, I think that it’s often worth putting in the effort to learn enough context so that you can appreciate lessons from experienced practitioners – I am reminded of Atul Gawande’s books, developing insights from the world of surgery.

My only complaint about The Laws of Trading (and it’s a minor one) is that the structure can be hard to navigate: within the 11 laws, there are plenty of long deviations that seem to have (at least on the surface) little relation to the thrust of the chapter. But this is perhaps an unjustified complaint because some of these tangents were the most interesting parts of the book. I particularly enjoyed the insights regarding the sociology of Bell Labs – the organisational factors that made it such a powerhouse of innovation.

All said, there is a reason why plenty of traders are highly recommending The Laws of Trading. This is probably a case where it doesn’t pay to be contrarian!

[Tim · Rating 5 out of 5]

Diamond hands. Perfect book. I rate it a 5/7.

Edit: I managed to turn $10 000 into $5 but still diamond hands.

[Ronald Rajagukguk · Rating 3 out of 5]

Doesn't really goes into details on trading, to me this is just scratching the surface, but it's a good intro book to some of the principles in trading (which can also be used in other fields too)

[Lyubomir Genchev · Rating 5 out of 5]

not the book (about prop trading) you want but the book you should read
- prop trader

[Kevin Whitaker · Rating 4 out of 5]

Very good read on actual trading, although some of the "here's how this explains the rest of your life too" parts are a stretch. It also does a great job of starting with the best ideas, and then some of the later ones get overly broad and try to explain big ideas in management / data / software design in a few pages.

Some ideas I took away:
- You may think you're doing a trade "to make money", but that's not always your real motivation -- sometimes it's to prove how smart you are, to avoid feeling afraid, or just out of boredom like a slot machine player
- Even if your model predicts the market correctly on average, you might lose money trading off of it, if everyone else also wants to do the same thing when your model is right (so you can't make all the trades) but not when it's wrong
- Over time, the profitability of any particular trade converges to zero. (This is even true for bad trades -- if you're consistently losing money, everyone else will compete to be on the opposite side of you, to the point that your trade no longer loses money.)
- A major but under-discussed factor in LTCM’s collapse was that a bunch of other companies thought they were really smart and copied them, creating hidden correlation risk (when a few LTCM positions fell, imitators had to sell everything else in their "LTCM-like" portfolios)

[Michael · Rating 3 out of 5]

Early on in the book, Augstin talks about EV and how it relates to trades. I liked the insight about how to do the "higher-order" thinking, e.g. if you have a bid-ask spread, and then someone has another bid ask spread that fills yours, you need to adjust your thinking that maybe you are wrong, e.g. you don't just keep filling their orders and keeping your spread static, unless, you are very certain that you know what's going on. And there were examples of trades that gave you insight into how real trading worked.

However, a lot of the EV stuff was a bit overblown and thought to be cliche/over applied. E.g. using EV "every decision in your life" -- sure, as a quant that might be how you think of things, but realistically it just felt a bit of a retrospective vs something you actually subconsciously do all the time. Also, pure EV has notoriously lead to some very bad decision making before, e.g. FTX collapse or very immoral decisions. Seen that IQ curve meme? Pure EV is the dude in the middle.

The "advice" later on about improving yourself and motivation pep talk was really boring, wish it wasn't in this book at all.

Overall I felt that it would probably be more valuable to eat dinner with some Jane Streeters a few times rather than read this book. If you want real trading advice, read Hedge Fund Market Wizards by Schwager.

[Darren Key · Rating 5 out of 5]

Great book about general tips on the trading mindset and (surprisingly) trading firm structure, with some tips that generalize beyond trading and more as a general idea for those in competitive environments. The three main takeaways I got from the book:

1 - view your own intrinsic motivations before trading, and be aware / develop processes to counteract some of the human tendencies that misalign with the profit motive (i.e. confirmation bias)
2 - edges should be easily explainable yet likely requires some degree of creativity to find, and it should represent a "story" (i.e. why something occurs)
3 - the main essence of trading is adaptation. By virue of existing in a highly competitive environment, the true role of a trader is to be able to continuously adapt to changing environments, as profitable trades, models, and edges will inevitably go to waste. This applies beyond the individual level - to groups, firms, etc.

[Arturo · Rating 3 out of 5]

Este es un libro que merece la pena leer si no conoces lo que cuenta. En mi caso, lo conocía ya casi todo, por lo que lo he podido leer bastante rápido. Donde creo que falla un poco es en el subtítulo pues creo que le queda un poco grande, aunque haya cosas interesantes, también en función de la exposición que haya uno tenido a las mismas; yo, no queriendo implicar que esté sabiendo aplicar acertadamente los conceptos, sí la he tenido.

Dicho todo esto, hay algunos capítulos que me han gustado mucho. Cap 1: Motivación, Cap2: Selección adversa, Cap5: Ventaja, Cap6: Modelos. Hacia el final, creo que le sobran un poco más.

Creo que el libro se valorará de forma distinta en función del conocimiento del lector. Se lee fácil y rápido. Mi valoración puede parecer "escasa" pero es la mía, con lo que ya sabía. Aún así, me lo leí entero.

[Donald Bayley · Rating 2 out of 5]

I'll admit to only getting about halfway through this book before putting it down for good. I took a break right around the point the author starts needlessly adding banal partisan "humor" and realized I hadn't learned enough of value to warrant continuing to read the second half. Some of the early, simpler content is good, but I found the more in-depth sections to be full of oversimplifications that could be considered incomplete at best and disingenuous at worst (the author's descriptions of Newtonian physics and heteroscedasticity come to mind here). Because of this, I'd advise avoiding this one altogether, or being prepared to take the authors claims with a healthy dose of skepticism if you decide to read it.

[Heng · Rating 4 out of 5]

I enjoyed most of the books chapters with a density of useful ideas and thoughts about trading, business, decision making and life. The main reason I gave this book four stars as opposed to five is that at-times it felt like the book was confused about its intended audience. If it was meant for serious traders looking to start their own firm, the parts on technology, models, and detailed nuances of tradecraft would make more sense but not necessarily the Trading 101 sections and ruminations on life. If the book was meant for retail investors or folks looking to learn about how concepts in trading might apply to life, I'm not sure how the more technical and nitty-gritty passages would apply. Overall, the book is worth a read given the concise writing and depth of thinking.

[Jonathan Birnbaum · Rating 5 out of 5]

Excellent. Agustin shrewdly lays out his models for how to think about trading and edge, and how to abstractly apply to all sorts of real world decisions. He hits on important and everpresent issues with engaging in markets such as winners curse so you can never be pleased with taking risk, and visible vs invisible risks in portfolios (homogenity anyone? see crypto markets in May) practical issues around trading, such as aligning capital and labor, and how you need to constantly evolve to stay relevant. Not a 'how to' primer on detecting chart patterns, but a meditation on engaging in markets for the serious risk taker to absorb foundationally.

[Josh Holder · Rating 3 out of 5]

Some interesting tidbits, but felt somewhat meandering. It didn't go quite deep enough into trading as I would've liked - for example, the book talked so much about edges and trading, but never provided even a simple example of a trade that's implemented in real life (other than an exceedingly archaic and sketchy trade which didn't feel representative)! With this book, I wanted to get an inside look into the life of traders, and I didn't feel like I got that.

On the other hand, the book dabbled very superficially in a variety of other fields - evolutionary biology, tech debt, organizational innovation - but I would rather read books specifically in those fields rather than a smattering of thoughts from an outsider. In the end, the book felt unfocused and without a coherent message. (I'm also left unconvinced that HFT firms are a shining example of companies making the world a better place, but that's besides the point.)

[Charlie Sabino · Rating 4 out of 5]

4.3

Don’t let the grifty title put you off! This book isn’t really about trading, but rather some useful ideas in trading. The value stems from these ideas’ broad applicability.

Arguably just as important to me are the interesting, entertaining anecdotes the book contains. I think the book is a good exploration of what Nate Silvers deems “The River”—in fact, I think far better than Silvers’ own book in which he defines it.

[Arun · Rating 4 out of 5]

Definitely a book I’ll be going back through a couple of times. You won’t be building new strategies from this but it’s cool getting into the mindset of a trader. I work with traders and I have no background in finance before this, so this book was valuable in getting to understand how they think better.

[Zachariah Schwab · Rating 4 out of 5]

I picked this book up from a Slate Star Codex book review.

It was a good introduction to what it's like to be a trader and shaped my understanding of options markets. If I join a prop shop or hedge fund I'll report back on how accurate it was but other trustworthy media tends to agree with its emphasis on adverse selection and liquidity.

[Harshvardhan Baxi · Rating 1 out of 5]

I found most of what was stated here difficult to grasp. I guess it takes the actual experience of having been on the inside one of these trading firms to better appreciate the author's worldview.

Nonetheless, just purely from the viewpoint of gaining some insight into the trading financial markets, one can give this book a chance.

[Dhaval Joshi · Rating 5 out of 5]

One of the best books I have heard.

It should actually be read/heard as a self-help/personal coaching books as it goes beyond trading (if does focus on trading) and gives you a lot of personal coaching.

Definitely recommend this book.

[Peter · Rating 4 out of 5]

Good read. If you’ve traded, this will crystallize a lot of trading’s dynamics that you couldn’t quite articulate. If you haven’t, it sets the groundwork for understanding the business like a professional. It’s serious and it’s savvy just as any true trading environment is.

[Ben Steward · Rating 3 out of 5]

Solid read. Author keeps it easy to follow whilst providing several insightful lessons. It’s not too specific so is useful for a wide variety of people looking to improve decision making and operating in markets in general, not just trading.

[Muhammad Farhan · Rating 5 out of 5]

One of the more practical books in the industry which also touches upon other aspects that trading bleeds into, and not just a regurgitation of old trader hay days (although would not have minded some tales about Jane Street and AQR days either)

[PF Chang · Rating 2 out of 5]

Not bad, but not outstanding either

[Min · Rating 4 out of 5]

that's right, me larping my way to legitimacy...

... well, no, not really, i'm already there, just feels fake and wanted to read something to confirm/deny internal bias

[Nurullah Öztürk]

Robot james ten gördüm kitabı

[Doug O'laughlin · Rating 4 out of 5]

Not bad! Has low moments and high

[Ruban · Rating 3 out of 5]

Early chapters were good but it got a bit pop-sciency/broad towards the end.