"90% of the Performance Variation of Professional Traders Is Due to Position Sizing Strategies. Position Sizing Is the Key to Meeting Your Trading Objectives." Dr Van Tharp Ph.D International Institute of Trading Mastery
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Definitive Guide To Position Sizing by Dr Van Tharp
How to Evaluate Your System and Use Position Sizing to Meet Your Objectives. 90% of the Performance Variation of Professional Traders Is Due to Position Sizing. And Position Sizing Is the Key to Meeting Your Trading Objectives.
That's right. Your success as a trader has little to do with selecting the right investment or even having a great system. Instead, it has everything to do with the "how much" factor when you invest or trade. Investment professionals have called this factor "asset allocation" or "money management." However, they failed to understand that the key aspect was "how much" to invest in any position.
Others work so hard to get themselves a good system, but then fail to realize that position sizing is the key element to getting what they really want. When you have a great trading system, it is certainly easier to meet your system objectives through position sizing, but even with an average system you still have a chance to meet your objectives and profit, if you understand how to position size properly. That's how important this key topic is.
Dr. Tharp, for many years has specialized in helping traders and investors understand position sizing and how to use it effectively. He originally published The Money Management Report as his guide to position sizing. But thanks to an overwhelming demand from his clients, we've now published the book you've all been waiting for, Dr. Tharp's Definitive Guide to Position Sizing.
Dr. Tharp's clients have been reviewing this book throughout the last year. Many of them think it is so important that they did not want to return it once they'd finished reviewing it. It is that significant to their trading.
In the Definitive Guide to Position Sizing you'll discover the following:
Ten trading biases to avoid and how to turn those biases into winning ideas.
How to understand low risk-ideas.
Systematic approaches to evaluate your system, plus how to rate your trading system for ultimate effectiveness.
Six kinds of markets and how to determine if your system works in all six.
How to let your winners win big and how to cut your losses short.
A visionary way to use position sizing to meet your objectives.
Six realistic methods that you could use to limit your potential for ruin or to limit large drawdowns in your account.
93 different position sizing models (yes 93 of them!).
Position sizing software reviews.
The answers to typical position sizing questions.
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Remove emotion and guesswork from your trading decisions. 14 day free trial. Integrates with MetaStock®format data. Position Sizing or how many shares to trade, done automatically. Stop Placement calculated automatically - Stop Loss and Trailing Stop exit price. Integrates with your updated MetaStock data service daily. Share Trading Diary/Journal for each trade. Long and Short Trades allowed for with independent performance reporting. Technical Stop entry is available in place of the automatic Trailing / Profit Stop. Maximum % Risk per Trade correctly takes into account brokerage charges. Limits over trading by optimizing your Trading Capital and timing. Multiple portfolios, Currency entry & Exchanges. Pivot Points automatically calculated and updated daily, for short term analysis and trend bias. Portfolio/Trade Performance. Average $Win and $Loss updated daily. Portfolio/Trade %Win and %Loss Ratio updated daily. Easily view all your Open and/or print Closed Trades/PositionsMoney Risk Management Share Trading Software. Show Cumulative Profit/Loss and Available Cash. Average Trading period for each Portfolio and trading days of each trade. Average $Rate of Return - Trade Expectancy. Total Brokerage charges for all closed trades. Stock Split adjustment process, very simple when required. Compare Portfolio Performance against any Index or security, easily.
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Now let's hear from Dr Tharp:
Do you really need to understand how markets work? No, you don't.
You only need to understand how the concept that you are trading works. For example, if you are a trend follower, all you need to understand is that the markets will occasionally move in very large trends, and if you can catch the big moves, you'll make a lot of money. If you have a system that does that, then that's all that you need to understand about the markets.
If you are a value investor, then all you need to understand is why something is undervalued and be confident in your ability to determine that. The other two things you need to understand are (1) when your investments are no longer undervalued, meaning it's probably time to sell, and (2) when you might be wrong about your evaluation so you can safely abort and preserve your capital. You don't need to understand the market at all. Warren Buffett doesn't-he thinks the markets are irrational.
Similarly, no matter how confident you are in your system, you will have trouble making market predictions. But you don't have to!
Psychological research has shown that there is no correlation between the confidence people have in a future trade and the likelihood of it being a success. I think this is especially true for traders with no proven system. In fact, there is probably a slight negative correlation between confidence level and the likelihood of success. In other words, the more confident you are, the more likely it is that the trade might go poorly. What I have learned over the years is that people are just not good at predicting success.
If you still believe that you can predict some trades very accurately, then I recommend that you collect some data on these trades. When you think a trade has a very high probability of success, make a note of it in a journal. After you've collected at least 30 of these trades, review the results. What relationship is there between your confidence of success and the actual success of the trade?
What's trading all about?
Isn't it about entering and exiting positions with the idea of meeting your financial objectives? And don't those objectives in some way relate to 1) capital preservation and 2) growth of some sort? Therefore, two of the most important questions you can ask yourself are "What are my trading objectives?" and "How can I use position sizing to meet these objectives?"
As you'll learn in the Definitive Guide to Position Sizing, there are probably an infinite number of possible objectives that you could have given that there are a large number of different sized drawdowns you might want to prevent (e.g., 10% vs. 40%), an even bigger number of gains you might aspire to make (e.g., 10% vs. 1,000,000%), and some combination of both-making even more possibilities. You must determine your objectives and then you can design a position sizing method to meet those objectives. How can you reach your financial goals if you haven't spent the time determining what they are?
How Can You Determine If Your System Is Any Good?
How do you know whether or not you have a good system? How can you determine how much better one system is over another? Is there any way to do this across system types and across markets?
Is a system that wins 70% of the time better than a system that wins 30% of the time? Not necessarily! Is a system with an average return (expectancy) of 1.5R per trade better than one with an average return of 1.2R per trade? You'd probably think so, but that's not necessarily true either. Or what about a system that should make 27R over the next month versus a system that should make 35R - is the 35R system a better system? You'd probably think so, but sometimes the best system is the 27R system. Why? It is because the best system is the one that will make it easiest for you to meet your objectives with position sizing. And in this book, you'll learn my approach for figuring out the best system with my System Quality Number® concept. And you'll also learn how to optimize the probability of meeting your objectives through position sizing. That, in a nutshell, is the real significance of this book.
Click here to review more of the Definitive Guide To Position Sizing by Van Tharp