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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 SizingSM.
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 SizingSM 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.
BUY
NOW
Now
let’s hear from Dr Tharp:
 Dear
Trader,
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 NumberSM 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.
BUY
NOW
Here’s
what one trader said:
“The
Definitive Guide to Position Sizing has a simple, comprehensive,
effective way to evaluate the ‘goodness’ of any system: the
System Quality Number. This is great for evaluating a single system,
a single system under various market conditions, and a system
that consists of many sub-systems in various market
conditions.
These
topics offer a rational and thorough basis for combining probability,
gambling, risk and return in a manner that improves people's
financial lives. It gives traders that edge that we all look for but
in a way that, if every trader had this same edge it, probably
wouldn't hurt anyone.
Now
I can see how it is possible, with reasonable work, to achieve 100%+
annual returns with acceptable drawdowns.
I can see how I can easily and effortlessly achieve 45%
annual returns with minimal drawdowns.
It
got me thinking about the elements of the condition of a market.
What makes it "better" or "worse" for a
particular system? The book presented the most ways to position size
I have ever read, with many ways to consider position sizing for a
trading system. Imagining and testing most of these will be a
wonderful way to improve my trading.
I’m
now focusing on what kinds of systems and what method of position
sizing are appropriate, and what combinations of these position
sizing methods will be most useful for which systems under which
market conditions to accomplish my goals and objectives.
The
review of software related to position sizing was also a big help
and a great place to start with software that includes many of Van's
principles. The
questions and answers stimulated my thinking about many trading
issues and potential biases.
It
is crystal clear how entries are so relatively unimportant and why
more time and thought devoted to position sizing is so much more
valuable to my trading and my life.
Through
reading this book I discovered new ways to define my objectives
quantitatively.” Jim W.
In
my opinion, position sizing is the most significant part of any
trading system. Many
professionals, and most amateurs, do not understand its importance.
In
fact, I once attended a seminar for stockbrokers that detailed a
particular method of investing that they could use to help their
clients. While the
seminar as a whole was terrific, the topic of money management, as I
define it, was not even covered.
One speaker did talk about money management, but I could not
really determine what he was talking about. As a result, at the end
of his talk, I asked him, “What do you mean by money
management?” His
response was “That’s a very good question.
I think it is how one makes trading decisions.”
I
looked up the topic of money management in an Internet search.
Although the search engine returned many articles on the topic, very
few of them had to do with what I call money management…which is
why I coined the term “position sizing.”
Numerous
searches came up with topics on “how to manage your personal
finances.” Other
searches came up with web sites describing professional money
managers who would manage your finances for you.
Still other searches went to web sites having to do with the
futures industry where money management seemed to be confused with
risk control, managing your worst-case risk through a stop loss, or
achieving maximum profits. My
definition of money management (or position sizing) is none of
those.
Let’s
look at a couple of other definitions, (none of which is correct for
what I’m talking about):
“The
process of budgeting, saving, investing, spending or otherwise
overseeing the cash usage of an individual or group. The predominant
use of the phrase in financial markets is that of an investment
professional making investment decisions for large pools of funds,
such as mutual funds or pension plans.
Also referred to as ‘investment management’ and/or
‘portfolio management’.”
InvestorWords.com
(which is what you might be exposed to if you are actually looking
for an investment type definition) says the following about what’s
critical to your investments:
“Here
are the seven fundamental principles of investing that every
investor should know. Topics include knowing your current situation,
goals and risk tolerance; getting your finances in order; thinking
long term and focusing on stocks; researching and monitoring your
investments; and knowing when and how to get financial help.”
The
site then goes on to define money management:
“The
process of managing money, including investments, budgeting,
banking, and taxes, also called investment management.”
I
searched Google for “money management definition” and went
through the first ten pages without finding a single useful
definition. The examples
given above are pretty typical.
However, I did go directly to Wikipedia and got the following
definition, which is about as accurate as I could find online:
“Money
management is used in investment management and deals with the
question of how much risk a decision maker should take in situations
where uncertainty is present. More precisely what percentage or what
part of the decision maker's wealth should be put into risk in order
to maximize the decision maker's utility function.”
How much risk should you be willing to take?
Isn’t
it interesting that most professionals cannot even agree on the
definition of what is probably the most important topic for all
traders and investors to understand?
In fact, in my three books, Trade
Your Way to Financial Freedom, Financial Freedom through Electronic
Day Trading, and Safe Strategies for Financial Freedom, I
totally eliminated the term money management and coined a new one,
position sizingSM. Since position sizing is the difference between
poor performance and great performance—the difference between
going broke and being a successful professional—it’s important
that I define it right now. Please
take note.
Position
sizingSM (what some call money management) is that
portion of your trading system that tells you “how many” or
“how much.” How many units of your investment should you
put on at a given time? How much risk should you be willing to take?
Aside from your personal psychological issues, this is the most
critical concept you need to tackle as a trader or investor.
When
you started trading or investing, you had probably never heard about
position sizing. If you
knew something about it, your knowledge probably came from some book
by an author who didn’t understand it either.
Most books that discuss position sizing are about
diversification or about optimizing the gain from your trading.
Books on systems development or technical analysis don’t even
begin to discuss position sizing adequately.
As a result, most traders and investors have no place to go
to learn probably the most important aspect of their craft.
I
present many position sizing methods that you might want to use in
your trading. However,
that choice should depend upon your specific objectives and your
comfort level with the various methods described.
Your trading success will still depend upon having a well
thought out business plan, developing systems that you feel
confident trading, and using a position sizing algorithm that you
feel confident will help you meet your objectives. Here’s what
another trader told me about the guide,
“If
you’re a serious trader, you simply can’t trade effectively
without this information. This book does the best job I’ve seen in
helping one understand how to use position sizing effectively. It
has done a great job of helping me translate my objectives into
effective trading system design. I wouldn’t approach the process
without it.” Rick
Freeman
Understanding
Low-Risk Ideas
This
guide covers the basic fundamentals of trading, but even more
importantly once you study this material you will understand what a
low-risk idea is all about.
A
low-risk idea is an idea with a long-term positive expectancy
that’s traded at a risk level to allow for the worst possible
occurrence in the short term so that you are able to realize the
positive expectancy in the long term.
Notice
how this simply states that if you have faith in the long-term
expectancy of your system and just follow the process, then
everything will work out. But
also notice how the idea of position sizing is critical to a
low-risk idea. If your
position sizing is too big, you are guaranteed to eventually lose
your funds. Let me state
that another way. If you
risked too much money on one trade, then you risk depleting your
funds so much that you can no longer trade effectively. And if you trade with too little
capital, then almost any trade you make will be “too much.”
What
Works and What Does Not Work?
This
book is meant to be a definitive guide to position sizing.
I cover many position sizing models that work. However,
because of the many psychological biases surrounding position
sizing, people often invent position sizing strategies that just
don’t work. Most books
totally avoid the topic, but occasionally one will mention position
sizing and present some very strange technique to guide you.
In this book, as a definitive guide, I’ve attempted to
cover every method I’ve ever seen, including those I don’t like.
I’ve presented you with 31 different models and 3 different
equity models. So in
this book alone you have 93 different position sizing models (i.e.,
31 times 3) that you can use. Furthermore,
many of the methods presented have many derivative models.
For example, you could probably come up with thousands of
varieties of market’s money alone.
In fact, one could probably spend as much time on position
sizing strategies as the average trader does on entries.
Therefore I devote an entire chapter to methods that, in my
opinion, either don’t work or are dangerous to help you steer
clear of the same mistakes. BUY
NOW
Here’s
what another trader said,
"I
learned about the little known and misunderstood ‘Holy Grail’
of successful trading. Position sizing is the most difficult
and most important part of trading to understand and use. It is the
most powerful tool in trading...you can make untold wealth, or blow
a hole in your wallet.
Here's
what Clint Eastwood's Dirty Harry would have said about it: 'I know
what you're thinking. Did he put on six contracts or only five?
Being that position sizing is the 44 magnum gun of trading
and can blow your head clean off, you got to ask yourself one
question. Do you understand position sizing?
Well do you, punk?'
All
joking aside, I found the trading became a lot easier once I had a
deeper understanding of position sizing.
I can lower my risk, increase my profits, and my confidence by
understanding this universal investing principle.
Best
of all, I learned how to turn a 10 point move, in a stock, into a
compounding profit machine!" —Frank Eaves
The Best Investment Decision You Could Make
What
to Do Next?
My
recommendation to you is that you determine your objectives for your
trading. What are you trying to accomplish in regards to capital
preservation and growth of your money? What are you endeavoring to
achieve financially? You could ask yourself the questions “Who am
I?” and “What are my financial goals?” Again, I cannot
overemphasize the importance of this step.
Next,
follow the guidelines in this book for using one of the methods to
meet these objectives. Work
with the methods you are attracted to until you thoroughly
understand them and feel comfortable with them.
Understand how the method works and develop confidence using
it before you start trading with it.
When
you know your R-multiple distribution, your system’s expectancy,
and your System Quality Number (SQNSM), you no longer have
to do the impossible and predict the market. You will be set up to
let your profits run and cut your losses short.
That information will help you determine what to expect from
your system in the long run. And
as long as you position size to avoid any worst-case disasters, you
should be able to achieve that expectancy.
Do you need to predict anything else?
Are
you beginning to see how trying to predict the markets and thinking
you need to pick the perfect stock can steer you away from what
works? When a pollster
predicts how the American population will vote, he doesn’t
necessarily understand why. He
just knows what the likely outcome of the vote will be.
After you read this book you will have enough information to
understand your system and how to cut your losses, and that’s all
you need.
When
you start thinking of a system as the R-multiple
distribution it generates, all of the information about trading
begins to make sense.
I’ve
designed this book to help you answer almost any question that you
may encounter about position sizing.
In
over 350 pages, I cover the hundreds and hundreds of questions and
situations that I’ve encountered as I have taught this concept to
trader after trader during the past 20 years. This definitive guide
is truly my ultimate knowledge on position sizing. And
if I must say so myself, I am considered the foremost expert on the
subject.
Add this Book to Your Arsenal Now
The
Definitive Guide to Position Sizing is one of the most valuable, if
not the most valuable tool to add to your trading system. It should
offer you a high ROI at only $149.00!
—
Van K. Tharp
Quick Listing of the Chapter
Titles
- The Golden Rules of Trading
- Risk and R-Multiples
- Evaluating the Quality of Your
Trading System
- What Can I Expect in the Future?
- Are You Doomed to Failure?
- The Most Important Factor (besides
you) in Your Trading
- CPR for Traders and Investors
- Core Position Sizing Models
- More Position Sizing Models
- Comparing the Impact of Various
Models
- Meeting Your Objectives
- Position Sizing Methods to Meet
Your Target Profit Objective
- Using Fixed Ratio Position Sizing
to Meet Your Profit Target
- Position Sizing Methods to Help You
Avoid Ruin
- Position Sizing Strategies to
Avoid!
- Putting it All Together: An
Interview With Chris Anderson
- Position Sizing Software Examined
- Self-Evaluation
More Info: Extended
Table
of Contents and Preface PDF Glossary
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