DEFINITIVE GUIDE TO POSITION SIZING REVIEW
“When you understand what’s involved in winning, as do professional gamblers, you’ll tend to bet more during a winning streak and less during a losing streak. However, the average person does exactly the opposite: he or she bets more after a series of losses and less after a series of wins.” – Van K. Tharp
Van Tharp is an American psychologist born in 1949. His all books are based on system development, position sizing, risk control, the psychology of trading and much more. According to him a successful trader is the one who expertise himself in money management. Doesn’t matter what are you trading into be it futures, options or stocks, you will know almost everything about money management. Dr. Tharp has been helping traders about positioning sizing strategies and how do you use them. The book includes position sizing strategies, position sizing models, objectives, quality of your trading system etc.
Before starting to trade, you must ask yourself one question.
What are my objectives of trading? Once you determine your objectives, you need to design a position sizing method to meet your objectives. According to Tharp, the key element of trading success is position sizing. And he says in the sub-title on the cover, “Size DOES matter in the markets.” For Tharp, the essential input for successful trading is not picking the right stock or market or finding the right trading system or having the right entry or exit point but having the right position-sizing model to fit your psychological makeup to achieve the objectives you think you want.
The author divides the book into four main parts – The first part deals with the golden rules of trading and examining the quality of your trading system. The second includes position-sizing basics and the third section includes how to use it to meet your objectives. The last section talks about analysis of position-sizing software and provides answers to trading systems, account size, math, etc.
The author states the 10 golden rules of trading which every trader should keep in mind:
1. Never open a position in the market without knowing your initial risk
2.Next, you must define your profit and loss in your trades as some multiple of your initial risk.
3.Make sure you limit your losses to 1R or less.
4. Make sure that your profits, on the average are bigger than 1R.
5.Understand your trading system in terms of the mean (what’s the average R) and the standard deviation
6.You must have some core objectives for your trading
7.In order to meet your objectives, you must practice proper position sizing.
8.Simulate your system to determine exactly what percentage you can risk.
9.To know the big picture (what factors are influencing the market); have a way to measure these factors; and have a business plan that helps you capitalize on these factors
10. To follow the ten tasks of trading and to master yourself.
Next, the author throws light on the quality of your trading system. Generally the quality of your trading system is evaluated by its expectancy. The expectancy of your system is the average of the R-multiples (both positive and negative) of your system. It tells you what you can expect to achieve in terms of R, on average, over many trades. Once you have the information of the expectancy of your system as an R-multiple, the standard deviation of your system and the number of trades it generates, then you are all set to evaluate how your trading system is.
Now coming to the part of position sizing basics.
How many shares you should take per trade? You would only come to know once you are aware of position sizing. You need to employ effective position sizing strategies if you want to trade and stay in the markets over the long term.
To meet your objectives you should have the following:
- Understand position sizing.
- Decent trading system.
- The right position sizing strategy.
Van says there are different position sizing models with its pros and cons and there are three basic models of trading capital allocation. Proper testing, sampling, simulation and analysis are all crucial to the process of choosing your position sizing methods. There are also software solutions to help you to choose proper position sizing methods for your strategy.
To sum up, Definite guide to position sizing is a must read for all the traders who aim to excel in their field. All of your position sizing questions will be answered in this book. The position sizing techniques which a trader applies in actual trading are all available in the book. It is really a thrilling book when it comes to the calculation of position sizing. Definite guide to position sizing is truly a bible for people who are interested in trading.