Hmm, have just finished reading Dr Van Tharp's book Trade your way to financial freedom. I have stopped trading completely to read it and it has changed my whole attitude. I notice hardly any posts on how to preserve your capital, probably because as the book says, people find this subject boring! They would rather attend a seminar on entry point and how to make billions than learn the basics of risk, money management and exits which turn out to be far more important. After reading his book, which is a revelation, I feel far more confident to start to put together a proper system to trade, it may take time but I now feel on the right track. I would say find the time to read this book if you haven't, it is a valuable tool.
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TraderPattern
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I agree with both of you. Tharp makes sense, which is an exception to most of the crap out there.
I have no time for Van Tharp as such - he is an academic, not a trader. However, money management is critical to trading. Understanding how much physical cash you are prepared to lose on any given trade and your exit point, define your entry point and volume traded.
Most people think the other way around - which was OK in a raging bull market but instant financial loss in the current markets.
5 types of trades:
1. Big win
2. Small win
3. Flat
4. Small loss
5. Big loss
If you can eradicate 5 and have a mix of 1-4 you should make money.
Most people think the other way around - which was OK in a raging bull market but instant financial loss in the current markets.
5 types of trades:
1. Big win
2. Small win
3. Flat
4. Small loss
5. Big loss
If you can eradicate 5 and have a mix of 1-4 you should make money.
cassiopeia
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Essentially trade type 2 cancels out 4 and 3 is neutral so the net money is made on 1s, the big wins. Hence that old chestnut, run wins cut losses.
However, greed and fear 😕 causes novice traders to cut their potential big wins too early so there are no 1s. Worse still there is a temptation to run losses 😱 in the hope the market will bounce back. They have 'predicted' the market and are waiting to be proved correct, sometimes it does bounce but they will get their share of 5s, result overall loss. 🙁
However, greed and fear 😕 causes novice traders to cut their potential big wins too early so there are no 1s. Worse still there is a temptation to run losses 😱 in the hope the market will bounce back. They have 'predicted' the market and are waiting to be proved correct, sometimes it does bounce but they will get their share of 5s, result overall loss. 🙁
So,
psychology or whatever (I like chestnuts, I must admit) entry/exit timing makes the difference, and of the two I figure exit is harder - so has anyone here found a really sensible, well thought out book covering the money management? Just interested, my limited experience is that there's a tendency to turn evangelical, or to treat it as being evidence for some kind of journey to self awareness, when my brain says it ought to be two or three simple rules.
For example, trail at 10%, or exit on a 37.5% drop from the peak, or sell 50% at a retracement of 20%, run the rest unless 50 is hit... or something you can measure and apply rigorously. I consider this essential myself, there's no point checking the stats of a trading system then checking your biorythms for whether it's time to sell or not 🙂
psychology or whatever (I like chestnuts, I must admit) entry/exit timing makes the difference, and of the two I figure exit is harder - so has anyone here found a really sensible, well thought out book covering the money management? Just interested, my limited experience is that there's a tendency to turn evangelical, or to treat it as being evidence for some kind of journey to self awareness, when my brain says it ought to be two or three simple rules.
For example, trail at 10%, or exit on a 37.5% drop from the peak, or sell 50% at a retracement of 20%, run the rest unless 50 is hit... or something you can measure and apply rigorously. I consider this essential myself, there's no point checking the stats of a trading system then checking your biorythms for whether it's time to sell or not 🙂
Dave,
It is something that is going to be very trade dependant though isn't it. Things I like and want to incorporate into my system:
1. A basic stop for if the trade goes wrong that gives me a low single digit percentage loss (will be a bit high at first (4-5%) as I am starting small, trading infrequently and only using money I can lose, if I start doing size I will probably cut to 1-2%).
2. A short term target that has a fairly high percentage where half the position gets cut and hopeully the stop can be moved up (so as to keep a psychologically beneficial check on the losses both in number and size).
3. A longer term target which backtesting suggests gives the best pound for pound results (but probably a worse percentage hence the desire to cut half before in return for better drawdowns and more wins).
wysi
It is something that is going to be very trade dependant though isn't it. Things I like and want to incorporate into my system:
1. A basic stop for if the trade goes wrong that gives me a low single digit percentage loss (will be a bit high at first (4-5%) as I am starting small, trading infrequently and only using money I can lose, if I start doing size I will probably cut to 1-2%).
2. A short term target that has a fairly high percentage where half the position gets cut and hopeully the stop can be moved up (so as to keep a psychologically beneficial check on the losses both in number and size).
3. A longer term target which backtesting suggests gives the best pound for pound results (but probably a worse percentage hence the desire to cut half before in return for better drawdowns and more wins).
wysi
Ooh seems I have generated some negative emotions by starting this thread. It also appears that some of you have never bothered to read Van Tharp, either that or you have completely missed the point of position sizing as he likes to call it. Makes perfect sense to me, clearly explained to me what I needed to alter to be a better trader. Have a bit of patience with the mathematics and all is clear.
Books to read
Hi Helenqu thank you for your support amongst these 'heathens' perhaps you would be kind enough to let me know the other one or two books in your 'must have' list, as I would like to read them if I have not already. I am always willing to learn a bit more.
Helenqu said:Hi twiglet,
I agree with you it's one of the two or three trading books that I consider "Must Reads".
Hi Helenqu thank you for your support amongst these 'heathens' perhaps you would be kind enough to let me know the other one or two books in your 'must have' list, as I would like to read them if I have not already. I am always willing to learn a bit more.
Hi Twiglet,
Well ........couldn't reduce it more 🙂
JJ Murphy - Technical Analysis of the Financial Markets
Steve Nison - Candlestick charting explained.
Alan Farley - Master Swing Trader
Mark Douglas - Trading the Zone
I think those cover all the most important areas for me.
Well ........couldn't reduce it more 🙂
JJ Murphy - Technical Analysis of the Financial Markets
Steve Nison - Candlestick charting explained.
Alan Farley - Master Swing Trader
Mark Douglas - Trading the Zone
I think those cover all the most important areas for me.
Ooooh Heathens is it!
Oh, okay, just looked it up... <g>
I'm not against Van Tharp, what I'm saying is not that I'm after a 'sell at X%' (wysinawyg post) but rather than discussing the psychology of trading, which many do, I'd like to see a mathematical treatment of risk management that a simple chap like me can follow - wysin (etc) yes, your trade will affect it - I buy/short shares and you are either trading a leveraged product or very confident for example <g> The ideal book would say 'here's the stats, here are a bunch of ideas to mix and match, with an indication of situation they are suited to'.
No offence to the psych lot, of which there seem to be plenty, but I often seem to end up translating this 'know yourself' stuff into 'why did you feel compelled to exceed your stoploss - was it because you didn't have a pedal car as a child?' I don't want analysis (err, well, maybe I need it, but that's different) but I really WOULD like a rigorous scientific approach to this that cut through all the waffle.
Dave
Oh, okay, just looked it up... <g>
I'm not against Van Tharp, what I'm saying is not that I'm after a 'sell at X%' (wysinawyg post) but rather than discussing the psychology of trading, which many do, I'd like to see a mathematical treatment of risk management that a simple chap like me can follow - wysin (etc) yes, your trade will affect it - I buy/short shares and you are either trading a leveraged product or very confident for example <g> The ideal book would say 'here's the stats, here are a bunch of ideas to mix and match, with an indication of situation they are suited to'.
No offence to the psych lot, of which there seem to be plenty, but I often seem to end up translating this 'know yourself' stuff into 'why did you feel compelled to exceed your stoploss - was it because you didn't have a pedal car as a child?' I don't want analysis (err, well, maybe I need it, but that's different) but I really WOULD like a rigorous scientific approach to this that cut through all the waffle.
Dave
Sorry not to have replied before, Dave, but I have been burning the midnight oil putting together my winning system since reading said book, he, he, he! Seriously though I think you have missed my point, have you actually read this book? Forget mind stuff, it is the position sizing he goes into, he has tested it and it makes sense that it works, and he gives basic ideas to put together a system, and I am going to research it further. It showed me what I did wrong, after doing quite well in my first 4 months spreadbetting I was up 11% on my capital, then gave it back in 1 bet after trying to be too clever and changing my way of trading because of greed and impatience. Working out exit points carefully before rushing in and only risking a certain % of capital each time must help the odds in your direction. If I come up with the goods after hard work I will let you know in the distant future! Happy trading all.
DaveJB said:Ooooh Heathens is it!
Hehehe, remember we let them build a wall to stop the sassenachs treading on the heather 😎
The only 'personal' thing about position sizing is knowing how much cash you are prepared to blow if things get really bad (emergency stop).
Say you had £10,000 (obviously petty cash to you, Dave)
You decide that you are prepared to place a maximum of £2500 per position and were prepared to loses a maximum of £250 against your '****, get me outta here' position - as opposed to a more gentlemanly scramble for the door if things just don't look right. So, you are prepared to hold 25% of total capital in any one position and prepared to risk 2.5% at any one time.
For arguments sake consider the following targeted trade:
Trading at 105 having just broken a double bottom at 100 from 70, giving you a target of 130. You note the major support at 85 and a reaction low at 80.
Your initial plan for the trade is to buy at 105 with a controlled exit if the price closes below 85 and an emergency exit at 79. Target 130.
The maths:
The total travel you are prepared to put up with is 105-79=29 points. The maximum cash you are prepared to lose is £250, less dealing costs (for arguments sake £15). So the maximum amount of shares you can buy against your maximum pain is (250-15)/0.29 = 810 shares.
Buying 810 shares at the current price would cost £850.5 - well within your maximum of £2500 per position.
Your targeted exit is 130 so your profit should it be hit is 25 per share - £202.5 - less the pleasure - £187.50.
As this stands some may take the deal, others not as the risk/reward ratio is less than 1:1 - you are risking £250 to make £187.50 - again we are back to personal choice.
As the trade progresses - assuming it goes up! The stops can be moved accordingly - say the price gets to 115, some may decide to lift the initial stop to 100 and the emergency stop to 90. If you are wanting to live with purely % stops, then just alter the figures accordingly.
That just saved you the cost of a book 😉
Of course Mr Van Tharp is famous for his position sizing, which is why he gave all his pension money to one guy - who then defrauded him of the lot. (allegedly/apparently etc...)
Hi Sandy,
£10k, crikey, I'd be able to put a brand new door on the hovel for that, AND have enough left over for the hovel...
I haven't actually called Mr Tharp daft or anything here, I was just wondering if anyone had seen a rigorous investigation anywhere - Van Tharp might well improve on sliced bread. Position size etc I was okay with - but it was a nice example and very clear, so thanks and I suspect others will apreciate it.
I'm more looking at the variety of exit tactics used, and wondering if anybody ever tested whether a trailing stop really is better than exiting on hitting resistance or a retracement, and so on. I've been looking into a variety myself, hoping to examine rather more soon, and wondered if I was following in better known footsteps.
Dave
£10k, crikey, I'd be able to put a brand new door on the hovel for that, AND have enough left over for the hovel...
I haven't actually called Mr Tharp daft or anything here, I was just wondering if anyone had seen a rigorous investigation anywhere - Van Tharp might well improve on sliced bread. Position size etc I was okay with - but it was a nice example and very clear, so thanks and I suspect others will apreciate it.
I'm more looking at the variety of exit tactics used, and wondering if anybody ever tested whether a trailing stop really is better than exiting on hitting resistance or a retracement, and so on. I've been looking into a variety myself, hoping to examine rather more soon, and wondered if I was following in better known footsteps.
Dave
kinglatfan
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I spent half of my Christmas reading Van Tharp`s Financial Freedom Through Electronic Day Trading ( co written with Brian June ).
I found it an excellent read. I wonder how many out there have actually taken the advice to prepare a written business plan. I am presently on my third draft and I can honestly say it has been a very enlightening and at times humbling experience.
I normally pour scorn on such business consultancy clap trap but treating your trading as your own sole proprietor business is extremely revealing (especially when you return with a SWOT analysis for each sub heading of the plan)
For example I have had real fun and games simply deciding what computer hardware to use. 56k modem simply not good enough. 256k RAM ok but 512k preferrable. Windows XP Professional and not Home Office virtually essential. In my cash flow projections hardware cost to be written off over two financial years.
My disaster contingency plans are now very much under the spotlight . Simply limiting yourself to a brokerage firm with a telephone back up is not enough. Turned the computer on the other day there was a complete outage from my ISP and for three hours of a trading day I was completely impotent. Am now considering upping my ISP account from home to business use to get greater connectivity.
I know my maximum exposure in any one day`s trading and I have my own day trading "three strikes and you are out" policy. Last week in accordance with my plan I gave up day trading the Ftse.
My message is simply embrace everything VT says about written business plans. Go beyond basic position sizing. Constantly revisit the plan. Even have monthly review meetings with yourself (with real minutes).
Keeping everything in your head is just not good enough. I feel that I have grown as a trader from putting myself through these written exercises. I can now trade virtually without any funny feelings in the bottom of my stomach. I only tade when I am happy with my own planning and know exactly what i will do if the market goes with me or against me.
I have promised myself a copy of VT`s original book but will not get it until i am satisfied i have learnt everything i can from Electronic Day Trading.
Happy reading.
Kinglatfan
I found it an excellent read. I wonder how many out there have actually taken the advice to prepare a written business plan. I am presently on my third draft and I can honestly say it has been a very enlightening and at times humbling experience.
I normally pour scorn on such business consultancy clap trap but treating your trading as your own sole proprietor business is extremely revealing (especially when you return with a SWOT analysis for each sub heading of the plan)
For example I have had real fun and games simply deciding what computer hardware to use. 56k modem simply not good enough. 256k RAM ok but 512k preferrable. Windows XP Professional and not Home Office virtually essential. In my cash flow projections hardware cost to be written off over two financial years.
My disaster contingency plans are now very much under the spotlight . Simply limiting yourself to a brokerage firm with a telephone back up is not enough. Turned the computer on the other day there was a complete outage from my ISP and for three hours of a trading day I was completely impotent. Am now considering upping my ISP account from home to business use to get greater connectivity.
I know my maximum exposure in any one day`s trading and I have my own day trading "three strikes and you are out" policy. Last week in accordance with my plan I gave up day trading the Ftse.
My message is simply embrace everything VT says about written business plans. Go beyond basic position sizing. Constantly revisit the plan. Even have monthly review meetings with yourself (with real minutes).
Keeping everything in your head is just not good enough. I feel that I have grown as a trader from putting myself through these written exercises. I can now trade virtually without any funny feelings in the bottom of my stomach. I only tade when I am happy with my own planning and know exactly what i will do if the market goes with me or against me.
I have promised myself a copy of VT`s original book but will not get it until i am satisfied i have learnt everything i can from Electronic Day Trading.
Happy reading.
Kinglatfan
cassiopeia
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Here is a link to some pages on money management just in case anyone hasn't seen this site before.
http://www.tsresearchgroup.com/index.php?lang=en&page=public
It's a bit over-theoretical in parts and I doubt if it is necessary to go into this much detail. However, there are some fascinating reports of professional people unable to make money out of trading games with a positive outcome through lack of a viable money management strategy.
ie. 95% of doctors lost money playing a game with a positive expectation! In an analogous game over a half of highly professional traders lost!
It seems our psychology forces us to do the opposite of what we should be doing, it as if they used strategies which were actually effective at losing, rather than neutral! (Perhaps they should try the suicide trading game)
Hence combating this trait goes hand in hand with money management. It isn't that one is more important than the other, but they are two parts to a machine which simply doesn't work without the other bit.
http://www.tsresearchgroup.com/index.php?lang=en&page=public
It's a bit over-theoretical in parts and I doubt if it is necessary to go into this much detail. However, there are some fascinating reports of professional people unable to make money out of trading games with a positive outcome through lack of a viable money management strategy.
ie. 95% of doctors lost money playing a game with a positive expectation! In an analogous game over a half of highly professional traders lost!
It seems our psychology forces us to do the opposite of what we should be doing, it as if they used strategies which were actually effective at losing, rather than neutral! (Perhaps they should try the suicide trading game)
Hence combating this trait goes hand in hand with money management. It isn't that one is more important than the other, but they are two parts to a machine which simply doesn't work without the other bit.
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So C. the point is that you should have your rules in place and action them... to my simple mind it seems that you can avoid psychological problems if you set rules and follow them. Easy to say, of course... but equally sensible in my view is to set the rules first, and worry if you can follow them later. Psychology forces us to do nothing, we allow our non-Vulcan halves to screw the plan up sometimes <g>
Kinglatfan - I understand there's a book on the way that goes quite heavily into this 'what do I need, what datafeeds do I want etc' stuff, isn't there Helen? 😉
Dave
Kinglatfan - I understand there's a book on the way that goes quite heavily into this 'what do I need, what datafeeds do I want etc' stuff, isn't there Helen? 😉
Dave
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