Trade Your Way to Financial Freedom – Van Tharp

Simply put, you can’t make money trading if you don’t control how much you lose on trades that don’t go your way. “Trade Your Way to Financial Freedom, published in 1998, is author Van K. Tharp’s generous contribution to the field of trading how-tos.

Trading that Fits

  • Not a one size fit all
  • Ask yourself: How much money do you have? Managing other people’s money? How much time do you have? How much money do you need?
  • Less money = can’t day trade because of brokage fees
  • No time = better off investing, not day trading

The Notion of R

  • R = the risk you predefine before entering the trade
  • Cut your losses and let your winners run
  • Idea of stop losses
  • Example: if price is currently at $1,500 and your stop loss is $1,400, your R is $100 ($1,500 – $1,400)
  • Return can be measured in R: if price increased from $1,500 to $2,000, the profit you made is $500 or 5R

Exiting Techniques

  • Trading is not a marriage
  • Profitable systems are built on large profits, but small frequent losses
  • 3 exiting techniques: 1) Percentage exits, 2) Time exits, 3) Volatility exits

Opportunity

  • Result that you can expect given a certain opportunity
  • Expectancy x Opportunity = Expectunity

Positioning Sizing

  • Most important part of the system
  • More you invest = more you return (and vice versa)
  • Put larger bets to opportunities with a greater expectancy