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 fail to realize that position sizing strategies are the key to getting what they really want.

When you have a great trading system, it is certainly easier to meet your system objectives through your position sizing method; however, you still have a chance to meet your objectives and profit with an average system if you understand how to position size properly. Yes, your position sizing strategy is that important.

For many years Dr. Tharp has specialized in helping traders and investors understand position sizing strategies and how to use them effectively. He originally published The Money Management Report as his guide to position sizing methods. 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.

When Dr. Tharp’s clients reviewed this book for publication, many found it so valuable that they did not want to return it once they finished their review.

In the Definitive Guide to Position Sizing you’ll discover the following:

• Position sizing biases to avoid.

• How to understand low-risk ideas.

• Systematic approaches to evaluate your system, plus how to rate your trading system for ultimate effectiveness.

• The six market types and how to determine in which markets your system will work.

• How to let your winners win big and cut your losses short.

• A visionary way to use position sizing strategies 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.

• Your position sizing questions answered.

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?

Trading is about entering and exiting positions with the idea of meeting your financial objectives of 1) capital preservation and 2) growth of some sort. Therefore, one of the most important questions you can ask yourself are “What are my trading objectives?” and “How can I use my position sizing method 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%).

Once you determine your objectives, 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 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 through your position sizing method. And in this book, you’ll learn my approach for figuring out the best system with my System Quality Number® concept. You’ll also learn how to optimize the probability of meeting your objectives through position sizing strategies. That, in a nutshell, is the real significance of this book.

In my opinion, position sizing strategies are the most significant part of any trading system. 

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 sizing™ strategies.

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 sizing™ strategies (what some call money management) are that portion of your trading system that tell 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.

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.

If you have faith in the long-term expectancy of your system and just follow the process, then everything will work out. But notice how the idea of a position sizing method is critical to a low-risk idea. If your position size is too big, you are guaranteed to eventually lose your funds.

Let me state that another way. If you risk too much money on one trade, you risk depleting your funds so much that you can no longer trade effectively. And if you trade with too little capital, almost any trade you make will be “too much.”

To make this book a true "definitive guide" to position sizing strategies, I ’ve attempted to cover every method I’ve ever seen, even ones I don’t like.

You will learn 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. However, because of the many position sizing biases, people often invent models that don't work. Therefore, to help you steer clear of the same mistakes, I devote an entire chapter to methods to avoid.

Furthermore, many of the methods presented have 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.

The Definitive Guide to Position Sizing is one of the most valuable, if not the most valuable, tool to add to your trading system. And at its reasonable cost, it should offer you a high ROI!

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?

• Ask yourself “Who am I?” and “What are my financial goals?”.

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 (SQN)® score, 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. You will know 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.

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, that’s all you'll need.

Add this Book to Your Arsenal Now

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 strategies. And if I must say so myself, I am considered the foremost expert on the subject.

— Van K. Tharp

• 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

To see an extended table of contents, click here.

“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.

“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

"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

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