System Quality Number® (SQN®)

 

After a number of years researching position sizing™ strategies, Dr. Van Tharp developed a proprietary measure of the quality of a trading system that he calls the System Quality Number, or SQN.

 

The better the SQN score for a given system, the easier it will be to use position sizing™ strategies to meet your trading objectives!

VanSQN
System Quality Number® (SQN®)

After researching position sizing™ strategies for a number of years, Dr. Van Tharp developed a proprietary measure of the quality of a trading system that he calls the System Quality Number, or SQN.

 

SQN measures the relationship between the mean (expectancy) and the standard deviation of the R-multiple distribution generated by a trading system. It also makes an adjustment for the number of trades involved. Dr. Tharp has determined that the better the SQN, the easier it is to use various position sizing strategies to meet one’s objectives.

 

The calculation, use, and interpretation of the SQN are discussed extensively in Dr. Tharp’s book, The Definitive Guide to Position Sizing.

 

In addition, Dr. Tharp discovered that when he applied the SQN formula to the daily percent price change of a stock or an index, it proved to be an excellent measure of trendiness. Dr. Tharp now calculates a market SQN for the S&P 500 based on the daily changes in the S&P 500 for periods of 25 days to 200 days and publishes the results each month in his free newsletter, Tharp’s Thoughts. Dr. Tharp’s monthly Market Update includes a graphical representation of the market SQN for 100 days, which makes it easy to see how the market is performing. Dr. Tharp also uses a quantitative world model of the markets that shows the strongest and weakest regions, countries, sectors, and currencies using the universe of ETFs. Dr. Tharp’s multiple analytical perspectives provide readers with a holistic view of market conditions and help them understand how the market is likely to perform in the short term.

 

Minimum System Quality Number

 

The following is a question about SQN from one of our readers.

 

Q: Can you advise as to what the minimum SQN would need to be for a system to have a 90% chance of its return being twice as big as its drawdown over a 100-trade period? For example, a 10% chance of a 25R drawdown and a 90% chance of 50R profits over 100 trades. I can then use position sizing methods to get the results I'm after.

 

A: First, there is no minimum SQN to have a system return twice as much as its drawdown. You can do that with high SQN systems and acceptable SQN systems. "Returns twice as big as a drawdown" is an example of an objective and you achieve your objectives through position sizing, not through your trading system. Your trading system needs to have a positive expectancy, but it is the SQN that determines your potential effectiveness and efficiency in applying position sizing strategies to meet your specific objectives. For systems with higher SQNs, you will find your objectives easier to achieve, you will have more flexibility in choices, and you will be more likely to meet your objective through position sizing methods. To learn more, I would recommend reading the Definitive Guide to Position Sizing in which I provide a full explanation of the SQN and explain a multitude of position sizing strategies. A number of readers have told us that the book completely transformed their trading by changing how they thought about trading systems and position sizing strategies.

 

The best traders apply their deep understanding of position sizing methods to a good SQN system and combine that with the proper psychological mindset to make great returns in the market. You too can learn to do that with a strong commitment and the proper training. I wish you the best of luck.

The best place to learn more about this topic:

 

The Definitive Guide to Position Sizing™

 

position sizing

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 fail to understand that the key aspect is “how much” to invest in any position. Others work 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's certainly easier to meet your system objectives through your position sizing method, but you can still meet your objectives and profit with an average system if you understand how to properly position size. 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. His Definitive Guide to Position Sizing contains all of this knowledge!

 

Learn More.

Buy Now ($249)

 

The Rest of The Tharp Think Concepts:

 

Psychology of Trading

Perfectionism, gambling, unnecessary losses, not being able to pull the trigger….

These are just some of the issues that traders contend with in the markets every day. What causes us to think this way and how can we learn to become better and more profitable traders? ….read more

System Development

Everyone is looking for the Holy Grail in the markets. How do you find the ideal trading system, the stock that is going to take off or that one big winner with your name on it?

There are hundreds, if not thousands, of trading systems that work. But most people, after purchasing such a system, will not follow the system or trade it exactly as it was intended. Why not? …read more

Risk and R-Multiples

Risk to most people seems to be an indefinable fear-based term – it is often equated with the probability of losing, or others might think being involved in futures or options is “risky.” Van’s definition is quite different to what many people think …read more

Position Sizing™

Position sizing is the part of your trading system that tells you “how much.” How many shares or contracts should you take per trade? Poor position sizing is the reason behind almost every instance of account blowouts…read more

Expectancy

One of the real secrets of trading success is to think in terms of risk-to-reward ratios every time you take a trade. Ask yourself, before you take a trade, “What’s the risk on this trade? And is the potential reward worth the potential risk?” What can I expect my trading system to do for me in the long term? ….read more

Planning Business

The market does not owe you or anyone great riches. The market does, however, occasionally tease a large number of people with seemingly easy gains (during bubbles and other manias) only to take them away again. If you are serious about being a good trader, then you need to approach the practice of trading with the same level of rigor with which you would approach any high level endeavor …read more

If you are not already a subscriber, consider subscribing to Van Tharp's weekly email. Each week you will get informative articles, trading tips, and a monthly update on market-type conditions. Also, you'll get the most recent ideas from Van before anyone else! There is no charge and we do not share your information. Click here.

Back to the Top
919-466-0043
919-466-0408     [fax]
Toll Free:
800-385-IITM  or  800-385-4486
Van Tharp Institute
Van Tharp Institute
View Our Site Map
Register For Tharp's Free Newsletter
102-A Commonwealth Court
Cary, NC 27511 - USA
email: info@vantharp.com
  © 1996-2017 IITM, Inc or its affiliates. All Rights Reserved
Van Tharp, Van Tharp Institute, Van TharpeLearning, Position Sizing, and IITM are trademarks of IITM, Inc in the United States and elsewhere.
SQN is a federally registered trademark of IITM, Inc
Terms & Conditions - Privacy Policies