Van Tharp's Definitive Guide To Position Sizing

by Van K. Tharp

How to Evaluate Your System and Use Position Sizing to Meet Your Objectives - Size *does* matter in the markets

Genres: Finance, Nonfiction, Economics

415 pages, Hardcover

First published January 1, 2008

Reviews

[Kiril · Rating 1 out of 5]

The whole R concept is flawed, and unfortunately lost me a lot of money to understand it.

Here's what I mean:
According to the system, if you put 2% of your portfolio at risk per position (say 1.000 USD per 50.000 USD portfolio). So you pick a position, that is not very volatile and decide your stop is 10% of the entry price. Numerically it looks like this:
- 50 usd entry price
- 10% stop = 5 usd = 1R

So based on the system you need to buy 1.000 : 5 = 200 shares, but the price is 50 USD, so you end up buying 10.000 USD in shares (or 20% of your portfolio is now in just 1 position). Very often unfortunately, if there's something negative that is due to come in the news about the company, the price slowly starts to fall, before the news comes public, due to the fact that there are always people that know it before you.
So you sit and wait, and your 50 USD price goes down and down to 46 USD, where it closes for the day. In the after hours the news breaks and your stock gaps 20% the next day. This is 9 USD more. Your stop is then worthless, because what happens often is that this is just a shake of the algoritmic trade, but your stop is executed at 37 USD. You lost 13 USD x 200 shares = 2.600 USD (2.6 R), which is way above your targets, and it is 5.2% of your portfolio. Do this a few times, and you need catch up 40-50% in returns, just to break even.

During my more than 10 years in the market, suffering from fraudulent accounting, bancruptcies etc., I've learned that 10% of your portfolio is the most you should put in 1 company, but if you base your position sizing based on the R methodology, you can easily go 20-25% of the portfolio in 1 position. Unless you invest in Berkshire, don't do this. This will save you a lot of potential headaches.

Edit: After reading about Richard Dennis and William Eckhard, from whom the concept comes, it was applied on Futures contracts, which have much less slippage than stocks. In his own words, Richard Dennis points that he would never trade stocks, because they are too volatile and erratic, i.e. hard to predict. So my point above holds true, that applying this concept to stocks will most probably loose you money, but if you are in the futures game, this is another story, that I have not explored yet.

[Javier Villar · Rating 5 out of 5]

The best trading book I know. This book is so good that cannot be stressed enough. The only downside is its concrete specificity. Those who don't need it will read it, while those who need it the most won't.

Although it's full of numbers and graphics, in reality the book is about objectives. The numbers are irrelevant, don't be overwhelmed by their seeming complexity. What do you want from your trading? This is the right tool.

[Chandru · Rating 5 out of 5]

There is no better book which tells you how you achieve your trading objectives in such detail.

[Alexander · Rating 3 out of 5]

Provides an approach to devising a position sizing algorithm based on the quality of your system. The most important part of your trading process. Being a 'definitive guide', it also consumes an inordinate number of pages explaining the attributes of shit position sizing models.

[Praveen Srinivasan · Rating 5 out of 5]

A must read for all traders.

[David Andrés · Rating 5 out of 5]

This is the best trading book ever written.

[สุทธิศักดิ์ ศรีหอม]

good way for tread