My guest today is Van Tharp. He runs the Van Tharp Institute and is the author of four acclaimed books published by McGraw Hill: Super Trader, Trade Your Way to Financial Freedom, Safe Strategies for Financial Freedom, and Financial Freedom Through Electronic Day Trading. His new book is called Trading Beyond the Matrix. He was also featured in Jack Schwager’s Market Wizard’s: Interviews with Great Traders. Van Tharp received his Ph.D. in psychology, is a certified Master Practitioner of Neuro Linguistic Programming (NLP), a Certified Master Time Line Therapist, a certified Modeler of NLP, and an Assistant Trainer of NLP.
The topic is his book Trading Beyond the Matrix: The Red Pill for Traders and Investors.
In this episode of Trend Following Radio we discuss:
Mr. Covel. First, thank you for a great job preaching not only trend following but the importance of a systematic approach to trading. Your web site is something I have come across recently, and I feel I have found a gem, because it is very difficult to find good relevant technical trading information. On slow trading days I have some great interview to look forward to. I use a volatility based trading strategy on the commodities I trade, with a Secure F (trailing) stop and proper position sizing. The last being the most important risk- and money management tool. Being from the outskirts of Europe, I am probably one of very few Norwegian followers, but I stick my head out with a suggestion and a question. Linda Raschke had a presentation at the Society of Technical Analysts (STA) in London UK, recently. Being one of very few women in the industry, she has an impressive track record and very interesting to listen to. She would be a good subject for an interview. My recent focus, has been scanning techniques for individual stocks or commodities – basically getting rid of non performing outliers and keep the “asymmetric positive skewed trades/stocks”. Is this a topic that has been explored in one or more of your interviews or is there other sources that you would recommend? Thanks again for an excellent site and service you do to the trading community. Best regards, [name], MSTA
Thanks for the nice words.
I do not have any leads on where you can go for more on portfolio selection. Most information I have, that has been across my desk, I share with clients via www.trendfollowing.com. It is a subject that is much work, but with big potential results.
I listened to your recent podcast with Jason Russell. The part concerning the importance of money management was interesting. My question: what is meant by money management? It seems to be a term that everyone uses but never really defines and it’s always good, right, just and American. Any trade you do that reduces your risk and volatility is good? And, the big question: when do money management trades become discretionary trades that are used in place of following the system? Back in the early ’90s when I sat in front of my CQG and got spooked by volatility I would override my system exits and reduce my positions only to have to buy them back a few days later. I correctly called that discretion and a lack of discipline – a trader must follow the system and enter and exit only when the system rules dictate it. Now, all of these ideas can be programmed and can be called “money management” when, in my opinion, they are little more than systematized discretion. Is it no less discretion and panic driven when the computer is telling you to do it? So many of the trades are not part of the system – entry, exit, stop loss – that produced the 2000 trade sample size that makes one feel that should rely on a trend following system. What’s the difference between a necessary sample size and “it’s worked in the past?” A lot. CTAs need to face this issue.
Perhaps the greatest secret to top trading and investing success is appropriate money management. I call it a ‘secret’ because few people seem to understand it, including many people who•ve written books on the topic. Some people call it risk control, others call it I diversification, and still others call it how to ‘wisely’ invest your money. However, the money management that is the key to top trading and investing simply refers to the algorithm that tells you ‘how much’ with respect to any particular position in the market.
John was a little shell-shocked over what had happened in the market over the last three days — he’d lost 70% of his account value. He was shaken, but still convinced that he could make the money back! After all, he had been up almost 200% before the market withered him down, He still had $4,500 left in his account. What advice would you give John? Your advice should be, “get out of the market immediately. You don’t have enough money to trade speculatively.” However, the average person is usually trying to make a big killing in the market, thinking that he or she can turn a $5,000 to $10,000 account into a million dollars in less than a year. While this sort of feat is possible, the chances of ruin for anyone who attempts it is almost certain.
I have been helping clients with these very issues in my trading courses for over a decade.
Money management in the context of trading refers to what a gambler might call ‘bet sizing’. It is how many contracts to trade on a certain strategy, given a certain bankroll. In my experience with retail investors, the number of contracts to trade is normally an arbitrary consideration. One contract, five contracts, ten contracts – whatever you can afford. I have known traders who spent countless hours studying Gann, or testing indicators, or drawing little lines all over their little charts. But when it came to placing the bet, there appeared to be no consideration to the position size. Someone even said to me recently, “It doesn’t matter how much you bet as long as it’s a good trade.” We will use a really simple example to explain why such thinking is incorrect.