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Strategies & Market Trends : The Thread Formerly Known as No Rest For The Wicked -- Ignore unavailable to you. Want to Upgrade?

To: Junkyardawg who wrote (8132)	1/18/1999 9:28:00 AM
From: backman	Respond to of 90042

Junkie: Hope your foot's getting better? how did you do that? RE: trading systems....not hunches Personal Best: What to Read Before You Set Off on Your Own By Desmond Macrae Special to TheStreet.com 1/17/99 12:15 AM ET Van K. Tharp, Trade Your Way to Financial Freedom McGraw-Hill, 1999. 343 pages. Before acting on a New Year's resolution to flee the rat race forever by setting up your own hedge fund, do yourself the biggest favor ever: Read, mark and inwardly digest Van K. Tharp's Trade Your Way to Financial Freedom. Tharp is no stranger to trading, as market aficionados who have read Jack Schwager's Market Wizards will recall. Tharp showed interest in the effects of stress on human performance while a graduate student at the University of Oklahoma. And after earning a Ph.D. there in 1975, he quickly focused his psychological research on winning in markets. By 1982, he had developed an Investment Psychology Inventory that he has since used to evaluate several thousand traders. Trade Your Way begins noting that most wannabe traders are looking for the Holy Grail -- a perfect system that has a 90% success rate, minuscule drawdowns and consistently high annual rates of return. And the book wastes no time in saying forget it. Tharp is quick to point out that in reality, good trading system success rates are anywhere between 38% and 50%. So what makes a trading system successful? Controlling risk, controlling the size of positions, taking losses, waiting for good opportunities and doing what others are afraid to do. In short, Tharp tells us, the Holy Grail is not a system. It is 100% personal psychology. Success comes in finding a trading system or methodology that is right for you. What makes this book truly worthwhile is that Tharp really does understand the mechanics of trading. Most traders spend virtually all of their energy looking for a good entry system. Tharp argues that entries are just 10% of a successful trading method. To prove it, he and trader Tom Basso concocted a simple, random-entry trading system, cited in Chapter 8, that worked with coin flips: We determined the volatility of the market by a 10-day exponential moving average of the average true range. Our initial stop was three times that volatility reading. Once entry occurred by a coin flip, the same three-times-volatility stop was trailed from the close. However, the stop could only move in our favor. Thus, the stop moved closer whenever the markets moved in our favor or whenever volatility shrank. We also used a 1% risk model for our position-sizing system. ... We ran it on 10 markets. And it was always, in each market, either long or short depending upon a coin flip. ... It made money 100% of the time when a simple 1% risk money management system was added. ... The system had a (trade success) reliability of 38%, which is about average for a trend-following system. If that alone isn't worth $29.95, read Chapters 9 and 10 on exits. People just seem to want to ignore exits -- perhaps because they cannot control the market on the exit. Yet for those who want control, exits do control two important variables -- whether or not you'll make a profit and how much profit you will make." Exits are one of two keys to developing a successful system. The other is position-sizing covered in Chapter 12, which is one of the most elegant summaries of the topic in trading literature. Does the book have faults? Other than a few bits of self-aggrandizement, no. But that is not to say the book leaves readers feeling gung-ho. On the contrary, one is left with a sense of deflation -- because Tharp drives home his main point so well. There is no Holy Grail system out there. Nobody is magically transformed into a trader. We take ourselves wherever we go, even into the trading arena. Each of us must find the trading system that best suits us, and this book tells us how to find it.