Table Of Content

TRADE YOUR WAY TO FINANCIAL FREEDOM VAN K.THARP Foreword by David Mob& Sr. xiii Acknowledgements xvii Preface xxi PART ONE THE MOST IMPORTANT FACTOR IN YOUR SUCCESS: YOU! The Legend of the Holy Grail 3 The Holy Grail Metaphor 6 What’s Really Important to Trading 9 Modeling Market Geniuses 11 Summary 14 chapter 2 Judgmental Biases: Why Mastering the Markets Is So Difficult for Most People 17 Biases That Affect Trading System Development 20 Biases That Affect How You Test Trading Systems 35 Biases That Affect How You Trade Your System 38 Summary 41 Chapter 3 __- Setting Your Objectives 45 Designing Objectives Is a Major Part of Your System Work 47 Tom Basso on Objectives 48 Setting Your Own Objectives 57 PART TWO: CONCEPTUALIZATION OF YOUR SYSTEM Chapter 4 Steps to Developing a System 61 1. Take an Inventory 61 2. Develop an Open Mind and Gather Market Information 63 3. Determine Your Objectives 66 4. Determine Your Time Frame for Trading 66 5. Determine the Best Historical Moves in That Time Frame and Notice What Those Moves Have in Common 69 6. What’s the Concept behind Those Moves and How Can You Objectively Measure Your Concept? 70 7. Add Your Stops and Transaction Costs 72 8. Add Your Profit-Exits and Determine Your Expectancy 73 9. Look for Huge Reward Trades 74 10. Optimize with Position Sizing 76 11. Determine How You Can Improve Your System 77 12. Worst-Case Scenari-Mental Planning 78 Chapter 5 Selecting a Concept That Works 81 Trend Following 82 Fundamental Analysis 86 Seasonal Tendencies 91 Spreading 99 Arbitrage 103 Neural Networks 110 There’s am Order to the Universe 120 Summary of Key Points 126 Chapter 6 Understanding Expectancy and Other Keys to Trading Success 130 The Six Keys to Investment Success 130 The Snow Fight Metaphor 133 Looking at Expectancy under a Magnifying Glass 137 Expectancy and R Multiples 143 Expectancy Applied to the Market 148 Using Expectancy to Evaluate Different Systems 152 A Review of How to Use Expectancy 158 PART THREE: UNDERSTANDING THE KEY PARTS OF YOUR SYSTEM Chapter 7 __- Using Setups 165 The Four Phases of Entry 167 Setups for Stalking the Market 172 Filters versus Setups 179 Setups Used by Well-Known Systems 184 hnmary of Setups 196 Chapter 8 Entry or Market Timing 198 Trying to Beat Random Entry 200 Common Entry Techniques 202 Designing Your Own Entry Signal 220 An Evaluation of Entry Used in Some Common Systems 224 Sunmary 229 Chapter 9 Know When to Fold ‘Em: How to Protect Your Capital 233 What Your Stop Does 235 Using a Stop That Makes Sense 243 Summary: Preserving Capital 248 Stops Used by Common Systems 249 Chapter 10 How to Take Profits 254 Purpose behind Profit-Taking Exits 255 Just Using Your Stop and a Profit Objective 263 Simplicity and Multiple Exits 264 What to Avoid 265 Summary 266 Exits Used by Common Systems 266 Chauter 11 The Opportunity and Cost Factors 270 Several Approaches to Take 270 Factoring in Opportunity 273 The Cost of Trading Opportunity 275 Summary 278 Chapter 12 What Do You Mean Position Sizing? I Only Have $10,000 in My Account! 280 Position-Sizing Strategies 284 Model 1: One Unit per Fixed Amount of Money 286 Model 2: Equal Value Units for Stock Traders 290 Model 3: The Percent Risk Model 292 Model 4: The Percent Volatility Model 296 The Models Summarized 298 Examples of the Impact of Position Sizing 300 Summary 306 Position Sizing Used by Other Systems 307 chapter 13 Conclusion! 314 APPENDICES Appendix I: Recommended Readings 325 Appendix II: Key Words Defined 328 Index 337 F O R E W O R D The title of Chapter 1 of this book is: “The Legend of the Holy Grail.” “The Holy Grail” is a phrase you often hear in some trading and investment circles. Most people believe that it refers to some mysterious trading system out there that is going to make them millions with little or no risk. It’s not that at all. But before I tell you about the Holy Grail, let me tell you a little about who I am and why Dr. Tharp asked me to write the Foreword to his book. I started managing other peoples’ money in 1992 and in just 5 years those assets have grown from about $3 million to about $50 million. That has happened partially because my hedge fund has compounded by better than 40 percent per year, net to investors, over the last 5 years. We were up 61 percent net to investors in 1996 and 53 percent net to investors in 1997. Since I met Dr. Tharp, my net worth has grown many times over, and I do believe that it comes from adopting many of the Holy Grail secrets contained in this book. I think that Dr. Tharp understands and teaches those,secrets better than anyone else I have ever met. Let me tell you why: When I was a young boy, I remember dreaming that I would become a millionaire by the time I reached 25 years of age. I reached that goal through real estate development in 1981, but only briefly and then it all came tumbling down around me. I was devastated, but I picked myself up and started again. My next attempt at real success was in the investment field. Yet I almost had a similar type of crash in my fortunes. I remember the day clearly. I was sitting in my office in Naples, Florida, in late 1992. It was a typical south Florida autumn day. I was watching the palm trees sway in the breeze outside my window, wondering why my trading had become more difficult since I began managing money for others. I wasn’t about to crash at the xiii time, but I had the same sort of feeling in my gut that I had had before my first crash. My interests in investing began in 1967, when I would make regular trips to the local public library to devour every book I could find on investing. I’d also study biographies of successful busi- nesspeople. I certainly wish I had been aware of Dr. Tharp’s modeling work back then, because it would have saved me so much time and so many heartaches. In 1969, at the age of 13, I talked my reluctant parents into opening a brokerage account for me at the local Merrill Lynch office in Toledo, Ohio. The conditions of the account: I had to fund the account myself from lawn mowing and odd jobs, and every trade had to be confirmed by my mother since it was a Unified Gift to Minors Act account. Once open, my father would occasionally give me a little money to put into the account, as long as I didn’t tell my mom. As I looked out the window, I realized how fortunate I was. I now lived in a tropical climate. I had probably again achieved my childhood dream of success doing something I loved to do. Twenty-two years had gone by since I made my first trade; only now I was doing it successfully. Yet, somehow, I was now begin- ning to find trading difficult. That nervous feeling helped me open up to whole new levels of success-way beyond those of my first childhood dreams. That feeling was the key to what was going on, and the key to my success, but I didn’t know what that key was- not yet at least. A few days later, I notice a magazine ad about Dr. Van Tharp. I had read about him in Jack Schwager’s book Market Wizards, so I decided to give him a call. That call was the start of a close profes- sional and personal relationship that would end up affecting my life, my family, and even my business interests and associates. I already understood many of the secrets contained in this book. However, through my association with Dr. Tharp, I now understood the ultimate aspect of the Holy Grail secret-the part that Dr. Tharp so eloquently describes in Chapter 1. The Holy Grail is not what you would expect it to be. It is something that is different for each person. It’s a hidden secret that you have to discover for ydurself, but it is obvious ~once it is realized. I must admit that when I first learned what Dr. Tharp was going to write about in this book, I was concerned. He was giving away too many of our secrets! However, I’m not concerned any more because I now realize that those secrets are so personal. My Holy Grail is not the same as your Holy Grail. In addition, many of you will just let those secrets pass by you, so I urge you to be care- ful. Read this book carefully. Indeed, pay particular attention to: . Understanding the psychological biases against good system development (Chapter 2) . Setting objectives for what you are trying to accomplish (Chapter 3) . Understanding expectancy and R multiples (Chapters 6 through 10) . Realizing that the golden rule of trading is created by how you get out of the markets, not by picking some magic stock (Chapters 9 and 10) . Understanding the importance of position sizing (Chapter 12) And pay special attention to the meaning of the Holy Grail as described in Chapter 1. Until you’ve mastered yourself, you’ll always struggle with the market. I wish all of you could integrate that meaning into your being and then truly apply it to your trading. The material that Dr. Tharp presents in this book, in his Market Mastery newsletter, in his home-study courses, and in his seminars will change your life if you are open to them. I urge you to take the first step today and open yourself up to the material found in this book. Enjoy the journey It’s a great one! David Mobley, Sr. Naples, Florida February 2998