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Book Review: Definitive Guide to Position Sizing by Van K. Tharp

September 10, 2013

Definitive Guide to Position Sizing by Van K. TharpWhat is great about reading a book by Van K. Tharp is that you may expect to get a lot of useful ideas and guidelines for trading without reading anything at all about entry and exit signals, which usually take up a big part in trading books by other authors. Definitive Guide to Position Sizing is not an exception — you will almost everything about money management for whatever you are trading — be it futures, options, stocks or currencies, but nothing about how to enter positions for those assets. And according to Dr. Tharp, money management is the single most important factor in trader’s success.

Before reviewing the book, it must be told that, currently, it is not possible to buy it anywhere. I was able to borrow it from a friend for some limited time, but I could not find any online or offline shops that would sell Definitive Guide to Position Sizing. The official website shows the book to be out of stock. It was also quite pricey in the times when it had been available (about $200). My best guess for the reason of its unavailability is the fact that some chapters of the guide now look rather outdated, so Dr. Tharp is preparing a new edition to be released soon. This guess is partially confirmed by this news of April 2013. You can also download free table of contents and a preface the the book from the official website.

Here are some of the main theses expressed in Tharp’s book:

  • The purpose of position sizing is to help traders meet their objectives.
  • Few traders understand their objectives.
  • Few traders use consistent and safe position sizing methods.
  • Even fewer traders use position sizing methods that would allow them to reach their trading objectives.
  • There are many position sizing models — each with its own pros and cons.
  • There are three basic (with infinite modifications) models of trading capital allocation, making position sizing techniques even more diverse.
  • Proper testing, sampling, simulation and analysis are all crucial to the process of choosing your position sizing methods.
  • There are software solutions to help you to choose proper position sizing methods for your strategy.
  • You can build some of such software on your own (or with some help) without in-depth programming knowledge.

Although I have already talked about the advantages of this Definitive Guide in the beginning of this review, I will reiterate my opinion:

  • The author includes a lot of different position sizing models in this book, even those models that he personally dislikes, so you have a great choice of the existing solutions.
  • You will learn how to go from a plain journal of your trades to recalculating it using R-multiples, to finding R-expectancy, calculating your system’s SQN and to finding the position sizing method that best fits your system and your goals.
  • While they are somewhat outdated (6 years is too long in computer world), the book’s reviews on various software packages are very useful and can be helpful even outside of the guide’s main scope.
  • It is easy to find something you want to reread because the book is well-structured.

This is in no way a perfect book, so get yourself acquainted with its main disadvantages before you decide whether to buy it or not:

  • It is outdated. Some chapters (especially the one about trading software) are no longer valid in current market reality. You either have to wait for a new edition or learn to discern that outdated information for not to confuse yourself with it.
  • Even though Van K. Tharp does some great job at minimizing the math required to manage your money properly, you still have to understand some basic formulas and be arithmetically literate to work with the given methods.
  • The key software piece, called Know Your System and which is used throughout the book to simulate trading systems with different position sizing models, is not publicly available. So you can neither validate any of the given calculation results nor test your own systems the same way Dr. Tharp does.
  • It is a long and, at times repetitive, read.

Overall, Definitive Guide to Position Sizing is a must-read and must-have reference book for traders aiming to excel in their work. It is definitely a useful one-time read, but you will have to reread some of the chapters whenever the latest updates to your trading system require some changes to your position sizing algorithms.

If you have any questions, comments or opinions about Definitive Guide to Position Sizing by Van K. Tharp, please feel free to submit them using the commentary form below.

One Response to “Book Review: Definitive Guide to Position Sizing by Van K. Tharp”

  1. dhee

    nice review, here some link if someone want to “borrow” the book :)

    http://lib.freescienceengineering.org/view.php?id=770278

    Reply

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