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

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. The Definitive Guide to Position Sizing is not an exception — you will learn 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 this book is very expensive. If possible, it is probably best to borrow it from a friend for some time before you decide whether you want to spend so much money on this book.

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 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 we have already talked about the advantages of this Definitive Guide in the beginning of this review, we will reiterate them below:

  • 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 (8 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 the 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 a 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 proposed methods.
  • The key software piece, called Know Your System, 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, the 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 update to your trading system requires some changes to your position sizing algorithms.

If you have any questions, comments, or opinion about the Definitive Guide to Position Sizing by Van K. Tharp, you can discuss this book on our Forex forum.