Trade Your Way To Financial Freedom

TRADE YOUR WAY TO FINANCIAL FREEDOM VAN K. THARP Foreword by David Mob& Sr. Acknowledgements xvii xiii 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 Modeling Market Geniuses 11 Summary 14 9 chapter 2 Judgmental Biases: Why Mastering the Markets Is So Difficult for Most People 17 Biases That Affect Trading System Development 2 0 Biases That Affect How You Test Trading Systems 3 5 Biases That Affect How You Trade Your System 3 8 Summary 41 Chapter 3 __- Setting Your Objectives 45 Designing Objectives Is a Major Part of Your System Work 47 Tom Basso on Objectives Setting Your Own Objectives 48 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 Summary of Key Points 126 120 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 hnmary of Setups 196 184 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 2 2 9 Chapter 9 Know When to Fold ‘Em: How to Protect Your Capital 233 What Your Stop Does 2 3 5 Using a Stop That Makes Sense 2 4 3 Summary: Preserving Capital 248 Stops Used by Common Systems 249 Chapter 10 How to Take Profits 254 Purpose behind Profit-Taking Exits 2 5 5 Just Using Your Stop and a Profit Objective Simplicity and Multiple Exits 2 6 4 What to Avoid 265 Summary 266 Exits Used by Common Systems 266 263 Chauter 11 The Opportunity and Cost Factors 270 Several Approaches to Take 2 7 0 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 2 8 6 Model 2: Equal Value Units for Stock Traders 2 9 0 Model 3: The Percent Risk Model 2 9 2 Model 4: The Percent Volatility Model 2 9 6 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 De