The Power of Position Sizing Strategies by Van Tharp

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How to Develop Powerful Position Sizing Strategies.

In the brand new home study, students will:

• Calculate your trading system’s System Quality Number score to measure its performance.
• Apply the SQN® score to determine which position sizing strategies will help you reach your objectives.
• Learn a simple process for developing a position sizing strategy that you can use for each one of your systems.
• Use a Monte Carlo simulator to see how different position sizing strategies affect your equity curve.
• Evaluate the effectiveness of a position sizing strategy by equity returns and drawdowns so you can reach your objectives.

Using your system’s simulated results and an Excel-based Monte Carlo simulator, you will be able to test several simple position sizing strategies for their effects on your equity curves.

To learn more about this home study workshop, check out our short 3-minute video featuring ^^

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All in the Position Sizing Strategy:

Several years ago at a Van Tharp Institute workshop in Sydney, one of the students talked about a recent experience.

He had been working some of his numbers one night when he had an epiphany –

 “. . . it was all in the position sizing strategy . . .”

He realized he could reach all of his financial goals by applying particular position sizing strategies to his current systems– and he started to cry. He explained that they weren’t tears of joy, they were tears of frustration. He shared how he had had the support of his wife for the previous eight years while he had worked very hard on improving his trading, that is, he had been trying to improve his few trading systems, but that effort had yielded little growth in his equity. Part of his frustration was realizing that effective position sizing strategies applied much earlier could have vaulted him a few years ahead of his retirement plans. We hope to save many other traders a few years and a few tears of frustration through this Elearning course.

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All of the Pieces, Except One…

Let’s say you have some objectives and you have some results from trading your systems. Let’s go so far as to say that in your trading business, you are rock solid in having excellent objectives and how to generate consistent results from your trading systems – but maybe you don’t really know how to make the critical connection between those two and “get the job done” and actually reach your trading objectives.

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How do you do that?

You do that through your position sizing strategies. If you don’t have a systematic way of knowing how much equity to risk on each trade in a way that has been optimized for meeting your specific objectives – then you are missing a crucial piece of knowledge or are not applying that knowledge effectively.

If you aren’t meeting your objectives, then understanding how to develop effective position sizing strategies and how to employ them to your trading systems would be enormously beneficial (slight understatement).

To help you figure out this issues, you have a few choices:

• You could follow some of the money management guidelines that have been circulating for years.
• Probably better than using nothing, but . . . you can do much better.
• You could try a bunch of different position sizing strategies and see what you get.
• This approach may take a long time and may end up being somewhat expensive in the end and, but if you need simplicity, it could be a good way to go.
• You could buy (or develop) some sophisticated software to run a lot of calculations for you.
• Great approach for a software engineer or a math minor . . . but not so much for the rest of us.
• You could learn a simple process from a trusted trading education company using probabilities and simulation to find simple strategies that could help you reach your objectives. (Hint – This one offers simplicity, time savings, and exceeding effectiveness!)

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Consider this question for a moment:

What are you doing in your trading? On a day-in-day-out basis, what are you doing exactly?

• Executing your trading systems?
• Focusing on making no mistakes?
• Watching the big picture?
• Monitoring the market type?
• Refining your system rules?
• Managing your psychology?

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Three Key Elements:

All of those tasks above are good tasks — and actually, all of those tasks are completely necessary for trading successfully. How well, though, would you say that activities list above helps you meet your objectives? You could be taking care of every one of those areas but not making the kinds of returns that will meet your objectives. You may be staying busy with a lot of trading activities, but you may be spinning your wheels in relation to making more money, to reaching retirement, to achieving financial freedom, or whatever else your trading objectives might include. Learn how to develop and employ effective position sizing strategies, each one tailored for each of your systems so you can have some confidence in reaching your objectives.

How do you craft customized position sizing strategies?

By focusing on three key elements and following a process to maximize your chances of reaching your objectives.

What are those three key elements to know about?

1. Your Trading Objectives.

•  Are they written down? Are they complete? Do they fit you? Do they drive everything you do in your trading business?

2. Your Trading System Performance.

• Do you have performance measurements by market type for each trading system? Have you selected your current systems through some set of defined criteria? Do you monitor your systems’ performance to ensure they are generating what you would expect them to and “behaving” as you expect?

 3. Your Position Sizing Strategies.

• Your position sizing strategies form the critical link between your trading objectives and your trading system. You design and create position sizing strategies specifically to help you meet your objectives. In fact, they are the primary drivers for your trading to meet your objectives.

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SQN – One Key to Creating Powerful Position Sizing Strategies:

The System Quality Number (SQN) formula is not terribly complicated – anyone who has a high school level understanding of statistics can calculate the figure, but…

The implications of the measurement are significant and extensive. The measurement affects your trading system selection, system improvement efforts, trading objectives, returns, drawdowns, risk per trade, total risk exposure, compounding, equity volatility management . . . well, just see the subject areas covered in the section below for the full list.

Most Importantly — understanding your trading system’s SQN score helps you evaluate what kinds of position sizing strategies you could, or should, use. It also tells you the kinds of position sizing strategies that you want to avoid.

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The Questions This Course Answers:

So this whole conversation begs the question…

How do you come up with effective position sizing strategies, strategies that will work with your trading systems to generate the kind of results you are aiming for? What is the process? There is a defined process, and you will learn it in this course.

• Another critical question: Is it even possible for your position sizing strategy to generate _____% returns with a particular system? Is it even possible for that position sizing strategy to help you avoid a ____% drawdown? (you can fill in the blanks for your preferred number) How can you tell? This course will help you answer those questions confidently.

Why Enroll? Isn’t this all in Van’s Definitive Guidebook?

• Those are fair questions. Why would someone enroll in this course when much of the knowledge behind the course is available in various places elsewhere? For the same reasons that universities offer a lab portion along with a lecture portion for many courses. You might think of the Definitive Guide to Position Sizing Strategies book as the “lecture” about position sizing strategies theories. This Elearning course then is the lab portion – the section where you learn how to apply in the physical world the concepts from the book.

• While most of the material for this course was sourced from the Definitive Guide to Position Sizing Strategies, very little of content was copied directly from the book – or from anywhere else. This course was developed as an application of and an extension to the Definitive Guidebook rather than just a repetition of it. Through the environment of a live workshop, the Elearning course enlivens concepts with examples, case studies exercises, and group conversations. Simply stated, the Elearning course delivers value far, far beyond what any book can offer.

Let’s list some of the many ways traders will benefit from the course:

• First, you can repeat any section of the course as many times as you like until you are confident you have a thorough understanding of the material. This is the top benefit of Elearning courses repeatedly cited by our students.
• Save numerous hours of development time creating spreadsheets (or trying to create them) which help you calculate system performance metrics, simulate system results, and test position sizing strategies.
• Understand what SQN scores mean and what SQN score for a system might be good enough for you. When you know what the SQN means and how to build good position sizing strategies, you can finally drop the search for a Holy Grail system.
• Define the criteria for a robust set of trading objectives. You will work on your own objectives as part of the Elearning course.
• Know what kind of position sizing strategies will help you meet your objectives – you can match the strategy with your system and objectives
• Learn how to develop a position sizing strategy that will fit your system’s performance and will help you reach your desired returns – as well as avoid your worst case drawdown.
• Determine the probability or confidence level for reaching your objectives using a particular position sizing strategy matched to a particular system.
• Learn how to use some simple Monte Carlo simulations of your trading system’s results to help you craft effective position sizing strategies.
• Practice developing position sizing strategies through case study scenarios of certain trading objectives and certain SQN scores.
• Create a plan for developing position sizing strategies that apply to your objectives and the steps to implement your plan.
• Accelerate your employment of the course concepts through the downloadable documents.

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E-Learning Course Topics:

– SQN Formula:

We will look at the idea behind the formula, the variables required, how and why it works to help you understand your system’s performance.

– SQN Formula Variations:

There are two primary versions of the SQN formula for evaluating systems. You will understand both versions and when to apply each of them. The two variations typically provide very different scores – each of which is highly valuable in different situations – though possibly dangerous when used in the wrong context.

– Types of R Multiple Distributions:

Different kinds of trading systems generate different kinds of R-multiple distributions. The type of distribution affects the SQN score for the system. You will learn how and why different aspects of trading systems affect the SQN score as well as consider what type of R-multiple distributions might better align with your trading objectives.

– The Benefits of High SQN Scoring Trading Systems:

When you trade a system with a high SQN score, you have more flexibility using position sizing strategies to help you meet your objectives. How and why this is so will be covered in depth. Also covered – what is a “high” score and what is a “good enough” score? The answer is, “It depends” and we’ll talk through the dependencies.

SQN – A Simple Way to Craft Effective Position Sizing Strategies

Understand how to use the SQN score to develop position sizing strategies that fit different objectives. You can get as complex as you like in this area but the SQN score simplifies the process overall.

– Three Broad Categories of Position Sizing Strategies:

All position sizing strategies are not created equally. Van has classified three main types, and you will explore the differences.

– Which Category to Use:

You are likely to find that one category of position sizing strategies help you meet your objectives over the other two. You will examine the reasons for concentrating your types of strategies versus utilizing two or three types.

– How to Apply Seven Specific Position Sizing Strategies:

We will study seven specific and very useful position sizing strategies in depth. In addition, we will also cover several variations for each of these strategies has several variations to know about — which we will also cover in depth.

– How To Calculate Your Max Portfolio Heat:

Portfolio Heat refers to the total risk you have exposed in the markets through your open positions. If you don’t manage this specific kind of risk, an external event that impacts the entire market can wipe you out. Each one of your position sizing strategies needs to incorporate this important element of risk control, and we’ll cover how to do that.

– How Losing Streaks Affect Your Position Sizing Strategies:

If you are scratching your head about why your losing streak would have any effect on your position sizing strategy, you probably don’t trade a system that has long losing streaks. Even for systems with short losing streaks, however, developing your position sizing strategies should account for this factor. Conversely, understanding how to use winning streaks probabilities can help you improve your returns.

– Why Your Drawdowns Are More Important Than Your Returns:

Your returns may make you rich, but your drawdowns can take you out of the game. Stay in the game first and always so you can keep trading!

– The Differences Between Trading Objectives and System Objectives:

Your trading systems need to accomplish a number of specific tasks. Objectives for your trading systems sound different (are different) then your trading objectives. If you don’t understand the differences, you could see deficiencies in your systems, in your position sizing strategies, in your overall trading, or some combination of those areas. Clarify your trading objectives and each trading system’s objectives for clarity in your business.

– Position Sizing Strategies That Reduce The Volatility of Your Equity Curve:

If you are up on the period, you might think you don’t mind some volatility in your equity – or you might know it bothers you. Either way, knowing what kind of position sizing strategies could allow some volatility or dampen it while still enabling equity growth would be highly valuable.

– Minimize Risk to Your Capital But Generate Amazing Returns:

There is one position sizing strategy, in particular, that is easy to understand and relatively easy to implement which minimizes the risk to your initial capital but also turbocharges your returns. It’s surprising that more people aren’t aware of its power and use it more often.

– Allocating Money Among Trading Systems:

If you know that you won’t use the same position sizing strategy on each system, how then do you split your capital among the systems? Is a simple, even split among them the best approach? Not likely. Learn methods for equity allocation that also help you meet your objectives.

– When To Adjust Or Change Position Sizing Strategies:

Sure, if your objectives change, you would probably adjust your strategies as well. But are there other situations where you would adjust your position sizing strategies? What process would you use to determine if to change them and how to change them? What criteria would you define?

– Given Objectives and SQNs, Determining Position Sizing Strategies:

Students will work through several “hands-on” exercises where you will have to come up with position sizing strategies and see how well those strategies did in relation to achieving the objectives.

– Applying Different Position Sizing Strategies To One Trading System:

As part of the hands-on exercises, you will get to see how different strategies generate very different ending equity results using the same system

– Applying The Same Position Sizing Strategy To Different Systems:

You will also see how different systems (with different R multiple distributions) using the same strategy generate different ending equity results.

– Monte Carlo Simulation:

The course includes a downloadable Excel-based Monte Carlo simulator that allows you to use your trading system’s distribution of R multiples to simulate the possible range of results for your trading system.

The chart above is one of the outputs of the simulator. Learn about Monte Carlo simulation and how to use the downloadable Excel-based tool to run simulations.

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Simulation Limitations:

Simulations are no panacea for traders. Actually, they are more like Pandora’s Box if you don’t know what you are doing. Discover the limits and risks of simulations, so you understand how to avoid the psychology and technology pitfalls inherent with simulations. You want to keep the simulation results helpful – not dangerous.

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Calculating Your Equity:

Many position sizing strategies are built on risking some portion of equity. When you stop for a moment to think about equity, however, it’s not as simple as it may sound at first. When you are opening and closing positions all the time, how do you calculate a risk amount based on equity “right now” for your next position? We’ll look at three simple ways to determine your equity, and you’ll be able to decide which one probably fits you and your objectives best.

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Ways You Might Improve Your System’s SQN Score:

One of the most common questions people ask after they learn about the SQN formula is, “How do I improve my system’s SQN score?” We’ll study that question and consider different ways that might be done. We’ll also look at whether you should invest any time or effort into that pursuit depending on several factors.

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Psychological Biases Inhibiting Better Position Sizing Strategies:

Why don’t most people learn about or use better position sizing strategies? There are serious psychological tendencies at work in your subconscious, and we’ll bring those into the light so you can deal with them if they pop up.

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Leverage:

Leverage can significantly impact on your trading results – both for good and for bad. After you understand your objectives and your system performance, however, you may realize that you can reach many trading objectives through good position sizing strategies without needing (or worrying about) highly leveraged instruments.

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The Inception of The System Quality Number Concept:

About 12 years ago, Dr. Van Tharp was preparing to release a software product intended to help traders develop good position sizing strategies for their trading systems. In the process of writing the instruction manual for that software, he started understanding system performance in an entirely new way.

Up to that point, Van had been using expectancy and the signal to noise ratio to evaluate system performance but both of those methods were limited in how effectively they could help a trader come up with a good position sizing strategy – good in the context that the strategy would deliver the desired returns but avoid the undesired drawdowns. In working through the problem over a period of months, new ideas came to him and eventually, a new theory was born. Van’s new theory related to the “quality” of a trading system so he called it the System Quality Number or SQN for short.

Rather than writing a software instruction manual, Van wrote instead a book explaining all of the new SQN concepts and related topics in “The Definitive Guide to Position Sizing Strategies.” Van never released the software as a product because traders didn’t really need it if they understood and applied SQN concepts to their position sizing strategies.

Since the book was published, many clients have asked for more guidance on applying the SQN concepts for developing effective position sizing strategies. We cover the SQN calculation and position sizing concepts in two of our live workshops but never before have we offered such detailed information about the process of developing effective position sizing strategies. Our intent is for students to both understand the related concepts in general as well as apply them specifically so they can better meet their objectives.

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What You Will Do In These Nearly 7 Hours of Lectures, Discussion, and Exercises:

This is “hands-on” Elearning course more along the lines of an instructional “laboratory” rather than covering lots of background and “theory.” You will spend a good amount of your time in activities or exercises. The expectation is that you have a basic or intermediate understanding already about SQN and position sizing strategies already, this course will give you the direct experience to apply those concepts in order to improve your trading results.

 Each section consists of a video lecture or exercises and the sections last anywhere from 20 to 60 minutes long.

These are the main sections of the course:

• The Power of Position Sizing Strategies
• An Interview with Dr. Van Tharp
• Creating Effective Trading Objectives
• Understanding SQN
• Developing Your Position Sizing Strategies
• Intermediate Position Sizing Strategies
• Simulating System Performance
• Stepping Through A Simulation Process
• Case Study Exercises
• Conclusion
• Bonus Section (on modifying the spreadsheets)

In addition, you will have access to 13 downloadable documents and spreadsheets. The documents include written instructions, checklists, and helpful reference information. The spreadsheets include useful reference data, system performance calculators, simulation tools, and position sizing strategy testing tools.

This 7-minute video goes into more detail about the practical application of position sizing strategies and more insight into the step-by-step approach your instructor takes while teaching the course. 

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What Are Good Position Sizing Strategies Worth?

If you wonder about the utility of good position sizing strategies, see the email extract just below. Similar to the experience of the Australian trader mentioned above, one of our clients describes his experience after attending the live SQN Workshop in 2016. Jim wrote us a few months after that Workshop to let me know how he was doing —

 . . . all I can say is WOW and thank you.

It has been a year since I took the Blueprint and Infinite wealth workshops in February (2016). Those were my first in-person trading workshops as I had just started working on a goal to transition to full-time trading within the next 5 years.

 At the SQN workshop (August 2016), I began to think about a monthly goal of 10% returns which is much larger than I had considered previously. I thought maybe that 10% a month was too much of a stretch, but I tweaked things a little based on what I learned at the SQN Workshop. I started trading those numbers after my vacation in the early part of September. By the end of the year, I had met the 10% profit target each month with less than a 4% drawdown over the entire four-month period. To say I was happy is an understatement. I was astounded at how well I traded.

When I was working through my objectives for 2017, I tweaked my position size again and changed my profit targets so I could replace my daily salary from my corporate job now, today – not sometime in the future. The best part? There is no additional risk required to make this happen. I wrote a special section in my trade plan to make just this change in my normal strategies and started to trade the variation in January right after the new year (2017).

In the five weeks since I started to trade the variation, I missed my target two days, but I met or exceeded my goal on every other day. If I can continue to do this through the end of 2017, I can transition to phase 2 of my “Escape Plan” in 2017 where I will work only part-time. Then by July of 2018, I will have the option of transitioning to full-time trading and not working for others. That would be implementing my plan in two and a half years instead of the five I allotted. That would be quite the accomplishment.

Thanks again,

Jim A, California, USA, February 2017

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Most of the course lecture videos were recorded live at a workshop held at the Van Tharp Institute training facility.

About Your Instructor:

R.J. Hixson is a graduate of the Van’s Super Trader program.</