Trade Your Way to Financial Freedom is a book principally about trading. The author, Van K. Tharp, aims to help the readers to overcome their psychological biases and design a trading or investing system that fits their own personality and objectives. I read the second edition of this book.
Layout of Trade Your Way to Financial Freedom
This book has 15 chapters, a foreword and two prefaces. The chapters are grouped into four parts.
Part One contains three chapters. It is named The Most Important Factor in Your Success: You! This part is about self-discovery.
Part Two is Conceptualizing Your System and it has four chapters. This part is dealing with system development and expectancy.
Part Three has four chapters too. The author names it Understanding the Key Parts of Your System and it covers the various parts of a trading system.
Part Four is Putting It All Together. It is made up of three chapters, putting all the lessons together.
The final chapter is the conclusion and summary of the book.
Highlights
Since this is a book about developing system, the author emphasizes on the prerequisites to design a good system. The important things are our beliefs and objectives. In short, the system should fit us.
The system that we develop should produce low-risk ideas. This means that the system has a long-term positive expectancy and a reward (overall return) to risk (maximum peak-to-trough drawdown) ratio that we can live with. It also allows trading at a position sizing level (based on a percentage of equity normally) that will protect us from the worst possible conditions in the short run but allows us to achieve the long-term expectancy of the system.
There are two things that I would like to highlight here and they are expectancy and position sizing. Expectancy refers to how much you make with your trading system per dollar risked. The author measures expectancy in R multiples. 1R equals to the initial amount risked per trade and it is related to the stop loss. He advises us to aim a minimum gain of at least 3R.
Position sizing means deciding how much we should risk losing in a trade. It determines whether we meet our objectives or meet ruin. What is important is the how-much decision rather than the investment selection decision. We should take position sizing into consideration when we design our system.
When designing a trading or investing system, the author holds the opinion that simple concepts work best. This is due to the fact that simplicity tends to be based on understanding than optimization. Complex calculations do not make trading more effective.
Conclusion
Although this is a trading book, there are things to be learned for value investors. The author did discuss a little bit on Warren Buffett in this book. I feel that the discussions on exits, expectancy and position sizing are very enlightening. These issues are often overlooked in the other books. I will recommend you to read this book just for the abovementioned issues.
As usual, before I end, I will share some witty quotes from the book.
“Investment success requires internal control more than any other factor.”
“You don’t trade or invest in markets – you trade or invest according to your beliefs about the market.”
“There is a strong psychological bias to be right about what we do with our investments. For most people, this bias greatly overrides the desire to make a profit overall in our approach, or it prevents us from reaching our true profit potential.”
“Remember that money is not made by being right about entry.”
Recommended book
If you are interested in Trade Your Way to Financial Freedom, you may get the book from Kinokuniya Malaysia through the link below*.
*Disclosure: The above link is Involve Asia affiliate link. Thus, I may earn a small commission when you purchase the book through this link.
