Q: I recently bought your revised version of "Trade Your Way To Financial Freedom" (which is excellent, btw) and realized how important position sizing is. So my question concerns position sizing: In your book you recommend trading several (non-correlated) trading systems. But how do I go about positing sizing the positions that are placed simultaneously by these systems? How much should I risk if I traded multiple trading systems that would risk only 1% of my trading capital in one position if I were to trade only one trading system at a time? Am I doubling my risk if I trade two trading systems simultaneously and thus need to adjust the position sizing algorithm to risk only half of what the trading system would usually risk?

A: How many systems are you trading? Divide your capital equally into the number of systems you have and treat each of them differently. If you want to risk 1% for each system, then do that with the capital allocated to that system. On a quarterly basis, rebalance the systems so that they all have equal capital again.

By the way, I have a much more detailed discussion of this in my new book, The Definitive Guide to Position Sizing, which should be published this fall.

Posted by Van K Tharp at 05:13 PM | Permalink | Comments (0) | TrackBacks (0)

Q: I run a quant based fund that uses AI techniques as a forecasting tool which in turn filters through a classic Modern Portfolio Theory model in a market neutral environment. The model forecast 1 week into the future and the portfolio weights are rebalanced every week.

Initially we always felt that we wouldn’t use a stop loss as the rebalancing each week would in effect be our stop loss. We are now however rethinking this philosophy and wanted to know if you had done much work on stop losses for portfolios and more specifically for portfolios run in a market neutral environment.

A: You haven’t told me whether you run a hedge fund or a mutual fund because there is a big difference. The latter has to be invested. If you are the latter then you use some of the ideas that were covered in my Interview with A Portfolio Manager – a back issue of Market Mastery.

Now I’m assuming by market neutral you basically mean that you have a short position for each long position? If that’s the case, then you probably don’t need stops. However, I don’t know the sort of things you find yourself dealing with. If I had a better idea of those, then I’d probably have a lot of suggestions for you.

For example, one of my supertraders ran a fund in London that was full of risk-adjusted positions. He really didn’t understand “Tharp Think” too well and I really didn’t understand his thinking. However, once I understood what he was doing and got him around to “Tharp Think” he made some very important changes to his portfolio and last year had his best year ever.

Posted by Van K Tharp at 06:56 PM | Permalink | Comments (0) | TrackBacks (0)

Q: A highly-respected trading coach has commented, “You do not trade the markets. You trade your beliefs about the markets…” How can we truly uncover and become aware of our beliefs about the markets? When I try to sit down and make a list of beliefs, my mind seems to go blank once I get past markets trend and markets consolidate.

A: One method is to just journal. Sit down each morning and force yourself to write three or four pages about yourself and what’s going on. Then read what you’ve written because it will reflect your beliefs.

For example, here are some of your beliefs that I got just from reading your questions.

• You believe in me and my belief that you can only trader your beliefs.
• You believe that you have trouble finding your beliefs.
• You believe that when you try to find beliefs your mind goes blank.

Posted by Van K Tharp at 05:07 PM | Permalink | Comments (0) | TrackBacks (0)

Q: I have been listening again to one of your CD programs where you raised the question, “Would you feel better about yourself if you had more money?” If my response is yes, then essentially I am guilty of self-sabotage. Wow! I can accept your proposition that subconsciously I don’t feel good about myself. I’m not happy about that, but I can accept this concept. I can accept responsibility for that belief, with the expectation of doing something about it. Now then, how do I change this belief? This relates to working on myself, right?

A: Beliefs are easy to change. If you find something you don’t want, then notice what it gets you into and you’ll probably decide it isn’t useful. Once you’ve made that decision, you can then replace it with something that is more useful.

This process works until you run into something with a lot of charge (feelings) stored with it. To get rid of these beliefs, you need to release the feelings first. I go over an number of such methods to release feelings in the Peak Performance Course. The Sedona Method Course is also all about releasing.

Posted by Van K Tharp at 04:29 PM | Permalink | Comments (0) | TrackBacks (0)