By Dr. Van K. Tharp

International Institute of Trading Mastery

380 pages, $149

If there is one person in the trading world whose name could be associated with "definitive," it is Dr. Van K. Tharp, one of the best-known trading coaches of our generation whose work on the psychological aspects of trading have helped countless numbers of traders over the last 25 years.

Tharp defines definitive with his exhaustive and thorough research and reports in his Market Mastery and Tharp's Thoughts newsletters and in his previous books and educational courses - Trade Your Way to Financial Freedom, Financial Freedom Through Electronic Trading, Safe Strategies for Financial Freedom, Peak Performance Course. His latest book is no different, including some of his observations on psychological issues, trading systems, etc. but focusing on the one thing that can make the biggest difference in trading performance.

That one thing has been called "money management" or "asset allocation", terms that are too vague and have different meanings for different people and fail to incorporate the critical "how much" factor into a trading decision. So Tharp quit using those words and created the term "position-sizing" a few years ago to more accurately describe the key element of trading success. As Tharp says in a sub-title on the cover, "Size DOES matter in the markets."

For Tharp, the essential input for successful trading is not picking the right stock or market or finding the right trading system or having the right entry or exit point but having the right position-sizing model to fit your psychological makeup to achieve the objectives you think you want. Certainly, having a great system and catching markets that make big moves in your favor are important. But Tharp contends that, with proper position sizing, even an average system can help you reach those objectives.

For many traders, position sizing may simply be a factor of account size. If you have a $20,000 account, you can trade X contracts and if you have a $40,000 account, you can raise your stake to XX contracts. Of if they are very sure that a particular trade will be profitable, they will risk a larger amount of their money on the can't-miss trade. In fact, Tharp says, the more confidence a trader has in a trade, the more likely it will wind up doing poorly.

Tharp presents 31 different models and three different ways to calculate equity - 93 different position-sizing models in all - and notes that variations could be applied to many of these. Who would have imagined that something that seems so straight forward could be so involved? He describes some strategies to avoid, such as Martingale position-sizing models, and a number of others that can be tailored to fit market conditions and trading system expectancies.

A key concept that he emphasizes early and often is, "The purpose of position sizing is to meet your objectives." Of course, that assumes that you can define your objectives, which are influenced by your psychological makeup.

Tharp divides his book into four main parts. The first section deals with his Golden Rules of Trading and emphasizes the importance of analyzing initial risk (which he labels "R") and R-multiples - terms and concepts that Tharp has introduced in his earlier works - and calculating a System Quality Number (SQN)^SM to evaluate the quality of any trading system under any market condition to give you some idea of how to position size your system to meet your objectives. These are his core fundamentals for successful trading.

Tharp introduces position-sizing basics in the second section and then explains the details of how to use position sizing to meet your objectives in the third section. The last section includes an analysis of position-sizing software, a real challenge to develop, and provides answers to nine categories of questions related to position sizing, including trading systems, account size, math, etc.

Even a casual reader will learn a lot from this book, especially on topics like risk factors and measuring system quality in the first section. But for a trader who is serious about position sizing, this book will require some careful, dedicated study and probably some experimentation. Tharp offers a number of thought-provoking concepts and dozens of tables to back them up, and you won’t be able to grasp their significance by breezing through his material with a quick read.

With his background as a trading coach and teacher, Tharp realizes it will require re-reading and reinforcement to understand an issue as complex as position sizing. He even provides a self-assessment chapter - a quiz of sorts - to help readers learn and understand the key points in each chapter before applying the position sizing techniques to actual trading.

Almost everything Tharp writes seems to have some significant insights. That’s why we are very pleased to have him as one of the contributors for newsletters available at www.TraderPlanet.com. The scope and content of this book will make it the Bible of position sizing for traders and is a book that every serious trader should read.

Review Date: April 2009