Q: I have saved some money and am looking to invest about $10,000. I just finished reading Trade Your Way to Financial Freedom and I am wondering what my best options are. Because my account size would be very small and my time somewhat limited I figured something long term would be best to keep transaction costs low. Do you think I should use a percentage based position sizing model. Should I be more aggressive than 1%? I also want to use a value based portfolio filter and would like your suggestions a good book to read on valuation. Thanks for your great book!
A: First, I wouldn’t do any investing until
1) You have developed a business plan as a working document to guide your trading. That plan should have a description of the big picture and how you
are going to monitor it. I do this once each month in Tharp’s thoughts in
case you do want to do it yourself.
2) Your plan should also have a worse case contingency plan.. and this can take quite a while to develop if you do it from scratch.
3) It should have three systems that fit the big picture.
4) For each system you should know the system quality number (TM) under six different market conditions
1) up volatile
2) up quiet
3) down volatile
4) down quiet
5) sideways volatile
6) sideways quiet
And you should only trade the system in the market conditions under which it performs well.
5) You should thoroughly understand that you are the primary driver of your performance and that if you do not regularly work on yourself, then your performance will suffer.
6) You must have objectives that you have thoroughly researched and that fit you.
And 7) You must understand that it is through position sizing that you meet your objectives.
I recommend that you read 1) My Definitive Guide to Position Sizing; 2) that you take my free Tharp Trader test;
3) that you thoroughly study the Peak Performance Course for Traders and Investors; and 3) that you possibly take my Blueprint for Success workshop.
Now those three suggestions will cost about 25% of your capital… but how
much did you just invest in your education. And do you think you can
really trade well without a reasonable investment in your trading education?