Q: You use the acronym SQN in your market update. Can you explain what that means?
A: After researching position sizing™ strategies for a number of years, Dr. Van Tharp developed a proprietary measure of the quality of a trading system that he calls the System Quality Number® or SQN®.
SQN measures the relationship between the mean (expectancy) and the standard deviation of the R-multiple distribution generated by a trading system. It also makes an adjustment for the number of trades involved. Dr. Tharp has determined that the better the SQN, the easier it is to use various position sizing strategies to meet one’s objectives.
The calculation, use, and interpretation of the SQN are discussed extensively in Dr. Tharp’s book, The Definitive Guide to Position Sizing.
In addition, Dr. Tharp discovered that when he applied the SQN formula to the daily percent price change of a stock or an index, it proved to be an excellent measure of trendiness. Dr. Tharp now calculates a market SQN for the S&P 500 based on the daily changes in the S&P 500 for periods of 25 days to 200 days and publishes the results each month in his free newsletter Tharp’s Thoughts. Dr. Tharp’s monthly Market Update includes a graphical representation of the market SQN for 100 days that makes it easy to see how the market is performing. Dr. Tharp also uses a quantitative world model of the markets that shows the strongest and weakest regions, countries, sectors, and currencies using the universe of ETFs. Dr. Tharp’s multiple analytical perspectives provide readers a holistic view of market conditions and help them understand how the market is likely to perform in the short term.
