Am currently reading an excellent trading book “Trade Your Way to Financial Freedom” by Van K. Tharp, after noticing that the name kept popping up in trader interviews in both Market Wizards (by Jack Schwager) as well as the magazine Technical Analysis of Stocks and Commodities. The book didn’t disappoint. While Tharp’s writing style is a little rambly and fluffy (including the use of several stretchy analogies), he covers the most important aspects of trading in great detail: from designing a trading system to entry and exit signals to position sizing and money management. While most trading books dwell on entry signals and/or market timing, Tharp constantly emphasizes exits, stops, and position sizing – factors that are essential for making sure you don’t go bankrupt trading.
It amazes me that even though this book was such a bestseller, the most popular market “experts” are still those that tell you which hot stocks to buy and hold, or how to time your entry into the market, making a rudimentary comment on risk management at best.
The book is geared to the general public, so it covers a wide variety of trading styles, most notably the buy-and-hold value investing style that so many of my friends are practising today. It is obvious, though, that Tharp is a trend-follower at heart, so his writings are slightly skewed to that form of trading. Which works fine for me, since I’m not a big fan of value investing anyway. It was also written in 2006, so some practices might have to be changed or have become invalid due to the financial crisis.
The first five chapters deal with individual psychology, issues that are useful for the trader that’s first starting out. In the next few chapters, Tharp brings up many interesting ideas for entry timing as well as stops, which makes me realize that I have a long way to go in terms of further testing my systems. I have also yet to reach the chapter on exits and position sizing – aspects that Tharp thinks are the most important in trading. Overall, I think it’s an excellent book for beginners and for people who don’t know which style of trading they’re interested in yet. Don’t expect it to be filled with examples of how to time the market though – there’re probably enough out there.