Dr. Van K Tharp is the president of the International Institute of Trading Mastery
Dr. Van K. Tharp is the founder and president of the International Institute of Trading Mastery, Inc. or IITM for short. In his capacity as a coach, he has helped people with everything from system development to private coaching on success-related issues and overcoming self-sabotage Dr. Tharp is the only trading coach featured by Jack Schwager in "The Market Wizard's: Interviews with Great Traders". He has published numerous articles in various industry publications and is in great demand as a speaker. His has written a home study course for traders and develop eight three day workshops on such topics peak performance trading, self-sabotage, position sizing, and how to trade the stock market. He has done psychological profiles of over 4000 traders in the last 18 years.
Van K. Tharp's investing rules
Whenever you enter into a position, always have a predetermined exit point at which you will concede you were wrong about the position.
This is your risk (R), and if you lose this amount, you have a 1R loss. Even if you are a buy-and-hold investor, you should have some point at which you will bail out of an investment because it is going against you (e.g. a drop of 25%). This rule essentially sets up all position sizing rules.
The golden rule of trading is to cut your losses short (1R or less) and let your profits run (more than 1R, i.e. a multiple of R).
Let's say you buy a stock at $50 expecting the price to go up $10, a 20% gain. You decide in advance to exit if the price falls by $1. Now assume that you have four failed breakouts (i.e. 4 x 1R losses) before you have your $10 gain (in this case a 10R gain). You were right only 20% of the time, but your losses totaled minus 4R and your profits totaled plus 10R. Your total gain was thus 6R, six times your initial risk.
When the total sum of your R-multiples for all of your trades is positive, you have a 'positive expectancy' system. You must have a positive expectancy system to make money in the market.
Expectancy is the sum of your R-multiples divided by the total number of trades. Thus, if you have 50 trades which give you a total R-multiple of 20, then from your 50-trade sample, you would estimate your expectancy to be 0.4. In other words, over many trades, on average, you will make 0.4 times your initial risk on every trade.