Greetings all -- Several people have mentioned Dr Van Tharp's book, "The Definitive Guide to Position Sizing".
I like Dr Tharp's work, I have corresponded with him about position sizing, and he was kind enough to mention me in his book. By all means, buy his book and study it -- there is a lot to like in it. But also read the threads on Aussie Stock Forums that discuss trading system design, position sizing, and specifically Dr Tharp's book. Here is the url to the home page of ASF: http://www.aussiestockforums.com I have a few reservations about his book. Dr Tharp begins by defining System Quality Number (SQN). 1. Then he states that he has registered SQN as a "service mark". I seriously object to people trying to claim ownership of a well known idea. 2. SQN is essentially a t-statistic, as Dr. Tharp admits on one page early in the text. 3. He discusses the characteristics of trading systems that have SQNs with values from 1 to 7. It is valuable to calculate the t-statistic of a trading system as a metric. The book would have been valuable if it simply stopped there and discussed some realistic examples. But much of the remainder of the book went down an unrealistic path. Just for fun, look at a table of t-statistics. Look up the probability of a one-tailed t-statistic being greater than +2.0 for a test that has 20 or more observations -- it is about 2.9%. This assumes that the observations come a normal distribution, which may or may not be the case for a trading system, but similar statistics can be computed that are not dependent on assumption about the distribution and the results are not different enough to alter my argument. The point is that the probability that a trading system has results that exceed random by enough that the t-statistic is greater than 2.0 is about 2.9%. He continues on to suggest that trading system developers search for systems that have scores of 3, 4, even 7, and that is the part that concerns me. I include a discussion of using the t-statistic as a metric in my advanced workshops. As part of that discussion, I hand out simulated closed trades that come from various distributions with various t-statistics. If you provide an experienced trader with a system that trades frequently, limits losses on losing trades, and has a t-statistic of 3.0 (truly out-of-sample), he or she can own Manhattan in a couple of years. If anyone knows of a system that has a t-statistic (SQN) greater than 3.0 on 20 or more out-of-sample trades, please call me so we can form a partnership and retire very rich very soon. To recap -- buy and study Dr Tharp's book, but be aware of the unreasonable assumptions he makes and the impossible task he sets. Thanks for listening, Howard
