Über die Autorin bzw. den Autor

Van K. Tharp, Ph.D., is an internationally known consultant and coach to traders and investors, as well as the founder and president of the Van Tharp Institute. He is the author of multiple bestselling books on trading and investing, including Safe Strategies for Financial Freedom and Financial Freedom Through Electronic Day Trading. Tharp is a highly sought-after speaker who develops courses and seminars for large banks and trading firms around the world. He has published numerous articles and has been featured in publications such as Forbes, Barron's Market Week, and Investors Business Daily.

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TRADE YOUR WAY TO FINANCIAL FREEDOM

McGraw-Hill

Contents

Chapter One

We have only to follow the hero's path, and where we had thought to find an abomination, we shall find a god. And where we had thought to slay another, we shall slay ourselves. Where we had thought to travel outward, we will come to the center of our own existence. And where we had thought to be done, we will be with all the world.

Joseph Campbell, The Power of Myth (page 51)

Let me tell you a secret about the market. You can make big money by buying breakouts that go beyond a normal day's range of price movement. These are called volatility breakouts. One trader is famous for making millions with volatility breakouts. You can do it too! You can make a bundle! Here's how you do it.

First, you take yesterday's price range. If there's a gap between yesterday and the day before, then add the gap into the range. That's called the true range. Now, take 40 percent of yesterday's true range, and bracket today's opening price by that amount. The upper value is your buy signal, and the lower value is your sell signal (that is, for selling short). If either value is hit, get into the market, and you'll have an 80 percent chance of making money. And over the long run, you'll make big money.

Did that particular pitch sound interesting to you? Well, it has attracted thousands of speculators and investors alike. And while there's some truth to the pitch—it can be a basis for making big money in the market—it's certainly not a magic secret to success. Many people could go broke following that advice because it's only part of a sound methodology. For example, it does not tell you

• How to protect your capital if the market goes against you

• How or when to take your profits

• How much to buy or sell when you get a signal

• What markets the method is designed for and if it works in all markets

• When the method works and when it fails miserably

Most importantly, you must ask yourself, when you put all of those pieces together, does the method fit you? Is it something you'd be able to trade? Does it fit your investment objectives? Does it fit your personality? Can you tolerate the drawdowns or the losing streaks it might generate? Does the system meet your criteria for feeling comfortable trading it, and what are those criteria?

This book is intended to help traders and investors make more money by learning more about themselves and then designing a methodology to fit their own personality and objectives. It is intended for both traders and investors because both of them attempt to make money in the markets. The trader tends to have a more neutral approach—being willing to both buy and sell short. The investor, in contrast, is looking for an investment that can be purchased and held over a longer period of time. Both of them are looking for a magic system to guide their decision making—the so-called Holy Grail system.

The journey into finding the profits available in the markets usually starts another way. In fact, the typical investor or trader, in preparing to trade, goes through an evolutionary process. At first he gets hooked on the idea of making a lot of money. Perhaps some broker gives him a pitch about how much money he can make playing the market. I've heard a radio advertisement in North Carolina that goes something like this:

Do you know where real money is made year after year? It's all in the agricultural sector—people have to eat. And when you consider the weather we've been having lately, there's likely to be a shortage. And that means higher prices. And for just a small investment of $5,000, you can control a lot of grain. You'll make a small fortune if grain moves just a few pennies in your favor. Of course, there are risks in this sort of recommendation. People can and do lose money. But if I'm right about what I'm saying, just think how much money you can make!

(I've heard similar pitches for various other commodities and, these days, even for currency trading.)

Once the trader has committed his initial $5,000, he's hooked. Even if he loses it all—and in most cases he will—he'll still retain the belief that he can make big money playing the markets. "Didn't Hillary Clinton turn $1,000 into $100,000? If she can do it, then I certainly can do it." As a result, our investor will spend a great deal of time trying to find someone to tell him what to buy and sell in his quest to determine the hot prospect.

I don't know many people who have made money consistently following other people's advice. There are exceptions, but they are very rare. In time, the people who have followed other people's advice and have consequently lost their capital get discouraged and drop out of the picture.

Another pitch that really seems to get people is the newsletter pitch. That typically goes something like this: "If you had followed our guru's advice, you would have made 320 percent on XYZ, 220 percent on GEF, and 93 percent on DEC. And it's not too late. You can get our guru's picks for each of the next 12 months for only $1,000." As you'll learn from both the expectancy chapter and the position sizing chapter, one could easily have gone broke following such a guru's advice because we know nothing about his or her downside or even the expectancy of his or her system.

I once heard this pitch from an options trading guru: "If you had followed my advice on every trade last year, you would have turned $10,000 into $40,000." Now does that sound impressive? It does to most people, but what he really meant was if you had risked $10,000 on every trade recommendation made, then at the end of the year, you would have been up by $40,000. In other words, if your risk per trade was 1R (where R is short for risk), then you would have been up by 4R at the end of the year. Believe me when I say that 99 percent of the trading systems you'll probably develop will give you better performance than this one. Nevertheless, people fork out the $1,000 for the guru's advice because the pitch suggests a 400 percent return rather than a 4R return. That is, they do until they decide that perhaps they should ask a better question.

A few people miraculously move onto the next phase, which is "Tell me how to do it." Suddenly, they go on a wild search for the magic methodology that will make them a lot of money. This is what some people call the "search for the Holy Grail." During the search, our trader is looking for anything that will provide her with the secrets to unlocking the universe of untold riches. Typically, people in this phase go to lots of seminars in which they learn about various methods such as this one:

Now this is my chair pattern. It consists of at least six bars in a congestion range followed by a seventh bar that seems to break out of the congestion. Notice how it looks like a chair facing to the left? See what happens on this chart after a chair pattern occurred—the market just zoomed up. And here's another example. It's that easy. And here's a chart showing how much profit I made with the chair pattern over the last 10 years. Look at that: $92,000 profit each year from just a $10,000 investment.

Somehow, when these investors actually try to use the chair system, that $10,000 investment turns into large losses. (You'll learn the reasons for these losses...