I saw an investment website recommending Trade Your Way to Financial Freedom as a must-read and decided to read it. The author wants to help the readers to earn profits by learning more about themselves and devise a plan to fit their own personality and objectives.
Van K. Tharp is a professional trading coach and consultant. He is also the founder and president of Van Tharp Institute. He has authored five books on the filed of investing.
Trade Your Way to Financial Freedom has a foreword, 2 prefaces, and 15 chapters. The chapters are divided into 3 parts.
Part One is The Most Important Factor in Your Success: You! The chapters are The Legend of the Holy Grail, Judgmental Biases: Why Mastering the Markets Is So Difficult for Most People, and Setting Your Objectives.
Part Two is Conceptualizing Your System. The chapters include Steps to Developing a System, Selecting a Concept That Works, Trading Strategies That Fit the Big Picture, and Six Keys to a Great Trading System.
Part Three is Understanding the Key Parts of Your System. The chapters are Using Setups to Jumpstart Your System, Entry or Market Timing, Knowing When to Fold ‘Em: How to Protect Your Capital, and How to Take Profits.
Part Four is Putting It All Together. The chapters include There’s Money for Everyone, Evaluating Your System, and Position Sizing – the Key to Meeting Your Objectives.
Chapter 15 is the conclusion of the book.
There is an introduction at the beginning of every part to introduce evert chapter in the part. Every chapter has a summary as the ending.
Trade Your Way to Financial Freedom contains the author’s beliefs and opinions.
First, let’s talk about author’s opinion on the relationship of inflation and price-to-earnings (P/E) ratio. The author believes that when inflation is 1 – 2%, the P/E ratios can be 20 or higher, at 3 – 4% inflation, the P/E ratios will be around 15, and when inflation is at 7% and higher, the P/E ratios should be 10 and below. Furthermore, in deflationary conditions, the P/E ratios will drop to single-digit range. He also mentions that S&P 500 is overvalued when P/E ratio is over 17. But these are just his beliefs and we do not need to take them as truth.
This book is about developing a trading or investing system that fits us. The system should be based on our beliefs and we should detail a plan with appropriate objectives. The author reminds us that simple concepts work best in system design because we understand them. Besides that, the system should produce low-risk ideas.
The author provides questions for us to answer in order to set objectives in Chapter 3. Furthermore, The author also provides some techniques and trading in action to let us choose which one suits us. There are some discussions on Warren Buffett too in the book but they are quite brief.
The 2 important things in this book are expectancy and position sizing. Expectancy means how much you will make with your system per dollar risked. The author uses the concept of R multiples to calculate expectancy. Position sizing is the determinant of whether we meet our objectives or meet ruin. It is about deciding how much to risk per trade. Good position-sizing systems increase position size when we have more capital.
Investors or traders succeed by controlling risk. Exits, whether aborting a losing position or taking profits, are the keys to making profits. Thus, the author advises us to set exit targets even before taking a position in the market.
We trade or invest according to our beliefs about the markets. Most investors have a strong desire to be right about every trade, and this bias prevents us from making good profits. Now we have the tools to design a system and overcome psychological biases, it is just up to us to be disciplined.
I will share what I learn about the phrase let the profit runs. I have set a plan to sell a stock when there is a retracement when it exceeds my target selling price or when it reaches its 1-year highest price. If the share price is less than RM 10.00, I am using a 10% retracement. It will be 5% retracement if the share price is more than RM 10.00. This might cause me to lose some gains but I am willing to live with it for now. Perhaps I will refine it in the future.
One fun fact: the author was at Malaysia in 1995 as a speaker at an international conference on technical analysis of futures and stocks.
- Financial freedom means that your money working for you makes more money than you need to meet your monthly expenses.
- Investment success requires internal control more than any other factor.
- Remember that money is not necessarily made by being right about entry.
- Yet what’s important is the how-much decision, not the investment selection decision.
- Be at cause for what happens to you, rather than a victim of external circumstances.
Interested in Trade Your Way to Financial Freedom?
You may get the book from Kinokuniya Malaysia through the link below*.
*Disclosure: The above link is Involve Asia affiliate link. Thus, I may earn a small commission when you purchase the book through this link.