Friday, December 5, 2014

Trade Your Way to Financial Freedom by Van K. Tharp

This book is not about how to make money instantly. It does not tell you specific ways to trade to be 'set for life'.

It does however, give an individual a good foundation on how to trade. Tharp emphasizes the need to come up with a system that fits you. The only way to trade is to understand who you are as an investor and develop a system that reflects how you view the market and your risk tolerance. He provides facts and figures about how the best way to assess a system and understand the risk that you will be taking on.

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One of the most important things I got out of this book was the emphasis on position sizing. Having a clear idea on how much to invest will enable an investor to better manage their risk and come out on top. For example, let's say that you have $10,000 to invest. If you invest $5,000 in one stock and it goes down 10%. This means you have lost $500 or 5% of your portfolio. For you to break even you will have to have a correct stock the next time otherwise you risk losing some serious money. By having equal positions of $2,500, you give yourself more bites at the apple, so to speak. This gives you a higher probability of making money.

Another important concept is the idea of risk assessment. Having set values for when you will get in and out of a stock will minimize your chance of losing a large amount of money on a loser and keep you from losing your profits on a winner.

This book is worth the read if you do not understand how to trade stocks and want to have a good understanding on what it takes to develop a strategy that you are comfortable with. For me, I was able to take away from this book a solid sense of how I needed to develop myself and understand how I want to manage my trades going forward.

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