I came across this quote in a book just now by Dr Van K. Tharp and it caught my attention:
“To be a money master, you must first be a self master” J.P. Morgan
He then goes on to say about the majority of traders that , "their focus tends to be on the need to be right. People are obsessed with it to the exclusion of all else. "
Well, isn’t that the be-all and end- all of trading - to be right?
No it is not! At least according to Mr Tharp…and I have to agree with him…
He argues that if a trader concentrates on six components of their trading system then they can still be profitable even when entering positions based purely on a toss of a coin. He is not, of course, suggesting that one should do that. He is saying that a total trading system should be focused on all these six components and not on just being right. In fact he states that just focusing on being right is just plain näive!
The first four of his components refer to what he calls expectancy:
(1) system reliability (success ratio losses v. gains)
(2) reward-to-risk ratio (The relative size of your profits compared with your losses)
(3) cost of trading (primarily spreads, commissions)
(4) your trading opportunity level (how often you trade)
The last two components are part of what he calls money management or position sizing.
(5) the size of your equity
(6) your position-sizing rules
And there it is, a comprehensive trading system is not just about getting it right. The “perfect” system has you at the centre with the right personal factors, surrounded by a model providing your entries and exits consistent with your objectives, and with the elements of expectancy and money management radiating out in balanced harmony to form a perfect whole - a balanced thing of beauty…