Trade Your Way to Financial Freedom – Van Tharp
Market Meditations | March 16, 2021
If only I bought more bitcoin in 2017 ?Sound familiar?
It’s something many people in the space think about. However, what they fail to realize is that entry is such a small part of trading. Even if you bought bitcoin in 2017, without the right trading strategy, there’s no way you would have held through the bear market ❌
In Trade Your Way to FInancial Freedom, Van Tharp goes so far as to argue that only 10% of a trading system is entry ? The majority is: personal fitting, risk/reward and exit strategy, among other factors. Let’s take a look at a few of his concepts today ✅
A good trading strategy is that which is tailored to suit you. Not your neighbour, not your cat, not your favourite crypto influencer but you ? That means, it needs to factor for:
- The amount of money you have ?
- The amount of time you have ⏰
- The amount of money you will need to have for your desired lifestyle ✈️
By way of example, you can’t be a scalper if you can only trade a few hours here or there. Or, if you are already extremely wealthy, your risk tolerance may be far lower than someone who is just getting started ?
? For as long as you copy other people’s trading strategies, you won’t be successful. If the market turns against you and you can’t truly resonate with the reasons you are in the trade, you will be very quick to abandon it.
? Know what you want out of the market, before you go in ?
We need to define our Risk, or R, before we enter a trade. In general, we want to define R such that we cut our losses short and let winners run ✂️ Let’s take a closer look ? at the concept of R, particularly because we hear it mentioned a lot in the space:
- If you enter a long position at $2,000 and set a stop-loss at $1,900, assuming you stick to your stop-loss, you have predefined your risk as $100. Barring some slippage costs, the most you stand to lose, or risk is $100. And so, 1R (your risk) is $100.
- Now, let’s say you set your take-profit at $2,400. Well, assuming you get lucky, you can potentially make $400. Or, to use our cool new lingo: 4R.
- In terms of a ratio, your risk/reward (R:R) is 1:4. You’re risking $100 to make $400.
?When you hear of R:R being ‘good’ or ‘bad’ it’s simply an assessment of how much you stand to gain compared to have much you are risking. As a rule of thumb, you should stand to gain more than what is at risk ? In other words, a 1:1 risk/reward ratio is probably not the best use of your time.
? A good trader will know their risk/reward ratio before they enter a trade. This, of course, would have meant predefining a stop-loss and take-profit level, which is also good practise ? Two birds, one calculation ?
When you start making a habit of calculating R, you will quickly be able to decide which of your trading strategies is the best use of your time. Because remember, time is money and lost opportunities ⏰
If you want to take things a step further by adding in expectancy and risk of ruin, be sure to check out our ? Risk to Reward Ratio Video Guide ?
Your exit strategy is far more important than your entry. As we discussed earlier, it must suit your personality. Some people have very successful trading strategies whereby they take 10 small losses in a row and then one big win ?
? Do you think you would be able to handle 10 small losses in a row? It takes a lot of willpower and mental stability.
Maybe you can and maybe you can’t ? As long as you know the answer when you are setting your strategy, then we are all good ✅ Whether it is based on a percentage % a timeframe ⏰ or a certain degree of volatility ? be sure you set a stop-loss level that you will be able to commit to based on your personal fitting.
And there you have it. Entry is not everything ? There are many different components to becoming a successful trader and investor. However, tick them off one by one and soon you’ll reap the benefits ? As part of the Market Meditations community, you’ll receive plenty of free resources to help you ?