R. Tharp's Trading Methodology

Discussion in 'Strategy Building' started by MichaelNorris, Jan 1, 2001.

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  1. From another thread RTharp briefly mentioned his trading methodology and I was wondering if RTharp could share more info on his trading strategy with some more indepth step by step proceedures that he uses in his trading.

    The following is what appeared in another thread:

    Rtharp writes:
    I used to trade a momentum system that did swing trades but it doesn't work anymore in this market, like the old bull market months back.

    I noticed that the biggest point gainers at the end of the day were also the biggest point gainers in the morning. I'd buy a few minutes after the open with a close stop. My figuring if this stock has this big of a gap, something is going on and it might continue for awhile. MY stop was a few points, which I adjusted after the close by the same amount. These trades could last for a few days. I had a few really big trades from trading this system. During this market I put this system on the shelf and now just daytrade on news,
    trade a tight channel on MSFT during the slow hours, and trade serious support resistance breakouts on high volatile stocks.

    If you understand stops, R multiples, position sizing, and your expectancy it doesn't matter what timeframe you trade. In fact the expectancy of my daytrading systems are a lot less than the swing trading/ position trading systems I use. A book that explain this was written by my trading coach Dr. Van Tharp one of the famous Market Wizards called Trade Your Way to Financial Freedom (yes I'm related to him). It tends to sell out in book stores so I would try Amazon or Traders Press.
    Another book that might interest you is coming out in a week or 2. Financial Freedom from Electronic Daytrading by Brian June and Dr. Tharp. They are both coaching my trading currently.

    Rtharp, any info you could share concerning your personal trading strategies plus how you personally use stops, R multiples, position sizing and expectancy in your own trading would be greatly appreciated.

    Michael Norris
  2. Hi Michael

    I have a few minutes so I'll start on this thread. The first thing I need to do is define my risk when I trade. My risk is always my stop price as I put one in. I classify my risk as R. The next factor to calculate in is your # of shares. This is a multiplier of risk.

    Risk per trade = ( Entry price- your stop price)* by the # of shares you buy. I try to keep this always around 1%.

    Let me give a few examples. A lot of accounts require $50,000 to trade so I'll use that figure.
    example of risk:
    I'm going to buy MSFT at a price of 50. I decide my stop is going to be 47 or I'm risking 3 points. Now with $50,000 of capital 1% of that is $500. I can buy 165 shares to have my risk for this trade at $495 or almost 1%. If I'm wrong I lose $495 but if I'm right I'll adjust my stop and let it go.
    If I'm daytrading I use a smaller timeframe. Say 1/4 point stop. So I'm buying MSFT at 50 with 1/4 point stop. So my risk is $0.25. I can buy 2000 shares and with a stop of 1/4 my risk is equal to $500. or 1% again. This also tops my account out with margin as 2000 shares of a 50 dollar stock with cost $100,000.

    This is my risk per trade. I try to have losses for all my timeframes of 1R. or only losing 1 x 's my risk. SOmetimes slippage comes into play so I'll lose 2R or a huge gap and maybe 4R losses.

    My wins though when I trail my stops can produce winners that are 50R where I made 50 times what I risked. These are the trades that can make my year. On my swing trading and position trading I find that I'm usually wrong about 60% of the time. My losses are usually very small and don't do much for my account. The winners come the other 40% of the time but a lot of them make 5R , 10R or every now and then 50R. This is how I do returns of over 300% in a year. My long term system for breakouts is very similiar to Catalite who I interviewed on my website.

    http://communities.msn.com/rtharpsland look under the interviews section and click on the name Catalite. I tend to trade breakouts for my position trading. I'll look for a nice base to form, wait for it to break out of it's base with more than average volume and get long with a close stop. During a bull market I make a killing do this. Breakouts fail now more often than not due to money flowing out of market.

    My swing trading I use a few different systems. One of my favorites that is super easy to follow is the idea that the biggest point gainers at the end of the day are also the biggest point gainers by the end of the day. (sometimes they just keep going) I used to buy the biggest point gainers 2 or 3 minutes in the morning when the market opened heavily positive. Depending on the price of the stock I would place my stop accordingly. I wouldn't buy anything under $60 as you get what you pay for. 60 3 point stop, 70-4 point stop, 90 -5point, 110-6 points, 130-7 point stop, 160-8 point stop, with more increments depending on the price. I would then adjust my winners witha stop below the closing price of the stock if it worked in my favor. I rode JDSU, INSP, QCOM, and a few others up heavily with this technique during the bull market rally.

    Daytrading I use a few different strategies which I'll explain later. I short climax runs with a small stop and a dayhold meaning I am either stopped out or close out the position at the end of the day. THis can equal some huge winners. I play channel trader, buying MSFT, DELL, INTC, or CSCO the big names. I wait for the slow hours of the market and no real trend for the overall market which is about 80% of the time. I then buy the lows in the channel and sell the highs 30 or 40 times a day. THis equals being right about 60% of the time. I make 1R losses and about half of that 60% is 1R gains the other 30% is about 2R gains.

    I also play a system with EMLX, SDLI and a few other mo-mo stocks waiting till they get absolutely outrageous #'s of bids or offers on LEVEL 2 and grab a ride. This signal is good once only 3 or 4 months but is almost guaranteed.

    I'll talk more on expectancy later and post more about some of my other strategies when I have some free time, which should be when I return home.


    Robert Tharp
  3. Expectancy is this.

    Add all of your trades R multiples for a day if you are a daytrader, or month trades for longer term then divide by the # of trades. This average is your average expectancy. It's the # you can expect to make per $1.00 risk over a long term time frame. My channel trading that I do daytrading, of buying low and selling high of a high volume stock during the middle of the day has only a expectancy of around .20 But I can do this trade 30-50 times a day so it has a lot of frequency.

    My swing trading has an expectancy of over 3.00 per trade. THis means that on average with every dollar I risk I make back my dollar and an additional $3.00 per trade, but the frequency is a lot less than daytrading.

    When you trade you must have a positive expectancy system. A lot of traders concentrate on being right. I know traders who are right 95% of the time but that 5% they give back all of their gains and then some. This is a negative expectancy system. I don't gamble. I want the odds in my favor over the long term. The house at Vegas has the odds in it's favor. As a trade you should also. My breakout system is only right about 40% of the time. My losses are 1 times what I risked because I used stops to limit them while some of my winners make me 50% return on my equity, which I got by finding a trend, and trailing my stop.

    I'll explain more later


    Robert Tharp
  4. Great information. Thanks. Looking forward to your next installment.
  5. Working on using one of the major website's messengers so I can teach a few others real time. Anyone have any feedback on this?

    More on my trading styles later.

  6. Vienna


    Robert, I am trying to post repeatedly at your message board, but the system does not seem to take it when I go "send". Just letting you know.
  7. you aren't the first who can't write me. Usually it's best to close out your webrowser and log back in. IF that doesn't work, email me with your message to post or try again later.

  8. Topmo wrote me "Hi RTharp,

    It's been interesting reading your posts. If you don't mind (maybe you do)...I was wondering if you might share some of the things that have worked for you the last few months with your personal trading. Thanks.

    Looking forward to reading your comments in the future."

    this was topmo's post in another thread. I thought I better reply on this one than the other one as I'm getting too off topic for the threads .

    I traded a breakout system for a long time. The key that made a huge difference to my trading was taking William O'Neil concept of the market is great at pricing stocks don't buy low price stocks a step higher. He says"nothing under 15" Well when I changed that to "nothing under 60" I started to find a lot more mutual fund support in my stocks. Mutual funds/insurance companies account for 70-80% of the marketshare. I want to trade what they are investing in.

    One of the key things then is to use position sizing in my trading. A lot of traders/ mutual funds water down the portfolio by buying a large assortment of stocks. It's a process known as diversification. financial Planners encourage it heavily. While it lowers losses it also lowers gains. You stock portfolio behaves more like an index. It is watered down. If you own QCOM during it's run you did quite well. But if you only owned .000001% in your portfolio it barely made a dent to your returns. It makes a lot more of a difference if you own 10+% in your portfolio. If fact with a tight stop during some of the days of extreme high momentum it was possible to buy it fully margined and get incredible gains to your account. Now if a stock also goes down 50% it will hurt you but it will hardly affect you if it's .00001% of your portfolio. The key for high returns is to have a higher average of the winners and a lower average of the losers. This means getting rid of the losers quickly and riding the winners. Hopefully also scaling in. Great position trading techniques and swing trading aren't working like they used to, but someday we will have another bull market. Will you be prepared when we do? Or will you have taken too much risk and not have enough capital to use towards your advantage.

    Ok this is starting to get long but it is just so important. I actually got hit with the crash, but hit more afterwards. I stopped out but breakout after breakout failed. I finally threw in the towel. I called a lot of my trading friends (most are professionals) and saw how they are doing> Only a few were doing well for this timeframe/ period. They were daytrading using a non-trending strategy and doing quite well. I need a break for some coffee but will continue this thread a little bit later

  9. Dustin



    I am confused.

    On one thread you say: I'm now getting ready to publish my track record, and start managing money in a hedge fund.

    On this thread you say:I actually got hit with the crash, but hit more afterwards. I stopped out but breakout after breakout failed. I finally threw in the towel.

    So you aren't trading now? I don't mean to be offensive, but for all of the resources you have available to you, it sure sounds like you aren't succeeding. You can't really blame it on the market either...the whole concept of day trading or position trading is being able to trade any market.

    You are sharing a lot of your "knowledge" here, but I'm wondering if it is helpful to anyone.
  10. Hi Dustin

    I think my thread that is Part 2 of what I was saying will help more. Understand I have been sitting in front of a computer all day. I needed a few minutes to have a breath of fresh air. I made a cup of coffee and I'm back. I was also unsure of how long a post I can submit. That's why I submitted that instead of just holding on. I'm testing the Elitetrader message board for length.

    Yes , failed and failed after March. I'm posting that to explain my circumstance and spread some light on how I operate. I'm a modeler, I find top notch talent and do what they do, that's it. I have done very well for quite some time, but when the market crashed conditions changed. I had to learn to adapt....which I did..now part II

    Well after each breakout wasn't working. I had to ask myself what was going on. Was I following my rules? Yes. It was obvious that the systems I was following weren't working in this market enviroment. By calling around I soon found a few friends who were doing well. I'm now doing what they do and am getting the same results.

    The traders who were having nice returns weren't trading trend following systems. They were trading systems that worked for markets not trending. Each one knew one stock and they knew it well. Very well, as it is all they traded. They knew who the axe was in that stock. How much the daily average range was. How the stock reacted when the S&P moved a certain way. They knew how the stock likes to behave with certain types of news. It only took a few minutes for me to figure out what they were doing.

    My trading styles vary. What is working now is what they do. I am mainly channel trading. I only trade stocks that are highly connected with the S&P. MSFT, DELL, INTL, CSCO, WCOM, and a few other big names. I heavily watch the S&P futures as it is a leading indicator for the market. Trades are only done when the odds are in my favor. I may not trade on heavily trending days. (different system which I'll get into later for those days) What I've seen is if no significant news is moving the market, or one of the stocks I'm trading after the first 2-3 hours it will hit a range. A stock will trade in a channel, with a very obvious high and a very obvious low. I'm counting on these support and resistance lines to not be broken. A lot of daytrading books talk about how great it is to trade stocks like SDLI and such. They are great for MO-MO plays. For intraday support /resistance plays they have very little and are a poor choice.

    The more who trade this system the better as they help prevent these lines from being broken. The high would be the resistance and the low would be the support. Pull up a 1 minute chart on INTC. After about the first 2 hrs do you see that range? That is the intraday support/resistance. I do know how to draw charts here yet, but I'll come back to this post and edit it when I figure out how to. All I'm doing is selling the stock when it reaches it's top channel and buying when it reaches it's bottom all day long. A trade can last anywhere from 3 minutes to over 2 hrs, but I haven't had anything longer than that. I can usually do these trades 20-40 times a day. I prefer stocks that are heavily related to the S&P as the S&P will react before the stock does. It's a leading indicator. If the S&P started to break resistance/support I won't trade this system. I'll bail out unless the positon is working which then I'll trail my stop after it breaks support/resistance (let your profits run...is half of the golden rule) Hopefully a short term trend will develop, but I'll portect profits if it doesn't. One of the real secrets of trading this is here. If you are going to buy near the support line place your buy limit order near it's high. Don't wait till it's near the low or you will be last in line and vice versa for selling the low.

    Now if the S&P breaks into new ground, I'll cancel my sell or buy order. Let me explain I'm trading INTC, I buy the low and put in my order to sell near the high. if the S&P start to rally I will judge the momentum of the move. If it's high I may cancel that sell and use a trailing stop instead. The opposite would be INTC was near it's high or resistance level so I shorted it. I place my buy order near the low again. If the S&P starts to gain momentum/force I may cancel that buy to get long and instead trail my stop.

    This system has only about a .20 expectancy. Meaning For every dollar risk I make back my dollar plus $0.20. This is really low compared to one of my breakout systems that had an expectancy of over $3.40, but I may only do a few trades a month with a breakout system like that. The key here is frequency I only make .20 but do it 30-40 times a day so it pays rather well, in fact better than breakouts. I like the breakouts though because it only took about an hour of my time per day while this type of trading I must be in front of the screen all day.

    Stops. I usually have my stops vary according to the range of the stock.
    If a range is 4 points than my stop will be 1/2 point

    If It it has an intraday range of 2 points than I'll have 1/4 point stop.

    If it has a range of 1 point than 1/8

    half a point range = 1/16

    this is one of the strategies I use. In fact I have a trading coach and this is one of his better trading strategies. He talks about it in the new book coming out.

    Financial Freedom through Electronic Daytrading, by Brian June and Dr. Tharp.

    I'll talk about some of the other strategies later. It's time for a soak in the spa.

    Robert Tharp
    #10     Jan 9, 2001
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