The Position Sizing Game 4.0 by Van Tharp
The Market Wizards agree that there are three keys to trading success:
1. Follow the golden rule of trading—cut your losses short and let your profits run
2. Master the part of your trading that tells you how much
3. Develop the discipline to follow both of those elements
The Position Sizing Game will help you with all three!
- First, you will now know how to answer the question “How much?” through position sizing™ strategies.
- Second, playing the game helps you learn how to let your profits run—and protect them as well.
- Third, playing the game using your own system’s results in simulation mode allows you to practice proper position sizing™ methods for your own trading. Trading simulation helps you develop the discipline to follow the other two keys for trading success.
“Tuition” for an education in the markets can be expensive; however, you can master these three keys without risking one cent of your valuable capital!
The overall objective of the game is to make a 50% return in each of the ten levels without going bankrupt.
As with real trades, there’s only one position sizing question to answer as you play the game:
“How much do I risk on each position?”
You establish your risk amount through the initial stop price (your risk per share) and by how many shares to buy (which determines your total risk). Do this well, and you are on your way to profits. Do it poorly, and you will blow up your account.
The first levels of this game teach you “position sizing strategies” and “the importance of large R-multiples.”
What you win or lose will be expressed as R-multiples. If you aren’t familiar yet with how R-multiples work, the game is a great way to learn it hands-on. You even get exposed to some more advanced systems concepts like separate probability statistics and expectancy statistics (Learn more about expectancy versus probability).
The Position Sizing™ Game 4.0:
As you progress, the game changes systems you trade so you can experience what it’s like to trade different probabilities and expectancies.
Beginning with Level 5, you have the option of going long or short on a trade, which means that you can go with the probability or with the expectancy.
Hopefully, you’ll learn how dangerous it is to bet against the expectancy, even though you get to win (or be right) more often.
In Levels 6 through 10, you have to earn your big R-multiples by letting your profits run on a winning position.
Losing trades happen quickly, but winning trades take time to develop fully. When a winning trade starts, it is probably just the 1R win, but chances are that it will continue to be a winner as the trade progresses. Once a winning trade starts, you have to decide how much to risk—time period by time period.
Do you want to risk a portion of your profits for a further gain or all of your profits for a shot at the moon? In the process, you learn not only about position sizing strategies but your emotional experiences along the way, which helps you exercise and develop your discipline.
To complete the game and make it through all ten levels, you have to prove your proficiency in four key principles:
1. The importance of R-multiples
2. The difference between expectancy and probability
3. Letting profits run without letting them escape
4. Using position sizing strategies to make sure you have a low-risk trade
The Position Sizing™ Game is designed to drive these principles home by giving you the experience of making (or losing) money in a game environment where losing is safer. Through the game, you begin to understand these principles experientially without having real money at stake.
My book, The Definitive Guide to Position Sizing, explains all of these ideas and is a perfect companion to the game. Definitive Guide to Position Sizing
Maximize Your Game Time:
Some people play this game once or twice, shoot for the moon and try to make a billion in their equity. While that might be fun, you could choose to play the game in a way that instead helps you earn equity in your real account.
You get the most out of the game by following these steps:
1. Play the game multiple times
2. Experiment with different position sizing techniques
3. Apply the position sizing lessons you learned in simulated game mode trading your own system
When you follow that process and internalize the three keys of success identified by the Market Wizards, then you are ready for the final step:
4. Apply the position sizing lessons you learned in simulation game mode in your live trading and the effect of that knowledge on your real equity
You won’t find any stock picking tips or amazing systems in this game, only seeds of trading success that you can nurture into reality. My game gives a new twist to the old saying “Play to Win.”
Using the Game as a Personal Trading Simulator:
- Have you ever wanted to research different position sizing strategies with your own trading systems but haven’t figured out how to do that?
Well, unless you want to create a marble bag with different colored marbles or learn how to codes software, the task can be very challenging. You can use this game as a powerful research tool for developing your position sizing strategies using your own trading system results!
Take the results from any of your trading systems, enter them into the game’s “Custom Mode” and then experiment with strategy after strategy to see which one helps you best meet your objectives.
- How would you do this?
It’s fairly easy if you have a set of trading system results (preferably 50-100 trades).
First, you would need to express each trade result in terms of its R multiple.
Then you would group the results into a small set of R multiples with the number of trades for each one. Microsoft Excel can help you do this easily by creating a histogram table. You would then take this information (the distribution) and enter it in the “Custom Game” mode. Then you would play the game — but in a whole new way. Rather than trade the programmed system in each level — you would play the game by trading your system, by trying to meet your objectives and testing out your position sizing strategies.
The Custom Mode also allows you to enter your many game parameters to make your simulation as close to your situation as you can. You define your starting equity, how many trades you take per round, your returns goal for each round, what kind of margin you have, etc. See the screenshot below for part of the custom game mode settings.
There are other settings as well, but most importantly, the simulation function of the game lets you focus entirely on your position sizing strategy while you trade your system. You can probably imagine several benefits from this exercise, but you might be surprised by the one we have heard most frequently from clients; you truly develop a feel for the kinds of wins, losses, streaks, and long-term performance you’ll experience trading the system. Software programs that run lots of numbers are incapable of helping you get that kind of feel. This experiential aspect of the game has been praised by traders as great preparation for live trading a system with a specific position sizing strategy.
Once you find the position sizing strategy that fits you and meets your objectives in the game, you can trade the live markets able to focus on executing your system flawlessly. Rather than wondering if you’ll reach your objectives, however, you can trade with confidence because you know your position sizing strategy is truly working to help you get there.
What’s New in Version 4.0:
- New Screen Designs: The game’s new look and feel, make it simpler to play, easier to understand, and more like what you are used to seeing when you trade.
- Realistic Mode: Play the game at a whole new level where slippage, commissions, taxes, and trader mistakes eat into your equity—just like real trading.
- Track Drawdowns “Playing” Your Own System: Input your own trading system in simulation mode, and the game tracks the drawdowns for you. Get some ideas about your system’s drawdowns: how deep they might get and how long they might last.
- Easy-to-Read Instructions and Help Section: The easy-to-read instructions and extensive guide help new players learn the game faster and provide position sizing ideas.
- Works on New PCs: Play the game on any Windows Vista, Windows 7, Windows 8, or Windows 10 PC (or on a Mac operating in Windows mode with one of those Windows versions).
- Hands-Free Updates: The game now automatically checks for software updates, so you will always run the most updated code for the version available.
The feedback on all of the improvements has been glowing.
We took a lot of time to make the game an excellent teaching tool, as well as a fun activity.
“I have found the game to be very helpful, and I’ve played it over and over again with different money management programs. It’s one thing to read about the mind traps that traders create regarding probabilities and the gambler’s fallacy, or to read that random number series can contain protracted winning and losing streaks, but playing a simulation that feels like trading really drives home the lessons about disciple, systems, and expectancy. Playing the game over time helps reinforce the idea that you get the same probability distributions as everyone else, and that your trading plan will need to address this fact through money management, position sizing, trading rules, etc.
“I have found that it also helps you change the way you frame the activity of trading because the game focuses on systems results and strips away entries, setups and the other false control illusions that traders inevitably get wrapped up in. At first, it didn’t feel like trading because it didn’t focus on the things that I did when I traded, but gradually it dawned on me that I might not be focusing on the right areas. The opportunity to view a trading system as the random distribution of hundreds or thousands of independent trials changed my view about my ability to ‘change the markets,’ and focusing on maximizing system outcomes has given me a fresh perspective on trading, systems development, and risk.”— Alan Stevens, Boulder CO