Becoming Financially Free Through This Book

First, I’d like to comment on the title, which includes the words “financial freedom” in it. Many people thought that the words “financial freedom” made the title a bit too commercial. Jack Schwager even wrote a comment on the first edition that said, “While I can’t promise your financial freedom, I can promise you a book filled with sound trading advice and lots of ideas you can use to develop your own trading methodology. And, if you don’t think that’s enough, then you really need this book.”

So what is financial freedom? The first edition of my book Safe Strategies for Financial Freedom is devoted to this topic. I won’t repeat that discussion here, but I will summarize it.

Financial freedom is really a new way to think about money. Most people think they win the money game by having the most money and the most toys. This rule has been set up by other people to mislead you. If you follow it, someone else besides you will win the money game. The reason is that only one person in the world can have the most money, and even if you think billionaire status qualifies, it still means that your chance of winning the game are very slim.

If you think having the most toys wins the game, then you’ll probably end up in debt because, after all, you can buy any toy now if the down payment and the monthly payments are low enough. However, doing this ultimately relegates you to a world of huge consumer debt and a life of financial slavery in which financial freedom (as I mean it) continues to move farther and farther away.

Financial freedom, to me, means adopting a different set of money rules to win the game of money. And if you follow those rules, become committed to the goal, and learn from your mistakes, then I cam promise you financial freedom through this book. Financial freedom means that your money working for you makes more money than you need to meet your monthly expenses. For example, if your expenses are $5,000 per month, and your money working for you makes you $5,000 or more each month, then you are financially free.

Trading and investing make up one of the many ways that you can have your money working for you. I believe if you can develop a methodology through this book that doesn’t require a lot of work to maintain (that is, it doesn’t require more than a few hours each day) and that can generate enough money to meet your monthly expenses, then you are financially free. For example, if you have a $300,000 account and you make $60,000 (that is , 20 percent) each year trading that account and it takes you only a few hours each day to do that, then you are financially free. That doesn’t mean that you won’t spend hundreds, or even thousands, of hours building the foundation for your financial freedom. It also doesn’t mean that you can avoid working on yourself yet continue to maintain that level of return. It does mean, however, that financial freedom is possible once you lay that foundation.

You Trade Only Your Beliefs

This book was originally published in 1999. Since then, numerous people have told me that it totally changed their thinking about trading, investing, and approaching the markets.

My understanding has always been that you cannot trade the markets. Instead, you trade your beliefs about the market. For example, if you believe that the market is going up (or generally that it goes up in the long run) and you believe that trend following works, then you might adopt a trend-following approach to buy stocks that are going up. However, if you believe that the market is overvalued and likely to go down, then you might have trouble buying stocks that are going up because dong so conflicts with your beliefs.

Everything that I said in the first edition of this book reflected my beliefs about the markets and what was necessary for trading success at the time I wrote the book. However, beliefs are not reality. Instead, they are your filters to reality. I’ve acknowledged that for a long time, and I’ve continually said that what I teach reflects the most useful beliefs that I now have about the market and trading success.

Over the years, I occasionally run across beliefs that seem to help people even more. And in the seven years that have elapsed since the first edition of this book was published, I’ve adopted many new, more useful beliefs. As a result, even though most of the core concepts have not changed from the first edition, enough things have changed that I can help people even further with this new edition of the book.

Here are a few of the major changes that reflect my current beliefs:

  • I believe that all trading systems should reflect the big picture. In 1999, we were nearly at the end of a great secular bull market that had begun in 1982. In 1999, you could buy any high-tech stock and hang on to it for six months and perhaps double your money. However, secular bull markets are followed by secular bear markets such as the one that began in 2000. These tend to last for as long as 20 years, so people need strategies that take advantage of these  macro tendencies to make good profits. The bear market isn’t bad news. It just requires a different focus to make money in it.
  • My model for developing a trading system that fits you has evolved slightly over the last six years, and I’ve included the changes in this book.
  • Although most of the concepts in the first edition are timeless, my perspective on them is not. As a result, I’ve changed my emphasis in this second edition to what I believe works best now.
  • My explanation of expectancy in the first edition of this book was slightly misleading and definitely confusing. I changed it in my other books, Financial Freedom through Electronic Day Trading and Safe Strategies for Financial Freedom, and I’ve also made sure that it is crystal clear in this book as well.
  • I now strongly believe that systems can be thought of as distributions of R multiples that they generate, which you’ll understand better as you read the book. When you understand this, your perspective on trading systems will totally change.
  • Because systems can be thought of as distributions of R multiples, it’s also possible to use those distributions to simulate what your future results might be like. And even more importantly, such simulations will tell you how to position size your system to meet your objectives. I’ve placed a strong emphasis on this topic in this new edition.

In addition, there are many small but significant changes in this edition that will help you become a much better trader or investor. I hope you benefit as much from the second edition as many people have claimed to have benefited from the first.

Van K. Tharp, Ph.D.
August 2006