Van K. Tharp

In the unique arena of professional trading coaches and consultants, Van K. Tharp stands out as an international leader in the industry. Helping others become the best trader or investor they can be has been Tharp’s mission since 1982. Dr. Tharp offers unique learning strategies, and his techniques for producing great traders are some of the most effective in the field. Over the years, Tharp has helped people overcome problems with system development, trading psychology and success-related issues like self-sabotage. He is the founder and president of the Van Tharp Institute, dedicated to offering high-quality education products and services for traders and investors around the globe.

Big Money’s Rules

Generally, big money believes the more people that play the trading game, the easier it is for them to make money. And, as I said before, big money has a set of rules for how it makes money, which has little to do with you making money. I’ve listed some of the rules created by big money here.

They profit on commissions, which they take whenever you make a trade, whether or not you make a profit. In fact, the industry considers it unethical for a broker to take fees based on the profitability of his clients. They make markets and get the bid/ask spread on every transaction.

• They continually invent new products for you to buy and they profit when you do so.
• They get paid a fixed fee based upon the amount of assets that they are managing without respect to their performance.
• They also get you to believe that you have to follow a certain set of rules for success in the market.
• Selecting the right investment (i.e., picking the right stock) is everything.
• When you find the right investment, buy it and hold it for the long term.
• Spend a lot of time analyzing the market to find the right investment.
• Listen to experts for advice, including newsletter writers, brokers, and the investment gurus on television.
• The market will determine whether you make money. You are at the mercy of the market in the short term, but if you hold on, you will prevail.
• If you do lose money, it’s not your fault. Find someone to blame and a good lawyer to help you sue them.
• The market is efficient.
• Asset allocation is very important (even though most people are not sure what that means).

The New Rules

The new rules are born out of the idea that trading is as much a profession as is any other profession. Most people spend many years learning their profession, but anyone can start trading today. Can you imagine walking into a hospital and saying, “I think I’ll try some brain surgery today.”? It just won’t work. Yet you can open an online brokerage account, transfer in $100,000 and, suddenly, you are a trader. Trading with no preparation, however, could be as fatal to your account as performing brain surgery would be on that unlucky patient in the hospital.

It takes significant time (several years) and a deep commitment to becoming a successful trader. I hold a similar belief to author Malcolm Gladwell that the best people in every field usually excel because they have successfully practiced their craft for 10,000 hours. That means they know enough about their field to produce success. By working on your personal psychology (which we’ll cover in the second level of transformation), you learn how you produce your own trading results and how you have tended to make everything much more difficult than it need be.

Learning the key rules is an essential part of this process. Here are some of the new rules that make up the first level of transformation:

• You are totally responsible for your performance as a trader; therefore, you should devote significant time to working on yourself in order to be successful.
• It’s important to know your initial risk in a trade before you enter a position—this allows you to ensure that your trade has a favorable probability for a sufficient reward-to-risk ratio. In other words, it will help you cut your losses short and let your profits run.
• Calculate the R-multiples of all your trades; this allows you to think of a trading system by the distribution of R-multiples it generates.
• Measure the quality of a trading system by its SQN® score. The SQN score tells you how easily you can meet your objectives through position sizing™ strategies.
• Position sizing strategies help you meet your trading objectives.
• There are as many objectives as there are traders.
• You can easily develop a Holy Grail trading system for any one market type; however, it is impossible to develop a system that will perform well in all market types.
• Your trading system must fit you. In fact, trading a good SQN system that fits you is probably better than a great SQN system that doesn’t fit you. Trying to trade a system that doesn’t fit you will likely cause you to make a lot of mistakes and see poor results—regardless of the system’s SQN score.
• Great performance is a function of the market, your system, and you as shown in the diagram below where the three circles intersect.
• Minimize your mistakes and trade at 95% efficiency or better. You make a mistake when you don’t follow your rules. If you don’t have rules, everything you do is a mistake. When traders do have rules, most of them have trouble trading above 70% efficiency (3 mistakes every 10 trades) simply because they haven’t worked on themselves. Trading at 70% efficiency will destroy the results from a good trading system.
• Trading is a process that can be statistically measured and described if you understand probability and sampling theory. Within one market type, the mean and standard deviation of your system’s R-multiples will give you a good idea about the future performance of that system under those same market conditions.
• Winning is a function of planning, so write a business plan to guide your performance and keep working on that document as you evolve as a person and trader.

Can you see how the first set of rules can lead to disaster while the second set of rules are a major transformation of the trading game and can lead to success?

Learn more about his work at www.VanTharp.com.