SUPER TRADER
MAKE CONSISTENT PROFITS IN GOOD AND BAD MARKETSBy VAN K. THARP
McGraw-Hill
Copyright © 2011 Lake Lucerne LP
All right reserved.
ISBN: 978-0-07-174908-4
Contents
Chapter One
PART 1 WORKING ON YOURSELF
The Components of Trading Well
I'm a neuro-linguistic programming (NLP) modeler and a coach for traders. As an NLP modeler, I encounter a number of people who excel in something, determine what they do in common, and then determine what beliefs, mental strategies, and mental states are required to perform each task. Once I have this information, I can teach those tasks to others and expect to get similar results. My job as a coach is to find talented people and make sure they learn and follow the fundamentals of my modeling work.
I remember doing a workshop with the Market Wizards Ed Seykota and Tom Basso around 1990. All three of us agreed that trading consists of three parts: personal psychology, money management (which I subsequently renamed "position sizing strategies" in my book Trade Your Way to Financial Freedom), and system development. We also agreed that trading psychology contributes about 60% to success, and position sizing strategy contributes another 30%, which leaves about 10% for system development. Furthermore, most traders ignore the first two areas and don't really have a trading system. That's why 90% of them fail.
After years of extensive modeling in all three areas, I now disagree slightly with our conclusions in 1990. First, I would argue that trading psychology accounts for 100% of success. Why? This conclusion is based on two findings. First, people generally are programmed to do everything the wrong way. They have internal biases that seem to lead them to do the exact opposite of what is required for success. For example, if you are the most important factor in your trading, you should spend the most time working on yourself, but the majority of people totally ignore the "you" factor in their success. Read over the checklists in this part that deal with good trading. If you've worked extensively in all the areas listed, you are probably very successful and are certainly a rarity.
Second, every task I model requires that I find the beliefs, mental states, and mental strategies that are involved. All three ingredients are purely psychological, so it's hard not to conclude that everything is psychological.
I now think that there are six components to trading well:
1. Developing and consistently maintaining a trading process. The trading process encompasses all the things you need to do on a day-to-day basis to be a good trader.
2. Understanding the wealth process. To trade successfully, you need to explore your relationship with money and why you do or do not have enough to trade with. For example, most people believe that they win the money game by having the most toys and that they can have it all right now if their monthly payments are low enough. This means that they save zero dollars and are over their heads in debt. If this is you, it also means that you don't have enough money to trade. Not understanding this process is one of the major reasons that individuals, corporations, and governments in the United States and around the world are in such deep debt.
3. Developing and maintaining a business plan to guide your trading. Trading is a business. The entry requirements are much easier than they are for other types of business because all you have to do is deposit money in an account, sign a few forms, and start trading. However, the entry requirements for successful trading require that you master all the areas listed here. That requires a lot of commitment, which most people do not have. Instead, they want trading to be easy, fast, and very profitable.
4. Developing a system. People often consider their system to be the magic secret for picking the right stocks or commodities. In reality, entry into the market is one of the least important aspects of good trading. The keys to a moneymaking system are elements such as determining your objectives and the way you exit a position.
5. Developing position sizing methods to meet your objectives. We've discovered through our simulation games that 100 people at the end of a set of 50 trades will have 100 different equities. (They will all get the same 100 trade results.) This extreme variability of performance can be attributed to only two factors: how much they risked on each trade (that is, their position sizing methods) and the personal psychology that determined their position sizing decision.
6. Avoiding mistakes. I've seen many short-term trading systems that would allow you to make 2R (twice your risk) per week or more. If you risked 1% of your equity on each trade, you would consistently make well over 100% each year. But most people cannot do this because they trade at about 70% efficiency or less. This means that they make three mistakes (meaning they don't follow their rules) every 10 trades. This will turn any winning system into a losing system.
Based on the six components of trading well, rate yourself by asking the following questions:
How well have I mastered the discipline of trading well each day? Do I do a daily self-analysis or a daily mental rehearsal to begin each day? If not, why not? I will give you a lot of ideas about how to improve in this area in the remainder of this book.
Do I really have enough money for trading to make sense? If you do not, you probably need to work on yourself and the wealth process.
Do I have a working business plan to guide my trading? If you don't, you are not alone. We estimate that only about 5% of traders have a written business plan. Then again, perhaps you've heard that only about 5% to 10% of all traders are really successful. Part 2 of this book will guide you toward developing this kind of working document.
Do I have a set of objectives thoroughly written out to guide my trading? Most people don't. How can you develop a system to meet your objectives without having objectives?
Have I paid attention to the how-much factor—that is, my position sizing strategy? Do I have a plan for using my position sizing method to meet my objectives? It is through position sizing strategies that you either meet or fail to meet your objectives.
How much time do I spend working on myself? You have to overcome your psychological issues and develop the discipline necessary to carry out the processes described above, which are necessary for success and for avoiding mistakes.
Most of the items described here could be the topic for an entire book. However, my intention is to give you an overview of what is required for successful trading, and my job as a coach is to find talented people and coach them on following the fundamentals I've described here.
Do an Honest Self-Appraisal
Peak performance traders are totally committed to being the best and doing whatever it takes to be the best. They feel totally responsible for whatever happens and thus can learn from mistakes. These people typically have a working business plan for trading because they treat trading as a business; that business plan gives them the confidence to do what they need to do to make large returns from the market and learn from the mistakes they make.
The first section of this book is not about some hot new investment. It's about how to be in the best possible condition mentally to trade...
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