Trading Your Beliefs
With Van K. Tharp
by Jayanthi Gopalakrishnan
Often imitated, never bested, Van Tharp is an original and a pioneer in the field of trading psychology. Van Tharp has been a coach and consultant to traders since 1982. He is the author of numerous books and home-study program and is widely recognized for his best-selling books Trade Your Way To Financial Freedom and Safe Strategies For Financial Freedom. His Peak Performance program is a well-regarded classic that is suitable for all levels of traders and investors.
STOCKS & COMMODITIES Editor Jayanthi Gopalakrishnan spoke to Van Tharp on September 6, 2006, and put together this interview with a combination of the spoken conversation and written answers.
There are beliefs about your strengths and weaknesses and who you really are that dictate the type of trading you can do.
Why is it so important to take an inventory of your skills, temperament, time, resources, strengths, and weaknesses before you trade?
People will not trade a system competently unless it fits them. It has to fit who they are and their current lifestyle. For example, if you have a full-time job, you probably would have trouble daytrading or even swing trading. You have to design a system that really fits your personality.
But it's more elaborate than that. First, you don't trade the markets, you trade your beliefs, so it's important to take an inventory of your beliefs. I believe there are three categories of beliefs.
What are they?
There are beliefs about your strengths and weaknesses and who you really are that dictate the type of trading you can do. I covered these extensively in my book, Trade Your Way To Financial Freedom, and even interviewed Market Wizard Tom Basso on his beliefs as an example.
Then you have beliefs about the big picture, setups, entry, exits, and position sizing. And then there are beliefs that result in emotional problems that could upset your trading.
What is the best way for somebody to objectively and honestly do something like this? What are the three different types of beliefs?
It's a long-term process. It usually takes people a couple of months. You just start writing down your beliefs. For example, the three types of beliefs can be broken down, with one basically being about who you are, relating to trading. Things like, "I have a full-time job. I want to play the markets, but I don't want to spend more than half an hour in the evenings looking at closing data. I want to put my orders into the market in the evening to be executed at the opening, or whenever my stop is hit." That would be one type of belief.
What's another type?
Another belief would be: "I'm a full-time trader. I think the best profits come from short-term trading where you get lots of opportunities and I am willing to put in the commitment to do that." That is one set of issues that defines who you are. Another set of issues defines your objectives, and what you are trying to accomplish.
Then you have other kinds of beliefs that need to be cleared out before you ever trade. This involves thought processes such as, "I'm not worthwhile" or "I get angry if such-and-such happens." You might not realize some things about yourself, but if you do enough of an inventory, you will figure those things out. And you need to because they produce emotional responses that get in the way of your trading.
What if somebody found out they carried a lot of emotion, in the sense they would not be able to accept losses? Would you recommend they not trade actively, and probably venture into making long-term investments?
I don't think that would be a good idea. If they think the solution
is buy & hold, they may make one good investment out of 20 stocks,
and the other 19 would not do so well. You really have to recognize your
behaviors and sort them out. That's why I conduct a peak performance course
that is all about doing that. It is an ongoing process, and the nice thing
about it is that you get happier and more functional in life once you understand
yourself. It is not just about improving trading. It is about improving
you.
...Continued in the November 2006 issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the November 2006 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2006, Technical Analysis, Inc.
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