In memory and appreciation of Dr. Van K. Tharp
I’m very sad to hear of the passing of Dr. Van K. Tharp. Van Tharp was a trading coach and psychologist. But he taught so much more than trading.
"You do not trade the markets. You can only trade your beliefs about the markets."
His mission; "Transformation through a trading metaphor." He didn't just teach, coach, and train better traders. He helped people live better lives.
Van Tharp’s books were the first ones I picked up when I got seriously interested in trading. The first note I made on his work is dated August 2012 and I still read something from him almost every day. His books introduced me to concepts such as:
System Quality Number
Percent-risk position sizing
The 10 tasks of trading
Tharp think (which I have included below)
and so much more.
The principles he taught have changed my life in so many other, better ways.
Van founded and ran the very successful Van Tharp Institute. Coaching classes and seminars there are always in high demand and come with a substantial price tag. But Van was incredibly generous with his time and knowledge by offering frequent online workshops, email newsletters, interviews, and articles for free. I never attended any of the workshops at the Van Tharp Institute in Cary, NC. But I did participate in many online seminars and I've read (and re-read) many of his books.
His book "Trading Beyond the Matrix: The Red Pill for Traders and Investors" is available for free. You only pay for shipping.
Van has been and will continue to be one of the top teachers for beginning traders and "Super Traders" alike.
Rest easy Dr. Tharp. Thank you for all that you have done.
Tharp Think Principles
1. Successful trading can be modeled and taught to other people.
2. Learning to trade well requires as much work/education as any other profession
3. You need to find a trading system that fits you.
4. In order to accomplish that, you must know yourself:
a. Your values
b. Your strengths
c. Your weaknesses
d. Your parts (see Section II)
e. Significant beliefs (spiritual, self, market, system)
f. Trading edges
5. You can only trade your beliefs about the markets, not the markets themselves. Thus, you should know and understand your beliefs and whether or not they are useful.
6. System development is 100 percent (1) beliefs, (2) mental states, and (3) mental strategies. Thus, it is 100 percent psychology.
7. You must know your personal criteria for being able to trade a system with confidence. What do you mean when you say that we trade our beliefs? Knowing your reward-to-risk in a trade. It should always be 3 to 1 or better at the beginning of a trade and at least 1 to 1 toward the end
8. A mistake means not following your rules. If you don’t have rules, everything you do is a mistake. It is much better to trade a lower-scoring SQN system that fits you than a higher-scoring SQN system that doesn’t fit you.
9. You are responsible for everything that happens to you. When you understand this, you can correct your mistakes. We call this respond-ability.
10. Repeating the same mistake over and over again is self-sabotage. 12. A trader who makes one mistake in 10 trades is 90 percent efficient; that 10 percent drop in efficiency could be enough to make him/her a losing trader
11. Fifty percent of system development is thinking through and clearly defining a set of written objectives. Those objectives should address your desired gain, your maximum acceptable drawdown, and the relative importance of each.
12. You need to design core objectives that fit you.
13. There are potentially as many objectives as there are traders.
14. You meet your objectives through position sizing strategies.
15. The overwhelming majority of your performance is due to your position sizing strategy and your efficiency as a trader.
16. You must know your mission/purpose in life and incorporate that into your trading.
17. You need to know your financial freedom number (passive income per month less monthly expenses). When it’s positive, you are financially free.
18. Never open a position without knowing the initial risk.
19. Define your profits and losses as a multiple of your initial risk (R-multiples).
20. Limit your losses to 1R or less.
21. Make sure your profits on average are bigger than 1R.
22. Never take a trade unless the reward-to-risk ratio of that trade is at least 2:1 and perhaps even 3:1.
23. Your trading system is a distribution of R-multiples
24. When you understand #6, you should be able to hear/see a description of a system and know the kind of R-multiple distribution it would generate.
25. The mean of that distribution is the expectancy, and it tells you what you’ll make on the average trade. It should be a positive number.
26. The mean, standard deviation, and the number of trades determine the SQN score for your system.
27. Your SQN score tells you how easy it will be to meet your objectives using position sizing strategies. Other than that, your system has nothing to do with meeting your objectives.
28. Systems are usually named after their setups, which are usually based on some attempt to predict future prices. Prediction has nothing to do with trading well.
29. System performance has to do with controlling risk and managing the position through your exits. You are not predicting what the market will do, you are making a reasonable estimate that your risk-to-reward ratio is at least 2 to 1. If that’s the case and you’re right at least 50 percent of the time, then you’ll have a positive expectancy system.
30. There are at least six different market types. You should understand how your system will perform in each of them.
a. Bull volatile
b. Bull quiet
c. Sideways volatile
d. Sideways quiet
e. Bear quiet (almost doesn’t exist)
f. Bear volatile
31. It’s easy to design a Holy Grail system (one with a high System Quality Number score) for any one market type listed above.
32. It’s insane to expect that trading system to work in all market types.
33. The biggest mistake people make is to try to design one system to fit all markets.
34. You should only trade your system in the market type for which it was designed.
35. Good traders understand the big picture, know how to measure it, and become aware when the situation changes
36. Media and academia know none of this and will not teach it to you.
37. For each market type, you need a large sample size to estimate what the population is for that system.
38. You also need to do Monte Carlo simulations with your system’s R-multiples to get a better idea of what to expect in the future. This will work if the sample you draw from is similar to the population.
This list was written by Dr. Van Tharp and has been collected from a note I made in June 2013. There have been some revisions and adjustments to this list over the years. Other documents may show slight differences. But the foundation is the same.
For more of Dr. Tharp's work please visit www.vantharp.com or view his books here.
Hi Andrew...this is by far the best summary I have ever read of Van's work. I have currently almost completed his ST program. He was truly a gift to all of us...personally and for our trading. Thank you for such a wonderful post!
Great Post. So much gold in there