Tharp's Thoughts Weekly Newsletter (View On-Line)

  • Article Understanding Your Trading Systems
  • Trading Education Tentative Schedule for Spring 2014
  • Trading Tip Attempting to Understand Money Creation by D. R. Barton, Jr.
  • Matrix Insight Entry by Vincent Z.

This November, VTI is excited to host three workshops taught by Dr. Ken Long, two of which have never been offered before!

kenOn November 8-10, Ken will be teaching his popular Swing Trading Systems workshop from 8am to 4:30pm, followed by the new Turbo Trading Systems workshop in the evenings, 6pm-9pm.

After three days of this schedule, you may want to stay on for an additional 2 days to live trade the systems you have learned, side-by-side with Ken.

If you've never been to one of Ken's workshops before (or even if you have), watch this video to get an idea of all the great information Ken teaches.

For more information or to see the full workshop schedule, click here.


VanUnderstanding Your Trading Systems

From the eBook:

Eight Edges You Must Have:
Your Written Trading Plan

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Most people don’t understand that they need a trading system if they are to make money in the markets. Most importantly, that system must fit you, your objectives, your psychology, and your beliefs, for you to be able to trade it effectively.

Furthermore, that system, at minimum, needs an abort signal (when you know you were wrong about the trade), a profit taking exit, and a position sizing strategy to meet your objectives. Without those criteria as a minimum, you don’t have a system.

Money is made by cutting losses short and letting profits run. It’s made not by being right most of the time, but by always thinking in terms of the reward-to-risk ratio throughout the trade. What is my potential reward right now? What is my potential risk? If the reward-to-risk ratio is not favorable, then you should not be in the trade. That’s why I always recommend that you think of your profits and losses in terms of the initial risk in the trade (or the trade R-multiples*). When you understand that your system is characterized by the distribution of R-multiples that it takes on, then you start thinking reward-to-risk, and that’s the road to success in the markets.

However, there are other key aspects to systems. You must know your objectives. What do you expect to achieve with your system? What can you tolerate in terms of drawdowns while you are trading? When you understand yourself, then you can come to terms with objectives that will fit you. When you do that, then you can begin to design a system that fits you. However, most people don’t think about their objectives, and thus they could never design a system that fits them.

Another key aspect of a system is that you don’t trade the market. Instead, you should trade your beliefs about the market. Until you have useful beliefs or can find useful beliefs, then you won’t be successful in trading. However, even when you have useful beliefs, you still must develop or find a system that fits those beliefs. To try to design or develop a system without knowing the beliefs that it must fit is a recipe for disaster.

For example, suppose you believe that you should buy something when it’s undervalued and sell when it’s overvalued. The first thing you should do with this belief is determine if your understanding of value has any validity. Is it useful? My impression is that most market analysts have nonuseful definitions of value when they assess the market value of a stock. For them, determining value is a mental exercise for which they get paid six-figure salaries, but it has nothing to do with the future price of the stock.

However, suppose your definition of the value of a stock is the liquidation value of the company. What would it sell for if you could liquidate it in a year? And if you subtract the company’s debt from that amount, is it still a positive value? What’s that liquidation value expressed per share of stock? What if the actual value of the stock is so depressed that it is selling for, say, 70 percent of the liquidation value of the stock? Now, that to me is a reasonable definition of value. I talked about this strategy in my book Safe Strategies. Another good definition of value might occur when a stock is carrying some assets on its books at $2 each when their real value is $20,000, and the stock is selling for only book value; again, that translates into real value.

However, most analysts determine something like (1) what the value of some new product might be to the company (such as the latest iPhone), (2) what the growth factor of the company would be with this new product, and (3) what price-earnings (P/E) ratio it should command with that growth factor. This, to me, has no real validity, but analysts get paid six-figure salaries to play this game. Who am I to argue with a game that pays so well? You might consider subscribing to some of the e-mails called “seeking alpha” (see for a good example of this. About 20 percent of e-mails I receive now tell me why Apple stock is overvalued and another 20 percent tell me why Apple is undervalued.

If you have beliefs about value that are useful, then you could probably translate them into a reasonable trading system. However, if you have such beliefs, could you buy a stock that just kept going up in price—all the way from $50 to $200—even if it didn’t have “value,” according to your definition, at a price of $50? You probably couldn’t because you can only trade your beliefs. Thus, for a system to fit you, you have to assess your beliefs about the market, the usefulness of those beliefs, and whether you can find something that fits those beliefs.

Most people don’t make such assessments. They don’t even understand the impact of their beliefs. Thus they purchase a system and wonder why they cannot trade it and why it doesn’t fit them.

Developing Your Edge

You need to understand that a system is a collection of beliefs about the market. That collection of beliefs should give you:

  • Setup conditions that must exist before you will enter the market.
  • A specific well-defined entry signal.
  • A worst-case exit that tells you when you are wrong about the trade and that defines what a 1R loss will be for you in that trade.
  • Your profit taking exit methodology.
  • Your objectives for that system; those objectives should say something about what sorts of gains you are looking for, what sorts of drawdowns you can tolerate, and the relative probability of each (e.g., you are willing to tolerate a 50 percent chance of a 15 percent drawdown).
  • A position sizing algorithm for meeting those objectives.
  • Last, an understanding of the various market conditions for which you should trade the system and the market conditions for which you should avoid the system.

When you understand your beliefs about each of these parts of a system, then you can run those beliefs through my belief examination paradigm as discussed in my newest book, Trading Beyond the Matrix: Taking the Red Pill for Traders and Investors.

*For more information about R-multiples, see my YouTube video here.

About this excerpt: The above section is an excerpt from Van Tharp's ebook, Eight Edges You Must Have: Your Written Trading Plan, published by John Wiley & Sons.

Click here to learn more about the eBook.


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Trading Education

Last 2013 Oneness Training is in November.

Fall 2013
November 8-10

Swing Trading Systems Workshop
with Ken Long


November 8-10

NEW! Turbo Charge these Swing Systems
with Ken Long

Stay late and Ken will show you how to use swing trading systems to catch intra-day moves.

November 11-12

NEW! Live Trading for Turbo Systems
with Ken Long

2 days of live trading alongside Ken Long

November 16-17

 Oneness Awakening Weekend
with Van Tharp and Janie Guill

December 8-15

The Annual Super Trader Summit

Click here to learn about the Super Trader Program


Tentative Schedule for Spring 2014

Do NOT book any travel based on these dates as they may change...

January 2014: Cary, North Carolina
January 16-18 Peak Performance 101
January 20-23 Peak Performance 202
January 25-27

Peak Performance 203

March 2014: Sydney, Australia
March 7-9 Peak Performance 101
March 11-13 Blueprint for Trading Success
March 15-17 How to Develop a Winning Trading System That Fits You


If you are in South Africa and would like have Van host a workshop there, please contact us at There is a possibility he will be visiting South Africa in early to mid 2014.

Click here to see the full workshop schedule or to register.

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Trading Tip

DRWhere Does the Fed's Stimulus Money Go?
Part II

Attempting to Understand Money Creation

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Each spring, the University of Delaware holds an economics competition for elementary school children from all over the state.  It gives me great joy to participate in coaching teams of 3rd through 6th graders on the basics of economics, entrepreneurship, and presentation skills so they can learn through competing.

The test portion of the competition always includes a question about the meaning of money, so I teach the kids the classic economics definition: “Money serves as a medium of exchange, a store of value or a unit of account.” Originally, items with perceived value were used as money—things like shells and eventually precious metals. Now, paper (gasp!) serves as the physical representation of money in most parts of the world, backed by nothing but a government (or coalition) promise.  In reality, the majority of money, as it is used in commerce today, is just a concept, tracked by 1’s and 0’s in the electronic ether…

One of the great misunderstandings of modern finance is exactly how money is created and the significant effects that new financial innovations are exerting on the money supply.

This Is Not Your Momma’s Money Creation

What many policy makers learned in school 20 or more years ago about money creation  has not worked in at least two decades, according to Peter Stella, former head of Central Banking and Monetary and Foreign Exchange Operations Divisions at the International Monetary Fund.  (I can only assume that he got tired of carrying around business cards large enough to hold that title and left the IMF to form his own consulting company…)

Stella, in his blog, lists the textbook money creation stream as follows:

  1. All credit was provided by banks.
  2. All bank credit (assets) was funded by the issuance, or creation, of depository liabilities (money) subject to a reserve requirement.
  3. Central banks controlled credit/money/inflation by rationing bank reserves. A stable 'money multiplier' was hypothesized to allow central banks to accurately predict the eventual impact of changes in bank reserves on money and credit.

While that’s a beautiful theory, Stella states his problem with it; “…none of those three assumptions has been true for at least a generation.”  First of all, the Fed no longer rations reserves (understatement of the year). As I mentioned in my last article, bank reserves have grown by $2.2 trillion since 2008.  At the same time, credit from commercial banks has not gone up at all.  Today, central banks main technique for influencing credit is by altering the interest rates that banks must pay on their reserves.

So why have reserves at all?  Stella again clarifies—to facilitate the management of the payment system.  Hence the Fed’s balance sheet expansion has the system primed with plenty of lubricant for payments and settling transaction among banks.  (To be fair, the QE has certainly provided other effects, including important psychological ones that we’ll cover in a future article.)

In short, bank reserves held at the Fed have very little direct relation to lending and credit. This leads us to the conclusion that, today, traditional “monetary policy” has almost nothing to do with money!

Most of the credit created today does not come from central bank reserves but from the so-called shadow banking: a stew of hedge funds, money market funds, investment companies, etc.  In a 2013 IMF paper, Stella and Claessens define shadow banking as, “all activities except traditional banking that require a private or public backstop.”

If new credit creation is not coming from the banks, as shown by the added $2.2 trillion in reserves since 2008, with zero growth in commercial bank loan amounts, why does QE continue?

We’ll dive deeper into that question next week.  Until then, your thoughts and comments are welcome — please send them to drbarton “at”

Great Trading,
D. R.

About the Author: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena. He is a regularly featured guest on both Report on Business TV, and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio. His articles have appeared on and Financial Advisor magazine. You may contact D.R. at "drbarton" at "".


MatrixTrading Beyond the Matrix

Matrix Insight Entry

I just wanted to thank you for all of your help over the past 10 years with your teachings in helping me to trade better; but your latest book, Trading Beyond The Matrix, was a grand slam that pushed me over the top of my obstacle heap. I can now actually feel my daily actions and behaviors resembling that of what you would call a Super Trader and I cannot thank you enough for giving me the red pill that made it happen! 

It was page 355, Table 18.2, question 1 that was the greatest insight to me. To make a long story shorter, I was following everything in the book nicely up until that point with an "alright, nice stuff, don't know how I should approach and use this stuff, what else is new?" attitude. Then when you said I should list several hundred beliefs about myself and the market and if you haven't, you probably have a lot of prep work to do, I said to myself "Really? Wasn't a dozen or so each enough? What could I possibly get out of doing this? Oh well, let's do it because that's part of taking the red pill." At first, I could only write down 12 beliefs of myself and then I was stuck. (Of course I was stuck, because that was all I believed I knew!) But then, when I wrote down #13, things started to happen. It was as if I had pierced a very small hole through a previously impenetrable membrane. I continued writing and as I wrote more and more beliefs down (and it felt harder and harder like trying to pry through a tough membrane), I started to see things about myself that I couldn't see consciously! I now began to actually see where I could get identity beliefs for the "parts" to do a Belief Examination Paradigm. 

The BEP process then lead me to drop several major beliefs which broke the dam and enabled me to move forward on doing things to become a Super Trader. I did the same with my beliefs of the market, and I adjusted my trading systems with the beliefs I dropped. I now have what I feel are better, lower risk, better-to-follow-the-rules systems all because of this little exercise. And I am only on #200 beliefs for self and for market (at least another hundred to go to get to several hundred)! And I can already experience the positive affect in my being and awareness of the world and events around me.

I stopped trading back in August when I started reading your book. I am not going to resume trading until I complete my Trading Business Plan which should be within a few more weeks. But I watch the markets and I recently "aborted" an entry into the corn futures market. My old system would have gotten me into the trade and, as of today, I would be in a position at my stop loss and wondering should I stay in to see if it will turn around. Instead, I am quietly waiting for the next entry opportunity and ready to pull that smaller stop loss trigger if necessary. I look forward to trading again having this new found feeling as "my edge".

God bless you,

Vincent Z.


Editor's Note: Recently, we wrote to you to tell you about a contest. We want to hear about the one most profound insight that you got from reading Van's new book, Trading Beyond the Matrix, and how it has impacted your life. If you haven't purchased Trading Beyond the Matrix yet, you can do so here. When you are ready to tell us about your insight, send an email to We are looking forward to hearing from you. If we pick your submission we will share it this newsletter.


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October 9, 2013 #650


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