My passion has always been to model how people do something, be able to do that myself, then teach others how to do it. I got an undergraduate degree in psychology in 1964, however, the primary emphasis for psychology was considered to be science (I believe this still is the case) and behaviorism. The belief behind behaviorism was, “We don’t care what goes on inside the brain (the black box), we only want to look at what is measurable. So, they look at the stimulus and the reinforcement given and determine the responses gotten and make laws based upon that alone. That wasn’t what I wanted, so I decided to do my graduate work in Biological Psychology — what goes on inside the brain.
Well, behaviorism was still rampant in graduate school and the approaches were very much the same. Stimulate this part of the brain and see what response you got. Cut out that part of the brain and see if you could determine what behavior was missing. It’s all the same model. And it didn’t teach me how to model. Now, I would probably still be in the field if I had gotten my Ph.D. recently — instead of 41 years ago. Right now they say that 95% of what we know about the brain has been learned in the last 25 years — and I believe that. I didn’t think I learned that much in the graduate program and was totally perplexed when whole groups of scientists would get together for some conference on what some obscure part of the brain probably did — and they couldn’t agree.
My Experience in NLP and Modeling
But then I discovered NLP (neurolinguistic programming) which I now consider the science of modeling.
NLP researchers, Bandler and Grindler had modeled some of the top therapists in the world — Fritz Perls, Virginia Satir, and Milton Erickson — and they were giving classes on NLP. Tony Robbins was also in the field as a young 26 year-old, claiming that he’d personally modelled everything about human success. I took Tony Robbins courses but decided he was not the master and his “high energy, rah-rah motivation” wasn’t what I was looking for at all. So I eventually took John Grinder's Practitioner Course, a Master Practitioner from Tad James, several courses from NLP Comprehensive, and most of the courses that Robert Dilts offered (I think at one point I was given a certificate as an associate trainer). But there was only one problem — I was learning a trail of techniques that people had developed from modelling others, but not how to model.
Richard Bandler’s strategy was to duplicate micro-strategies which was good for developing models that caught the subtleties of certain therapists, with each one being different.
David Gordon had come out with a model for modeling based upon the criteria for doing some task, but it tended to be based upon the skills of one individual and if you didn’t get the criteria right you didn’t get the model right.
To the best of my knowledge at the time, no one had ever modeled a huge project that involved many complex dimensions. But I wanted to model good trading/investing and that is a huge, complex process.
Then I took a modeling course from Wyatt Woodsmall (who I understand moved to the UK and is actively teaching there) that give me what I need. Wyatt said the following (but of course there were lots of details I’m not giving you here):
To model something, you first need a number of people who could perform the task well.
He emphasized (unlike Bandler) that if you just modeled one person you could easily get the idiosyncrasies of that one person rather than what was critical for the model.
When you have a number of people who do something well, you find out what they do in common. What are the common tasks?
When you get the common tasks, then you must determine the three ingredients for each task: 1) the critical beliefs behind doing the task well; 2) the mental state necessary to do the task; and 3) the mental strategy necessary to do the task (i.e., the sequencing of thought).
For me the formula was a huge breakthrough. I was part of the original Market Wizards book and I had access to a number of great traders. And I had a basic formula to use. As a result, I was off on my lifelong project of modeling good traders.
Developing Trading Models
The first model I developed was of the trading process. I interviewed good traders exploring what they did during the process of trading. They’d each tell me a little about their system, but their systems were all different (see Woodsmall, point 2 above) and that helped me understand that success wasn’t due to a specific system. This eventually led to my development of the Tasks of Trading. The Tasks of Trading as a model is taught in our Peak Performance 101 Workshop (where we also emphasize beliefs, mental states and self-sabotage). Traders can also study these concepts in the Peak Performance Home Study Course..
The second point that came out of all the modeling work was that something called money management was critical to trading success. Thus, I researched the topic of money management extensively. However, it became obvious that traders used the term “money management” to name lots of things. Some people managed money for others and called what they did money management. Money management also meant how to manage your finances and be wise with money. And even among the people who knew that money management (as they were talking about it) meant “how much” were still confused about the topic. In an effort to really demonstrate this “how much” factor, I developed and wrote a publication called the “Money Management Report.” After that I wrote “Trade Your Way to FF” where I coined the term “position sizing” to specifically define what this meant. Shortly after the publication of that book journalist and chat room members all started using the term and it became a part of trading lexicon. Today it’s used worldwide.
Eventually, as I refined this idea more and more, it became clear how important position sizing techniques were to help you meet your objectives as a trader. And that your system had nothing to do with that except to determine how easy it would be to do that through position sizing techniques. And finally, I wrote the book the Definitive Guide to Position Sizing Strategies, with the second edition containing virtually everything you could possibly want to know about this topic. Soon, we'll offer a video series to simplify what you need to know about the topic, and we’ll also be turning the book and a video series into a full course on the topic. Position sizing is a game changer when it comes trading - it's important to me that traders "get" this point.
The third model I developed from my NLP modeling could best be called “How to Develop a System that Fits You” and, which my most current thinking expands on this to include, “…for a Particular Market Condition.” I first developed a workshop by this name, that I gave with Tom Basso, in 1993. But at that point, I hadn't yet discovered three more important modeling points.
That you met your objectives through position sizing, not your system. And,
That there were different market types and that it was fairly easy to develop a system that was pretty good for one market type but unrealistic to expect it to work in all market types.
Systems development requires that you become a systems thinker but only about 20% of the population is even capable of doing that. We expect that our Super Trader program, however, changes people enough so that everyone who completes Super Trader 1 can be a systems thinker. (I have been working with Ken this past year to develop a course on this topic as well. More on that below).
What is relatively new for Tharp Think, however, is a process that Dr. L. Michael Hall developed called Mind to Muscle. I always thought that you needed to decide that a belief was useful and that you would/could automatically adopt it. But apparently, you really need to get critical beliefs like the Tharp Think beliefs into the muscle (meaning fully into your body-mind) for them to be really yours. The Tharp Think principles are neatly outlined in Trading Beyond the Matrix. And we now have Super Trader lessons to make sure that our Super Traders get them into their neurology.
A fifth model is the Infinite Wealth Model. In Peak Performance 202 we teach the concepts of games. My definition of a game is any situation in which you can either win or lose and the possibility of wining/losing makes it a game. (Dr. L Michael Hall has a much broader definition in which any human activity can be considered a game, but I prefer my definition). And the reason I prefer my definition is that we you understand that you are playing a game you can change the criteria for winning and losing and totally change the game.
So you get brainwashed in life that you win the money game by having the most money. Someone famous once said, “I get up each morning and I look at the Forbes 400 list. If I’m not on it, then I go to work.” John D. Rockefeller, who his was probably the richest man ever, was asked “Now that you have all of this money, what do you want next?” His response was “More!” That pretty much says that you win the money game by becoming a billionaire and that means being among the top 400 wealthiest people in the world. But it probably used to mean being a millionaire — that’s what it meant to me when I was about 10 and said that I was going to become a millionaire. And by that definition you would only have to be in the top 1% of people in the United States. But you could also take this definition to the extreme and say that you don’t win the money game until you are #1 on the Forbes 400 list.
Of course, most people can even hope to reach the millionaire definition so big money has given them a new way to play the game. The new game says you win the money game by having the most toys — or at least more toys than all your neighbors. And then “big money” introduced credit cards and said you can have any toy you want if the down payment is low enough and the monthly payments are affordable. This version of the money game, however, wasn’t a path to wealth; it is the path to financial slavery.
As a result, we changed the rules of the game. The new game is called the Infinite Wealth Game. You win this game when your passive income (my definition is that passive income is money that doesn’t require more than 2 hrs work per day to obtain) is greater than your expenses. And if you calculate your monthly expenses and your monthly passive income, you actually can obtain a FF (see definition above) number. And, of course, the model we’ve developed has all sorts of things you can do to reduce that number below zero quickly.
When I first realize this, I was a millionaire, but my FF number was quite high. But knowing the new game, I took me less than six months to achieve FF. And we now consider this model to be a critical part of the Super Trader program.
There is something even more important about the Infinite Wealth game and that is purpose. Several times I’ve heard people say “If Van knows so much about trading, why doesn’t he just trade!” That statement makes the assumption that the money earned from trading is the be all and end all of the world. It might be for some people, but it certainly isn’t for me. Our mission is transformation through a trading metaphor. I get a tremendous amount of joy from helping people change their lives. And as a result, I have no intention of ever retiring from the wonderful work that we do to help people.
There is a sixth and seventh model that are each still in the developmental stages, and this is because the concepts involved seem to have recently evolved and need to be clarified over time, however, I’ll just mention them here.
The Sixth Model has to do with Market Type. Market type doesn’t predict (anymore than a trend predicts what will happen the next day). But it’s clear that system performance is quite difference in various market types, not matter what the definition. We’ve been evolving this model and a number of my Super Traders are doing research on the topic.
The Seventh Model has to do with Systems Thinking. Ken Long, who has been an instructor for us for many years, has a master’s degree in Systems and his Ph.D. is on the topic of “Decision Making Under Uncertainty.” Ken is clearly a systems thinker.
Some of our Super Traders commented recently that Ken changed his system rules over time (implying that system rules should be constant). Ken replied those comments simply revealed naivety about systems thinking. Many of his rules and many of his systems have indeed changed over time. Why? Here’s a partial answer. Ken agrees that the intersection between 1) system, 2) self and 3) market forms a sweet spot and this is where it all happens for great traders. Over time, however, those three trading components are systems in and of themselves, each of which evolve on their own. In addition, institutions evolve how they play the big money game over time. To prosper as a trader, you have to stay slightly ahead of big money and you have to keep up with a moving sweet spot (system, self, market). All of this is systems thinking.
I thought our Super Traders should learn how to become true systems thinkers. As a result, I asked Ken to create a systems thinking workshop which he taught in July. I just presented an updated version at the Super Trader Summit that included the latest NLP thinking about systems thinking. Thus, I’d consider “systems thinking” another model for traders but one that we still have under development.
Next week this series continues with part II, about teaching these models.
P.S. We will be raising the price of our Super Trader Program on January 30th 2017. So if you have been thinking about or planning on joining the program, then I’d suggest that you do so before January 30th. One perquisite of submitting an application is attendance at the Peak Performance 101 workshops. This is so I can evaluate your openness to the program. There is one more Peak 101 scheduled before the price increase, January 20-22, 2017.
About the Author: Trading coach, and author, Dr. Van K. Tharp is widely recognized for his best-selling books and his outstanding Peak Performance Home Study program—a highly regarded classic that is suitable for all levels of traders and investors. You can learn more about Van Tharp www.vantharp.com.
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These concepts take the mystery out of trading by helping you understand who you are as a trader, how your personal psychology can work for you instead of against you, how to think about and manage risk, and how to develop winning trading systems.
Psychology of Trading
Perfectionism, gambling, unnecessary losses, not being able to pull the trigger….
These are just some of the issues that traders contend with in the markets every day. What causes us to think this way and how can we learn to become better and more profitable traders?
Everyone is looking for the Holy Grail in the markets. How do you find the ideal trading system, the stock that is going to take off or that one big winner with your name on it?
There are hundreds, if not thousands, of trading systems that work. But most people, after purchasing such a system, will not follow the system or trade it exactly as it was intended. Why not?
Risk and R-Multiples
Risk to most people seems to be an indefinable fear-based term – it is often equated with the probability of losing, or others might think being involved in futures or options is “risky.” Van’s definition is quite different to what many people think.
Position sizing is the part of your trading system that tells you “how much.” How many shares or contracts should you take per trade? Poor position sizing is the reason behind almost every instance of account blowouts.
One of the real secrets of trading success is to think in terms of risk-to-reward ratios every time you take a trade. Ask yourself, before you take a trade, “What’s the risk on this trade? And is the potential reward worth the potential risk?” What can I expect my trading system to do for me in the long term?
System Quality Number® (SQN®)
After a number of years researching position sizing™ strategies, Dr. Van Tharp developed a proprietary measure of the quality of a trading system that he calls the System Quality Number or SQN.
The market does not owe you or anyone great riches. The market does, however, occasionally tease a large number of people with seemingly easy gains (during bubbles and other manias) only to take them away again. If you are serious about being a good trader, then you need to approach the practice of trading with the same level of rigor with which you would approach any high level endeavor.
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