One of my current areas of research is in the area of trading mistakes. What the average R-multiple of a mistake? Do some mistakes have more impact than others? While I don't know the answer to the last question yet, our preliminary results suggest that a mistake might be worth about -4R. So just think about it. If you have a system with a 1.2R expectancy that generates about 50 trades per year, then you can expect to make about 60R in the year. But if you make 1 mistake per month (1 mistkae per four trades), at the end of the year you'd have 50R in profits less the impact f your mistkaes (48R). Your net results is +2R -- pretty terrible. Yet you only made one mistake per 4 trades, so on that basis you are 75% efficient. However, in terms of R you only got 2R out of a possible 60R generated by your system, so you about 3% efficient.

The key to your success is clearly moving from 4% efficiency to 100% efficiency. Most people spend a lot of time trying to improve their system. But quite often it's not the system at all -- it you. What's your efficiency?

Posted by Van K Tharp at 10:53 PM | Permalink | Comments (2) | TrackBacks (0)

Psychological reserach over the last 20 years has proven that human beings are very inefficient decision makers. This is because we have so much information to process that we must use shortcut mechanisms to deal with it all. Psychologists call these mechanisms judgmental heuristics and I've documented a lot of them in the new edition of Trade Your Way to Financial Freedom. However, the key to my coaching is help you make yourself as efficient as possible. I think the trend of Behavioral Finance-- to try to predict the market through understanding these inefficiencies.-- is ridiculous.Your job is to make yourself as efficient as possible and you can do that through eliminating mistakes, but that is the topic of rule 4.

Posted by Van K Tharp at 01:01 AM | Permalink | Comments (1) | TrackBacks (0)

My second psychological rules is that success requires commitment. If you are 100% committed to success then the universe will help you create miracles to get it. But if you are not committed, then you will find lots of distractions that will seem like major roadblocks.

I've seen this over and over again with my client and I won't acept someone in our supertrader program that I do not believe is committed. I know when they have it that they succeed in the program and if they don't there will be no success.

Posted by Van K Tharp at 09:32 AM | Permalink | Comments (0) | TrackBacks (0)

I thought it might be interesting to do a series of rules of the next posts on the Blog. I thought, I'd do 10 psychological rules, 10 business planning rules, 10 system development rules, and perhaps 10 miscellaneous rules. That might fill this Blog for some time. Won't promise that I'll post that much but let's start out with the first of the 10 psychological rules.

RULE 1: You create your trading results. If you assume that you are totally responsibile for your trading results, then you'll be continually eliminating mistakes. If you blame your results on someone or something else... if you justfiy your results... if you blame yourself, and any of 1000 other things you could do besides taking totally responsibility for your results, then you'll be hinding mistakes and repeating them over and over again.

But the way, most of you can probably buy into this rule when I phrase it this way. But when I say correlaries of this rule (i.e., everything is psychological or you are totally responsibile for your results) then most people will tend to disagree. Nevertheless, it is all the same. And it is the NUMBER ONE RULE. When you master this one, you have a chance.

Posted by Van K Tharp at 02:30 PM | Permalink | Comments (0) | TrackBacks (0)

In the mid-1990s I was on the board of directors of a new mutual fund that was designed to trade foreign currencies. I was asked to be on the board to supervise the trading, but we never got that far. Their basic strategy was to do something like the Max Yield Strategies (see Safe Strategies for Financial Freedom for how to do that) and the key emphasis was to convince regulators that this was a legitimate mutual fund product. However, the fund was born out of a Forex Trading company, rather than a mutual fund company and it didn't have big backing. It was done with a minimum of start up capital (like you might start a hedge fund) and that, along with a lack of worse case contingency planning, doomed it from the start. The fund probably started out with $500,000 and the accounting/auditing company was charging about $18,000 per month for auditing which was their MINIMUM charge for any mutual fund. And all these problems, unknown to me, existed when I agreed to be a director. Thus, most of our job as a board of directors was involved in winding the fund down and all the legal ramifications of that. It was a disaster.

I mentioned that in this post because suddenly I've been exposed to two sources of input about how to trade forex on the stock market. Steve Sjuggerud, in one of his great newsletters, has just recommended a mutual fund that's be around for a long time that basically does the max yield strategy. They must have been formed about the same time as the other fund only they planned better and were better capitalized when they started. They've earned double digit returns most years and have only had one losing year. See the January issue of True Wealth if you are interested.

But if you want to actually trade forex, Rydex has now introduced ETFs for that purpose. RIght now funds are available to trade the Aussie dollar (FXA), the British Pound (FXB), the Canadian Dollar (FXC), the Euro (FXE), the Swiss Franc (FXF), the Mexican Peso (FXM), the Swedish krona (FXS), and later this month the Japanese Yen (FXY). Notice the pattern to the symbols and they'll be easy to remember.

Anyway, despite the secular bear market, the stock market will not stop being the place to be because there are ETFs and funds available for you to invest in almost everything.

Posted by Van K Tharp at 05:23 PM | Permalink | Comments (5) | TrackBacks (0)

I think it's important for everyone to understand that there are three keys to becomming a master trader. You must treat trading as a business and develop a thorough business plan to guide your behavior. That plan should include such things as a worse contingency plan and an overview of all of the factors influencing the markets.

Second you need several well-research, non-correlated trading systems that fit the big picture as you outlined it in your plan. These should have a strong postiive expectancy and be high quality systems.

And third, you need on ongoing discipline to take you through the day to day tasks of trading. Part of this should be the ten tasks of trading and part of this should be an ongoing program of working on yourself.

While all of this seems like it might be easy, we've found that it takes about 2 years of dedicated work to build these first three items up to a professional level.

Posted by Van K Tharp at 08:04 PM | Permalink | Comments (0) | TrackBacks (0)

I play a lot of poker tournaments now and I usually finish in the money or close to it. However, I've noticed that I still occasionally make a big mistake. What's a big mistake? Well, suppose I raise to 4 times big blind before the flop. I have King Ten suited. That is the 14th best starting hand of the 169 possible hands when playing with 9 other people.

Now what happened today was someone quadrupled my raise. My immediate response should have been to think, "this is getting really big. What are the chances that this guy has me beat? He could easily have a large pair a very high suited connector (AK suited). I have the 14th best hand but if he has, let's say, a pair of queens, he's got me beat." I didn't do that, I just called, "thinking he's probably bluffing or something similar." Sinice I had the 14th best starting hand, it was probably reasonable to call or it might have been a minor mistakes. He did have a pair of queens, but I didn' tknow that.

The flop comes (the first three common cards that are dealt face up) and I don't improve my hand. I bet half my chips to get his attention which was my second mistake and my first BIG mistake. My hand was not improved at all...I probably shouldn't have called the initial raise, and I certainly should not have bet when the flop didn't improve my hand. I bet simply because I was feeling "powerful." I wanted to bully him. And those feeling produced a huge mistake. But at least I'm aware of the feelings that come up and can work on them constantly.

My opponent then goes all in, and as if I wasn't stupid enough so far, I called his bet. Why? I have nothing. Most of my chips are gone if I lose and I bet them without even having a pair. My thinking was, "I'm pot committed now, perhaps I'll get something with the last two cards." Big, big mistakes. But at the time, I didn't think any of these things -- I just reacted. I had about 30,000 chips when this started and let's say my initial bet of 2000 and the raise to 8000 were okay. At that point, I still had 22,000 chips and enough to compete in the tournament. But the next bet cost me $10,000 more and the all in reraise cost another $10,000. Those two mistakes cost me 2/3rd of my chip stack (equity) and were disastrous. They were emotional mistakes.

And, of course, my opponent, as I said, had the third best starting hand in texas holdem, a pair of queens. There were only three cards in the deck (the other three kinds) that would allow me to beat him. But no kind came up in the last two common cards and after those mistakes, I'm practically out of the tourament.

At the time, I made those mistakes, I was 4th in chips among the final 9 of 90 players. A first place win in the tournament was huge compared to a ninth place finish. Ninth place paid about twice the entry entry-- which wasn't much payoff for three hours of poker. But when I finished the three mistakes in that hand, I was 9th in chips. And I was eliminated from the tournament shortly thereafter in 9th place.

I'd played about 200 hands mistake free and then I make a bone head play and basically miss out on a big payoff.
Mistakes in poker, just like mistakes in trading, can kill you.

Now you might ask why did I made the mistakes. The answer is simple -- emotions. That whole series of mistakes occurred in the space of about 5 to 10 seconds. Not much time to think. I was simply ruled by my emotions.

I've been working on eliminating mistakes and I'm doing pretty well. I usually finish in the top 10% in most tournaments I enter now. I used to make a lot more mistakes, and when I did, I didn't make any money. But today's mistakes probably prevented me from making two to ten times as much money as I should have, so its still very expensive.

I currently use all the tools in the Peak Performance Course to eliminate mistakes. And I'm getting better and better. I used to make 3-4 mistakes in 200 hands, and now its just 2 major mistakes in one hand. And quite often I don't make any. Perhaps soon, such mistakes will be a thing of the past.

So what's the point and how does this relate to trading? Well, it all relates to your efficiency as a trader. How many mistakes do you make and what does it cost you? Poker is a good way to look at this because 200 hands in a few hours probably is equavalent to 200 trades in terms of the opportunity to make mistakes.

Posted by Van K Tharp at 04:49 AM | Permalink | Comments (3) | TrackBacks (0)

What's your trading efficiency? Well if you have a system that gives you 80R in a year, but you only capture 40R in profits (losing the rest in mistakes), then you are 50% efficiency as a trader.

And from what I've seen that might not be that bad. Many traders are so inefficient that they can turn a winning system into a losing system. That means the system might give you 80R, but you make so many mistakes that you actually lose money.

You might not take some trades.
You might take some discretionary trades that lose money.
You might not keep your stops.
You might get out of a winning trade too soon.
You might not plan for some worse case contingency that comes along.

And all of these mistakes can make you a very inefficiency trader. And most inefficient traders repeat the same mistakes over and over again.

Posted by Van K Tharp at 08:06 AM | Permalink | Comments (5) | TrackBacks (0)