I've been working on this book for some time now. And because I really want it to be definitive, I decided that I need to include one more chapter: software for position sizing. However, I don't have the time to review lots of software. As a result, I'd like your comments on what software you use for position sizing. And if you'd like to write a review (no more than 1000 words) on any software you happen to use for position sizing, then send it to us. If we use it in the book, I'll include your name with the review and give you a free copy of the book.

If you are interested, contact book@iitm.com with your suggestion or if you don't want to write a review, just mention the product here as a comment.

Posted by Van K Tharp at 03:32 PM | Permalink | Comments (7) | TrackBacks (0)

I've talked about inefficiences, about how people play a trading game and a money game according to rules made up by someone else, and even trading fundamentals which most people have trouble following. All of this leads to psychological rule #11 -- people will do the opposite of what it takes to be successful.

I even think this might apply to trading recommendations. For example, Steve Sjuggerud likes to recommend what is highly undervalued, hated, and starting to go up. The more something fits that criteria, the more people are not likely to take the recommendation. He gives the example of rare coin recommendations about which he says people say "I've taken most of your recommendations except those coin ones."

Now contrast that with what some analyst might say on CNBC. He or she might say, "My favorite stock is XYZ" and people will flock to it in droves. In fact, some good short term traders say they listen to CNBC just to find ideas to short....the one's people flock to in droves.

My guess is that the closer a recommendation is to a "Holy Grail" recommendation, the less people are likely to take it. As a matter of fact, I made one in one of my posts here. I didn't give any specifics, but what I said didn't even produce any comments. And that makes me feel even better that I've invested in that area.

And I expect that some of you might even comment... what was it. But if I told you, you wouldn't act on it anyway.

Posted by Van K Tharp at 10:36 PM | Permalink | Comments (2) | TrackBacks (0)

In the last psychological rule I talked about trading games. Well there are also money games. For example, most of us play a game in which we think that to win that game we must have the most money. It used to be that perhaps you won if you became a millionaire. However, about 1% of Americans are millionaires, so that's not such a big deal. And when you achieve that status, you'll probably notice that nothing changes -- you don't feel any more comfortable or any more secure. So perhaps we need to be a billionaire to be rich... now were down to the top serveral hundred wealthiest Americans.

Most of us can't get there so we adopt another rule. Have the most toys...and you can have anything you want if the down payment (and monthly payments) are low enough. Well, this rule (created by credit cards) has created a nation of financial slaves. And for the first time since the Great Depression Americans as a whole are now spending more than the earn.

We need a better rule...which is that you are finacially free when your passive income is greater than your expenses. And most people can acheive that if they want to and are committed. See Safe Strategies for Financial Freedom.

However, what does this rule have to do with trading. Well, what basically occurs is that any psychological issues you have with money will also influence your trading. These include:

1) Fear of Money -- you'll push it away
2) Desire for Money -- you'll also push it away. Traders for whom money is important never do well. If you trade to make money (rather than for fun or to be the best or to follow the process) then you'll probably lose.
3) Money ceilings -- if you only think you are worth so much, then that will be your ceiling.
4) Not being worthy generally --
5) Fear of being punished if you have money --
6) Not having money to get even with your parents.

I've seen all of these (and many more) in my consulting practice with traders over the years.

Posted by Van K Tharp at 08:49 AM | Permalink | Comments (0) | TrackBacks (0)

I just watched a show in which scientists discussed things that could end or drastically change life of earth, listed in order from least likely to occur soon to most likely. These disasters were as follows:

1) A star explodes. Apparently, astronomers can see this happening someplace in the universe almost daily. However, the shock was that if one occurred in our Gallaxy (remember there are billions of Gallaxies), then the Earth would probably be destroyed fairly quickly.

2) A black hole approaches...when a star collapses it forms a black hole, sucking in everything around it. Scientists used to think these were stationary, but they are not. They move quite rapidly through space. And if one approaches Earth, we can all say goodbye. Fortunately, none of the known ones are approaching.

3) Super Intelligent Machines. You've seen stories about how Robots or Machines take over (e.g. the Terminator series comes to mind). Well, scientists now believe it is inevitable that machines we create will one day (next 100 years) be more intelligent than us. And when they reach that status, they could easily decide to wipe us out.

4) Super Volcano -- There is one in Yosemite. It blows about once every 600,000 years and when it does so it wipes everything out. That hasn't happend for 630,000 years, so its now due. Very few human beings on the planet would survive this.

5) Astroid -- They have discovered one that on April 13, 2029 will come so close to the earth that it will be inside the orbit of our communication satellites. Fortunately, it will miss the earth. However, there is a 0.1% chance that the earth's gravity will have enough influence on the astroid to change it's orbit slightly, meaning it would crash into the earth on April 13, 2036. And if it does it will cause mass extinctions.

6) Atomic disaster is the next most probable....and you all know about this one.

7) The next most likely is a Pandemic...10 of these have occurred in the past 300 years and they wipe out a lot of people. Let's see that works out to one every 30 years and we're way overdue. Pandemic flu is supposed to be the next one. However, the scientists think that one we make through our technology could be the real next disaster and dwarf anything made by nature.

8) The last one discussed is already happening -- global warming. We might be able to soften its impact by taking immediate action, but we cannot prevent it. In fact, CO2 levels are now higher than they have been in the last 600,000 years and there is a direct correlation between CO2 levels and the amount of global warming. In other words, CO2 levels are now higher than anything we can measure in the past (and some bad things have happened in the last 600,000 years climate wise). The best we can do is stop CO2 levels from rising more, but we cannot reduce the current level. But does our government (much less the world) do anything with an eye for future generations? Very little because they only care about what will impact the next election. Al Gore might have been an exception.

So what will happen with global warming? One sure thing that will happen (probably within the next 100 years) is that the ocean levels will rise 40 feet. That could easily put most of the world's major cities underwater -- Boston, New York, Philadelphia, Washington, Norfolk, Charleston, Miami, Tampa, New Orleans, San Diego, San Francisco, LA, Portland, Seattle, etc. (even Chicago because of Lake Michigan) -- just to name some major cities in the US. And those are just some of the lessor predictions of global warming. "The Day After Tomorrow" gives an example of "feedback loops" that might be triggered through global warming, but hopefully that's just someone's wild imagination.

Now I mention these disasters, not to scare you, because these events would all wipe out mankind (or nearly so). And they all will happen someday and there is nothing we can do. Just as it's pretty certain you'll die one day and there is nothing we can do. And one of them is happening right now, although the major impact of it might not be felt in our lifetimes -- just our children's lives. We cannot stop it although we may be able to ameliorate it. Yet most people don't even think about these things. And if there is nothing you can do, why worry? You are probably safe for at least the next 10-20 years. Thus, our government will probably implode from debt prior to a major impact from global warming. However, I would not want to be in the "insurance business" over the next 50 years. That means, for example, Warren Buffett, but he won't be around 50 years from now either.

So what's the Point of All of This?

Price shocks in the market place, where prices over a wide variety of stocks, futures, forex, etc move 10% or more within a day or so are much more likely than anything discussed above. These could wipe out many people financialy. Yet most people trade like these have no chance to occur at all. There have been two major ones since I've been a trading coach -- September 11, 2001 and Black Monday (October 1987). That amounts to a 13 year average between price shocks. By the way, if anyone has a list of major price shocks over the last 200 years, I'd be interested. These have to be one's that have had a major influence on the markets -- like a 10% change in the market within a few days or overnight.

So what's the next one and how will it affect you? I have no idea. They are not that predictable except to say they will occur. What you really need to do is make sure that when the next one occurs that it doesn't wipe you out, especially if you play a highly leveraged trading game. This means watching your portfolio heat and doing some worse case disaster planning. Consider the following:

Carefully, consider the impact of price shocks in your position sizing.

Develop a business plan and do a worst case contingency plan as part of it. We have material at our web site to help you here, such as the business planning CDs.

Posted by Van K Tharp at 04:23 AM | Permalink | Comments (3) | TrackBacks (0)

Trading is a game with certain rules for winning and certain rules for how the game is played. And if you don't know this, then you are playing by other people's rules and probably have little chance of winning. Who makes up the rules? The answer is the people with the most money at stake.

Now, if this is all new to you and you'd like to know the rules you are playing by, then I'd suggest that you spend a day reading back issues of the Wall Street Journal and perhaps a week listening to CNBC. You also might go to the bookstore and pick up a couple of the most popular trading books (my books won't work for this purpose). When you'd done with all of this, then write down what you think the rules for trading might be.

Your rules would probably be something like:

1) Success is created by picking the right stock.
2) Find them and hold them.
3) Diversification is the key to not losing money.
4) Some stock pickers are better than others and they must have a magic secret.
5) If you found this secret, you could make millions in the market (even with a $5000) account.
6) And if you trade, you need to make lots of trades, because the costs become much lower.
and winning in the market involves making 100s of millions of dollars.
7) It doesn't take a lot of work to make money in the market, you just have to find the right investments or the right money manager.

If you haven't figured out that trading is a game, then you are probably playing by these rules. And they are dangerous. Most people lose money playing by them because they were designed (by the people who made them up) to make them a lot of money.

However, once you understand that trading is a game, you can (within limits) make up your own rules for how to play the game and especially your own rules for how to win the game. People who do this usually become winners. And if you'd like to understand a set of rules that you just might be able to win with, then I'd suggest that you look at the new edition of Trade Your Way to Financial Freedom.

Posted by Van K Tharp at 03:32 PM | Permalink | Comments (2) | TrackBacks (0)

Dan Harrington, one of the greatest poker players ever, said that, "Over the long run my results will be roughly equivalent to the sum of my opponents mistakes less my own mistakes." But as I have said regularly in the psychological posts, most people don't recongize their mistakes.

Let me give you an example from poker. In a low-stakes no limit game, I called a bet of 3.5 times the big blind with a KT unsuited and there were four people in the pot. My KTu is about the 45th best hand in poker so I could have easily been outclassed by one of the other hands. However, the flop was very favorable K42 with two spades. I check and someone with a small stack went all in (which was about twice the size of the pot). One other player called and I called.

On the turn an Ace came up. The next player raised enough to put me all in. I thought for as long as I could. I was beaten at this point with A anything and only a ten out there could save me. I was also beaten by an KJ and a KQ. And there was always the possibility of a flush. One of these two probably had me beaten and I assumed it was the one who just went all in. At this point I really assumed that calling was foolish and I folded. I lost most of my winnings by that fold, but I was still ahead in the game.

The last card came up as an insignifcant 6 of diamonds, so there was no flush for anyone with two spades in their hand. But I was shocked when the other players cards were revealed. The first one to go all in had a nut flush draw. He would have beaten me on the initial all in with his pair of aces. However, the other person who went all in second and would have put me all in revealed a 74 of spades. He had called the intial pot with trivial cards and my fold had cost me a lot.

I think my original fold still made sense, but it was a mistake had I known this player a little better. Over the course of 90 minutes, this player had lost three times the maximum buy in. Knowing that I should have taken a chance, but I didn't. It was clearly a mistake.

Ironically, I've found in cash poker games that you only get to see other peoples whole cards in one hand out of five or six (sometimes even more). That means that most of the time, people fold to big bets. There are a lot of opportunities for bluffs.

Posted by Van K Tharp at 04:24 AM | Permalink | Comments (1) | TrackBacks (0)

I've stated this rule before in prior posts, but I'm restating it again because it is an import rule as well. You can look at earlier posts for more about this subject. However, I wan't to make two important subpoints here. First, you can only trade a system that fits your beliefs, so you must look at those beliefs carefully. Are they valid beliefs? Are they your beliefs? And while you can find facts that support every belief and usually have them or you wouldn't have the belief, you need to ask yourself, "Are my beliefs useful? Do they help me make money?" (And making money may not be your criteria for usefulness).

Second, beliefs that are supported by strong emotion are usually difficult to change if they have a strong charge on them due to some psychological trauma. Even if you decide they are not useful, they'll be difficult to release. You must release the charge on them first before you can change them. And this is part of what is necessary to eliminate self-sabotage.

Posted by Van K Tharp at 04:03 PM | Permalink | Comments (0) | TrackBacks (0)

Some people have asked me, "how can I get to the depths of my self-sabotage and clear it out?" Well rules 7 and 8 both address that. First, you need self-responsibility. You need to say, "it's me. I created this." That means taking ultimate self-responsibility.

Second, you need to examine your emotions. Most people who are attracted to trading tend to be very logical and tend to avoid their emotions. This actually requires years of avoiding looking inside at what's going on inside. It takes practice and it takes much more practice to undo the habit. So start looking at your emotions and notice how much of your behavior is control by your emotions.

Third, you need to start a practice of working on yourself. One example is my Peak Performance Course. People tend to go through it once, but it is a lifetime exercise, not a one time exercise. And the first time through most people totally skip what they need to work on the most.

Fourth, you need to be totally honest with yourself. Any blame, justification, or guilt will tend to keep you from seeing the solutions.

And lastly, you need to commit to a lifetime of working on yourself. I've been doing it for over 25 years and I'm just now discovering elements of self-sabotage and that includes elements that I have not been willing to look at before. At it's not that I suddenly have insights, because that happens on a regular basis when you commit to working on yourself as a lifetime work.

Ans who knows, by commiting to a lifetime of working on yourself, you might save yourself lifetimes.

Posted by Van K Tharp at 07:39 AM | Permalink | Comments (2) | TrackBacks (0)

Whenever I work with a client who is having problems with self-sabotage -- such as a psychological ceiling, a lot of fear, procrastination, perfectionism, etc. -- I always know that the problem is NEVER what the client thinks it is.
Usually, I run through a check list of things such as:

1) Does the client understand Tharp fundamentals?
2) Does the client have a business plan?
3) Does the client have a decent system, with an acceptable expectancy?
4) Does the client have a have emotional reactions?
5) Does the client follow the ten tasks of trading?
6) Any trading trauma?

And the list goes on and on. And for some people, I need to check everything.

My experience always is that something like not executing trades properly is the result of some emotional trauma that usually happened in the first five years of life. And most of the time the client has totally forgotten about it. But when the experience is relieved of its charge, then he or she can do the things necessary to correct the problem.

Posted by Van K Tharp at 09:11 AM | Permalink | Comments (2) | TrackBacks (0)

I want to interrupt my psychology of trading rules posts to comment on rare stamps, especially rare US stamps which I know a lot about. To my knowledge two people have acquired (or nearly acquired) a complete 19th century rare stamp collection and it may never be done again.

The first was Robert K. Miller. Miller's collection was fabulous. He acquired most of his collection before the first stamp catalogue came out and it was unbelievably complete. He gave his collection to the NY public library in 1925 and made sure it was almost impossible for another collector to get a complete collection. That collection was on display until around 1970 when (because of 4 robberies) it was put into cold storage. However, for the first time in over 30 years, it is now on display at the US Post Office Museum in Washington. I saw it when I was there (and although I was about the only one really looking at it) it is is faboulous. Millions of dollars worth of rare stamps.

The second person to acquire a complete collection (well except for 64 and Miller didn't have that either) was Robert Zoellner. His collection was sold by Siegel in 1998. And the 1cent z grill (there are only two copies and one of them is in the NY Library) went for $935,000. And guess what? Bill Gross (head of Pimco) acquired that recently by trading an inverted airplane plate block (C3a) that he paid $3.5 million for for that stamp. I think Bill may also have a complete collection as well now. And to my amazement, both copies of the 1 cent z grill were on displace that the postal museum. YOU CAN ONLY SEE IT FOR A LIMITED TIME, so it you are interested get to Washington, DC.

I mention this because I think that if 100 people were each willing to invest $100,000 in rare stamps (and I'm taking about the ones in which only 50 or so exist), those rare stamps would go through the moon.

Posted by Van K Tharp at 02:29 AM | Permalink | Comments (0) | TrackBacks (0)

Let' me repeat the title. Repeating the same mistake over and over again is self-sabotage and still holds, even when you don't know you are making a mistake.

So let's look at when you don't know you are making a mistake. If you blame something/or someone else, you won't recognize how you made a mistake. If you justify what happened (oh, the market is really crazy!), then you won't know you are making a mistake. If you blame yourself (I'm a stupid idiot!), then you won't know you are making a mistake. You must recognize what your contribution was and call it what it is.

And what are example of big mistakes. Entering a trade because someone else tells you about it. Entering a trade without a system. Entering a trade without a predefined exit point. These are mostly what I call "Tharp" fundamentals and I could go on and on, but they are all mistakes.

And when you repeat them, its really terrible.

Posted by Van K Tharp at 09:52 PM | Permalink | Comments (0) | TrackBacks (0)