Here are the next five of Dr. Tharp's favorite trading books:

6) Schwager, Jack. The New Market Wizards. New York: Harper Collins, 1992. There are a lot more than 16 great traders and Schwager presents some more of them in this classic book. I personally think the William Eckhardt’s interview alone is worth the price of the book.

7) Wilder, Wells. New Concepts in Technical Analysis. Greensboro, NC: Trend Research, 1978. This is the oldest book on my list and I’ve included it because it is the original presentation of some of the classical tools of trading including ADX, ATR, and many other classics. If you are not familiar with these concepts, now is the time to start and this is the book to start with.

My books:

8) The Definitive Guide to Position Sizing: How to Evaluate Your System and Use Position Sizing to Meet Your Objectives. Cary, NC: IITM, 2007. I’m a little reluctant to put this book in my list because we haven’t released it yet, but it’s already written and I think it is a new classic. It includes how to measure the quality of your system objectively, no matter what style of trading you have or what instruments you trade. And then it includes everything you could possibly want to know about how to use position sizing, depending upon the quality of your system, to meet your objectives. It’s that simple and I’ve very excited about it. We’ll probably release it in 3-4 months.

9) The Peak Performance Course for Traders and Investor (5 books I’ll count as one). Cary, NC: Van Tharp, 1989. When I developed the Investment Psychology Inventory to measure strengths and weaknesses of traders, people started saying, “I totally agree with your analysis, but how can I use this information to improve my trading.” As a result, I wrote the home study course over a five year period to do just that. The course should be must reading for anyone who is serious about trading or investing. And if there is a number one choice among the ten books, this is it.

10) Trade Your Way to Financial Freedom, 2nd Edition. New York: McGraw-Hill, 2007. I’ve been profiling this book in my tips over the last few months. If you really want to understand systems and how to approach the markets, then this book is also a must read. You can find out more information about it at www.iitm.com

Posted by Van K Tharp at 03:30 PM | Permalink | Comments (1) | TrackBacks (0)

I put this post under the heading poker and trading but it could just as well go under the heading of trading psychology.

Start thinking of your trading in terms of statistics and probabilities. I've already given you a good idea of how to do that on other posts. For example, if you think about your trading system as an R-multiple distribution, then you can simulate it and (to the extent that your sample of R-multiples is accurate, reliable, and representative of your system's performance) determine what to expect from it in the future.

When you do such simulations you'll learn, for example, that if you have a 50% system, then in 100 trades you'll have a losing streak of 5 in a row for certain (100% probability). You'll have a 10% probability of a losing streak as long as 9 in a row. You'll have a 1% probability of a losing streak as long as 12 in a row. And you'll have a very slight chance of a losing streak (in those 100 trades) as long as 20 in a row.

I have not seen many long losing streaks in my trading lately, but I certainly have in poker. In fact, one just occurred in a very short period of time. It wasn't a time in which I was making a lot of mistakes (as best I can tell), it was just a time when "luck" (or probability) was against me. I had a period in which I probably went through 30 games in a row without making money (i.e., meaning I lost my stake for that game).

For example, I don't like to put my tournament life at stake (i.e. go all in) unless I'm almost certain of winning. However, my preference doesn't always (or even usually) dictate the situation.

For example, suppose I get dealt an KJ of the same suit. Of 169 possible poker hands, that is the 11th best hand you can be dealt, so I'm likely to play it. Nevertheless, with 10 players playing through the river...it still only has an 18.14% chance of winning. Yes, my poker is that precise.

However, along the way you are faced with various decisions. First, suppose I raise three times the big blind which is my standard raise. Someone else goes all in and if you call it risks most of your chips. Well, there are ten hands that are better than KJ suited and that person could easily have one of those.. including AA. Do you call? Your decision has to depend upon your assessment of that other person. During my losing streak, this decision was usually wrong. Most of the time they had a better hand and, of course, nothing happened to improve my hand.

But, of course, perhaps 40% of the time I had the better hand. When that happened, the other person usually got better cards on the flop, turn or river (often the river) and beat me.

Here is a good example, sometimes I'll play in a free tournament in which the winner has a chance to enter another tournament to win a seat at the world series of poker. There are usually 300 people in those tournaments and most of them are crazy. I do my best to avoid playing until the first 150 or so have been eliminated. However, one time I was dealt AA on the first hand. AA is the best hand out of 169 possible hands, but it only has a 33.6% chance of winning with 10 players if all of them stay until the end. I was the first to bet and I raised 3 times the big blind. The next person went all in. Six other players called the all in. What would you do with your AA under those conditions? It's absolutely the best hand, but if I call it means that my tournament life is at stake and with 8 people I only have a 41.58% chance of winning (not even 50-50). Yes, my result is huge if I win.

Okay, so I called. Of the other people who went all in, one had a KT unsuited (the 40th best hand) and another had 33 (the 53rd best hand). The other five all had worse hands. And one person had a 74 offsuit. By the time the river was turned over, a 6 5 and an 8 had turned over to give the 74 offsuit a straight. And I lost with my AA. But that's the luck factor in poker. But what do you do? Fold the best hand and give up 10% of you chips or take a 41% chance that you'll win a ton of chips?

Based upon expectancy, you take the chance -- just as you do in trading. But quite often (59%) of the time, you'll lose everything and be eliminated from the tournament.

And quite often you'll have huge streaks where that happens.

You go in the your KJ suited, raising times the big blind. A king comes up on the flop. You now have top pair with a good kicker. You bet the pot and then someone goes all in. Does that mean they have AA, a set, two pair, or are the bluffing with a draw or with nothing? I'll probably call the all in with high pair and a J kicker, but when your luck is bad, chances are 1) they have a better hand, which might include just a higher kicker or 2) they are bluffing with a draw and they get the draw; or 3) they are bluffing with nothing and they still get something with the next two cards. Those things can go against you many times and you must be able to survive that.

And let's say you don't want to take the chance, after the flop you have the high pair and bet the flop, but you fold later when someone else bets everything. Well, you can only afford to fold like that a few times before you are out of chips. When are a on a losing streak, you'd be surprised how often that happens as well.

But that's why position sizing is so important. You must be able to survive long losing streaks so that you can benefit from the expectancy over the short term.

Posted by Van K Tharp at 06:05 PM | Permalink | Comments (0) | TrackBacks (0)

I want to briefly describe my ten favorite trading books. I’m not going to give them in any particular order because I’m not sure I can rank them that concisely. However, these are my ten favorites and I’ve ranked them alphabetically by author, except that three of the books are my own and I’ve included them at the end. In addition, most of them are classics, so my description of each of them will be brief.

1) Easterling, Ed: Unexpected Returns: Understanding Secular Stock Market Cycles. Fort Bragg, CA: Cypress House, 2005. This is a self published book in which Ed does a masterful job of helping people get a major perspective of why the stock market will do what it’s going to do. If you want to understand the big picture, then this book is a must read. Michael Alexander’s book, Stock Market Cycles is also a favorite book, but I only wanted to pick one book of this type, so this is the one I selected.

2) Faith, Curtis: Way of the Turtle. New York: McGraw-Hill, 2007. I was so impressed by it that I begged to write the foreword and I did. First, it paints a very clear picture of what is necessary for trading success. Curtis says in very concise terms that it’s not about the trading system. Instead, it’s about the trader’s ability to execute the trading system. Secondly, it probably has the most lucid description of how some of the principles of behavior finance apply to and influence trading that I’ve ever read. The third aspect is that I really like Faith’s emphasis on game theory and using it to explain how a trader should think.

All of this together with a number of stories about Curtis’ experiences as a Turtle make it a very valuable read.

3) Graham, Benjamin. The Intelligent Investor: The Classic Text on Value Investing. New York: Harper, 1995. Value investing is one of the best ways for the long term investor to beat the market. This is the classic text of value investing and it’s the essence behind much of what Warren Buffet does. So if you have the desire to do this sort of investing, then this book is a must read.

4) LeBeau, Charles and David W. Lucas. The Technical Trader’s Guide to Computer Analysis of the Future’s Market. Homewood, IL: Irwin, 1992. I’ve been associated with Chuck for a long time and he’s a presenter in our systems workshop. And the reason he is a presenter is this book. It probably does the best job of any book up to it’s publication date of taking apart systems into components and showing you how to logically think about and develop systems.

5) Schwager, Jack. Market Wizards. New York: Institute of Finance, 1988. Jack Schwager interviews 16 of the top traders in the world (and he also interviewed me.) This book, like no other until its sequel, really elucidates what’s important for trading success. I’ve always said that trading success consists of the commonalities of what great traders do and how they think. And if you want to learn that, then this book is the place to start.

Posted by Van K Tharp at 09:23 PM | Permalink | Comments (1) | TrackBacks (0)

Thanks to everyone who has sent questions to Dr. Tharp so far. Please, keep them coming.

Dr. Tharp is vacationing with his wife and her family for the next few days, celebrating Kala's birthday. When he returns, he will be able to get to your questions.

We have received several requests for Dr. Tharp's top 10 book list, so expect to see that posted in a few days.

Posted by Van K Tharp at 08:54 PM | Permalink | Comments (0) | TrackBacks (0)

I find that much of the material I teach is timeless. However, I've said it all before in my workshops, writings, and newsletters.

I write a monthly column in Tharp's Thoughts on my market commentary. And although I could add something weekly here, I don't think it serves any purpose. My comments on the market will have nothing to do with your success.

I could teach you psychological principles of success. And, in fact, I started to list some of the critical ones in past posts. However, as I got further and further into the core of what was important, people who are not working on themselves regularly started to get more upset with the posts. And that certainly isn't my purpose.

As a result, I've decided to use this post to answer questions. To start with each week I'll select the best question I've received and answer it here. If I start to get lots of GOOD questions, then I'll update the frequency of my posts.

If you'd like your question answered, please send them to info@iitm.com with the subject line being QUESTION FOR THE BLOG. Those will get forward to me, and I'll select the best to answer.

However, I typically teach using the Socratic method because the real answers are within you. So don't be surprised if my answer has a few questions back that you need to consider in order to get an answer that fits you.

Posted by Van K Tharp at 09:09 AM | Permalink | Comments (3) | TrackBacks (0)