Profile of Van Tharp

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Introduction to Van Tharp

Van K. Tharp stands as a monumental figure in the trading world, renowned for his pioneering work in developing trading systems and coaching traders. He is widely recognized for his psychological approach to trading, often captured through his famous quote, “We trade our beliefs about the market.”

Brief Bio of Van Tharp

Van Tharp’s educational journey began with a bachelor’s degree in psychology, followed by a PhD in the same field, setting the stage for his unique approach to trading psychology. He has been associated with various institutions over his career, developing a reputation for blending psychological elements with systematic trading strategies.

Van tharp

Van Tharp’s college education includes:

  • A Bachelor’s degree in psychology.
  • A PhD in psychology, which provided him with a deep understanding of the behavioral aspects that influence trader performance and decision-making.

His educational background in psychology has been integral in shaping his approach to trading, focusing on the psychological factors and risk management techniques essential for successful trading.

Interview with Van Tharp

I was lucky enough to interview Van Tharp and ask him 10 questions that I feel are important for every trader to understand. Here are Dr Tharp’s responses:

1. How did you first get started trading, and in your business, of modelling good traders and coaching traders?

I first started trading in the early 1970’s. I had a $20,000 account while I was in graduate school, and I watched it go to zero in about 6-9 months. But to be fair, in those days your broker charged you 2% commissions to get into a trade and 2% to get out, so you had to make 5% just to make money.

I did it again in 1982. By this time, I had earned my PhD in psychology. When viewing the situation through the lens of a psychologist, I decided that it must be me—something internal, not external, was affecting my trading. This realization started a search for what I was doing wrong. I got involved with what I call the science of modelling, Neuro-linguistic programming (NLP), and started to help others as well as myself. I must admit, I didn’t trade for quite some time, because my passion became transformation, specifically within the context of helping traders.

Currently, I trade a fairly large retirement account for myself and my employees.

2. What was the turning point that really propelled you towards trading success? What’s the turning point for most people?

Deciding my trading results were a function of me was the key to my trading success, and it’s the key for everyone. Once you come to this realization, you to also have to understand these points:

  1. It takes as much education to succeed in trading as in any other profession; and
  2. Trading is a business

Then, you have to master certain key principles, which I collectively call Tharp Think. These including thinking in terms of reward-to-risk, understanding that through position sizing that you will meet your objectives, and most of all, mastering yourself.

These concepts are so important they are mentioned in most of the books I have published.

3. Can you talk about objectives?

There are as many objectives as there are traders! For example, you could set objectives like:

  • During a one year period, I don’t want a peak–to–trough drawdown bigger than 20%, or
  • Over a one year period I want every year to be profitable, or
  • I’d like to average 2% gain per month, or
  • While I’m willing to accept a peak-to-trough drawdown of 20% at the end of the year, I don’t want to have lost any of my starting equity.

When you think of how many variables there are, and how many combinations of numbers there are, you can see how each trader can have different objectives. After a trader has solidified his or her objectives, the key is to understand that you meet those objectives through position sizing strategies.

All your chosen system does it help make it easier for you to do that. It is not the key to achieving your objectives — that is done through position sizing strategies. Every trader has to master that principle.

4. How do you define a trading mistake, and how to you monitor mistakes?

A trading mistake occurs when you don’t follow your written rules. And, if you don’t have written rules then everything you do is a mistake.

One of my tasks of trading is called a daily debriefing. One aspect of this is for the trader to decide if they have made any mistakes that day and what it cost them in terms of their initial risk, or R.

I require each of my Super Traders keep a mistake log as part of their program, and it’s integral to their success in the program. When students begin, they are about 70-80% efficient. That means 2-3 mistakes every ten trades.

Let’s say your system makes 0.8R per trade. That means that after 10 trades you should be up 8R. But, if you make 2 mistakes each costing 3R, then you are only up 2R. And, a third mistake puts you in the negative.

You’ve turned a good system into a losing system, simply by making mistakes – and most people are never aware that they are doing it.

To become a graduate from the Super Trader program students must complete 100 trades with at least an efficiency of 95%. And it’s not as easy as it may sound.

5. What does it take to find a trading system that fits you and that works?

Well, a trading system that fits you has to work in the market type that you are currently trading.

For example, it’s pretty easy to design a good system for any one market type, but it’s insane to expect it to work in all market types. A system that works great in a bear market would not work the same in a sideways bull market, for example.

Ideally you can trade a system that has an SQN® of 2.5 or better after 100 trades. (SQN is short for System Quality Number®, it’s a measure I developed to rate how well a system performs).

Next, it has to fit your beliefs and your criteria for trading. You don’t trade the market -you trade your beliefs about the market, so the system you pick should be one that fits your beliefs.

Finally, everyone will want to have a set of personal criteria by which a trader could determine a system fits him or her, so it also has to fit that list of criteria as well.

6. What 1-3 trading books should every trader read?

The two musts are the Definitive Guide to Position Sizing Strategies (2nd Ed.) and Trading Beyond the Matrix: The Red Pill for Traders and Investors. Those, in my opinion, are my two most important books.

Then, if I were to pick one book that I didn’t write, it would probably be the original Market Wizards book.

7. If you had 1 minute with someone who wants to learn how to trade in stocks, what would you say?

Understand that the results you get are totally a function of YOU, so you had better get to know yourself. That’s a big task but it’s a task that will change your life forever.

The second part of that is to realize that trading is as much a profession as any other profession. You need the right education to do it correctly. Most people think they can just open up an account and make money by somehow figuring out the right investments. And it’s not that simple at all.

8 What separates the average from the very best traders?

Well, in screening for my Super Trader program, I look for traders who are willing to look at, and work on, themselves. I look for commitment to do the work necessary to succeed. I look for intangibles such as being good at math…. like games and strategizing, NTJ personality on the Myers Briggs scale, if possible. Those are the primary ones. Plus someone should thoroughly understand the answer to question 7, above.   Those people have a chance to be great traders.

On the other hand, if you think understanding the market is the key to success, have no interest in discovering your impact on your trading results (because there is always something to blame), or spend all your time looking for a Holy Grail entry system, then you are average at best and will probably lose a lot of money.

9. How should one ensure that their trading will continue to be successful in the future?

The first thing I would recommend  is a good “worst case” contingency plan, which could  take about 40 hrs of work to thoroughly explore all likely scenarios. During this process, you should have rehearsed solutions to those contingencies that might come up.

Because the market is more creative than most people’s imagination, when they consider what could go wrong, I recommend a daily mental rehearsal in which you think of what could happen to cause you to make a mistake during the trading day.  With each potential mistake, then think of a solution or two and rehearse it.

And last, there are at least six market types, Bull, Sideways, and Bear and each could be under Quiet or Volatile conditions.

As I have said before, it is insane to expect one system to work in all market types, so you should either be prepared to be in cash in when something you cannot handle arises, or have a different system for each market type.

10. How do you help traders in your Super Trader Program?

Actually, when I wrote Trading Beyond the Matrix, it was designed to almost be a home study mini-version of the Super Trader program. However, the Super Trader Program is an extensive 4-6 year program, which probably involves about 3,000 hours of work.

After successfully completing the program traders understand the key principles in trading, they clear out all their blocks to success, and really get to know themselves.

They must also develop a business plan for their trading business (this usually requires 150+ pages to do), have at least three systems that fit them, covering all the market conditions, and then be able the trade those systems at least 95% efficiency.

(Editors Note: Sadly the Super Trader program has been discontinued due to Van Tharp’s passing in 2022)

Van Tharp’s Trading History

Van Tharp’s trading history is marked by the development of the “Tharp Think Concepts,” which emphasize risk management, psychological strategies, and systematic approaches to trading. His career timeline includes key milestones like the establishment of the Van Tharp Institute, dedicated to offering courses and workshops on trader education.

Van Tharp’s Trading Strategy

Van Tharp’s trading strategy is centered on the integration of psychology with risk management and systematic trading principles. Here’s a deeper dive into the components of his approach, which has influenced many traders worldwide:

  • Psychology First:
    Tharp places a strong emphasis on the psychological aspect of trading. He believes that understanding oneself is the first step toward trading success. This involves recognizing one’s own risk tolerance, emotional responses, and behavioral biases. Tharp’s work helps traders develop personal trading plansthat align with their psychological profiles, enhancing their ability to execute strategies effectively.
  • Position Sizing:
    A key element of Tharp’s strategy is position sizing, which he considers more important than the entry and exit rules of a trading system. Position sizing strategies are designed to control the risk on a trade-by-trade basis, helping traders manage their equity effectively. His methodologies ensure that traders can maximize gains while minimizing risks, adapting the size of their positions based on the volatility of the market and the trader’s individual risk tolerance.
  • System Development:
    Tharp advocates for the development of robust trading systems that can withstand various market conditions. He emphasizes the need for thorough backtestingand forward testing to validate the effectiveness of a trading system. Tharp’s approach is not about finding a “holy grail” but rather developing a system that suits the trader’s personal style and objectives, and that can adapt to the changing market dynamics
  • Risk Management:
    Tharp’s risk management practices are integral to his trading strategy. He teaches traders how to manage their risks through diversification, the use of stop-loss orders, and careful monitoring of market conditions. His risk management principles are designed to prevent significant losses and protect trading capital, which is crucial for the long-term sustainability of a trading career.
  • Market Type Diagnosis:
    Van Tharp introduces the concept of market type diagnosis as part of his strategy. This involves identifying whether the market is trending or ranging, and its volatility level. Understanding the market type helps traders adjust their strategies to be more effective under current market conditions. For example, trend-following systems might perform well in trending markets, whereas mean-reversion strategies might be more suitable for ranging markets.
  • Continual Learning and Adaptation:
    Tharp stresses the importance of continual learning and adaptation in trading. Markets evolve, and what worked yesterday might not work tomorrow. He encourages traders to stay informed about financial markets, continually test their systems, and refine their strategies as needed.

Van Tharp’s comprehensive approach to trading is not only about specific entry and exit rules but more about developing a complete trading framework that includes understanding oneself, managing risk effectively, and adapting to the market’s changes. This methodology appeals particularly to those who are willing to invest in their personal growth as traders, emphasizing that success in trading is a journey of continuous learning and adaptation.

Quotes by Van Tharp

"The key to trading success is emotional discipline. If intelligence were the key, there would be a lot more people making money trading."

"I often say that the market is all about risk. Those who accept risk manage it, and those who don't like risk manage it through denial."

"To produce consistent performance, you need to create a consistent process."

"To produce consistent performance, you need to create a consistent process."

"I always say that you could publish my trading rules in the newspaper and no one would follow them. The key is consistency and discipline."

"Position sizing is the part of your trading system that tells you ‘how much.’ How many shares or contracts should you take per trade? Few people understand its importance."

"Trading is not about being right or wrong. It’s a game of probabilities. Those traders who make a great deal of money have a system that shifts the odds in their favor."

Notable Achievements

Van Tharp has managed substantial funds and is celebrated for his educational contributions to trading. His work includes developing the “Peak Performance Course,” aimed at helping traders manage their emotions and psychological responses to market dynamics.

Philosophy and Values

Van Tharp’s philosophy integrates personal growth with trading success, focusing on self-awareness as a key component of effective trading. His charitable efforts are aligned with educational initiatives, aiming to provide resources for underprivileged youth interested in finance and psychology.

Impact and Legacy

Van Tharp’s impact on the trading world is profound, with his teachings helping countless traders refine their strategies through psychological resilience and risk management. His legacy is captured in his books and the ongoing work of the Van Tharp Institute.

Books by Van Tharp

  1. Trade Your Way to Financial Freedom

This book is one of Van Tharp’s most famous works, offering a step-by-step guide to developing a personalized trading system that fits the trader’s unique personality and financial goals.

  1. Super Trader, Expanded Edition: Make Consistent Profits in Good and Bad Markets

In this book, Tharp outlines the journey to becoming a successful trader by focusing on the psychological, business, and trading skills needed to transcend the typical pitfalls of the market.

    1. The Definitive Guide to Position Sizing Strategies

    This comprehensive guide delves into the strategies that help traders determine how much to trade, aligning with their risk tolerance and objectives to maximize profitability.

    1. Beyond the Matrix: The Red Pill for Traders and Investors

    In this collection of articles, Tharp shares insights into the psychological aspects of trading and investing, helping readers understand how to better manage their minds and emotions in the context of the market.

    1. Financial Freedom Through Electronic Day Trading

    Co-authored with Brian June, this book explores the world of day trading, providing insights and strategies for navigating the fast-paced environment of electronic trading markets.

    1. Safe Strategies for Financial Freedom

    Co-authored with Steve Sjuggerud and D.R. Barton, this book provides strategies for achieving financial independence faster than conventional approaches through safe and effective financial strategies.

    1. Peak Performance Course for Traders and Investors

    If you’re facing challenges in trading, like missing out on potential wins or struggling with a ceiling on your earnings, Van Tharp’s comprehensive five-book course is designed to help you conquer these obstacles. Ideal for traders at any level, from beginners to experienced, this course particularly benefits those who feel their emotions, such as fear of loss or excitement for risk, may be sabotaging their success. It offers a deep dive into understanding and transforming self-sabotaging behaviors and beliefs, ensuring you trade based on a sound mental approach. Moreover, the course promises to equip you with the techniques to enhance self-confidence, essential for executing your trading strategies effectively. By learning to recognize and adjust your beliefs about trading and profitability, you set yourself up not only for improved financial outcomes but also for personal growth and better decision-making in trading and beyond.

    Estimated Net Worth

    While precise figures are speculative, Van Tharp’s successful career in trading education and management suggests a significant net worth, often cited in various financial publications.

    Interviews with Van Tharp

    Here are several interesting interview with Van Tharp discussing his approaches to trading psychology.

    Van Tharp Interview with Better System Trader:

    Van Tharp Documentary with Investopedia:

    Van Tharp Interview with Michael Covel on Trend Following Radio:

    Note: All information is sourced from public domain websites on a best efforts basis. For any corrections, additions, or to request this profile be removed, please contact [email protected].

    Sources:

    • Van Tharp Institute
    • Financial publications
    • Trading seminars
    • Various Van Tharp Publications

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