Transformation through Financial Metaphor

Recently, I began to look more closely at our mission statement and realized that we actually take people through three levels of transformation. 

The first level we offer is transformation of the trading game—from rules that assure big money wins to rules that give the astute trader a huge edge.  These new rules consist of the Tharp Think concepts that I require all Super Traders to know and understand as the first part of their program.

That’s funny, you want them to know and understand, yet Van Tharp is not a super trader.

In one of my advanced workshops I teach the concept that we all play “games” in life. A game can be defined as any dynamic consisting of two or more players with a set of rules that generally define how the game is won or lost. I’m using the concept of the “trading game” to symbolize a big picture description of all aspects trading.

Don’t forget about the financial education game, too. That’s where the money is, right? If you learn something – I make money. If you do not learn anything of value – I make money. If your trading improves – I take credit (or you credit me for the improvement). If you lose in the markets – I make money. Win – Win – Win –Win!

Level I:  Transformation of the Trading Game

I believe the financial markets are part of a huge game and at the top level, where the rules get set, made, and changed, there is big money.  Big money makes its own rules and profits no matter what you or any individual trader does—they are so much bigger than that.  Big money controls the US government—notice where US Treasury leadership comes from so often and where they go afterwards. Big money also has created a two party political system in which people argue over everything except what is really going on.

Van Tharp actually begins taking some sense, maybe’s been reading the blogs. Ten to fifteen years ago he never made such statements. It never entered into his market beliefs… 

Trading is not easy; however, becoming a trader is very easy.  There are no obstacles whatsoever to anyone opening a trading account. I have long said that if trading were easy, big money would make the entry requirements so steep that it would be impossible for an average person to trade.  Big money might do this through an education and exam system that would weed out most people.  Even today, brokers have to take a Series 7 exam; however, passing this exam has nothing to do with success in the market.

Tharpy makes a nice point here about the lack of entry requirements… at nineteen I had already achieved a Series 7, at twenty I was trading futures contracts and options from my college dorm room.

Big Money’s Rules 

Generally, big money believes the more people that play the trading game, the easier it is for them to make money.  And, as I said before, big money has a set of rules for how it makes money, which has little to do with you making money. I’ve listed some of the rules created by big money here.

• They profit on commissions, which they take whenever you make a trade, whether or not you make a profit.  In fact, the industry considers it unethical for a broker to take fees based on the profitability of his clients.
• They make markets and get the bid/ask spread on every transaction.
• They continually invent new products for you to buy and they profit when you do so.
• They get paid a fixed fee based upon the amount of assets that they are managing without respect to their performance.

They also get you to believe that you have to follow a certain set of rules for success in the market.

• Selecting the right investment (i.e., picking the right stock) is everything.
• When you find the right investment, buy it and hold it for the long term.
• Spend a lot of time analyzing the market to find the right investment.
• Listen to experts for advice, including newsletter writers, brokers, and the investment gurus on television.
• The market will determine whether or not you make money.  You are at the mercy of the market in the short term, but if you hold on, you will prevail.
• If you do lose money, it’s not your fault.  Find someone to blame and a good lawyer to help you sue them.
• The market is efficient.
• Asset allocation is very important (even though most people are not sure what that means).

The New Rules

The new rules are born out of the idea that trading is as much a profession as is any other profession.  Most people spend many years learning their profession, but anyone can start trading today.  Can you imagine walking into a hospital and saying, “I think I’ll try some brain surgery today.”?  It just won’t work.  Yet you can open an online brokerage account, transfer in $100,000 and, suddenly, you are a trader.  Trading with no preparation, however, could be as fatal to your account as performing brain surgery would be on that unlucky patient in the hospital.   (Training is important in medicine, it’s also important in gambling.)

It takes significant time (several years) and a deep commitment to become a successful trader.  I hold a similar belief to author Malcolm Gladwell that the best people in every field usually excel because they have successfully practiced their craft for 10,000 hours.  That means they know enough about their field to produce success.  By working on your personal psychology (which we’ll cover in the second level of transformation), you learn how you produce your own trading results and how you have tended to make everything much more difficult than it need be.

Tharpy makes the point about practice being important, so how many hours of actual trading experience does Van Tharp have? Six or seven hours perhaps… his only experience is in talking about the markets for ten thousand hours!

Learning the key rules is an essential part of this process.  Here are some of the new rules that make up the first level of transformation:

• You are totally responsible for your performance as a trader; therefore, you should devote significant time to working on yourself in order to be successful. (Yet, Tharpy isn’t a successful trader.)
• It’s important to know your initial risk in a trade before you enter a position—this allows you to ensure that your trade has a favorable probability for a sufficient reward-to-risk ratio.  In other words, it will help you cut your losses short and let your profits run. (Still, you know how tough this is? Tharpy can’t support himself by trading – yet he’s going to teach you how to train yourself!)
• Calculate the R-multiples of all your trades; this allows you to think of a trading system by the distribution of R-multiples it generates. (He began using the terminology R-multiples several years ago…)
• Measure the quality of a trading system by its SQN® score.  The SQN score tells you how easily you can meet your objectives through position sizing™ strategies. (Something he developed a belief in over the last few years, it wasn’t important in his training for most of his market training years back.)
• Position sizing strategies help you meet your trading objectives. (He’s been saying this since at least 1998 when I noticed it in magazine interviews. Yet, it appears he hasn’t used it himself to reach any kind of trading success.)
• There are as many objectives as there are traders. (On Sunday June 5^th, 20/20 aired a segment on High Frequency Trading. Tharp has not discussed the technology edge in his newsletters. There’s real money to be made there, but he is not a part of it.)
• You can easily develop a Holy Grail trading system for any one market type; however, it is impossible to develop a system that will perform well in all market types.
• Your trading system must fit you.  In fact, trading a good SQN system that fits you is probably better than a great SQN system that doesn’t fit you.  Trying to trade a system that doesn’t fit you will likely cause you to make a lot of mistakes and see poor results—regardless of the system’s SQN score. (Tharp has been saying this for years - he just added the SQN thing to his belief. The funny thing is, he doesn’t even have a trading system that fits him.)
• Great performance is a function of the market, your system, and you as shown in the diagram below where the three circles intersect.

• Minimize your mistakes and trade at 95% efficiency or better.  You make a mistake when you don’t follow your rules.  If you don’t have rules, everything you do is a mistake.  When traders do have rules, most of them have trouble trading above 70% efficiency (3 mistakes every 10 trades) simply because they haven’t worked on themselves.  Trading at 70% efficiency will destroy the results from a good trading system. (Does Tharp follow this himself? No, because he doesn’t trade for a living.)
• Trading is a process that can be statistically measured and described if you understand probability and sampling theory.  Within one market type, the mean and standard deviation of your system’s R-multiples will give you a good idea about the future performance of that system under those same market conditions. (Tharp does not have a system that makes him money, other than a system for recruiting people to pay him for stock market education.)
• Winning is a function of planning, so write a business plan to guide your performance and keep working on that document as you evolve as a person and trader. (A good example of being right under Van Tharp’s wing and not having things work out profitably is the example of R.J Hixson, one of Tharpy’s comrades, who has taken the super trader seminar and who helps out with seminars. In the Van Tharp newsletter R.J. documents the difficulties in being able to meet any goals and profitability. He still has no edge in the marketplace to earn a living from trading. Van Tharp is able to keep his mouth shut on the difficulties of trading for a living because he has not done it, nor is he capable of doing it himself, or providing R.J. with any meaningful results.)

Can you see how the first set of rules can lead to disaster while the second set of rules are a major transformation of the trading game and can lead to success?

My next book will be about trader transformations.  The book will cover the three levels of transformation and include stories from five or six different people who have accomplished a major transformation on each level.  We are accepting submissions now, and we’ll be paying $250 for any chapter that we publish in the book.  If you think you’ve made a major Level I transformation, as described in this article and would like to write a chapter-length article (3000-6000 words), we would love to see it.

There a number of Market Wizards who did not recognize working on themselves as anything meaningful during their interviews. And it becomes obvious how little Tharpy values your transformation so he can have content for his next book.

Van Tharp, through his newsletters, and some of his books has a very limiting view of the world. Everything is a transaction where risk must be limited – in 2004 when he was screaming in his newsletters that the stock market was in “red-light mode” and was due for a crash he completely overlooked the IPO of Google, or the comeback of RedHat Linux share prices, or of Apple computer, which was trading around $28 to $32 per share in April 2004. He cannot see opportunity – holding Google and Apple computer from 2004 would have been more profitable than anything he offers. The proof – he never generated any insight of specific stock portfolio value, and none of his strategies from around the time of his Safe Strategies book was released in 2004 outperformed simply holding Google or Apple computer stock.

My failing, after buying RHAT, GOOG, and APPL I didn’t hold them long enough.

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This entry was posted on 9. June 2011 at 11:58 and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or trackback from your own site.