Van Tharp - Trading Psychology and Position Sizing
In this episode of Trend Following Radio, Michael Covel interviews Van Tharp. Van Tharp has a diverse career in the trading world and runs Van Tharp Institute and is a proud author of four renowned books published by McGraw Hill: Super Trader, Trade Your Way To Financial Freedom, Safe Strategies For Financial Freedom, and Financial Freedom Through Electronic Day Trading. Moreover, Van Tharp was featured in Jack Schwager’s Market Wizard’s: Interviews with Great Traders. Van Tharp has a ton of experience on his hands and has received a Ph.D. in psychology. He is a certified Master Practitioner of NLP (Neuro-Linguistic Programming), a certified master timeline therapist, an accredited modeler of NLP, and to top them all, an Assistant Trainer of NLP.
Taking advantage of his vast experience in NLP, Van Tharp built successful models of trading and investing. In this podcast, Covel goes deeper into the importance of psychology in trading and gained valuable insights from Van Tharp. Van Tharp was one of the pioneers in bringing the psychological aspect in trading, and many people attribute ‘Trading Psychology’ to Tharp. Van Tharp explains the listeners about the advantages of three levels of transformation in trading psychology and further explains the concept of happiness, markets money, and self-sabotage in trading.
Van Tharp discusses the NLP context regarding his work. To him, it is the science of modeling, how you can figure out why and how somebody took a specific action, and how you can teach somebody else to do the same thing. Van further ponders that you have to model a number of successful people to utilize the NLP fully.
Moreover, Van Tharp goes into an in-depth discussion about the importance of position sizing in trading. Van believes that position sizing helps you achieve your trading objectives and goals. He further explains why position sizing is critical to help you make money and to minimize the chances of losses.
Trading tips by Van Tharp that will make you a successful trader
- Understand Van Tharp’s three levels of transformation. Firstly, highlight the need to adapt the ways to become a successful trader. Secondly, make personal changes you need to adapt to the trading models. Lastly, you can transform yourself enough to the level of consciousness.
- Understand your level of consciousness on a scale of 0 to 1000. This step will make you well aware of the psychological aspect of trading.
- Before you enter into a trade, you should know at what point you have to exit the trade.
- Never enter into a trade unless you have at least 2 to 1 reward-to-risk ratio in your favour.
- Think of trades in terms of risk to reward.
- You have to reprogram your beliefs while trading, as emotions, can play a massive part in trading.
- Do not trade out of fear, anger, hatred.
- You have to accept that you will face losses at some point.
- Your position sizing strategy is not correlated with your systems. All your system does is tell you how easy or difficult it will be to meet your objectives through a position sizing strategy.
- A good position sizing strategy can help you to minimize the losses.
- Take advantage of the market’s money concept. Let’s say you are risking $500 on $100,000 account, and you are up to $110,000. Now you can risk $500 on the initial $100,000 and $1000 on $110,000. Hence, your risk or position sizing has increased with a small increase in profit.
- Measure your own self-sabotage. Making a mistake in trading is not following the rules, and rules should be detailed enough to be easily followed. Let’s say you have a rule that you will never take a trade unless you see a 3 to 1 reward to risk ratio. You must follow this rule to become a successful and disciplined trader.
- Keep track of your trading mistakes and analyze what those mistakes cost you.
- Do not enter a trade based on some rumour as you can miss some vital trading opportunities in the meantime.
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