Jump to content
Rob C

Tharp Think Principles for trading

Recommended Posts

I was rereading Van Tharp's 40 principles for reinforcement and thought it would be good to post them. These are from a free book on the website: https://www.vantharp.com/home-study

Most of these principles you will find in Andrew's book but stated differently. Also, Van Tharp is much heavier into position sizing strategies. I can post more about that topic if there is an interest.

Here they are:

Tharp Think Principles

1.       Successful trading can be modeled and taught to other people.

2.       Learning to trade well requires as much work/education as any other profession.

3.       You need to find a trading system that fits you.

4.       In order to accomplish that, you must know yourself:

a.       Your values

b.       Your strengths

c.       Your weaknesses

d.       Your parts

e.       Significant beliefs

f.        Trading edges

g.       Trading weaknesses

5.       You can only trade your beliefs about the markets, not the markets themselves. Thus, you should know and understand your beliefs and whether or not they are useful.

6.       System development is 100 percent (1) beliefs (2) mental states, and (3) mental strategies. Thus, it is 100 percent psychology. 

7.       You must know your personal criteria for being able to trade a system with confidence.

8.       A mistake means not following your rules. If you don’t have rules, everything you do is a mistake.

9.       It is much better to trade a lower-scoring SQN system that fits you than a higher-scoring SQN system that doesn’t fit you.

10.   You are responsible for everything that happens to you. When you understand this, you can correct your mistakes. We call this respond-ability.

11.   Repeating the same mistake over and over is self-sabotage.

12.   A trader who makes one mistake in 10 trades is 90 percent efficient; that 10 percent drop in efficiency could be enough to make him/her a losing trader.

13.   Fifty percent of system development is thinking through and clearly defining a set of written objectives. Those objectives should address your desired gain, your maximum acceptable draw-down, and the relative importance of each.

14.   You need to design core objectives that fit you.

15.   There are potentially as many objectives as there are traders.

16.   You meet your objectives through position sizing strategies.

17.   The overwhelming majority of your performance is due to your position sizing strategy and your efficiency as a trader.

18.   You must know your mission/purpose in life and incorporate that into your trading.

19.   You need to know your financial freedom number (passive income per month less monthly expenses). When it’s positive, you are financially free.

20.   Never open a position without knowing the initial risk.

21.   Define your profits and losses as a multiple of your initial risk (R-multiples).

22.   Limit your losses to 1R or less.

23.   Make sure your profits on the average are bigger than 1R.

24.   Never take a trade unless the reward-to-risk ratio of that trade is at least 2:1 and perhaps even 3:1

25.   Your trading system is a distribution of R multiples.

26.   When you understand #6 you should be able to hear/see a description of a system and know the kind of R-multiple distribution it would generate.

27.   The mean of that distribution is the expectancy, and it tells you what you’ll make on the average trade. It should be a positive number.

28.   The mean, standard deviation, and the number of trades determine the SQN score for your system.

29.   Your SQN score tells you how easy it will be to meet your objectives using position sizing strategies. Other than that, your system has nothing to do with meeting your objectives.

30.   Systems are usually named after their setups, which are usually based on some attempt to predict future prices. Prediction has nothing to do with trading well.

31.   System performance has to do with controlling risk and managing the position through your exits.

32.   There are at least six different market types. You should understand how your system will perform in each of them.

a.       Bull volatile

b.       Bull quiet

c.       Sideways volatile

d.       Sideways quiet

e.       Bear quiet (almost doesn’t exist)

f.        Bear volatile

33.   It’s easy to design a Holy Grail system (one with a high System Quality Number score) for any one market type listed above.

34.   It’s insane to expect that trading system to work in all market types.

35.   The biggest mistake people make is to try to design one system to fit all markets.

36.   You should only trade your system in the market type for which it was designed.

37.   Good traders understand the big picture, know how to measure it, and become aware when the situation changes.

38.   Media and academia know none of this and will not teach it to you.

39.   For each market type, you need a large sample size to estimate what the population is for that system.

40.   You also need to Monte Carlo simulations with your system’s R-multiples to get a better idea of what to expect in the future. This will work if the sample you draw from is similar to the population.

  • Like 2
  • Thanks 1

Share this post

Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now

  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.