Dr. Van K. Tharp – The Psychology of Trading (Market Wizards)
Given those areas, what are the characteristics of the losing trader?
“The composite profile of a losing trader would be someone who is highly stressed and has little protection from stress, has a negative outlook on life and expects the worst, has a lot of conflict in his/her personality, and blames others when things go wrong. Such a person would not have a set of rules to guide their behavior and would be more likely to be a crowd follower, in addition, losing traders tend to be disorganized and impatient. They want action now. Most losing traders are not as bad as the composite profile would suggest. They just have part of the losing profile.”
“Now, let me explain some of my findings in working with top traders. You might find some of these beliefs confirmed in other interviews in your book. Generally, I find that top traders believe:”
- Money is NOT important.
- It is OK to lose in the markets.
- Trading is a game.
- Mental rehearsal is important for success.
- They’ve won the game before they start.
You mentioned that winners know they’ve won the game before they start. Although I can easily see how such confidence would be beneficial for the established winning trader, might the impact of this trait actually be reversed for the novice trader? For example, in your first week on skis, confidence about your ability to go down the expert slope might not be such a great quality. How does the less expert trader distinguish between justified and misplaced confidence?
“The top traders that I’ve worked with began their careers with an extensive study of the markets. They developed and refined models of how to trade. They mentally rehearsed what they wanted to do extensively until they had the belief that they would win. At this point, they had both the confidence and the commitment necessary to produce success. In addition, they also had the entire constellation of beliefs I just described. As a result, I believe that there are three major differences between justified confidence and misplaced confidence. First of all, justified confidence comes from a constellation of beliefs, such as the one I just described. If a trader has confidence and nothing else, he is probably in a lot of trouble. Second, justified confidence comes from extensive testing of some sort of model of trading. If you don’t have a model that you have properly tested, then your confidence is probably misplaced. Third, justified confidence comes with an extensive commitment to being successful as a trader. Most people who want to be traders are not committed—they just think they are. There is a poem by W. N. Murray, of the Scottish Himalayan expedition, that says: “That the moment that one definitely commits oneself, then Providence moves too.”"
“If you are really committed, then not only are you certain that you are doing the right thing, but somehow events just seem to occur to help you. If you are really committed to being a trader, then you probably have an understanding at some level of what I’m talking about. You probably even understand that those events that help you might be big losses. If you are not committed, on the other hand, then you are probably saying, “I don’t understand what Tharp is saying. I’m committed, but events certainly have not been helping me.”"
When people own their own problems, they discover that their results usually stem from some sort of mental state. Common examples are:
- I’m too impatient with the markets.
- I get angry at the markets.
- I’m afraid at the wrong time.
- I’m too optimistic about what will happen.
These are just a few examples of mental state problems. Once you identify a mental state problem, you can do something about it because this sort of problem is within your control. I’ve already mentioned how one can use body posture, breathing, and muscle control to manipulate one’s mental state. To try this out for yourself, go into a shopping mall and notice how other people walk. Duplicate a dozen or so walks for yourself and notice how your mental state changes with each one.
I’m not saying that controlling your mental state is the magic solution to trading success. It’s just part of the answer. But when you admit that the answer is within yourself, you’ve come a long way. The realization that you are responsible for the results you get is the key to successful investing. Winners know they are responsible for their results; losers think they are not.
Can you give a practical example of how someone can control their mental state?
Well, mental state manipulation is what most people call discipline. I teach people a very simple procedure that they can use right away. For example, suppose you are at your desk and you become aware that you are in a mental state that you would like to mental state that you would like to change. Get up out of the chair. Walk away about four feet and then look at how you looked in that chair. Notice your posture, your breathing, your facial expressions. Then imagine how you would look if you had the sort of mental state you would like. When you can see that clearly, sit down in the chair again and assume the position that you just imagined. That exercise works for almost any situation as it involves several important principles—changing your body posture, seeing yourself from a more objective viewpoint, and imagining a more resourceful state.
Please elaborate on mental strategies—the third element you cited earlier as critical to duplicating success. Could you provide some examples?
To understand strategies, you have to understand how people think. People think in the same modalities as their five senses, that is, in terms of visual images, sounds, feelings, and for some people, tastes and smells. Those five modalities are to mental strategies as the alphabet is to a great novel, or as musical notes are to a great symphony. It’s not the elements, but the way in which the elements are put together. A mental strategy is really the sequence in which you think.
Rather than explain a complex topic in detail, which I think is beyond the scope of this interview, let me give you two examples. First, imagine that you have a trading system that gives you specific signals. Since most signals are visual, such as a particular chart pattern or certain signals on your computer, imagine that your system gives you visual signals. Now, try on the following strategy:
- See the signal.
- Recognize that it is familiar.
- Tell yourself what might go wrong if you take it.
- Feel bad about it.
Could you trade effectively using that strategy? Would you even take the signal? Probably not! What if you used the following strategy?
- See the signal.
- Recognize that it is familiar.
- Feel good about it.
Could you trade from that signal? Probably. So even though the two strategies are quite similar, they lead to very different results in terms of trading. If you are trading a system, you need a simple strategy like the last one in order to use it effectively.