Trading Influences: Van K. Tharp

Continuing my series on Trading Idols series, I’ve decided to throw in someone who isn’t really  a trading idol at all — but who as a trading author has definitely influenced my trading. I have no idea how good Van Tharp really is as a trader, but I do know that he has written some of the most useful, comprehensive and influential trading books including one of my favourites: “Trade Your Way To Financial Freedom”. I have no connection, by the way, so no axe to grind nor interest to promote here.

Tharp’s aforementioned book promises to reveal his secrets for:

• Searching for the Holy Grail in the Market
• Finding a Trading System That Works for You
• Selecting a Time Frame and Market

While I’m not sure that any true “secrets” are revealed, the book does help you in your search for a Holy Grail, to find a trading system that works for you, and to select a time frame and market.

Van Tharp’s books — and presumably his trader coaching — are designed to help you find your own secrets for successful trading. And that’s important, because I believe that there is no one-size-fits-all trading system that will work for all traders at all times. How could there be, because everyone would be using it and no one would have an advantage… so there would in effect be no “market”.

Tharp’s writings provide us with what might be described as a complete trading system construction kit covering the various options for trade set-ups, trade entry, money management, profit-taking, position sizing, and accounting for trading costs.

While many trading coaches and authors, and (even worse) “investment” authors, imply that it’s all about clever “stock picking”, it was Van Tharp who first got me thinking seriously about the crucial money management and position sizing skills that will keep you in the game long enough to realise your trading edge — if you have one. Or will help you to go broke less quickly if you don’t.

Determining whether or not you do have a trading edge is a matter of determining the expectancy of your trading strategy, with a positive expectancy (or expectation) meaning that you will surely come out ahead… in the end. Tharp gives us the tools we need to calculate the expectancy of our trading systems.

Lest we should think that successful trading is all about the mechanical calculation of system expectancy, optimal stop order levels and position sizes, Tharp reminds us that it is Trader Psychology that accounts for 60% of trading success compared with 30% importance for Money Management and 10% for Trading System Development. As a picture, the breakdown looks like this:

Whether or not Van K. Tharp is worthy of the title “trading idol” may be a matter for debate; but he sure can teach us something about how to trade. On this basis I grant him honorary membership of my “trading idol” club as a “trading influence”.

Tony Loton is a private trader, and author of the book “Stop Orders” published by Harriman house.