Key Principles To Run A Trading Business

By Van K. Tharp, Ph.D.

The second edition of my book Trade Your Way to Financial Freedom is now available, so I thought I would do the next set of tips around a key idea from each chapter of the book.  And I’m actually going to start with the Foreword.   The Foreword was written by one of my long-time clients and friends, Chuck Whitman of Infinium Capital Management.   And Chuck says that he runs his business around certain key principles, most of which he learned from being one of my supertraders.  

So let’s look at those:

The first principle is that you can have the best opportunities and resources in the world, but you won’t make it if your psychology is flawed.  

On this topic alone, I could do hundreds of tips, but I want to focus on several key principles. 

·         First, you are responsible for your result.   If you fail to make that assumption because of blame, justification, or some other excuse, then you will never recognize the mistakes you make.  And as a result, you’ll repeat those mistakes over and over again.

·         Second, you can only trade your beliefs about the market – not the market itself.   So if you think you need to find value to make money, you’ll look for value.  If you think you need buy what everyone else is avoiding to make money, then you’ll do that.  And if you think you need a great trend to hop onto to make money, then you’ll probably do that.

·         And, third, you basically manifest a reality based upon your beliefs no matter how destructive those beliefs might be.  For example, in my trading blog, I recently made a statement that trading (or anything) was 100% mental.   Some people may find this statement easy to understand, but others have beliefs that won’t allow them to accept it.  And whatever you believe becomes your reality, which simply proves my point.

The second principle has to do with the importance of position sizing. 

You can have the best system in the world, but if you bet too big you will blow up.   And if you bet too small, you won’t make your objectives.  

The key to a low-risk idea is to trade it at a level that will allow you to survive the worst case contingencies in the short run in order to realize the expectancy of the system and you can only do that through proper position sizing.   Again, I’m only scratching the surface here, but my objective is just to give you the key principles.   And speaking of objectives, the purpose of position sizing is really to help you meet your objectives.

The third principle is to find the best markets to trade.  For example, you could be an excellent trader, but if you are not trading the markets that give you the best opportunities, then your life will be a struggle.  However, if you find the best markets and trade them, then you’ll do well as a trader.   The new edition of the book has an entire chapter on looking at the big picture and that’s really about finding the best possible markets.

The fourth principle is that you make money through how you exit the market.  You must limit your losses by knowing when you are wrong and getting out of a position and you must let your profits run when you are right about the markets.  This is really the “Golden Rule” of trading success.

And the fifth principle is that entries are not that important, even though most people focus on them and define their systems by their setups and entries.   Instead, what’s really important are the other key principles.   And if you understand and practice these five key principles, then you understand the essence of trading success.

Until next week, this is Van Tharp.

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