3 Core Principles of an Enlightened Trader

3 Core Principles of an Enlightened Trader

Since I became a full time trading coach almost thirty years ago, my mission has been transformation through a financial metaphor. My staff thrives on the comments that we receive on almost a daily basis: “You have changed my whole life for the better, thank you” Or “I want to thank you for your materials that have helped me become so much more confident and optimistic.”

Several years ago, my staff agreed at a meeting that along with the fundamental trading principles we teach, we should also really promote our mission of transformation. Being open about our passion for transformation would help answer people who occasionally ask, “If Van Tharp knows so much about trading, then why doesn’t he just trade?” Well, that question presupposes that money from trading is “the be-all and end-all” of life. It’s not for me. My mission is transformation. I find much greater joy when people say, “Dr. Tharp, you’ve not only improved my trading but every aspect of my life.” than from any of the money I have made from trading.

In the last few years, I’ve actually come to discover that we help people with transformations on three individual levels.

Transformation One:  Adopt the Core Trading Principles that Work

At the first level, we help traders transform their core beliefs about the markets and trading to those beliefs that coincide with top traders. In my research, I have modeled many of the top traders in the world to discover what they have or do in common with each other. Once you understand how they think and what they do, others can learn their processes. I’ve never seen anyone else put all of this material together so we call it Tharp Think.  There are about 50 core principles to Tharp Think.  However, many people can’t just adopt those principles. Instead they have to transform themselves so some degree before they can internalize these core principles.

Let me give you an example. Larry Connors did some research on how repeated market behaviors can give traders an edge. For example, in his book How Markets Really Work he suggested that a stock would tend to have a nice upward move after it had gone down for at least five consecutive days. One of our instructors, Ken Long, developed a full trading system around that tendency that he teaches in one of our workshops.

Setup:  1) You have five or more down days followed by an inside day.  The inside day tells you “it’s stopped going down.”  This is shown in the figure below.  2) This setup works if it produces a potential reward-to-risk ratio of at least 3 to 1.

If you are looking for high probability trading, you’ll want to read this new research in High Probability Trading with Multiple Up & Down Days.

Risk (1R) is the difference between the high of the inside day and the low of the last down day. Reward is the potential move from the high of the inside day to the old swing high, assuming this to be a target. In the figure the risk is the distance between the two bottom horizontal lines. The reward is the distance between the two top horizontal lines. It’s about 3 to 1 in this example.

Entry:  Enter the next day if the price moves just above the high of the inside day.

Protective Stop:  Just below the low of the last down day.

Ken Long Entry Setup Chart
Figure 1:  Five Down Days Trade

Target Exit:   At the old swing high.  However, in this trade you’d probably exit at the close of the green bar that exceeds the old high.

Trailing Stop:  You’d at least bring your stop to break even once you had a 1R profit locked in (i.e., a profit as big as your initial risk).