While this is a simplified version of Ken’s rules, it illustrates the parts of a full trading system very well and it also illustrates several of core Tharp Think principles.
- Always have a predetermined risk (1R).
- Never take a trade unless the reward to risk ratio is at least 3 to 1.
- Which means cut your losses short and let your profits run
How does the system work? During 2008-9 bear market, Ken traded GM long only using these rules all the way to GM’s bankruptcy. In other words, as GM went from its highs in 2007 down to zero, Ken made a big profit trading it by going long. Could you do that?
Most people probably couldn’t because this system clashes with many of their beliefs, such as-
- How can you go long in a bear market?
- How can you go long a stock that is crashing?
- The trend is down, why don’t you follow the trend?
- Etc, etc. etc.
Transformation Two: Transform Yourself Enough to Adopt the Core Principles That Work.
Some traders are able to adopt core trading principles as soon as they hear and understand them. Most traders, however, need to go to the second level of personal transformation so they can adopt the core trading principles that work. For example, there really is a Matrix, like that of the movie. You create your own matrix with your beliefs and your beliefs program you into behaving like a robot – you act consistently with what you believe. Once you understand Tharp Think, watch CNBC for a while.
Here’s a quick example of how beliefs affect two groups of traders – those who watch CNBC and those that understand Tharp Think
CNBC says it’s all about picking the right stocks.
Tharp Think says it’s all about trades with 3:1 reward to risk ratios or better.
CNBC says that diversification and asset allocation are all important but never mentions position sizing.
Tharp Think says position-sizing is the most important non-psychological factor in your trading. It’s how you achieve your trading objectives.
Can you see the contrasts in these beliefs? Can you see how believing one set or the other would lead you to different actions and trades? If you don’t understand the powerful role of beliefs in your trading, you are caught in the matrix and don’t even know it.
In order to transform yourself, you must
- Really look at your beliefs to determine if they are useful.
- Identify non-useful beliefs and transform them. This is easy to do once you decide the belief is not useful unless the belief is locked in place with an emotional charge.
- If the belief is locked in place with a charge, then you must do some sort of feeling release work to release the charge. Once that’s done then you can replace the old belief with a more useful one.
- These are just a few of the techniques we teach to help you through your transformation. Others include various forms of conflict resolution, developing a strong internal guidance, etc.