Everyone Can Profit

What most people don't realize is that at any given time 4-5 people might go long a position and another 4-5 might go short or unload a position. Each of them can have different systems and different ideas, and all of them can make money. They might have different ideas about the market, but they trade it because they've figured out that it is a low risk idea. And a low risk idea is one that I define to be an idea with a positive expectancy, that's traded at a position-size level so as to survive the worst case contingency in the short run so as to realize the long-term expectancy. In addition, they all have common characteristics, some of which I'll discuss later in this week's tip.

In Chapter 12 of the second edition of Trade Your Way to Financial Freedom, I discuss the strategies and thinking of five such investors.

• Mary, a long-term trend follower.
• Dick, a swing trader.
• Victor, a value investor
• Ellen, trading on the idea that there is some order to the universe and the markets and
• Ken, a spreader-Arbitrager

These five people are contrasted with Eric who just buys and sells when he gets an urge to do so and Nancy who follows the advice of several newsletters. I then show how these people would evaluate five different market scenarios and how those scenarios turned out six weeks later. The interesting thing is how the five major characters can generally make money despite totally different market views.

The reason they can do that is because they all share ten common characteristics which most good traders have. In this tip, I'll share five of those with you.

• First, they all have a tested, positive expectancy system that's proven itself to make money. We've been discussing how that's done in this series of tips.
• Second, they all have systems that fit them and their beliefs. They understand that they make money with their systems because it does fit them.
• Third, they totally understand the concepts they are trading and how those concepts generate low risk ideas.
• Fourth, they all understand that when they get into a trade, they must have some idea of when they are wrong and will bail out of the trade. This is what determines 1R for them as we've discussed previously.
• Fifth, they all evaluate the risk-reward ratio of each trade that they take. For the mechanical traders this is part of their system. For the discretionary traders, this is part of their evaluation before they take the trade. And the chapter goes into how they specifically do that for each of the five trading scenarios.

Can you begin to see how those five qualities would start to generate success? However, there are five more qualities that are just as important and, in some cases, even more important than the ones just listed. Why don't you read through prior tips and see if you can determine what they might be.

Have a good weekend. Next week I'll talk about what those remaining five traits are, but hopefully you'll be able to figure out at least 3-4 of them on your own by reading through some of my prior tips. Until then, this is Van Tharp.

Better to be Profitable Than Right

The ultimate goal of a futures trader should be to have overall trading success by being profitable. There is no single-best path one can take on the destination to trading success and profitability. However, there are a few general trading tenets to which all successful traders have subscribed. One such trading tenet is "losing your ego" when trading futures.

Mark Cook, a well-respected trader and trading educator from rural Ohio, for many years has stressed that traders need to lose their egos before getting into trading futures markets. He is also an advocate of survival in futures trading. One must survive in this challenging arena before one can succeed. I enjoyed listening to Mark at a trading seminar a few years ago. He even used to wear bib-overalls (with no shirt) at some of his trading seminars - just to drive home the point that trading futures is not easy and that ultimate success takes a lot of hard work.

My good friend and respected trader and educator Glen Ring also espouses the notion, and may have even coined the phrase, "it's better to be profitable than right in futures trading." Those who know or have talked to Glen know he, too, is a no-nonsense, no-hype trader who takes a yeoman's approach to the business. When asked what direction a specific market "will" go in the future, Glen is never afraid to say, "I don't know," before he adds that, "successful trading is not a business of predictions but one of probabilities based on past price history."

It's been reported that people who get into the endeavor of futures trading tend to be of higher-than-average intelligence and have more aggressive personalities - called "Type A" personalities. Having higher-than-average intelligence certainly can be advantageous in any field of endeavor. However, in futures trading, possessing the "Type A" personality can be a disadvantage. Reason: More aggressive and competitive people do not like to lose and do not like to be wrong. It's a time-proven fact that trading futures is about absorbing numerous losing trades. But that does not mean "Type A" personalities cannot succeed in futures trading. Those with the competitive and aggressive tendencies just need to realize they possess those traits and then manage them properly when trading futures. (My wife says that I'm a "Type A" personality, but I say I'm not. I just know I'm right and she's wrong - just kidding!)

Most have heard the simple trading adage, "Cut your losses short and let your winners run." What this also implies is that during any given year the vast majority of futures traders will see more losing trades than winning trades. Yet, some can still realize profits by getting out of the more numerous losing trades quickly at small losses (by setting tight protective stops), and allow the fewer winners to run and accrue bigger profits.

Just think for a minute about the futures trader who does not want to lose his or her ego. This is the trader who likes to be right and cannot stand to be wrong. In fact, this type of trader will probably go to great lengths just to be proven right. What does this mean when executing trades? It probably means that the trader who hates to be wrong won't be willing to get out of a losing position at a small loss. Instead, this type of trader may pull a protective stop when in the heat of a trade, or may not use protective stops at all - in the hope that he or she will be proven correct. This type of trader is likely to see a small loser turn into a big loser, and might even get a margin call from his or her broker. And if this type of trader repeats this scenario and keeps absorbing big trading losses, he or she will eventually be forced to exit the endeavor of futures trading. This is also the type of person who would likely blame the markets or the broker for his or her lack of trading success.

Be a humble futures trader. If you are not a humble futures trader now, the markets will eventually make you one - and very likely sooner rather than later. I guarantee it. There are few guarantees in futures trading but this is one that I can make.

Peak Performance Trading Tips

Jack Schwager's primary conclusion after writing the first two Market Wizard books is that great traders all have developed systems that fit who they are. I tend to agree that that's one of the secrets to success. Chapter 4 of the new edition of my book, Trade Your Way to Financial Freedom presents my revised 14 step model for designing a system that fits you. While I cannot do justice to the model in a short tip, what I can do is list some of the criteria you might want to think about in order to design a system that fits you.

Some of the criteria were mentioned in the last tip and I'll just add to that.

1. You need to know who you are. How can you design something that fits you if you really don't know who you are?

2. Once you know who you are, then you can determine what your objectives are and design a system to fit those objectives.

3. What are your beliefs about the big picture and to what extent must your system be able to fit your big picture beliefs. For example, if you believe that the U.S. dollar is doomed to collapse over the next 15-20 years, how would that affect your thoughts about developing a trading system.

4. You can only trade your beliefs about the market, so you need to understand what those beliefs are. What specifically do you believe about the market and how does that give you an edge? When you understand these criteria, then you can specifically design a system that you are comfortable.

Let's take a look at one example. Suppose you believe that markets are not really random because there are big trends in the market that don't fit the price movements you'd expect of random markets. You perhaps believe that the best way to make money in the markets is to find and capitalize on those trends. Now if this was your primary belief, do you think you could do the following?

• Buy things that were out of favor that nobody likes? Probably not because this doesn't fit the primary belief that you believe gives you an edge.
• Sell high and buy low, like a band trader is likely to do? Probably not because this is a very different mentality.

Now I could give lots of examples of beliefs and lots of examples of things that might be hard for you because they don't fit those beliefs. Hopefully, you've got the idea by now. You must determine what you believe about the markets that will give you an edge because you can only trade something easily that fits your beliefs.

5. Next you must understand the various parts of a system and the beliefs that you have about each of those parts. For example, what do you believe about setups, entry, stops, taking profits, position sizing etc. Again, you can only comfortably trade your beliefs

For example, suppose you want to catch trends, but you believe in tight stops. This means that you could easily get whipsawed in and out of trades a lot, but that when you do catch a big trend, your total reward will be many times your initial risk.

6. One of my beliefs is that a trading system is characterized by the distribution of R-multiples that it generates. (See prior tips for a discussion of what R-multiples are (or see the book). That distribution will have a mean and standard deviation that will tell you a lot about how easy it will be to trade. So you must decide what your system's R-multiple distribution must be like in order for you to be willing to trade it.

7. Another way of stating #5 is to ask yourself, "What criteria must my system meet in order for me to be able to comfortably trade it?" And while I can give you lots of suggestions, this is still a matter of personal comfort and a big part of developing a system that fits you.

8. You must also ask yourself, how can I use position sizing to meet my objectives and what is the probability, given the systems R-multiple distribution, that I will be able to do that. And if you have an accurate sample of R-multiples, then you can probably answer this question through simulations.

Lastly, you must ask yourself, what you will do to make sure your system fits all of these criteria well enough for you to be comfortable trading it. If it doesn't meet some of your criteria that well, what will you do to make it fit? Or will you change your criteria?

4 Key Questions to Gauge Your Trading Success

The attitude of the individual trader (part of the important aspect of trading psychology) plays a huge role in success (or failure) in futures trading. For a trader to become successful, he or she must enjoy the "process" of futures trading.

I have a few questions below that will help determine whether you are a good candidate to become a successful trader--if you don't feel you already fit into that category.

Before I get to the questions, it's important to touch upon the term "trading success." What is trading success? Many would reply that trading success is defined as being profitable at trading-­making more money at futures trading than one loses. I cannot disagree with that definition, but there is more to trading success than just the amount of profits accrued from trading. To better explain, here are examples of two hypothetical traders:

1. Trader Bob just started trading this year and has racked up $50,000 in futures trading profits. But he's not happy with that figure. He wants more. Bob wants to "bring the markets to their knees"--and quickly. Bob does not at all enjoy studying charts or reading and learning about fundamental factors that impact markets. His trading decisions are based mostly upon "tips" from friends or his broker. Soon, Trader Bob says he will begin establishing larger trading positions to accrue even bigger and faster profits.
2. Trader Mary has read many books and attended trading seminars--and "paper traded" before she began putting "real money" on the trading table. She, too, has been trading for around one year, and has accrued about $2,000 in profits. She enjoys studying charts, reading about market fundamentals and continues to read books on how successful traders became successful. Trader Mary enjoys the interaction she has with other traders with whom she has become acquainted. She does not get overly excited about winning trades or overly discouraged about losing trades. Trader Mary knows she's "in it for the longer haul" and figures that if she works hard, uses sound money management and "loses her ego," then hopefully good things will come from trading futures.

One can argue that both Trader Bob and Trader Mary have been successful futures traders. But which trader would you say has been most successful? Which trader would you say will continue to be successful? Most would agree that Trader Mary is achieving the greater degree of success in futures trading--even though she does not have nearly as much trading profits as Trader Bob. No doubt, Trader Bob has seen a very good run of trading profits. However, he appears to be a "flash in the pan" and is very likely doomed to "flame out."

One more analogy before I get to the questions that may help determine if you are, or will be, a successful trader. (I think my friend and respected fellow trader and educator Joe DiNapoli would agree with this analogy, as Joe restores classic cars, too.) Trading futures is like rebuilding and restoring a classic automobile. There are several tasks (many of them tedious) on the road to completing the restoration. Those restorers who do not enjoy the tasks of restoring likely will not continue to restore, and will not have a good finished product. Those restorers who take their time and enjoy the entire process of restoring an automobile will have a very fine finished product. The same is true with trading.

Now, here are a few questions to help determine if you are, or will be, a successful futures trader:

1. Do enjoy the entire process of trading futures--from studying charts, reading about and learning fundamentals, listening to and learning from mentors, and even figuring out what mistakes you have made in previous trades, and how you will improve from those previous mistakes? (Remember, a trader never stops learning and should never stop seeking knowledge about markets and trading.)
2. If you are a beginning trader with less than a couple years experience, are you willing to use the very sound money management principles required for survival in futures trading--even if it means meager profits (or meager losses) the first year or two?
3. Do you have the "patience" to wait for good trading opportunities to develop, and then have the "discipline" to follow your trading plan once you make the trade?
4. Are you the type of person who CAN stand to lose, and can you accept that trading losses are your own fault? (This is a very important question, because the typical futures trader has a more competitive personality. Remember that even the most successful traders have losing trades--and sometimes several in a row.)

If you have answered "yes," to these questions, then your road to trading success will be less rocky. If you answered "no" to any of the above questions, then you face a more difficult task on the road to trading success, and you need to figure out what changes you should make to make the "process of trading" more rewarding.

Vitamins for Your Soul, Part VIII

If you've been practicing our vitamins for your soul tips, you've probably seen some major changes occurring in your life. Most of the change may be non-trading related, but overall, I believe they'll help you immensely as a trader because they'll help you lighten up.

Our last six vitamins have included:

1. Focus on the Moment;
2. Make Yourself Laugh;
3. If Something Bothers You, Give It To God;
4. Give Thanks Every Day for your Blessings;
5. Follow Your Bliss;
6. Commit to Love; and
7. Meditate and Listen

This week my I'm adding a difficult, but very beneficial one called fasting.

Fasting

I once did a 57 day fast. It started with three meals a day of just fresh fruit and vegetables. In between the meals, I took shakes with lots of fiber and barium to coat my system. In addition, I was taking special nutritional supplements.

When my system felt like it could tolerate it, I reduced by one meal and just substituted a shake. I continued this process until I was only doing the shakes, plus lots of water. The total experience was 57 days and the last 10 days involved no meals. I lost 33 lbs (which I gained back quickly) but by the end of the fast I had an amazing amount of energy. I felt clean and better than I've felt in a long time. However, I'm not recommended anything that strenuous.

Fasting is actually your body's way of cleansing itself. When you think about humans living with nature, they had to deal with the seasons. During the growing season there was plenty of food, but in the winter months there was nothing. People could only eat what they had managed to preserve and save from the growing season. So naturally there was probably a lot of fasting.

When you were fasting, the body would feed off of itself and it would eat those portions of the body that were the least useful - things that are actually harmful to the body. Today, of course, there is no need to ever fast. We have refrigeration and lots of preservatives, so there is always food - even in the depths of winter. However, much of that food is not very good for us. It contains food elements that have been refined out of much of the nutritional value (i.e., wheat) or preservatives which are designed to keep other things from eating your food (and thus are not good for you either) or chemicals. For example, the most nutritious food in nature was either sweet or salty. Those tastes basically meant that the food was full of essential minerals and vitamins. We crave those foods. However, modern man has figured out how to artificially produce those flavors (i.e. sugar and sugar substitutes) and has created massive addictions as a result. Sugar is not that different chemically from alcohol.

If you decided to try this vitamin for your soul, it probably will not be that pleasant. Within a day, you'll probably get either withdrawal reactions or side effects from some of the poisons that are already in your system. However, I'm not suggesting anything drastic. Just spend one day drinking lots of fresh water and fruit juice with no food. Notice your experience when you do that. Or, instead, spend three days on a fresh fruit and vegetable fast. Notice your experience then. This one is another exercise in self-discovery.

Vitamins for Your Soul, Part VI

If you've been "taking your vitamins" for your soul, since I started these tips, you've probably noticed some lightening and some expansion in yourself. And lightening up as a trader will help you immensely. So far your recommended vitamins have included:

1. Focus on the Moment;
2. Make Yourself Laugh;
3. If Something Bothers You, Give It To God;
4. Give Thanks Every Day for your Blessings; and
5. Follow Your Bliss

This week we will add another interesting tip, Commit to Love.

Commit to Love

Two months ago, I attended a self-improvement workshop given by someone that I considered to be very loving. Most of the workshop involved people bringing up problems and he would very lovingly help them release the problem. That was great, but I noticed that certain people would bring the same problem up over and over and over again. In fact, one person, who might be described as a "starving actor," had been to over ten of these workshops and he was still bringing up trivial stuff – almost as if he'd accomplished nothing. Nevertheless, the workshop guru laughed with him and gently took him through a release of his problem.

My initial thought was "how can he not react to that person bringing up the same stuff over and over again." In fact, I'm sure he got the workshop for free for being an assistant, but that means he's probably brought up the same stuff over and over again at each workshop. And again I thought, "how can he not react to this person's lack of progress?" And then he told me the secret. The secret was to love the person as he was. This means that he has no emotional investment on whether or not the person makes a change. He just loves him, which means he can respond lovingly, no matter what happens. And when I understood that, I really began to understand what unconditional love really means.

So this week's tip is all about being loving. That means loving everything exactly as it is without any judgment.

Most of our decisions are made from fear and worry. I can remember numerous times in the past when I might have noticed that a future workshop we were doing had a very low enrollment. My natural tendency would be to start to worry about that. What if no more people enroll? What if there is not enough enrollments to pay for speakers fees much less the hotel? But what if we cancel? Then we have a bad reputation with the hotel because they cannot rely on us. We also lose all the marketing money we've already spent on the workshop. I could go on and on with that kind of dialogue and worry. When I do that, I'm operating out of fear and that's not useful. Instead, I elect to operate from love.

One way to operate out of love is to declare who you are. For example, you might make a declaration that says: "I'm a loving, kind, compassionate man." Write it out! Memorize it and declare it to yourself so that it becomes second nature to you. And, when you make decisions, you then begin to say, "What does a loving, kind, compassionate man do in this situation?" He certainly doesn't make decisions based upon fear. Instead, he makes decisions based upon love and compassion. And, of course, the first thing that pops into my mind when I say that is "How can I handle this situation so that everyone wins?" What more can I give to increase enrollment in this workshop? How can I add more value to this workshop so that more people can attend? And, of course, those responses get a much different response than saying to yourself, "We're going to lose a lot of money here even if I cancel the workshop."

So here's your next assignment: Start doing what you love to do. Notice what you love to do and what you dislike doing and move toward doing what you love. Even if it seems scary, try selecting what you love to do. And when you do that, notice the results you get.

Secondly, decide who you are and make a commitment statement that reflects who you are. That statement might go something like: "I'm a powerful, generous, kind leader!" Or, "I'm a courageous, loving, compassionate woman." Write down whatever you think might fit you. Put it on a sheet of paper and memorize it. And when you make decisions read your personal declaration and act as if it were true. Once you've done that, then make your decision. If you do, you'll probably find that your results are much different in all aspects of your life.

Vitamins for Your Soul, Part V

If you've been "taking your vitamins" for your soul, since I started these tips, you've probably noticed some lightening and some expansion in yourself. And lightening up as a trader will help you immensely. So far your recommended vitamins have included:

1. Focus on the Moment;
2. Make Yourself Laugh;
3. If Something Bothers You, Give It To God; and
4. Give Thanks Every Day for your Blessings.

This week we will add one of my favorites, Follow Your Bliss.

Follow Your Bliss

When I first went through A Course In Miracles, I made a commitment to follow my bliss. Joseph Campbell stated in his remarkable series The Power of Myth that following your bliss is essentially following God's path. And that seemed great to me: do what gives me joy, and my life would work better.

In 1986, I made a commitment to quit my part-time job. I was working one day a week on a job I hated, but that job was a security blanket. As long as I was part-time, I had medical benefits and the possibility of becoming full-time again. I quit the job and got rid of the security blanket. Two weeks later my wife unexpectedly lost her job and was not re-employed for about nine months. However, I made it through that year without even having to borrow much money.

By 1987 my own business was progressing. I decided that I needed to hire a secretary to keep up with the workload. However, I hadn't made that much money the prior year and a secretary's salary would take up most of that. Nevertheless, I took the plunge—another sign of commitment—and that year was the first year that I made a six-figure salary. My business really seemed to take off from there.

In each case, the decisions were difficult. I was giving up security and the status quo for something unknown. Even though I hated the known and loved what I was going into, it was very scary.

Along the way, through following this guidance of where joy seemed to be, I moved away from almost every attachment I had at the time—which included my marriage. It just wasn't working and we couldn't seem to fix it. Much of this was very scary, even though I was moving toward more joy. In the end, the results have been wonderful. It's a big step, but following your bliss is a very important vitamin for your soul.

What do you love to do? That's probably a sign that you should be doing more of that. What do you hate to do? That's probably a sign that you should be doing less of that. At one point, when my business was already quite successful, I made a note of all of the things I hated to do and all of the things I loved to do. Guess what? All of the things I loved to do were the things that probably made the most money for the business. They revolved around helping people, doing creative things, doing my workshop, developing new products, and trading. Those were all things that made money.

What I hated were the day to day routine of managing the business and all of the details I had to put up with by doing that. While I still have some of those tasks, I elected to find other people who do a much better job of doing those things than I could ever do. And now I totally concentrate on the things I love to do.

So this week's assignment is to make a list of what you love to do and what you dislike. If you love it, then decide how you can do more of it. If you dislike it, then determine how you can turn it over to someone else. You'll probably find that this simple act makes a tremendous difference in your life.