Trading Beyond The Matrix: Book Notes

This post contains my personal notes from the book, Trading Beyond the Matrix by Van Tharp.

  • Van Tharp has a mini version of the book that is available for free. You can get access to this mini e-book here. In this mini e-book, the preface and the first chapter can be accessed in full. You can also access the table of contents here.
  • The five  areas that Tharp talks about in this book are: Tharp Think Concepts, Transforming yourself, Developing a personal business handbook for trading/investing, assessment of your preparation for trading, and understanding your trading mistakes.

Tharp Think is the essential trading and psychological principles of trading the market according to Van Tharp. I have summarised this below:

The four primary rules

1. The first new rule is that trading is as much a profession as any other.
2. The second new rule is that trading reflects human performance just as much as any top athletic endeavour. You must understand that you are responsible for the results you get.
3. The third new rule is that objectives are important. Further more, you achieve your objectives through position sizing strategies.
4. The fourth new rule is that trading/investing is all about probability and reward-to-risk ratios under specific market conditions. When you understand these rules and the market conditions, you can use statistics to predict what your performance will be under similar market conditions in the future.

The four new rules say that great performance is a function of what the market gives you, your system and you.

The six key parts of Tharp Think

1. Learning to trade is hard work, but it can be taught

  • Successful trading can be modeled and taught to other people.
  • Learning to trade well requires as much work/education as any other profession.

2. Knowing yourself

  • You need to find a trading system that fits you.
  • In order to accomplish that, you must know yourself: your values, strengths, weaknesses, parts, significant beliefs(spiritual, self, market, system), trading edges and trading weaknesses
  • You can only trade your beliefs about the markets, not the markets themselves. Thus, you should know and understand your beliefs and whether or not they are useful.
  • System development is 100 percent (1) beliefs, (2) mental states, and (3) mental strategies. Thus it is 100 percent psychology.
  • You must know your personal criteria for being able to trade a system with confidence.

3. Mistakes

  • A mistake means not following your rules. If you don’t have rules, everything you do is a mistake.
  • It is much better to trade a lower-scoring SQN system that fits you than a higher-scoring SQN system that doesn’t fit you.
  • You are responsible for everything that happens to you. When you understand this, you can correct your mistakes. We call this respond-ability.
  • Repeating the same mistake over and over again is self-sabotage.
  • A trader who makes one mistake in 10 trades is 90 percent efficient; that 10 percent drop in efficiency could be enough to make him/her a losing trader.

4. Objectives and Position Sizing Strategies

  • Fifty percent of system development is thinking through and clearly defining a set of written objectives.Those objectives should address your desired gain, your maximum acceptable drawdown, and the relative importance of each.
  • You need to design core objectives that fit you.
  • There are potentially as many objectives as there are traders.
  • You meet your objectives through position sizing strategies.
  • The overwhelming majority of your performance is due to your position sizing strategy and your efficiency as a trader.
  • You must know your mission/purpose in life and incorporate that into your trading.
  • You need to know your financial freedom number (passive income per month less monthly expenses). When it’s positive, you are financially free.

5. Probability and reward-to risk assessment

  • Never open a position without knowing the initial risk.
  • Define your profits and losses as a multiple of your initial risk (R-multiples).
  • Limit your losses to 1R or less.
  • Make sure your profits on the average are bigger than 1R.
  • Never take a trade unless the reward-to-risk ratio of that trade is at least 2:1 and perhaps even 3:1.
  • Your trading system is a distribution of R-multiples.
  • When you understand #6, you should be able to hear/see a description of a system and know the kind of R-multiple distribution it would generate.
  • The mean of that distribution is the expectancy, and it tells you what you’ll make on the average trade. It should be a positive number.
  • The mean, standard deviation, and number of trades determine the SQN score for your system.
  • Your SQN score tells you how easy it will be to meet your objectives using position sizing strategies. Other than that, your system has nothing to do with meeting your objectives.
  • Systems are usually named after their setups, which are usually based on some attempt to predict future prices. Prediction has nothing to do with trading well.
  • System performance has to do with controlling risk and managing the position through your exits.

6. Systems and Market Type

  • There are at least six different market types. You should understand how your system will perform in each of them. 1 . Bull volatile 2. Bull quiet 3. Sideways volatile 4. Sideways quiet 5. Bear quiet (almost doesn’t exist) 6. Bear volatile.
  • It’s easy to design a Holy Grail system (one with a high System Quality Number score) for any one market type listed above.
  • It’s insane to expect that trading system to work in all market types.
  • The biggest mistake people make is to try to design one system to fit all markets.
  • You should only trade your system in the market type for which it was designed.
  • Good traders understand the big picture, know how to measure it, and become aware when the situation changes.
  • Media and academia know none of this and will not teach it to you.
  • For each market type, you need a large sample size to estimate what the population is for that system.
  • You also need to do Monte Carlo simulations with your system’s R-multiples to get a better idea of what to expect in the future. This will work if the sample you draw from is similar to the population.

The psychological rules of Tharp Think

  • You are responsible for everything that happens to you. When you understand this, you can correct your mistakes. We call this “respondability.”
  • When you are not committed, you tend to run into obstacles and do a dance with them instead of going around them and moving on to your committed goal.
  • If you are not committed to doing the necessary work on yourself and on your trading, you will not succeed.
  • Do what you love. If that doesn’t include trading, you should not be a trader.
  • You are a crowd inside, and that crowd is who you think you are.
  • Parts have good intentions, but they start doing their own thing and cause conflict.
  • You can eliminate that conflict through parts negotiation or TfM( transformational meditation).
  • You must understand your identity and spiritual beliefs and determine whether or not they’re useful.
  • You can change any belief that isn’t useful simply by understanding that it isn’t useful— unless that belief has stored charge in it.
  • If the belief has stored charge in it, you need to remove the charge through feeling release.
  • You need to continually monitor and work on yourself to trade well.
  • When you discover a major issue blocking you, you need to know how to solve the issue and avoid doing a dance with it.
  • Your internal guidance is your best friend. Learn to use it.
  • But don’t mistake “into wishing” for intuition.

The 12 tasks of trading are:

  • Self-analysis to determine if you are okay to trade.
  • Mental rehearsal to prevent mistakes.
  • Daily focus to point you toward your goals.
  • Developing a low-risk idea( which is done way before the trading starts)
  • Stalking, moving down to a shorter time frame to lower the risk even more.
  • Action that requires commitment and no thought.
  • Monitoring to keep the risk low.
  • Aborting if the trade goes against you.
  • Taking profits when the reason for the trade ends.
  • A daily debriefing to monitor and prevent future mistakes.
  • Being grateful for whatever went right.
  • Doing a periodic review to make sure everything is working.

Tharp also talks a lot about transformation and this part of the book is almost spiritual. Apart from the Tharp psychological principles which I have discussed above, the other important concepts according to me were as follows:

1. The relationship between beliefs and experience can be seen and understood through the figure below:

Beliefs and experience2. There is also a belief hierarchy which is as follows:

Belief hierarchy

 

  • Spiritual belief: Your overall philosophy in life and how the universe is organised.
  • Identity belief: Who a person thinks he or she is and what they think is one’s mission in life.
  • Value belief: What we think is important to us
  • Capability belief: What you believe you can or cannot do.
  • Behavioural belief: Your beliefs about your behaviour
  • Environmental beliefs: Your beliefs regarding what is and your attempts to organize observations about the world.

3. How to change beliefs using the belief examination paradigm:

  • Recognise the belief.
  • Is it a deliberately chosen belief or did someone give it to me? Who gave it to me?
  • What does this belief get me into? What happens when I have this belief?
  • What does this belief get me out of? Who would I be without this belief?
  • Is this belief useful?
  • If the belief is not useful, you can change it , if the belief does not have any charge( like fear, anger or negative emotion). If it has a charge, you have to release the charge before you can change the belief.

4. Everything has the meaning you give it. 

5. Accepting our feelings, our creations and understanding oneness of everything leads to peace.

6. We are all a crowd of conflicting parts and resolving this is essential for peace.

7. In transformational meditation(TfM), we offer all our parts to our spiritual self and ask them to be integrated with it. If they do not want to be integrated, we discard them.

8. The nine steps to mastering oneself are:

  1. Learn that you are a crowd inside.
  2. Get 25 to 30 identity-level beliefs from each part.
  3. Do a belief examination paradigm on each of your beliefs.
  4. Learn about projection and your shadow self.
  5. Work on the charge through feeling release exercises like those in the Sedona Method. The main thing is to really feel the feelings and then they will dissolve.
  6. Do a life review and list the beliefs that come up, examine them and release non useful beliefs.
  7. Make a list of your problems and find the root cause( beliefs and feelings)
  8. Get in touch with your internal guidance.
  9. Work to eliminate parts, or at least get them to work together with you.

9. The ultimate aim is to transform our consciousness. Some levels of consciousness are shown in the figure below:

Levels of consciousness

 

10. The transformational model is shown in the figure below:

Transformational model11. Seven key lessons to do things effectively:

  1. Take personal responsibility.
  2. Deal with thoughts, emotions and actions on a regular basis.
  3. Know that your thoughts are not yours.
  4. Trust your inner guidance.
  5. Understand that the world is perfect.
  6. Know your purpose
  7. Reinvent yourself

The rest of the areas can be accessed through the following documents:

  • Develop a personal business handbook for trading and investing: This can be accessed here.
  • Assess your preparation for trading: The checklist for this can be accessed here.
  • Recommended books for further reading can be accessed here.
  • Key words used by Van Tharp and their meanings can be found here.
  • The reference notes also contain valuable material and references for further study. You can access it here.

The Van Tharp  website has a lot of useful materials. Browse through it and you will find a lot of free gems and diamonds.

 

 

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