Trader Self Evaluation - Part Two

Trader Self Evaluation Part Two is the second article in a series in helping understand yourself to become a better trader. If you haven't read part one yet, you can find Trader Self Evaluation Part One here:

What are Your Key Beliefs About the Markets?
By Van K. Tharp, Ph.D.

Last week I asked you to begin a process of self-evaluation, mentioning that in my work with traders and investors I believe the most significant work that anyone can do to increase market returns is self work. Really understanding yourself and how you think can give you an edge that others in the market don't have.

As part of my Super Trader Program, I give a long questionnaire to each trader to do an evaluation of themselves. Some of the feedback that I get is that taking the test is like doing a Ph.D. program! It's that involved.

I consider that answering the ten questions, the essence of this self-evaluation process, to be a minimum starting point for this type work.

This week we'll continue this process with a second important question to explore. Remember, my advice to my Super Traders is to spend at least an hour on each question—a day is even better. These questions are meant for you to really dig deep and come up with responses from your core belief structure.

Question of the week: What are your key beliefs about the markets?

It is important for you to remember that you can only trade your beliefs about the market. So what are the key beliefs that are guiding you?

To really understand what’s guiding your trading, you should list at least fifty beliefs. However, at least ten is a good starting point.

To help you get started, I’ve listed twelve of my most important beliefs about the market. Some of these are core principles that I teach everyone and some of them are just things that fit me. Also I just came up with these twelve off the top of my head. Like I mentioned, you’ll probably need to discover at least fifty beliefs to thoroughly cover the key principles that guide your trading.

1. Cut your losses short and let your profits run!!!!!!!


2. Risk, as it relates to how much you can lose in a trade, is much more important than risk as it related to how much volatility you can have. Both are related though.


3. You must understand the R-multiple distribution of your trading system and the average R it produces (expectancy) and the variability of that distribution (i.e., how volatile it is).


4. You must know the objectives you wish to accomplish. What would you like to accomplish and what can you tolerate in terms of drawdowns? In my case, I’d like to make 10% per month in my trading.


5. To achieve your objectives, you must understand and use position sizing to your advantage.


6. Fill your portfolio with a core position that you might adjust weekly or monthly. However, then find efficient stocks and use leverage with those stocks to achieve peak performance. (Again, remember that these are my beliefs and they might not fit you.)


7. When I have a large down day, thoroughly investigate what happened and how I might have caused it or made any mistakes.


8. Keep a trading diary on every trade.


9. Follow the ten tasks of trading.


10. When I cannot be actively trading, remove all speculative positions.


11. Understand the risk reward of each trade before you enter it. For example, your potential reward should be at least three times your potential risk.


12. Keep stops loss levels with my core positions and actively monitor the market for my speculative positions. (Again, this one is my personal preference.)

I want to caution you again that these 12 beliefs are my personal beliefs. Your beliefs might be different. However, certain beliefs are universal for good trading. These include beliefs 1- 4 (knowing your objectives), and 8-11. These are just ideas to get you going. So be honest with yourself, and start to look at what you truly believe about the markets. You may surprise yourself.

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About Van Tharp: World-renowned trading coach, author and psychologist Dr. Van K. Tharp, is widely recognized for his best-selling book Trade Your Way to Financial Freedom and his outstanding Peak Performance Home Study program - a highly regarded classic that is suitable for all levels of traders and investors.

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