Trader Self-Evaluation
By Van K. Tharp, Ph.D.*
Posted: Nov 24, 2006
In my work with traders and investors, I believe that the most significant work 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 training, I give a long questionnaire to each trader to do an evaluation of him or herself. One piece of feedback I get is that taking the test is like doing a Ph.D. program! It's that involved.
I consider the 10 questions I give my Super Traders the essence of this self-evaluation process -- a minimum starting point for this type of work.
In this article, we'll start this process for you, the reader, with just two of the questions. My advice to spend at least an hour on each question -- a day -- is even better. These questions are meant to get you to dig really deeply and come up with responses from your core belief structure.
Question 1: What are the 7 key psychological areas you need to work on or are currently working on?
Don’t say “none” because that answer really suggests that you are totally unaware of what is going on with you.
Basically, we live in a society in which we are programmed to feel separate and alone from everyone else, programmed to follow the rules of the games that others invent for us to play. The net result is that most people do the exact opposite of what is necessary for their success.
As you become aware of this, you’ll also become aware of all the patterns, beliefs and emotions you need to work on or clear out to become more successful as a trader.
Here are some examples that might fit some of you:
Example Psychological Challenge 1: I really have a fear problem that enters into my trading. I want to make trades, but I’m afraid to pull the trigger. And, that fear seems to come up in other areas too; I guess I’m really afraid of failure.
Example Psychological Challenge 2: I have some internal conflict when it comes to working on myself. On one hand, I want to, but, on the other, I’d rather do other things. Working on myself feels like having a tooth pulled. For some reason, I just don’t want to do it.
Example Psychological Challenge 3: I don’t have any discipline. Sometimes, I just decide to trade. I make trades that are almost random, or I’m capriciously selective about acting on recommendations I’m given, selecting only those that appeal to me. And, the net result is that those trades never seem to work out. (Note: This is also an incomplete answer. What is the selection process? What happens to those trades? Do you cut losses and let profits run? Are you compelled to trade by some emotion?)
Example Psychological Challenge 4: My mother continually criticizes me. She gave me everything when I was growing up, and I’m very grateful to her. But, she’s always telling me what I do wrong. In fact, it upsets me to be around her. Yet, at the same time, I feel that I must support her. I need to find out why her criticism bothers me so much and what I can do about it.
Example Psychological Challenge 5: I really don’t like to be alone. When I do the things important to trading success, such as psychological work, I have to go inside and search and that really disturbs me. Also, when I try to meditate, things come up that cause me to be afraid. (And, of course, if you’d had this response, I’d want you to, at the very least, find out what’s trying to come up that is causing this).
Those five examples are just that -- examples of what might come up for you. But, whatever you find…look thoroughly. What’s really going on? What are the emotions you don’t want to feel? What are the hidden beliefs? What is the internal conflict where part of you wants certain things and another part wants something else?
Question 2: 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 guiding you?
To really understand what’s guiding your trading, you should list at least 50 beliefs. However, 10 is a good starting point.
To help you get started, I’ve listed 12 of my most important beliefs about the market. Some of these are core principles that I teach everyone, and some are just things that fit me. Also, I just came up with these 12 off the top of my head. As I mentioned, you’ll probably need to discover at least 50, so you can thoroughly cover the key principles that guide your trading.
Example Belief 1: Cut your losses short and let your profits run!
Example Belief 2: Risk, as it relates to how much you can lose in a trade, is much more important than risk as it relates to how much volatility you can have. Both are related, though.
Example Belief 3: You must understand the R-multiple distribution of your trading system, the average R it produces (expectancy) and the variability of that distribution (i.e., how volatile it is).
Example Belief 4: You must know the objectives you wish to achieve. What would you like to accomplish, and what can you tolerate in terms of drawdowns? (In my case, I’d like to make 10 percent per month in my trading.)
Example Belief 5: To achieve your objectives, you must understand and use position sizing to your advantage.
Example Belief 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, so they might not fit you.)
Example Belief 7: When you have a large down day, thoroughly investigate what happened and how you might have caused it. Determine what mistakes, if any, you may have made.
Example Belief 8: Keep a trading diary on every trade.
Example Belief 9: Follow the 10 tasks of trading.
Example Belief 10: When I cannot be trading actively, I should remove all speculative positions.
Example Belief 11: Understand the risk and reward of each trade before you enter it. For example, your potential reward should be at least three times your potential risk.
Example Belief 12: Keep stop loss levels with your core positions and actively monitor the market for your 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 through 4 (knowing your objectives) and 8 through 11. This set of 12 is just meant to get you going.
So, be honest with yourself and start looking at what you truly believe about the markets. You may surprise yourself.
*Reprinted (and modified) with permission from Van K. Tharp Ph.D. of http://www.tradingeducation.com/
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