Dr.Van K. Tharp is a widely recognized trading coach and author. Several years ago, I read two of his books Trade Your way to Financial Freedom and Safe Strategies for Financial Freedom. To this very day I still employ his strategy of combining risk management and position sizing.
I received the email below from him this week. I found it quite interesting. You can sign up for the email on his web site. The price is right – it’s free.
Are you a discretionary trader? How would you be able to tell? Here is a quiz that will help you decide. Answer Yes or No to the following questions.
- Do you sometimes buy newsletter recommendations without having a real plan for how you’ll get out of the trade?
- Do you occasionally (or often) take trades based upon some interesting indicator that you learned in a workshop (i.e., when you see that indicator go, you usually get into a trade, but again you have no real plan about how you’ll get out of the trade)?
- Do you trade three or more different systems in the same account?
- Do you trade more than ten different systems?
- Do you sometimes enter a trade and later not remember why?
- Are you unsure of how many systems you have?
- Do most of your systems lack a complete set of rules to guide your behavior?
- Are your systems equivalent to the setups used to get into the trades and nothing more?
- Are you unable to list the rules for the last trade you made?
- Are you able to list the rules for any of the last five trades you made?
If you answered Yes to as many as two of the questions above, you have some elements of a no-rules discretionary trader. However, if you answered Yes to 6 or more questions above, you definitely are a no-rules discretionary trader.
Chances are you seldom make money in the market because you are not playing a winning game. You probably make many mistakes. In fact, since you don’t have rules, I would consider everything you do to be a mistake until you have a set of rules in place. How can you effectively learn from any of your trading experiences if you do not know which ones are mistakes?
If it is any consolation, most traders fall into the no-rules discretionary category. The best among this group might be dedicated to following the trades of a single newsletter. If that applies to you, do you even know the rules of the newsletter? Does the newsletter writer have rules to guide his trading? Chances are, if he must come out with a specific recommendation once every month on a specific date, he doesn’t have such rules. And chances are also good that you don’t follow the recommendations of the newsletter writer exactly: you don’t take some trades, you may miss some others, you buy at a price other than that recommended, and you probably don’t sell when you are told to. Again, these are all signs of a no-rules discretionary trader.