Tharp's Thoughts Weekly Newsletter (View On-Line)

  • Special Offer 20 Percent Off Sale Going On Now
  • Article What Most of Us Believe Is Probably Not Very Useful by Van K. Tharp
  • Workshops Important Information Regarding our Winter 2011 Workshops
  • Trading Tip Traders, It's Time to Take a Break! by D.R. Barton
  • Mail Bag Looking for an R-multiple Distribution Simulator

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Feature Articlevan

What Most of Us Believe Is Probably Not Very Useful

How human beings work has always fascinated me. I received my bachelor’s degree in psychology in the 1960s when the field of psychology was dominated by behaviorism. The mantra was "Understand the stimulation one receives and you can figure out the responses you'll get." I, however, found this idea limiting; I didn’t believe it showed how we really work.

I pursued a doctorate in biological psychology to go beyond behaviorism, but I found out that behaviorism dominated that field also: “Stimulate this part of the brain and notice the responses you get.” “Cut out another part and notice the differences.” It was more of the same! I wanted something more.

Upon graduating with my Ph.D., I discovered it’s easy to get published if you write a paper that agrees with the scientific community, with perhaps a slightly different take. But if your ideas are too different, then getting published is very difficult. I remember reading, The Structure of Scientific Revolutions, which helped me make sense of this phenomenon. It detailed progress in science and how that usually comes from someone outside of the primary area of research, usually with great resistance.

While working as a researcher, I came across Neurolinguistic Programming (NLP). How people thought and acted finally made a lot more sense to me after that. As I had suspected, thinking and behavior had nothing to do with stimulus-response relationships. I discovered that that anyone could learn to do what others did through the process of modeling. Modeling requires that you find successful people in a particular area and learn how they think and what they do. By finding the three common elements in these people's tasks, an NLP practitioner can model and teach the same process to other people. The ingredients (i.e., the sequence of our thinking), for those of you who have not read The Peak Performance Course, are beliefs, mental states, and mental strategies.

Over time, I've modeled trading, wealth accumulation, system development, position sizing™ strategies, and even how top brokers perform. And I came to the conclusion that most people believe the opposite of what is necessary for success.

As an example, let's look at a few of the beliefs of mainstream versus successful traders.

Old Belief/Mainstream New Belief/Success Modeling Area Modeled
Learn how to pick stocks well. Understand reward-to-risk ratios. Trading
Asset allocation and diversification are critical. You achieve your objectives through position sizing strategies. Position Sizing Strategies
There is a magic system. You need trading systems that fit you and the current market type. System Development
Winning the money game amounts to having a lot of money. When your passive income is greater than your expenses, you are infinitely wealthy. Wealth
Analyze the markets well. Analyze yourself well. Trading
Risk it all under the right conditions. Find a position sizing strategy that fits your objectives. Position Sizing Strategies
Find high probability entries and setups. You make money through your exits. System Development
You can afford it if the down payment and the monthly payments are small. What you own tends to eat you financially. Wealth

I could go on and on, but you get the idea. Remember: you don’t trade the markets, you trade your beliefs about the markets.

After many years of study, it’s obvious to me that beliefs create your reality. It's as if the movie, The Matrix, has come true. Society tends to program you with certain beliefs, most of which are not true, at least as measured by their impact on success. Thus, taking the "red pill" amounts to determining how you shape your reality with your beliefs, which allows you to discover beliefs that are not useful and then reprogram yourself to have more useful beliefs.

As I began to understand the impact of beliefs, I also learned about belief hierarchies, which indicate that certain types of beliefs carry significantly more weight than others. Beliefs about yourself tend to be very influential as they determine your sense of "who you are." Beliefs about the universe tend to be even more important because they shape your reality. For example, if you believe the universe is a friendly place, you are open to everything because you are not afraid. If you believe that the universe is a dangerous place, you'll isolate yourself and build defenses to protect yourself.

When I studied psychology as an undergraduate, psychology was trying to be a science. In fact, it was modeling itself after Newtonian physics even though quantum physics as a general model had already displaced Newtonian physics. I pursued my Ph.D. 40 years ago so I recently spoke to a new psychology graduate to determine if the study of psychology had changed much since then. My first question was "Is psychology still trying to prove itself to be a science?" Her response: "Oh, we are a science." That response prompted me to check some of their assumptions, so I asked, "Are you taught that our beliefs shape our reality?" She responded, “Oh, I don’t believe that.” I didn’t bother to ask any more questions; nothing has changed.

The Belief Examination Paradigm

Since beliefs create our reality, I have a general set of questions you should ask yourself when examining your beliefs that I call the Belief Examination Paradigm.

  1. “Where did the belief come from?” It’s often useful to know how you came to have a particular belief.
  2. “What does that belief get me into?” And you should be able to list about 10 things that happen when you have the belief.
  3. “What does that belief get me out of?” Most people have trouble with this because they are stuck in the belief. Another way of saying it might be, “Who would I be without this belief?”
  4. “Is the belief useful?” and “Does it have charge?” If it’s not useful and doesn’t have charge, it is easy to change the belief. If, however, the belief does have charge, you must release the charge before you can change the belief.

It used to be hard for many people to change their beliefs. But people’s level of awareness has increased dramatically over the last 20 years and now most people can understand, for example, how some of the old trading beliefs in the above table are not nearly as useful as the new beliefs.

Let’s go a little deeper. What happens to you when you wear a belief? Here is an example of a belief that a trader might have:

“I’d be a great investor if I could just pick stocks like Warren Buffet.”

Let's run it through the Belief Examination Paradigm.

Belief Examination Paradigm

1. Who gave it to me?

a. Probably the media or the titles of various books. It’s what’s taught generally about investing: Warren Buffet is the world’s greatest investor. He’s a stock picker, so in order to be great, I need to pick great stocks, too.

Is there evidence for it?

b. Well, there are a lot of books promoting this concept. And Warren Buffet is a great stock picker… according to these books.

2. What does it get me into?

a. It gets me into trying to pick stocks.
b. It gets me into reading books about how to pick stocks.
c. It gets me into finding good criteria to pick stocks.
d. It gets me into wanting to be like Warren Buffet.
e. It gets me into buying Berkshire Hathaway stock so I can go to the annual meeting and hear Warren Buffet speak.
f. It gets me into thinking there is a magic formula for picking stocks.
g. It gets me into watching “stock picking” shows on the financial news media network.
h. It gets me into thinking that when someone’s picks don’t work out that he is a poor stock picker.
i. It gets me into thinking that I’m a poor stock picker because most of mine don’t work out.

I could go on and on, but you get the picture. Now let’s look at the third question.

3. What does it get me out of?

a. It gets me out of looking at what else might be important to trading:

i. me
ii. exits
iii. position sizing strategies
iv. reward-to-risk ratios

b. It gets me into thinking that Warren Buffet is a total genius and out of looking at his failures.
c. It gets me out of thinking short term.
d. It gets me out of thinking, “How would I know if I were wrong about this position?”
e. It gets me out of critical thinking.

Again, I could keep going. Most people have a lot of trouble with this question because they have trouble stepping out of themselves and seeing what life might be like without the belief.

At this point, you would answer the last question one of two ways: ”Yes, it is useful,” if you think that stock picking has something to offer to success or “No, it’s not useful,” if you really realize that other factors are more important.

I’ve seen people take beliefs, that almost everyone else would recognize as limiting, and defend them with every ounce of energy that they have. It is that important for them to be right. So when I say one of my criteria for a good trader is the willingness to work themselves, what I’m looking for is an openness to examine everything, including rigid beliefs at the identity and spiritual level. And this doesn’t mean that they accept my beliefs, it simply means that they are open.

Personal Responsibility and the Belief Examination Paradigm

I’ve always said that personal responsibility is the most important trait any trader can have because personal responsibility gives you the power to improve. However, there are many levels to this.

At the first level, personal responsibility means that you are responsible for your reactions to whatever happens to you. For example, you might notice that you get angry when the market does X. Well, not every trader gets angry when the market does X and that probably isn’t a useful response. When you are able to accept this, you can use the techniques we teach to change your beliefs and mental states.

At the second level, personal responsibility means that you create your reality through your beliefs and emotions. This idea has been around throughout history and it’s been recently popularized through Rhonda Byrne’s The Secret. If you take personal responsibility to this level, you literally believe you create your own reality. And obviously, if you realize this (and believe it), then you can create an amazing reality. And if you believe that you don’t, then you won’t, which means that you did. (That, by the way, is a paraphrase of one of my favorite quotes from Harry Palmer and it really fits here). Can you notice how important the word "belief" becomes in this context?

At the next level, if you believe that we do create our own reality through our beliefs and thoughts and emotions, then also we do this collectively in our cultures and societies. The reality we create is a collective illusion—one that is full of separateness and judgment. At their core, every spiritual path recognizes this illusory world.

Quantum physics offers an intriguing idea for this level—there is no difference between matter and energy (i.e., E = MC2). The universe is an unlimited field of pure potential through which creation happens. Neo came to understand the possibilities of this idea at the end of The Matrix when he suddenly realized that he could go “beyond the Matrix.”

When you begin to take personal responsibility to this level, all sorts of changes happen. You take trading to another level and at the same time trading itself does not even matter. But that’s another story.

I’d like to conclude with an excerpt from a beautiful PowerPoint full of quotes from A Course in Miracles. It’s called Jewels:

Part if of it goes as follows:

The oneness of the Creator and creation is your wholeness, your sanity, and your limitless power. This limitless power is God’s gift to you because IT IS what you are. If you dissociate your mind from it, you are perceiving the most powerful force in the universe as weak, because you do not believe you are a part of it.

If you have trouble taking personal responsibility to this level, then “you are perceiving the most powerful force in the universe as weak, because you do not believe you are a part of it.” And you don’t even have to believe that, at least for now. You just need to be open to the possibility.

About the Author: Trading coach, and author, Dr. Van K. Tharp is widely recognized for his best-selling books and his outstanding Peak Performance Home Study program—a highly regarded classic that is suitable for all levels of traders and investors. You can learn more about Van Tharp at  



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Trading Tipdr


Traders, It's Time to Take a Break!

Last week we talked about some holiday thoughts for traders and investors. Many thanks to all of you who sent in such nice comments about last week’s article; they are much appreciated! For those of you who missed the article last week, you can find it here.

Today, I wanted to take a very practical short-term look at what traders, especially shorter term traders, should be doing during the last week of trading for the year. After a close review of the data, here is my recommendation: Do nothing.

Sit on your hands. Stare out the window. Enjoy time with family and friends. Do anything but trade! And this is why: Almost all strategies in short-term trading require a healthy dose of market movement to provide profit opportunities. We usually use the terms “market movement” and volatility interchangeably in this context. And as many of you know, my favorite volatility indicator is Average True Range (ATR), the tool popularized by Welles Wilder. In short, this indicator tells us the average daily range of an instrument, while taking into account gaps. Wilder’s original settings looked at a 14 day ATR, and I still find that length very useful for intermediate term trading. However, today we’ll look at a shorter term timeframe.

Over the past week of trading, the 5-day ATR has dipped to its lowest levels of the year. And if history is a useful guide, this volatility contraction is not over. Historically, the last trading week of the year (the time between Christmas and New Year’s Day) is a very low volatility time. This certainly makes anecdotal sense, since many traders and funds have significantly reduced activity during this time of year. Let’s look at how this play out via a chart of the S&P 500 index.

chart 1

As you can see, this year end volatility contraction has been very consistent in recent years. At the end of 2006 and 2007, we still got volatility contractions, but they were atypically not the lowest 5-day ATR readings of the year. I say this is atypical because, as we look back, the pattern picks up again.

chart 2

Once again, we have the lowest ATRs of the year between Christmas and the New Year for the five years from 2001 to 2005. And the pattern repeats itself about 70 – 80% of the time looking back even further.

The bottom line: take a break! As we say down South, don’t try to squeeze blood out of a turnip—i.e., don’t try to make something happen when nothing is happening! (This saying came about because turnips have very white flesh inside, so the last thing one could expect is to get something dark red out of root that is so white.)

Many traders hit the end the year trying to make up for some losses or get to that final P&L goal only to get frustrated or, worse yet, generate some big losses trying to trade when the markets are giving significantly fewer opportunities than usual. Don’t be that person who tries to make something out of nothing! Use this time to reflect and prepare for next year.

As the Bartons enjoy some precious family time and prepare to celebrate the birth of Jesus, we hope that whatever your spiritual tradition is that you have a season filled with peace, hope, joy and love.

I’d love to hear your thoughts and feedback on this article or about trading and investing in general at drbarton “at” Until next week…

Great Trading,
D. R.

About the Author: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena. He is a regularly featured guest on both Report on Business TV, and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio. His articles have appeared on and Financial Advisor magazine. You may contact D.R. at "drbarton" at "".


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Looking for an R-multiple Distribution Simulator

Q: I just finished reading The Definitive Guide to Position Sizing. I found it to be very valuable and contain vital trading information. I now evaluate all the systems I use in terms of R-multiple and SQN.

I have no simulator at the moment I would like to see if my systems are robust. Can you recommend a simulator where I can plug-in my R-multiple distributions?

A: Finding the expectancy and SQN for your systems will give you an idea of the quality of your systems. Van developed SQN so that people would not have to simulate their systems (which used to be the only way people could get an idea of how to position size).

Once you have the R-multiple distribution for your trading system, you can use our Position Sizing Game to simulate trading it. It has a custom mode where you enter your results and then you trade your system to see what kind of results you generate with different position sizing strategies. You can learn more about the game here.

Even still, some traders like to run large scale simulations and there are ways to do this with Excel rather than using dedicated software for the purpose. In the next year or so, we hope to have something written for people who want to simulate their trading systems with large simulations.

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December 22, 2010 - Issue 506

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The Van Tharp Institute will be closed on Friday, December 24 and Monday, December 27 for the Christmas holiday.

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