VTP Lessons Learned Legacy (VTP 3L)

The VTP Lessons Learned Legacy (VTP 3L) is where I share some of the lessons I’ve learned through more than two decades of trading financial markets, along with my experiences of coaching and mentoring other traders. Some lessons have come from getting things right, others from getting things wrong, but all have helped shape my understanding of what it takes to become a better trader.

The Wallace Brief takes a wider view, exploring what those experiences can teach us about performance, decision-making and human behaviour, both inside and outside financial markets.

Your Trading Results Are a Reflection of Your Beliefs

The 4Ms — Myself | Understanding how your beliefs, mental state and risk decisions influence your trading performance.

An Early Introduction to Dr Van Tharp

I was very fortunate to come across the work of Dr Van Tharp right at the beginning of my trading journey. Looking back now, with more than two decades of experience in financial markets, I suspect that early introduction to his thinking helped me enormously, probably far more than I realised at the time.

One of his observations particularly resonated with me: we don’t trade markets, we trade our beliefs about markets. That idea made a great deal of sense to me, and over the years I’ve come to appreciate just how much truth there is in it. In fact, I agreed with it so strongly that it eventually became the inspiration for the name of my own trader performance coaching business, TradingBeliefs.

Now, that early exposure didn’t make trading easy. It certainly didn’t remove the challenges, frustrations or mistakes that are part of learning to operate in financial markets. What it did provide was a useful way of thinking about trading, particularly the relationship between what happens in the markets and how we interpret and respond to those events.

Through my own trading, and subsequently through coaching and mentoring traders from a wide range of backgrounds, I’ve seen just how much our beliefs influence the methods we choose, the risks we’re prepared to take and the decisions we make when things don’t go according to plan.

Van Tharp spent decades researching trader performance, and three areas of his work are particularly relevant to anyone trying to develop as a trader: beliefs, mental state and position sizing. They’re worth examining because they tend to receive considerably less attention than the latest trading strategy, indicator or entry technique.

The Beliefs We Bring to Trading

One of the things I’ve noticed over the years is that people don’t arrive in financial markets as a blank canvas. They bring with them a lifetime of experiences, expectations and beliefs about how the world works, what success looks like and how they should go about achieving it.

This is particularly interesting when working with people who have already been successful in other careers or professions.

Many have achieved that success through hard work, discipline, intelligence and the ability to influence or control their environment. They’ve learned that if they work harder, prepare better or apply more effort, they can generally improve the outcome.

Then they arrive in financial markets, where those same assumptions don’t necessarily hold true.

You can do all your preparation, identify what looks like an excellent trading opportunity, execute your plan correctly and still lose money. The market doesn’t know who you are, what qualifications you hold or how successful you’ve been elsewhere. It certainly doesn’t owe you a profitable trade simply because you’ve worked hard.

For some people, that’s a difficult adjustment to make.

I often remind traders that you cannot control the market, but you can always plan your trade, trade your plan and manage your risk. Those are things that remain within your control, regardless of what the market subsequently decides to do.

This is where understanding your beliefs becomes important. If you believe that being right is essential to being a good trader, how will you respond when the market proves you wrong? If you believe that successful traders should make money every day, what happens when you experience a run of losing trades?

And if you believe that working harder means taking more trades, you may find yourself becoming increasingly active precisely when the best decision would be to sit on your hands.

These beliefs don’t just influence how we execute our trading methods. They can also influence which methods we choose in the first place.

A trader who believes that success requires constant activity may gravitate towards very short-term trading. Someone who struggles with uncertainty may continually search for indicators that promise greater certainty. Another trader who believes that small profits aren’t worth the effort may take excessive risks in pursuit of larger returns.

None of this automatically makes someone a poor trader. However, it does mean that we need to understand why we’re making certain choices, rather than assuming those choices are always based on sound market analysis.

Your Mental State Matters

The second area Van Tharp emphasised was the importance of the mental state in which we operate.

This is something that has always interested me, not just in financial markets but through my earlier career in the RAF, where situational awareness, decision-making and performance under pressure were everyday considerations.

One of the lessons I’ve taken from operating in demanding environments is that having a good plan and being capable of executing that plan under pressure are not necessarily the same thing.

We can understand exactly what we’re supposed to do, rehearse it, practise it and even demonstrate that we can do it successfully in relatively comfortable conditions. However, introduce uncertainty, pressure, fatigue or emotional involvement and our decision-making can change considerably.

Trading is no different.

Think about a trader who has just experienced three consecutive losing trades. They may have a perfectly reasonable trading method, with clearly defined entry criteria and risk parameters. However, when the next opportunity appears, they hesitate because they’re afraid of taking another loss.

Alternatively, they may become frustrated and increase their position size because they want to recover the money they’ve lost.

The trading method hasn’t necessarily changed, but the person operating it has.

I don’t believe the answer is to pretend that traders shouldn’t experience fear, frustration, excitement or disappointment. These are normal human emotions, and they’re particularly understandable when our decisions have financial consequences.

What matters is developing sufficient self-awareness to recognise when our emotional state is influencing our behaviour, and having a process that helps us respond appropriately.

Sometimes that might mean taking a short break, reducing our position size or reviewing whether the market conditions still suit our method. On other occasions, it may simply mean recognising that we’re uncomfortable but that the trade still meets our criteria and remains within our agreed risk parameters.

The objective isn’t to become an emotionless trading machine. It’s to become someone who understands how they respond under pressure and can make better decisions as a result.

That requires practice, reflection and a willingness to examine our own behaviour, particularly when things haven’t gone as we’d hoped.

Position Sizing and Staying in the Game

The third area highlighted in Van Tharp’s work is position sizing, something he regarded as a fundamental component of trading performance.

I think this is one of the most underappreciated aspects of trading, particularly amongst people who are relatively new to financial markets.

It’s understandable that traders become fascinated by entries and exits. They’re visible, they’re exciting and they’re often the focus of trading education and social media. However, knowing when to enter a trade is only part of the equation.

You also need to decide how much you’re prepared to risk, what that risk represents in relation to your overall capital and whether you can tolerate the inevitable periods when your trading method isn’t producing the results you’d like.

This is one of the reasons that within the Veterans Trader Project we place such emphasis on our development philosophy of SURVIVE → ACQUIRE → PROSPER.

Before you can acquire the experience and skills necessary to become a competent trader, you need to survive long enough to develop them.

A trader who continually risks too much may never give themselves that opportunity. Even if they have a reasonable method, a normal sequence of losing trades can cause considerable financial damage, or leave them so emotionally affected that they’re no longer capable of following their plan.

There’s also an important relationship between position sizing and mental state.

Imagine two traders taking exactly the same trade. Both have the same entry, stop-loss and profit target, but one is risking a relatively small proportion of their capital whilst the other is risking an amount they really cannot afford to lose.

Although the market opportunity is identical, their experience of managing that trade may be very different.

The first trader may be reasonably comfortable allowing the trade to develop according to their plan. The second may find themselves watching every price movement, worrying about the potential loss and looking for excuses to interfere with the position.

The difference isn’t necessarily their understanding of the market. It may simply be that one trader has chosen a position size that allows them to operate effectively, whilst the other has created unnecessary pressure through their own risk decisions.

This is why I see risk management as more than simply protecting capital. It’s also about creating the conditions in which we can make better trading decisions.

Does That Mean Your Trading Method Doesn’t Matter?

One of the arguments often associated with Van Tharp’s work is that traders devote far too much attention to entry signals and not nearly enough to their beliefs, mental state and position sizing.

I agree with the underlying observation. Spend any time looking at trading discussions online and you’ll find endless conversations about indicators, chart patterns, entries and the latest strategy that supposedly provides an edge.

However, I would be careful about taking that argument too far.

You still need a trading method that has some form of demonstrable positive expectancy. Good beliefs, excellent emotional awareness and sensible position sizing cannot magically turn a method with no genuine edge into a consistently profitable approach.

Equally, having a perfectly reasonable trading method doesn’t guarantee that you’ll make money from it.

I’ve worked with traders who understand their method very well but continually undermine their results through poor execution, excessive risk, overtrading or an inability to accept losses. I’ve also encountered traders who are disciplined and committed but simply haven’t established whether their chosen method provides a genuine advantage.

These are different problems, and they require different solutions.

This is one of the reasons I use the 4Ms — Markets, Method, Money and Myself — within the Veterans Trader Project. They provide a framework for examining the different elements of trading performance rather than assuming that every problem can be solved by finding a better entry signal or improving your psychology.

Sometimes the issue really is the method. Sometimes it’s how the trader manages their money. Sometimes they’re trying to operate in market conditions that don’t suit their approach. And sometimes the greatest challenge is the person looking back at them in the mirror.

The important thing is to establish where the actual problem lies before trying to fix it.

Understanding Yourself as a Trader

One of the things I particularly appreciate about Van Tharp’s work is that it encourages traders to examine themselves rather than continually looking to the markets for answers.

That isn’t always a comfortable process.

Regardless of your age, experience or professional background, financial markets have a remarkable ability to expose the good, the bad and the ugly aspects of our personalities.

You may discover that you’re less patient than you thought, that you struggle to accept being wrong or that your appetite for risk changes considerably when real money is involved. You may also discover strengths that you hadn’t previously recognised, particularly in your ability to remain calm, follow a process or make decisions in uncertain circumstances.

None of this makes you a terrible person or necessarily a terrible trader. It simply means that, like everyone else, you have strengths and weaknesses that need to be understood.

The objective is to recognise those characteristics so that you can leverage your strengths and mitigate your weaknesses.

I’ve always believed that becoming a better trader requires more than simply acquiring additional market knowledge. It also requires developing a better understanding of yourself, how you make decisions and how you respond when the markets challenge your expectations.

That understanding doesn’t arrive automatically with experience either. You can spend years repeating the same mistakes if you’re unwilling to examine what you’re doing and why you’re doing it.

This is why reflection, review and honest self-assessment are such important parts of trader development.

The Lesson I Took From Van Tharp

Looking back, I’m grateful that I encountered Van Tharp’s work so early in my trading journey.

It didn’t provide me with all the answers, and it certainly didn’t prevent me from making mistakes. However, it introduced me to an important idea that has stayed with me throughout my career: the results we achieve in financial markets are influenced not only by what the markets do, but also by what we believe, how we behave and the decisions we make.

That thinking has influenced my own trading, my coaching work and ultimately the philosophy behind TradingBeliefs and the Veterans Trader Project.

I think there’s a useful lesson here for anyone who is struggling with their trading, particularly if they’ve spent considerable time and money searching for a better strategy, another indicator or a different market to trade.

Before you go looking for another solution, it may be worth examining some of the beliefs that are influencing your current approach.

Why do you trade the markets and timeframes you’ve chosen? What do you believe constitutes a successful trading day? How do you respond when you’re wrong, when you lose money or when the market doesn’t provide the opportunities you were expecting?

And perhaps most importantly, are the beliefs that brought you into trading actually helping you become the trader you want to be?

You may find that some of those beliefs have served you very well and deserve to be retained. Others may need to be challenged, adapted or discarded as your understanding and experience develop.

That’s part of the journey of becoming a trader, and it’s one of the reasons I remain convinced that understanding yourself is every bit as important as understanding the markets you choose to trade.

Trade well.

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Trade well,
Paul