I came across Dr. Van Tharp when I first listened to the CDs that were included in Robert Kiyosaki’s Cashflow 101 game. Robert did an interview with Dr. Tharp and he expressed some interesting views about how to trade and the psychology behind trading. The interview peaked my interested enough that I looked up more information about Dr. Tharp and then purchased and read his book “Trade Your Way To Financial Freedom” (Which I believe is a fantastic book). And as I got more and more into Dr. Tharp’s material, he has a common theme that personal psychology is the most important factor in your trading success.
This lead Dr. Tharp to create the “Peak Performance Course”. It consists of 5 volumes, each of which takes you through a considerable amount of self-study and preparation for trading. I picked up the 1st version a while back (There is now a 2nd Edition of the course) and went through it. However I decided to go through the course again, especially after creating my trading business plan so I could re-examine the areas of my psychology that need work. And I figured that I might as well write an overview and review of the course, since extensive reviews of the course are hard to find, and also to increase my own retention of the material.
Since the course itself is so big, I have broken the review into 5 sections; 1 for each volume.
The name of the 1st volume for the Peak Performance Course is titled, “How to Use Risk”. Chapter 1 discuss “Commitment” and how most traders are not fully committed to trading. Most traders want the quick fix, the holy grail, as they thinking successful trading is just an answer, or just finding the right system and then all of your problems are over. However trading exposes that the majority of people have the exact opposite risk psychology that is need to be a successful trader. Therefore, in order to become a successful trader, one must develop commitment to the process through:
- Determining your obstacles (Through keeping a trading diary and looking for consistent patterns)
- Determine how those obstacles reflect what is going on inside of you.
- Deal with whatever is going on within you.
Looking back on my own life, I have found that I achieved my greatest successes when I was totally committed to the process of achieving the goal, so this did resonate with me. Additionally, 1 quote stuck out for me which was, “The ultimate test of commitment is consistent profits”. I really couldn’t think of a better way to sum up commitment than that.
Chapter 2 is entitled “How to Use This Course”. It is a basic overview of the course and the importance for going through it (multiple times even). Additionally it discusses the “Investment Psychology Inventory” which is an online test you can take to help determine scores for:
- How well rounded you are
- If you have a positive attitude
- You motivation level
- If you have prosperity conflict
- If you have a propensity to be a gambler
- How respondable you are
- Your organization level
- Your judgmental heuristic level
- Your propensity to conformity
- Your intuition use
You don’t need to take the inventory test to complete the course, but it is supposed to help you identify areas that you may want to focus your efforts on.
Chapter 3 is entitled “How to Duplicate Success”. Dr. Tharp is a modeler. Basically that mean NLP or Neuro-linguistic programming. Dr. Tharp discusses the foundation of uses modeling for duplicating success, which I had heard before having been exposed to material by Anthony Robbins. NLP basically states that if you can mimic 3 things in successful people, you can share the same success they have. Those 3 things are:
- How you filter information and create judgments, categorization, meanings, etc.
- Mental States
- Discipline or emotional control. Controlling your mental state has a lot to do with what you do with your body.
- Mental Strategies
- A sequence of the 5 sensory modalities
This chapter was a mixed bag for me because I had modeled successful people in the past and had both success and failure. But that may have been because a) the people I was modeling were not successful after all, b) I wasn’t fully duplicating what was required for success.
Chapter 4 is called “The Task Top Trading”. Here Dr. Tharp introduces his research on successful traders and how they all seems to follow these tasks of trading. They are:
- Developing Self-Insight
- This allows you to capitalize on your strengths and overcome weaknesses through self-analysis
- Personal issues tend to resurface as market experiences until we deal with it.
- Developing a Low-Risk Game Plan
- This must be a written plan because it requires you to be precise
- Daily self-analysis
- A daily system for analyzing your current psychological state and if you are high enough to trade.
- Daily Trading Rehearsal
- This visualization exercise allows you to pre-plan how you will carry out your trading tasks.
- It also lets you prepare for potential problems and how you will adapt.
- Developing a Low Risk Idea
- This basically boils down to determining when the risk is overwhelmingly in your favor and controlling that risk
- Stalking is the process of searching for low risk opportunities
- The action of taking the trade
- Closely watching the position and determining if to do 1 of the next 2 tasks
- Cutting your losses short is the foundation of successful trading
- Take Profits
- Exiting your successful trades based on points identified prior to entering the trade
- Daily Debriefing
- Keep a trading journal
- A mistake is not following your trading plan, regardless of profitability
- Periodic Review
- Take some time and review your trading rules and if they are still appropriate.
I really liked how Dr. Tharp broke this down. This list makes sense, although some I thought could be combined (Action/Monitoring/Abort/Take Profits), but this list gives you a good way to organize your trading tasks and to develop a plan for each item.
Chapter 5 is named “A Brief Look at Risk”. This chapter mostly looks at what Dr. Tharp calls “The Loss Trap”. This is the pattern of a trader not wanting to take a loss. As a trade falls further and further, they think that it can’t possibly go any further and so they hang on to the trade, or even worse, double down on it until they are forced the take the loss. However this desire to avoid a loss is the exact opposite mentality of what you need. In fact, you need to make it okay to lose. You need to let go of the loss and move on to the next trade.
Chapter 6 is entitled “The Psychological Elements of Risking”. This chapter goes through how certain psychological patterns tend to keep us in the “Loss Trap”. First off is framing. Framing is a way of keeping us from seeing things as they really are. For example, a person can frame their trading losses as “A Tax Write-off”. Also traders use the percentage frame where they will accept a $500 loss on a $10,000 position, while stressing about the same size of loss on a $2000 position. The losses are the exact same size!
Next is the need to explain. Traders with a loss will look for a superstitious reason for the loss, or they will look to consensus opinion on CNBC or some expert to tell them that they are right, regardless of what may have happened in their account. Overconfidence is another way traders can blind themselves by being “right” 90% of the time, but still losing money on the large 10% of their losing trades.
Dr. Tharp then gives an excellent exercise which he calls “The confidence Exercise”. Basically, you look at several charts, and you determine which direction the market is going to go, and what level of confidence you believe in that direction. The outcome for the exercise is not to determine how accurate you at picking the direction, but rather determining if you are over-confident or under-confident based on how well predicted. For example, if you got 70% of the examples right, but you were 90% confident in your predictions, you are obviously overconfident, while predicting 90% of the moves correctly but being only 65% confident means you are under-confident in your abilities.
Chapter 7 gives some “Techniques to Objectively Measure Risk”. The first is utilizing the standard deviation as a measure of risk. If you calculate the % change in your account every month, you can find the standard deviation of those values which would give you an idea of how much volatility your account is experiencing. And while a lower value means you are more consistent, it can also mean that you are just a consistent loser.
Next is utilizing Probability of Success with 95% confidence limits. This takes a sample of your trades (Min 30. Paper trade if you don’t have enough trades) and applying Statistical Confidence limits to that set of trades to determine what probability limits your results will lie in. He discusses using the Confidence test to calibrate yourself, but I already discussed that.
Chapter 8 finally gives us “Techniques to Control Risk and Safely Manage Money”. There are 2 keys to successful trading: cutting your losses short and letting your winners run. To cut your losses short, you need to have a stop loss. This means defining the point and which you accept that you were wrong, and you get out of the market and move on. To let your profits run, it depends on your skill level. If you can accurately spot major market moves, just take those moves and risk higher amounts of capital. If not, just take lower risk trades. If you can spot major market moves, but you are often wrong, you may want to consider a pyramiding plan where you start with a small number of contracts and add to your position as it moves in your favor.
And that is the end of Volume 1. I really enjoyed this volume. In particular, I really liked the psychological tests that he presented as a way to determine your psychological readiness, or confidence levels. I also really enjoyed how he utilized statistics as a way to evaluate your potential trading success.
On the downside, the writing sometimes feels like he is trying to dumb down the material. The pictures in the volume (As in his other books as well) feel childish and add no real value. So it feels a bit inconsistent at times.
Still, this was a fantastic volume. There is lots of value here and lots of great exercises. I can highly recommend this 1st volume to all traders.
Great breakdown – I am going through the PP101 self study myself now and I am a certified NLP practitioner, something I did 4 years back but only now I realize the use and value of it. The self-work has been invaluable. very surprised to see that I am the first one to comment!
thank you for the breakdown.