Breaking the Trading Matrix By Dr. Van Tharp Trading Education Institute
Matrix Essay by William Lee
After reading your two books, Trade Your Way to Financial Freedom and Super Trader, I was really eager to get my hands on your new book, Trading Beyond the Matrix. Yet, frankly, given my non-religious and non-spiritual beliefs, I had trouble completing the book the first time I read it. Even now, I can't say I have become a spiritual man, yet I can say that I have taken the first step on a journey of self-discovery and transformation.
Trading Beyond the Matrix is not a book to read. It is a book to be practiced every day. I have done belief evaluations on Tharp Think and adopted most. I am in the process of matrix reprogramming according to the blueprint you provided in the book. Today, I would like to borrow the "matrix" metaphor from you and express my understanding of the trading matrix.
"The Matrix" is a great movie and an excellent metaphor for trading. In my mind, there are three levels of matrix to break if I want to become a truly successful trader.
The first one is easy money matrix.
Every trader, myself included, is attracted to trading because of the lure of easy money. You read about legendary traders who make $1 billion in one day, or a next-door mom who picked a couple of stocks and become a millionaire, or even a teenage trader sensation. You think to yourself: how hard can it be? Buy low, sell high, quite simple, right? When you look at a chart, you begin to see patterns and profits, lots of it. It seems the trading profit is just around the corner waiting for you to pick it up.
When you open an account to rake in the profit, you find the process is really a snap. You don't need a million dollars to start trading. On the contrary, you can use your credit card to fund your forex account with as little as $100. They've made it so easy that anybody can do it. You don't need five years of graduate or medical school, or four years of college, or even a day in kindergarten.
The financial establishments make it so easy to trade, you ask yourself, "Why didn't I start this earlier?" Armed with super confidence in your own intelligence and luck, you are all set to make a killing in stocks/futures/forex/options or whatever market you set your eyes on.
In reality, over 90 percent of traders in leveraged markets lose money and 60-80 percent of stocks traders lose money depending on the studies. For the same reason that the billion-dollar casino's design is NOT to make you (the gambler) rich, the financial market isn't designed to make everyone a millionaire. In reality, should everyone make money, the system would collapse.
You, as a trader, have to break the easy money matrix and ask the hard questions, "What do I have to enable me to compete against and win over hundreds of thousands of professional money managers/traders, or even millions of other investors/traders just like me?"
If you still believe your intelligence and luck are the keys for your success. Then, good luck. You really need it. When you start your quest to collect millions, the seemingly unlimited profits suddenly become elusive. You begin to lose money or worse, you start to win, which inflates your expectations. You take a real plunge, and oops…the profit evaporates. After a while, you may ask why everyone else is making money while you are losing. You may conclude that they must have found the Holy Grail, a secret code, a perfect order in the market that allows perfect timing, or a perfect stock before it leaps ten-fold.
Whatever it is, you decide to find it. You spend days, months, or even years studying company reports, plotting trendlines, conducting backtests, yet the Holy Grail remains to be found. Hey, it's the Holy Grail; it is supposed to be buried deep, camouflaged well, and painstakingly guarded. But you are tough and persistent, you are determined to uncover it, possibly at the cost of spending your whole life chasing it.
Well, this is the matrix of the Holy Grail, thinking that the only way to achieve market success is a secret method to minimize or even eliminate loss.
The bad news is that there is no such Holy Grail. The good news is that once you break this matrix and face reality, you can spend your energy and resources on the real valuable aspects of trading. To me, it is the RED principles.
R is the risk control: proper trade management to align your trading objective with the position size and system performance.
E is proven edge: sufficient number of trade distribution with a positive expectancy under right market conditions.
D is discipline: consistency in trading can only be achieved if the beliefs of the trader match those of the trading system, and traders are aware of and able to overcome behavioral biases rooted in our psychology.
The RED principles are not cute slogans to hang on the wall. They are tools and measurements to monitor my status, to reveal my behavior, good and bad, and to track my progress.
If you implement the RED principle or its variations, you can steady the ship, possibly achieve some degree of profits. But you still feel there is something missing. You still make trading mistakes and the true potential of your earning power remains to be unlocked.
Welcome to the third matrix, human psychology.
To survive and function as human beings, we accumulate many behavior and cognitive traits that are not exactly suitable for trading. Behavioral finance reveals our biases collectively in dealing with financial decisions. For an individual trader, we have to go through awakening and transformation processes as it was elaborated on in the Trading Beyond the Matrix.
I can only achieve wizard trader status after completing this transformation. This is the biggest matrix to break and also a life-long journey to embark for self-discovery and self-mastery. Trading is one way to measure my progress on this journey.
Now, as in the movie The Matrix, Neo can only be shown the door, he must go through it on his own. You have led us to the door, it is up to each and every one of us to go through the door and find what we are looking for.
Thank you, Van, for leading and showing the door to me! And happy journey to you too!