An Interview with Van K.
Most people are not successful when it comes to trading.
I can answer that question on a number of levels. At the most
basic level, people must trade by processing information.
Unfortunately, we're not very efficient information processors.
We have a lot of biases which enter into trading decisions.
I've documented 25 of them in my home study program. However,
I think most of those biases can be summarized by realizing that
trading/investing are very simple processes and we human beings
try to make it into something much more complex. Those biases
are all about adding complexity to the world.
Is it really that simple?
Consider the trading rules that work: 1) follow the trend; 2)
let your profits run; 3) cut your losses short; and 4) manage
your money so you can stay in the game. If you design something
around following those rules, you'll make a lot of money. But
when a great trader says, "That's what I do," the average person
responds, "Yes, but tell me what your real secret is."
The markets are not random in that we have very large
abnormal price moves. On a normal distribution curve, these
amount to abnormally large tails. For example, in the past, we
have seen a one-day move of 500 points in the Dow Jones and a
very short-term move of crude oil from the mid-teens to the $40
level and back to the mid-teens. We might expect those moves by
chance, perhaps once in a 1000 years, but not several times in a
decade. But we've seen those moves in the last decade.
Consequently, what most traders need to do to be successful
is to participate in those moves in some way and not lose too
much money when we're wrong. Unfortunately, we have all sorts of
biases in our thinking which keep us from doing so.
What are some of those biases, Van?
First, we have a bias to understand things-such as why is the
market acting like it is? Most traders make money with systems
that are right less than fifty percent of the time. What makes
them money is that they make a lot more, on average, than they
lose. Executing a system based on probabilities doesn't require
an understanding of how the market works, it requires money
Nevertheless, people want to treat the world as if they could
predict and understand everything. As a result, they tend to
seek patterns where none exist and to invent the existence of
unjustified, causal relationships. Traders don't want to trade
probabilities. Yet trading is a probability and money management
Another bias that most people have is called the law of small
numbers. This means that we don't need a lot of information in
order to find the patterns or causal relationships that produce
our understanding -it only takes a few examples.
People also have a bias in that we tend to imagine that what
we see or expect to see is typical of what can and will occur.
Thus, if you observe a pattern in the market, you expect it to
occur. If you develop some concept about the market, you will
look for data to support that concept in the market-and you will
probably find it whether it exists or not.
Add to those another bias called the conservatism bias. This
means that once we find a pattern or causal relationship, we
tend to ignore contradictory evidence no matter how pervasive it
is. There are many more biases. Hopefully, you get the picture.
We tend to create a reality that's much more complex than what
really works-we try to add complexity rather than employ sound
There is one more important bias, called the ego bias. The
ego bias amounts to the fact that most of us make the following
statement: "Yes, I understand that most people have these
biases, but none of them apply to me."
Are there any biases around money management?
Yes, there are several. The most notable is called the
gambler's fallacy. People tend to assume that after a string of
losses, a win is much more likely and vice versa. Thus, after a
losing streak they are likely to risk a lot because they believe
a win is more likely. Or after a winning streak they are likely
to bet less because they believe a loss will occur soon.
However, in reality a win or loss depends upon the
probabilities levels in your type of trading-not what has
happened in the past. Professional gamblers know that you bet
small during a string of losses and bet big during a winning
streak. This is the reason most professional traders use some
sort of money management in which they risk a percentage of
equity. Your equity increases during a winning streak and
decreases during a losing streak.
Most good traders would agree that risking less than 1% of
equity in a trade (where 1% is the amount you would lose if your
stop loss was hit) is a prudent risk. Risking between 1% and 3%
gets into the gunslinging range. Risking any more than 3% is
usually financial suicide and the average trader commits
financial suicide all the time without knowing it.
Your definition of 1% risk is important!
Most people don't understand risk at all-including a lot of
professionals. Risk often is equated with the probability of
losing. Thus, for some people, futures trading is considered to
be risky. Others equate risk with the amount invested or with
margin. But that's not it at all. Risk is the amount of money
you are willing to lose if you are wrong about the market. When
you define risk that way it changes a lot.
Let me give you an example. An equity trader might say, "I
risk 10% on each trade." For him, that might mean that if he has
$100,000 he wouldn't invest more than 10% in each stock or
$10,000. That's not the same thing. According to his definition,
he could only buy 50 shares of a $200 stock. But let's say that
he bought a stock at $200 and that he would admit to being wrong
if his stock dropped to $198 and sell it-that's a $2 stop. If he
is willing to risk 10% of equity it means that he could buy 5000
shares of the stock.
Those 5000 shares would cost him a million dollars and no
brokerage house would allow him to buy that much with a $100,000
account. Risk must be thought of as the percent of equity you
are willing to lose on a trade if you are wrong. And when you do
it that way, anything over 3% is extremely risky-especially if
you have 10 to 15 positions on at one time.
What's really interesting is that once you understand risk
and portfolio management, you can design a trading system with
almost any level of performance. For example, you can design a
system to trade for clients that would make about 30% per year
with only 10% drawdowns. On the other hand, if you want to trade
your own account and be a little more risky, you can design a
system that will produce a triple digit rate of return-as long
as you have enough money to do so and are willing to tolerate
Van, you call yourself a modeler. What is a modeler?
I've had a lot of training in NeuroLinguistic Programming
(NLP), over 100 days worth, and I consider NLP to be the science
of modeling. That means if you can find several people who do
something well, then you can determine how they do it. You need
several people, because if you try to model one person you tend
to find that person's idiosyncrasies rather than what makes that
person a super-performer.
For example, I know one "Market Wizard" caliber trader who
has actually hired people to model him. However, they've all
failed because they were only trying to model one person and
that just doesn't work. They'd just find out what he thinks he's
doing and that's not it at all. Most of what he thinks is
important are his idiosyncrasies.
Anyway, once you get the common tasks that produce excellent
behavior, you need to get the ingredients of those tasks. Those
ingredients include the beliefs, mental resources, and mental
strategies necessary to carry out those tasks. Once you have
that, then you can teach the same skill to others and have them
perform well. And when you can duplicate success in others,
which we have been able to do in most aspects of trading, then
you know you have a workable model.
What is a coach for traders?
A coach is someone who takes raw talent and brings out top
performance. People sometimes forget that trading is human
performance--measurable human performance. Changes in equity
reflect the performance of the trader much more than what
happens in the market. A good trader can make money in the long
run no matter what the market is doing. In contrast, a poor
trader is unlikely to make money, regardless of what the market
A coach is someone who attracts talented people and then
teaches them the fundamentals of good performance. At the
Yankees spring training camp, Casey Stengle, who coached such
baseball greats as Mickey Mantle and Roger Marris, used to hold
up a baseball to his entire staff and begin the season with the
statement, "This is a baseball." Even the best players need to
be reminded of the fundamentals occasionally.
But just what are the fundamentals of trading?
To me, trading fundamentals include the ten tasks of trading.
Traders need to be reminded of that and to eliminate any
self-sabotage that keeps them from following those tasks. That's
what I do and I am very effective at doing it.
Van, what is a low-risk idea?
A low-risk idea is a trading strategy or concept with a
long-term positive expectancy for profit, but which, allows for
the worst possible result in the short term. It still allows the
trader to remain in the game to obtain the long-term rewards.
Why did you decide to do modeling and coaching with
My mission in life is to teach people how they think and how
they can change their lives and this planet by changing their
thinking. Traditional occupations do not do that. If I can
influence just one more person by creating great models, I'm
eager to do so.
People need to realize that they can wish upon a star and get
their wish. What they really want is happiness. Happiness does
not come from wealth or money or achievement. People get
happiness from deep down inside of themselves. And they realize
they have it by giving it away. I guess that's what I'm
about-giving away happiness. I sell financial success, but what
I'm attempting to do is give away happiness in the process.
You said there were other levels at which we could talk
about why people lose in the markets?
Yes, at another level, people get exactly what they want out
of the markets. Most people are afraid of success or failure. As
a result, they tend to resist change and continue to follow
their natural biases and lose in the markets. When you get rid
of the fear, you tend to get rid of the biases.
I guess the classic question is can a losing trader
I believe that if one person can do something, then you can
model it and teach it to others. And we've developed all sorts
of trading models that work. In fact, we've had great success
teaching the models to other traders.
Yet transformation is only something that winners do. I've
found over the years that most of the people who come to me are
above-average traders and investors. In fact, when my clients
have tried to talk others into using my service, they don't want
I can remember one client telling a friend that if my course
didn't help him (both his life and his trading) that he (my
client) would pay for it. The friend still refused to buy it.
Eventually, the friend lost so much money that he no longer
trades. Yet he never called me. I hear stories like that all the
time. The best way to describe the phenomenon is to say that
losers don't want to transform themselves.
What role does discipline play?
Discipline to me means being able to control one's mental
state where mental state is like the emotional context that one
brings to a task. Every task has some state of mind that's
important for optimal performance. For example, in answering
these questions I'd describe my state as being relaxed,
confident and focused. I just let the answers flow. If I were in
any other state, I think it would be a lot harder to come up
with the answers.
Well, the same thing holds for trading-there's some optimal
state that is necessary for carrying out each of the tasks of
trading. Overall, you need a background state of confidence-of
knowing that you'll make money in the long run. If you don't
have that context, then trading is quite difficult. And, each
trading task requires a different sort of state.
Can you give us an example?
The first task of trading, self-analysis, requires that you
be introspective, dissociated, objective, curious, and willing
to trust messages that come from your unconscious mind. If you
don't have a mental state like that, then it's hard to do
self-analysis properly. And the same goes for any of the other
nine tasks that are important to successful trading.
Can one change their mental state?
Yes. We teach about 15 methods for changing one's state. One
that everyone reading this interview can use immediately has to
do with what we do with our bodies. Our posture, our breathing,
the muscle tension in our bodies-all have a profound affect on
our mental state.
There's a profound statement credited to the native American
Indians: "Before you judge someone, walk a mile in their
moccasins." So try it-only imitate their walk rather than
actually wear their shoes. Try on four or five different walks.
That also leads to a profound way of changing yourself when
you are not in a resourceful state. Change what you are doing
with your body. Change your posture! Notice your posture and
change it. Notice the muscle tension in your body (especially
your face) and change it. And notice your breathing. Sometimes
when people panic, for example, they completely stop breathing.
That's not very useful, so change your breathing.
What are mental strategies?
Essentially, mental strategies refer to another of the three
ingredients of success. It refers to the sequencing of our
thoughts-most of which is unconscious. For example, most people
make decisions based upon specific details of their mental
Traders usually have a mental image of a trade that works. If
the image is in the correct location and has a sharp
figure-to-ground distinction (i.e., the last bar stands out),
then people get a strong feeling to act. Now, that's not the
same for everyone, but it's the most common pattern. Everything
else we do in terms of manipulating the environment or changing
our own thinking is just to set up an image like that which
causes us to act.
Are there different mental strategies for different types
Floor traders, for example, tend to be more auditory than
off-the-floor traders. That's one reason floor traders have
trouble making the transition to an off-the-floor job. Their
decisions usually relate to the volume, pitch, and location of
the sounds they hear in their mind. When they are off-the-floor
and don't have that input, they feel lost. In our courses I
usually can suggest some strategy work with them to help them
make the transition to being a position trader.
What other kinds of strategies are there?
We have strategies which distinguish confusion from
understanding; successful versus unsuccessful decisions to act;
what is easy-to-remember from what is hard-to-remember; and even
what's "real" from what's made up. People are really amazed when
I teach them that!
What's the difference between system development and
System development is different than trading. For a beginner,
it's learning how to trade. For a seasoned trader or investor,
it is ongoing research. But in either case, it is different from
the actual tasks of trading.
I have continually asked top traders how they learned to
trade and there are a lot of commonalities. As a result, I have
incorporated many aspects of systems development into my work.
It started with the material in How to Develop a Winning Trading
System that Fits You courses and has evolved into detailed
information about position sizing and expectancy.
Jack Schwager says in his New Market Wizards that the most
important characteristic that all market wizards have is that
they've adopted a trading system to fit their personality. Well,
that's the concept that I've seen work over and over again and
it's what I've built my system development work upon.
What can you share with us about system development?
First, there are a number of psychological issues involved in
system development. That topic covers a lot of ground. It's too
much to cover in this interview, but I've written a newsletter
on the topic, so I'll refer readers to that issue. (
Psychological Issues in Trading System Development, Course
Second, trading systems tend to have various components.
Those components include selecting the market, the entry, the
initial stop, the exit, and the money management overlay.
Everyone concentrates upon entry which is the least important
component. In fact, technical analysis, which is popular among
investors and traders, focuses primarily upon market
timing-which implies entry. I've conduced a study in which you
can use a coin flip for entry and still make money if you use
the other components effectively.
Incidentally, the most important part of the equation is the
money management overlay that I've already talked about. Yet, if
you bought a software package to develop a trading system, you
could not apply any of these money management overlays. Isn't
that interesting? All of the software packages give people what
they want and thus focus on the least important areas of system
development-how to use various indicators for entry.
What about a trading business plan? What role does that
play in trading success?
I think the statistics indicate that 90 to 95% of all new
businesses fail and the reason they fail is that they do not
plan adequately. Most fail because they lack an adequate
business plan. Well, trading is just like a business. Traders
need more than just a system-they need a business plan. And that
business plan should include several systems that generate
low-risk trading ideas; a psychological management plan; a money
management plan; and a worst case contingency plan.
The psychological management plan has to do with managing
oneself. Trading is human performance and the main determiner of
the performance is the trader. For example, most people spend
all their time analyzing the market and trying to predict what
is going on-which has very little to do with successful trading.
As a result, I recommend that people develop a full
psychological management plan.
This involves analyzing themselves regularly and spending
time on anything that would improve their own performance. This
would include such things as proper diet, regular exercise,
regular relaxation or meditation, goals, planning, and avoiding
anything that would get one's life out of balance, etc. This
kind of mental rehearsal will go a long way toward improving
But perhaps the worst case contingency planning is even more
important. It amounts to brainstorming about what could go
wrong. That doesn't mean that I'm advocating that one expect
disasters, just that one plan for them so that it's easy to
weather the storm. Once you've brainstormed what could go wrong,
then I recommend that your plan include three or four ways of
dealing with each potential disaster.
Once I got a phone call from Tom Basso wondering what I had
called about the previous day. He said, "We had a disaster
yesterday and I wasn't able to answer the phone." I said that I
hoped everything was okay and Tom responded that it was a
They had planned and run-through dress rehearsal of a
disaster in which all of their computers and phone systems were
down. Thus, they were assuming that they had to run the office
on Tom's home computer and home phone line. Could they do it?
What would the problems be? And how would they overcome problems
they hadn't predicted? I think every trader should do that kind
Do you advocate a mechanical approach to trading for most
That's generally true. Most people have better things to do
with their time than sit around watching a monitor all day,
which is usually necessary if your trading is not mechanical.
Also a lot of problems tend to develop in discretionary traders
that system traders can easily avoid. Consequently, I advocate
system trading for most people.
But I also think that discretionary trading can be terrific
once someone has had a mental clearing and knows what he or she
What other component is important to trading and
Belief systems. Beliefs are grounded in the universe.
Everything I've said in this interview reflects my beliefs.
Beliefs are filters. You see and experience what you expect
because your beliefs are filters to reality that allow you to
find information and evidence to confirm them. Beliefs are
concepts that help you understand things in this universe.
For example, people once believed that the earth was flat and
that everything in the universe revolved around the earth.
People's lives were shaped by that belief. We then believed in
Newtonian physics where everything was mechanical and lawful and
most of the universe was thought to be outside of us. And today
we've moved into quantum physics in which everything is relative
and the observer has an effect on the observation because he is
part of it.
The laws of physics (which are really just beliefs) shape our
concepts, inventions, and progress. Probably at a level beyond
all of that (of course, this is a belief) is that once you give
up all of your beliefs, you have an experience of the universe
as it really is-which tends to be a very profound spiritual
experience of the kind that some of my clients have after an
Beliefs are one of the ingredients of success. They tend to
form a hierarchy with spiritual beliefs and self-concept beliefs
being the most significant. I've written extensively on this
topic in my home study program. Most significantly, I have
developed my newest course, Advanced Peak Performance 202, to
maximize a person's understanding of belief systems and how they
affect not only our trading and performance, but our daily
lives. It's powerful material.