Building Your First MR Trading Plan: A Tharp-Based Process for ES Futures

Author: Tom B. & Greeny (Synthesized from 6 Van Tharp Books) | Categories: Day Trading, Trading Psychology, Position Sizing, Risk Management, Trading Systems, Mean Reversion

About This Book

This is a beginner-level process template for building your first mean reversion (MR) trading plan on ES futures, constructed entirely from Van K. Tharp's six major works. It is not a finished trading plan -- it is a structured workbook that walks you through Tharp's frameworks step by step, with ES mean reversion examples at every stage. Some sections are prescriptive (formulas, risk rules, routine templates) and some are workbook-style (prompts for you to fill in based on your own beliefs and circumstances). Every framework, exercise, and principle is sourced from the actual Tharp books with citations provided throughout.

What is ES? ES is the E-mini S&P 500 futures contract, the most actively traded equity index futures contract in the world. It trades on the CME (Chicago Mercantile Exchange) during Regular Trading Hours (RTH) from 9:30 AM to 4:00 PM Eastern Time. Each point of movement in ES is worth $50, and the minimum price increment (tick) is 0.25 points, worth $12.50 per tick. So a 4-point move equals $200 per contract. ES requires margin to trade -- think of margin as a good-faith deposit, not a loan. For daytrading, intraday margins are typically $500-$2,000 per contract depending on your broker.

What is Mean Reversion? Mean reversion is the tendency of price to return toward an average or "fair value" after moving away from it. When price stretches too far above or below a reference point (like the Value Area, VWAP, or prior day's levels), responsive participants step in to push it back. Tharp calls this concept "band trading" -- buying at the lower band, selling at the upper band. (Source: Trade Your Way, Ch 5)

Section 1: Why Most Traders Fail -- and What to Do Instead

The Tharp Trading Hierarchy

Van Tharp spent over 30 years studying what separates consistently profitable traders from the majority who fail. His conclusion, stated across all six of his books, inverts what most people assume about trading:

(Source: Super Trader, Introduction; Trade Your Way, Preface to Second Edition)

This hierarchy is the single most important idea in all of Tharp's work. Most traders obsess over finding the perfect entry signal -- the indicator that will tell them exactly when to buy and sell. Tharp calls this the "Lotto Bias": the compulsive search for the magic entry, as if trading were a lottery ticket where picking the right numbers is all that matters. (Source: Trade Your Way, Ch 2)

The truth is the opposite. Entries contribute roughly 10% to your results. In one famous experiment, Tharp and fellow trader Tom Basso tested a system that entered the market randomly -- flipping a coin to go long or short. With proper exits (a 3x ATR trailing stop) and 1% position sizing, the system was profitable over 10 years across multiple markets. The conclusion: if random entries can make money, entries are not where your edge lives. (Source: Trade Your Way, Ch 9)

The Holy Grail Metaphor

In Trade Your Way, Tharp opens with the metaphor of the Holy Grail. Like the medieval knights who searched the world for a sacred cup, traders search for the perfect system -- the indicator, the formula, the secret that will unlock the market. But the Grail legend has a twist: the Grail was inside the knight all along. The same is true in trading. "The Holy Grail of trading is inside you." (Source: Trade Your Way, Ch 1)

What does this mean practically? It means the work is not finding a better indicator. The work is understanding yourself -- your beliefs, your biases, your emotional triggers -- and then building a plan that fits who you are.

The Snow Fight Metaphor

Imagine a snowball fight. Tharp uses this metaphor to explain expectancy. You have a bag of snowballs -- some white (winners) and some black (losers that splatter mud). If your white snowballs are bigger and you throw more of them, you win the fight. (Source: Trade Your Way, Ch 7)

Applied to ES mean reversion: your white snowballs are MR trades where price reverts from a structural level (like prior day's Value Area High or Low) back toward the center. Your black snowballs are trend days -- days where price drives through your level and keeps going. You will always have some black snowballs. The question is not "how do I avoid all losses?" but "how do I make sure my winners collectively outweigh my losers?"

What is R?

R stands for your initial risk on a trade -- the dollar distance from your entry to your stop loss. Every trade result is then measured as a multiple of R. (Source: Trade Your Way, Ch 7)

ES Example:

• You buy 1 contract of ES at 5050
• Your stop is at 5046 (4 points below)
• 1R = 4 points x $50/point = $200

If the trade goes to 5058 and you exit, you made 8 points = $400 = +2R. If you get stopped out at 5046, you lost 4 points = $200 = -1R.

R gives you a universal measuring stick. Instead of thinking in dollars (which change based on how many contracts you trade), you think in multiples of your risk.

What is Expectancy?

Expectancy is your average R-multiple per trade. It tells you how much you expect to make (in R) for every trade you take. (Source: Trade Your Way, Ch 7; Financial Freedom Through Electronic Day Trading, Ch 7)

Formula: Expectancy = (Win% x Average Win in R) + (Loss% x Average Loss in R)

Example for an MR system:

• You win 65% of the time, average winner = +1.5R
• You lose 35% of the time, average loser = -1R
• Expectancy = (0.65 x 1.5) + (0.35 x -1.0) = 0.975 + (-0.35) = +0.625R per trade

If you take 4 trades per day, that is 4 x 0.625 = 2.5R per day. At 20 trading days per month, that is 50R per month. This is the power of expectancy combined with opportunity -- what Tharp calls "expectunity." (Source: Trade Your Way, Ch 13)

The Marble Game

Tharp's most famous teaching tool is the marble game, played at his workshops. A bag contains 10 marbles representing an R-multiple distribution: (Source: Safe Strategies, Ch 14; Trade Your Way, Ch 14)

• 7 marbles at -1R (losers)
• 1 marble at -5R (big loser)
• 2 marbles at +10R (big winners)
• Expectancy: +0.8R per trade (positive despite only 20% win rate)

Workshop participants play the game with $100,000 of pretend money, drawing marbles and applying position sizing. The results are consistently shocking:

• One-third of the room goes bankrupt
• One-third loses money
• One-third makes a fortune

All participants played the exact same game. The only difference was how much they risked per trade and how they handled the emotional pressure of losing streaks. This single exercise proves that position sizing and psychology -- not the system -- determine your results.

For an MR system, the marble distribution looks different. MR typically has a high win rate with smaller average wins:

• 6 marbles at +1R (Contract 1 hits target, Contract 2 stopped at breakeven)
• 2 marbles at +2R (both contracts profitable)
• 1 marble at -1R (normal stop-out)
• 1 marble at -2R (slippage or gap through stop)
• Expectancy: +0.8R per trade (same expectancy, but 80% win rate)

The key insight: MR has more frequent small wins, which feels good psychologically. But MR is also more sensitive to the occasional large loss. One -2R trade wipes out two +1R trades. This is why discipline and position sizing matter even more for MR traders.

Section 2: Know Yourself Before You Build

You Trade Your Beliefs, Not the Market

This is Tharp's foundational premise, stated in the preface of Trade Your Way and repeated in every subsequent book: "You cannot trade the markets. Instead, you trade your beliefs about the market." (Source: Trade Your Way, Preface to Second Edition)

Two traders looking at the same ES chart at the same moment will reach different conclusions. One sees price at prior day's VAH and thinks "short opportunity -- price will revert." The other sees the same level and thinks "breakout -- price will continue." Neither is objectively right or wrong. Each is trading their beliefs.

This is why self-examination comes before system design. If you do not know what you believe, you cannot build a system that fits your beliefs. And if your system conflicts with your beliefs, you will sabotage it.

Simplified Belief Examination

From Trading Beyond the Matrix, Tharp provides a structured process for examining your beliefs. Here is a simplified version with 5 prompts for beginners:

Prompt 1: "What do I believe about mean reversion?" Write it down. Be specific. For example: "I believe price tends to return to the Value Area after extending beyond it." Or: "I believe MR works most of the time but occasionally gets destroyed by trend days."

Prompt 2: "Where did this belief come from?" Did you develop it from your own observation and testing? Did you read it somewhere? Did a mentor tell you? Beliefs from personal experience tend to be stronger than borrowed beliefs. (Source: Trading Beyond the Matrix, Ch 8)

Prompt 3: "What do I believe about taking losses?" This is one of the most critical beliefs in trading. Useful belief: "A loss is the cost of doing business. If I followed my rules, the loss was correct." Destructive belief: "A loss means I was wrong and I need to make it back immediately." (Source: Super Trader, Part 1)

Prompt 4: "What do I believe I am capable of as a trader?" Honest self-assessment. If you believe you are not capable of following rules under pressure, that is important information. It does not mean you cannot trade -- it means you need to work on discipline before risking capital. (Source: Super Trader, Part 1, "Do an Honest Self-Appraisal")

Prompt 5: "Is each belief useful for my trading? If not, what would be more useful?" Tharp's key insight: beliefs are not true or false. They are useful or not useful. A belief that causes you to hold losing trades too long is not useful, regardless of whether it is "true." Replace it with something more useful. (Source: Trading Beyond the Matrix, Ch 8)

The 7 Trader Archetypes

In Trade Your Way (Ch 12), Tharp profiles seven traders who all traded the same five stocks over the same period:

Every professional trader was profitable despite using completely different methods. The only loser, Eric, had no system at all -- "like a doctor practicing medicine without going to medical school." (Source: Trade Your Way, Ch 12)

Dick is the closest archetype to MR trading. Dick enters a full position, sells half at a nearby profit target (approximately 1R), and moves his stop to breakeven on the remaining half. He lets the remainder run with a trailing stop. This is exactly the 2-lot structure we will build in Section 4.

Ask yourself: Which archetype am I closest to? Am I patient like Mary, or do I prefer the quick satisfaction of Dick's approach? There is no wrong answer -- but your system must match who you are. (Source: Trade Your Way, Ch 12)

Commitment

From Super Trader (Part 1, "Commitment"): before building your plan, you must answer honestly: "What am I willing to do to build this plan?"

Tharp estimates that genuine trading competence requires significant personal work. The question is not whether you are talented enough. The question is whether you are committed enough. Write your answer down. Be specific about:

• How many hours per week will you dedicate to study and preparation?
• Are you willing to paper trade for weeks or months before risking real money?
• Are you willing to examine uncomfortable beliefs about yourself?
• Are you willing to follow rules even when your emotions scream otherwise?

Section 3: Understanding Mean Reversion Through Tharp's Lens

Band Trading

In Trade Your Way (Ch 5, "Band Trading"), Tharp describes a trading concept where price oscillates within a range. The trader buys at the lower band and sells at the upper band. This is the essence of mean reversion.

From Financial Freedom Through Electronic Day Trading: "At any given time, most stocks are range-bound. They establish a trading range and oscillate within that range." (Source: Financial Freedom Through Electronic Day Trading, Ch 5)

Applied to ES: the "bands" are structural levels derived from market profile and volume analysis:

• Prior day's Value Area High (VAH) and Value Area Low (VAL): the range where 70% of the prior day's volume traded. When price extends beyond this range, responsive participants often push it back.
• Overnight VPOC (Volume Point of Control): the price with the most volume during the overnight session. Acts as a magnet.
• Developing VPOC: the price with the most volume during the current session, constantly updating.
• Naked VPOCs: VPOCs from prior days that price has not revisited. These act as unresolved magnets.

The matrioshka principle (from TradersLab methodology) says that levels on higher timeframes nest into lower timeframes, like Russian nesting dolls. A prior day's VAL that aligns with a weekly support level is stronger than a prior day's VAL that stands alone. When multiple timeframes agree, mean reversion has higher confidence.

The 6 Market Types

Tharp classifies all markets along two dimensions: direction and volatility. This creates 6 market types: (Source: Super Trader, Part 3; Trading Beyond the Matrix, Ch 5)

Mean reversion works in Sideways Quiet and Sideways Volatile markets. These are the market types where price rotates within a range rather than driving in one direction.

Mean reversion does NOT work in trending markets -- Bull Volatile, Bear Volatile, and directional moves within Bull Quiet or Bear Quiet. A key Tharp principle: "It's insane to expect one system to work in all market types." (Source: Trading Beyond the Matrix, Tharp Think Principle #34)

How to Classify Market Type for ES

Direction: Is price trending or rotating? Check: is the volume profile developing symmetrically (sideways) or with single prints and elongation (trending)? Is price inside or outside the prior day's Value Area?

Volatility: Is the Initial Balance (IB -- the range of the first hour of RTH, 9:30-10:30 AM ET) normal, narrow, or wide compared to the 20-day average IB width?

ES Example: MR Day (Green Light)

• IB forms within prior day's Value Area
• Volume profile developing symmetrically (no single prints)
• Overnight range contained within prior day's range
• IB width is average (not narrow, not wide)
• Classification: Sideways Quiet = MR day. You can trade your MR system.

ES Example: Trend Day (Red Light)

• IB is narrow (bottom 20% of recent IB widths)
• Price drives away from prior day's Value Area with single prints forming
• Profile is elongated, not symmetric
• Classification: Trending market. Do NOT trade MR. Step aside or use a different system.

Section 4: The 2-Lot Structure -- Tharp's Proof of Concept

Why 2 Lots?

Two contracts is the minimum viable position to prove a system works. With one contract, you face an all-or-nothing binary on every trade. With two contracts, you can: (Source: Trade Your Way, Ch 12, Dick's approach; Safe Strategies, Ch 14)

• Contract 1 (C1): Exit at a nearby target to recover your total position risk
• Contract 2 (C2): Trail toward a larger target, capturing the bigger MR move

This structure comes directly from Dick's approach in Trade Your Way: "Dick would enter a full position and sell half at approximately a 1R profit target. He would then move his stop to breakeven on the remaining half and trail it." (Source: Trade Your Way, Ch 12)

The CPR Formula

CPR is Tharp's foundational position sizing formula: (Source: Safe Strategies, Ch 14; Trade Your Way, Ch 14; Super Trader, Part 4)

C = P x R

Where:
  C = Cash risked (total dollar risk on this trade)
  P = Position size (number of contracts)
  R = Risk per contract (stop distance in points x $50)

Solving for Position Size:
  P = C / R

Step by step:

1. Determine how much cash you are willing to risk: C = Account Equity x Risk Percentage
2. Determine risk per contract: R = Stop distance (in points) x $50
3. Position size: P = C / R (round down to a whole number)

Full Worked ES Example

Account: $50,000 Risk per trade: 1% = $500

Setup: Price has dropped to prior day's VAL at 5050. Fuel (clustered stops) sits below 5046, providing invalidation. The matrioshka principle is active: prior day's VAL aligns with a weekly support level.

Trade plan:

• Entry: Long 2 contracts at 5050
• Stop: 4 points below at 5046 (below the fuel zone -- if stops are triggered and price keeps going, your MR thesis is invalid)
• 1R = 4 points x $50 = $200 per contract
• Total position risk = $200 x 2 contracts = $400 (0.8% of account)

CPR check: C = $500 (1% of $50,000). R = $200 per contract. P = $500 / $200 = 2.5, round down to 2 contracts. Confirmed.

Targets:

• C1 target: Developing VPOC at 5056 = +6 points = $300 = 1.5R per contract
• C2 trail target: Prior day's VPOC at 5062 = +12 points = $600 = 3R per contract

If both targets hit:

• C1 profit: $300
• C2 profit: $600
• Total: $900 on $400 risk = +2.25R on the trade

If C1 hits but C2 gets stopped at breakeven:

• C1 profit: $300
• C2 profit: $0 (stopped at entry after moving stop to breakeven)
• Total: $300 on $400 risk = +0.75R on the trade

If stopped out:

• Total loss: $400 = -1R (0.8% of account)
• You live to trade tomorrow

The Drawdown Math -- Why 1% Risk Matters

From Trade Your Way (Ch 14) and Safe Strategies (Ch 14):

Common beginner mistake: risking too much per trade. At 1% risk, 10 consecutive losers = 10% drawdown (survivable -- you need 11% to recover). At 5% risk, 10 consecutive losers = 40% drawdown (you need 67% to recover). The relationship is non-linear: the deeper the hole, the exponentially harder it is to climb out.

This is why Tharp says: "Risking 2% is a LOT, not a little." (Source: The Definitive Guide to Position Sizing Strategies, p. 130)

Section 5: Designing Your System -- The Process

Tharp's system design process has 5 components. Every complete trading system must address all five. For each component below, there is a teaching section (what Tharp says) and a workbook prompt (for you to fill in). (Source: Trade Your Way, Ch 4-11)

Component 1: Setup (Your Conditions for Considering a Trade)

Teaching: Setups are filters, not entries. They narrow the universe of possibilities to "worth watching." A setup says "conditions are right to look for a trade" -- it does not say "take the trade now." (Source: Trade Your Way, Ch 8)

Workbook prompt: "Write your beliefs about why MR works on ES. Then list the conditions that must be true before you consider a trade."

Example beliefs:

• "Price that extends beyond the Value Area attracts responsive participants who push it back."
• "Fuel (clustered stops) beyond key levels creates springs and upthrusts that reverse."
• "Levels where multiple timeframes converge (matrioshka) are more likely to hold."

Example setup conditions:

1. Market type is classified as Sideways Quiet or Sideways Volatile
2. Price has reached a structural level (prior day VAH/VAL, overnight VPOC, naked VPOC)
3. The structural level has confluence -- it aligns with a higher timeframe level (matrioshka)
4. Economic calendar is clear (no FOMC, CPI, or NFP in the next 30 minutes)

Component 2: Entry Trigger

Teaching: Entry is the least important part of your system. Tharp's random entry experiment proved you can make money with coin-flip entries if your exits and position sizing are sound. Your entry just needs to be "good enough." (Source: Trade Your Way, Ch 9)

Workbook prompt: "What specific trigger tells you to enter the trade? What confirmation do you need?"

Example: A reversal candle at prior day's VAL (long wick below the level, close back above) combined with declining volume on the probe away from value. This tells you responsive buyers are stepping in.

Component 3: Stop (Defines 1R)

Teaching: "Every trade must have a predetermined exit point before entry. This defines your initial risk." The stop is where you are wrong. It is not optional. (Source: Trade Your Way, Ch 10; Trading Beyond the Matrix, Tharp Think Principle #20)

Workbook prompt: "What makes you wrong? Where does the market have to go for your MR thesis to be invalidated?"

Example: Price accepts below the structural level by 2 points (two consecutive 5-minute closes below). This means the fuel zone has been consumed and the market is not reverting. Stop at that level. For the trade above: stop at 5046, which is 4 points below entry.

Component 4: Exits (C1 and C2)

Teaching: Exits are far more important than entries. This is where your R-multiple distribution is created. Dick's approach: sell half at the first target, trail the rest. (Source: Trade Your Way, Ch 11; Trade Your Way, Ch 12)

Workbook prompt: "Where does Contract 1 exit? Where does Contract 2 aim for? What trails your stop on C2?"

Example:

• C1: Exit at developing VPOC or VWAP -- the nearest structural target above entry. Approximately 1-1.5R.
• After C1 fills: Move stop on C2 to breakeven (entry price). The trade is now risk-free.
• C2: Trail by stepping your stop up from each new swing low, targeting the opposite Value Area boundary (e.g., if you entered long at VAL, C2 targets VAH) or prior day's VPOC.

Component 5: Position Sizing

Teaching: Position sizing is the part of your system that answers "how much." It is the key factor in whether you meet your objectives. Start with 1% risk via the CPR formula. (Source: Trade Your Way, Ch 14; Safe Strategies, Ch 14)

Workbook prompt: "Calculate your position size for your account using the CPR formula and the stop distance from Component 3."

Your calculation:

• Account equity: $________
• Risk percentage: 1% = $________
• Stop distance: ________ points = $________ per contract (x $50)
• Position size = Cash risked / Risk per contract = ________ contracts (round down)

Section 6: Risk Rules and Daily Process

Prescriptive Risk Rules

These rules are non-negotiable. They come directly from Tharp's work and are not subject to your personal "feelings in the moment":

Rule 1: Never risk more than 1% per trade. (Source: Safe Strategies, Ch 14; Super Trader, Part 4) At 1% risk, you can survive extended losing streaks. At higher percentages, the drawdown math works against you exponentially.

Rule 2: A mistake = not following your rules. (Source: Super Trader, Part 5, "Mistakes and Self-Sabotage") Not every losing trade is a mistake. A trade that followed your rules but lost money is a good trade. A trade that broke your rules but made money is a mistake -- you just got lucky. Tharp's research shows the average mistake costs 2-5R. (Source: Trade Your Way, Ch 15)

Rule 3: Mistakes destroy systems. If you make 1 mistake per week at an average cost of 2R, that is 104R per year. A system generating 80R per year is now -24R. "Your net results as a trader, over the very long run, will be a function of the expectancy of your system less any mistakes that you make." (Source: Trade Your Way, Ch 15)

Daily Routine Template

Pre-Market (30 minutes before RTH -- 9:00 AM ET):

1. Mark your levels on the chart: overnight VPOC, overnight high/low, prior day high/low, prior day VAH/VAL, naked VPOCs, developing VPOC (Source: Financial Freedom Through Electronic Day Trading, Ch 8)
2. Check the economic calendar -- no MR trading during FOMC, CPI, or NFP releases
3. Calculate your daily max loss: 3R = done for the day (Source: Financial Freedom Through Electronic Day Trading, Ch 10)
4. Self-assessment: "Am I fit to trade today? Am I mentally clear, physically rested, emotionally stable?" Rate yourself 1-10. If below 7, reduce size or do not trade. (Source: Financial Freedom Through Electronic Day Trading, Ch 8; Super Trader, Part 5)
5. Mental rehearsal: "What could go wrong today? What if I get 3 stops in a row? What if my internet goes down? What if a news headline causes a spike?" Rehearse your response to each. (Source: Super Trader, Part 5, "Mentally Rehearse Your Disaster Plan")

During Session: 6. First 30-60 minutes: classify market type (direction + volatility). Do NOT trade during this observation period. (Source: The Definitive Guide to Position Sizing Strategies, p. 140) 7. Execute only trades that match your playbook from Section 5 8. After each trade, record the R-multiple immediately 9. Time-of-day awareness: primary MR window is 10:00-11:30 AM ET, secondary window is 2:00-3:30 PM ET. Avoid the dead zone from 11:30 AM to 2:00 PM ET. (Source: Financial Freedom Through Electronic Day Trading, Ch 8) 10. If you hit 3R daily loss, you are done. Close the platform. (Source: Financial Freedom Through Electronic Day Trading, Ch 10)

Post-Session: 11. Daily debrief -- ask yourself: "Did I follow my rules?" If yes, acknowledge good process, even if you lost money. If no, identify the mistake, determine the conditions that led to it, and mentally rehearse the correct behavior for next time. (Source: Super Trader, Part 5; Safe Strategies, Ch 16) 12. Update your R-multiple tracking journal

R-Multiple Journal Template

Track every trade in this format. At the end of each week, calculate:

• Total R earned
• Number of trades
• Average R per trade (expectancy)
• Number of mistakes and their R-cost
• Win rate for C1 and C2 separately

Section 7: Your First Trading Business Plan

Tharp insists that trading is a business and must be treated as one. From Super Trader: "Have a plan for your trading/investing." From Trade Your Way: the business plan is a living document that guides everything you do. (Source: Super Trader, Part 2; Trade Your Way, Ch 4)

Below is a simplified 8-component business plan adapted from Tharp's full 15-component framework. For each component, there is a prompt and an example. Fill in your own answers.

Writing Your Plan

Take each component and write your answers in a document. This does not need to be long -- one paragraph per component is enough to start. The plan is a living document. You will revise it as you learn. The point is to have one at all. Eric, the only losing trader in Tharp's 7-trader study, had no plan. Every profitable trader did. (Source: Trade Your Way, Ch 12)

Next Steps

1. Complete the belief examination in Section 2 (write your answers)
2. Paper trade 30+ trades using the 2-lot structure from Section 4
3. Track every trade using the journal template from Section 6
4. After 30 trades, calculate your expectancy and evaluate your system
5. Only then consider trading with real money, starting at 0.5% risk until you have proven the system works live
6. Continue the psychological work -- it never stops. As Tharp says: "It takes a lot of work on yourself (perhaps 1,000 to several thousand hours) before you can make trading look effortless." (Source: Trading Beyond the Matrix, Tharp Think Principle #7)

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