International Institute of Trading Mastery, Inc February 4, 2004 — Issue #155

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In this Issue:

Feature Article 

Personality Type and Trading: (Part I), By Van K. Tharp

Special of the week Peak Performance Home Study
Listening In

Money Management and Position Sizing

Trading Tips

Trading and Christmas Presents, Part Five, by  D. R. Barton, Jr. 

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Feature Article :

Personality Type and Trading: (Part I)
By Van K. Tharp, Ph.D.

The path toward becoming a better trader is usually a path toward wholeness, and no two paths are identical. Each of us has to begin where we are in our own life situation. No matter what your path, you must first determine where you are. What are the patterns in your life that block you-in your trading, in your relationships, in every aspect of your life? Those patterns can be available to you right now, because they show up in your trading and in every other aspect of your life as well. Unfortunately, in most cases, people are not aware of them. Thus, the transformation journey often begins with a crisis. For it is only when an obvious crisis begins that we wake up to the fact that something is wrong in our lives.

This article, the first in a series, on individual differences or personalities is to help people determine where they are. Jack Schwagger has suggested from his experience interviewing "market wizards" that the most important element of successful trading is having a trading system that fits your personality. As a result, I'm going to base this article on the fact that knowing your personality type is important to finding out where you are in your journey toward wholeness and what will work for you in your current situation-what qualities are important for trading success and how you can develop those qualities.

The importance of personality traits comes into play because they provide a quick mirror of where we are and the neglected parts of yourself that you must nourish. For example, all of the personality traits that we are going to examine in this series come in pairs. If your personality tends to be extraverted, it simply means that you tend to focus your energy more externally than internally. Wholeness for you may mean moving more toward an internal focus (e.g., determining how you produce your results by your thinking) until you achieve a balance between focusing on the internal and the external.

Understanding Your Personality:

If you've taken the Investment Psychology Inventory, you probably received a much more comprehensive personality profile based on the four dimensions of personality developed by Carl Jung. These include introversion/extraversion; intuition/sensing; thinking/feeling; and perceiver/judger. When you evaluate someone along four dimensions, you arrive at 16 personality types instead of four. This is similar to the well-known Myers-Briggs profile. If you haven't taken the Investment Psychology Inventory, you have two choices. Take the profile and find your personality type and determine your strengths and weaknesses for trading. Or, as a second solution, you can got to the following web site to get a personality profile for free: , http://www.humanmetrics.com/cgi-win/JTypes2.asp. When you get your type, look it up in www.google.com. The sites you find will tell you a lot about yourself. And in this series of articles in Tharp's Thoughts, we'll tell you how your type relates to trading.

Three personality types-the ENTJ (known for their ability to develop strategies), the INTJ (known for their scientific reasoning), and the ISTJ (the trustee type person) combined should constitute about 12% of the population. However, at this time these three groups represent 50.1% of our current sample. The NTs constitute 45.6% of our sample, probably because these people are always attempting to improve themselves.

Given these interesting developments, we can discuss the four Jungian elements of personality, and how they combine to form cognitive processing modes and temperaments. We can also discuss how these modes and temperaments are related to trading success. 

Most of us give little thought to how we process and perceive information in order to make sense out of what is happening. Yet dramatic differences occur in how people perceive and interpret what goes on around them. And these differences lead to dramatic contrasts in behavior and personality. 

The next step in this series on personality type and trading we will examine the four dimensions of personality developed by Carl Jung and how each of them might influence you as a trader.

Sources: 

Jung, Carl G. Psychological Types. Collected Works of Carl Jung, Volume 6. Princeton, NJ: Princeton University Press, 1971. Originally published in 1923.

Myers, I. Manual: The Myers-Briggs Indicator. Palo-Alto, CA: Consulting Psychologists Press, 1962. 

 

Listening in....

Excerpts from Dr. Tharp's Discussion Forum. 

 

Money Management and Position Sizing 

Author: Billy 
Date: 02-03-04 21:17

It seems that everyone and their brother is now an avowed practitioner of money management/position sizing strategies. Since everyone's doing it what are the contrarian implications?


Re: Money Management and Position Sizing 
Author: Van Tharp 
Date: 02-04-04 11:05

It's hardly a mania. When I speak at conference most have still never heard about it. Portfolio managers cannot practice it because they must be 97% invested so they don't have stops. There it's still collecting the right assets in your portfolio.

Most bank traders don't know 1) how much money they are trading or 2) how much money they can lose before they lose their job. So they don't practice position sizing.

But let's take the opposite side of the equation and assume that everyone did become more efficient in this manner (chuckle, gurgle, hysterical laughter).... there would always be other ways in which there are not efficient.

For example, here is a challenge. My guess is that not one person in three reading this forum has a record of the r-multiple distribution of their last 50 trades. (That's one out of three). I'd actually be surprised if it is one out of ten.

And guess what? You cannot develop a meaningful algorithm for position sizing without knowing that information. You can be conservative and only risk 1/2 to 1%, but cannot know exactly how to do position sizing without it.

And on top of that, probably another 9 out of 10 don't have a clear idea of their trading objectives except perhaps to make a million and not lose it all. And again, without a lot of thoughts about objectives, position sizing is meaningless.

Hopefully, that answers your question.

Van

Read the full, unedited thread  by clicking here. Van K. Tharp and traders, investors and wealth builders around the world connect on this site, share ideas and learn from each other.

Special of the Week:

Dr. Tharp's Masterpiece

Peak Performance Home Study Program

If you don't have this program, we can not stress enough what a powerful tool this program is to both empower your trading activities, and to re-order important aspects of your life. 

Also consider Dr. Tharp's Investment Psychology Inventory, an analysis developed by Dr. Tharp to help illustrate a traders weak points and highlight the strengths. 

 

Trading Tips:

Peak Performance Trading Tips

Tip# 104

Trading and Christmas Presents
(Part Five)

by  D. R. Barton, Jr. 

"A thing long expected takes the form of the unexpected when at last it comes. "  --Mark Twain

For the past four weeks we've discussed one of the big problems with finding a trading system that fits you. I call it the Christmas Present Syndrome because the problem is like the one that faces present openers. When we unwrap a present or dig into new trading system or idea, we are confronted with a difficult emotional and intellectual transition: we move from the world of possibility filled with hope and unlimited expectation into the world of definitive knowledge, filled with the reality that flaws and tradeoffs exist and that it may not work as well as it did on TV. During the holidays, having our Christmas presents turn from possibility into reality can cause a bit of post-celebration overeating. With a trading system, it can cause us to toss out good and useful ideas.

To combat the knee-jerk of throwing out a trading system or idea the first time we find a tradeoff that has to be considered, we spent the last two articles talking about setting goals for our trading (BEFORE looking for a system) and looking at some key big-picture measurements of system performance that should help be considered. This week we'll look at some other measure of performance that should be considered when evaluating your trading system. Make sure you look at the following as you review your candidate system (in addition to the items that we discussed last week):

  • What percentage of the system's profits did the top two or three winners generate? This is a frequent problem for systems that have a low frequency of trade or long holding times. Some position trading systems are notorious for generating great track records because they caught one or two phenomenal moves and were mediocre on the rest of the trades. While catching big trades is a good thing, you can't have a system that is breakeven except for that once in decade move in coffee… One way to test your system to make sure it isn't a "one hit wonder" is to see how well it performs if you omit the best three and the worst three trades.

  • Pay attention to the average profit generated per trade. This is the net profit divided by the total number of trades. When all other characteristics are equal, this is a great tie-breaker. Gravitate toward systems which, for the same time frame (i.e. day trading or swing trading), generate the same amount of net profits in fewer trades. But be sure that all the profits aren't generated by a few trades (see the first item above).

  • Be sure to look at some measure of variability of the trading results. A system with a smooth equity curve is much easier to trade than one that has huge run-ups and scary drawdowns. Look at the standard deviation of your trades, and look at the standard deviation just the winning trades and just the loosing trades as well as the standard deviation of monthly returns. An added benefit of a smooth equity curve is that you can implement more aggressive position sizing with a lower variability system.

  • Once again, make sure you concentrate on the things that matter most to you and your trading style. If you can't stand long strings of losses, don't waste your time reviewing long-term trend following systems that only win 35 percent of the time.

  • Always look at the tradeoff for increasing performance in one area. If you increase winning percentage, then average profit per trade will most likely drop as will the ratio of the average winner divided by the average loser.

  • How will transaction costs affect the system performance? Transaction costs usually vary in significance in inverse proportion to the time spent holding each trade. For longer holding times, transaction costs play a smaller role. Shorter holding times increase the significance of transaction costs.

  • Think often about the influence of trading frequency. Does the system trade often enough to keep your interest? Does it trade too frequently for you to execute it properly? Do you have sufficient account equity to take all of the signals? This is one of the most overlooked areas of systems analysis.

This list is by no means exhaustive, but includes some of the items that I concentrate on when analyzing systems. Next week we'll take a final look at trading systems and Christmas presents.

D. R. Barton, Jr. is a lead instructor for IITM courses. He is the Chief Operating Officer and Risk Manager for the Directional Research and Trading hedge fund group. D. R. has been actively involved in trading, researching and teaching in the markets since 1986. In 1999. D. R. has created extensive and innovative new training products and taught extensively in many investment areas including intra-day trading, swing trading, and cutting edge risk management techniques.

His writing credits include: Safe Strategies for Financial Freedom by Van K. Tharp, D. R. Barton, Jr. and Steve Sjuggerud and cover articles for the trade newsletter Market Mastery where he also serves on the editorial advisory board. In addition, D. R. writes a stock screening newsletter for traders and investors called The 10-Minute Trader.

 

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Quote of the Week:

"Always bear in mind, that your own resolution to succeed is more important than any other thing."

- Abraham Lincoln 

 

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2004 Schedule is now on line!
(CLICK HERE)

Peak Performance 101 and 202, March 2004

Raleigh, NC

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Dr. Van Tharp's Trading Discussion Forum
  www.mastermindforum.com

Ask questions, share ideas, information and feedback with Dr. Tharp and other like-minded traders and investors. 

 

 

 

 

 

 

 

 

 

 

 

 

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