The Van Tharp Institute

August 17, 2005 — Issue #233

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In this Issue:

Feature Article

How Did He Do That? By Van K. Tharp

Coming Workshops Five Premium Workshops for Traders and Investors. Sign up early and save.
Trading Tip

An IPO Caught in a Sector Crunch, By D.R. Barton, Jr.

Listening In Expectancy (for a beginner) 
Special Report Eight Page Report by Van Tharp, Does Your System Still Work in Changing Markets? 

View this newsletter on-line, or read back issues

Feature

How Did He Do That?

By

Van K. Tharp

Tiger Woods finished 1st, 2nd, 1st, and 4th in his four major golf tournaments this year. He was “four missed puts” away from winning a grand slam in golf. And the question I always want to ask is, “How did he do that?”

Ed Seykota became a computerized trend follower in the 1960s when you needed big punch cards to program a computer. And a machine with less computer power than a small hand-held today filled up a big office room. Ed went on to dominate the world of futures trading for over 10 years. And the question I always wanted to ask is, “How did he do that?”

The question ‘How Did He Do That?” has always fascinated me. I became a psychology major to answer the question. As an undergraduate in the 1960s, I was exposed to theories that assumed that human beings were like a black box. If you stimulated them in a certain way, you’d get a certain response. Thus, if you could just understand the patterns of stimulation, and understood a few basic laws, you could figure someone out. Imagine getting taught that in an atmosphere that stressed that psychology was a science, but the model for science was Newtonian Physics, which had long been proved obsolete.  I went through that sort of training, but couldn’t buy into the solutions I was given. “No,” I said, “you can’t answer the question, ‘how did he do that:,’ with this approach.”

I thought, “This isn’t the answer, it’s somewhere else!” And I chose to go to graduate school in Biological Psychology. But it seemed like more of the same. If you stimulate this part of the brain, what happens? If you cut out that part of the brain, what happens?  If you give someone this drug, what happens? Everyone was asking questions like we were robots, totally at the mercy of the environment. And in five years of graduate school, plus another two years of post-doctoral work with the Navy, and then another six years doing research, I never found what I thought were answers to my burning question, “How did he do that?”

Between 1973 and 1983, I also had two periods in which I enjoyed trading. However, I also lost a lot of money in trading during that period. It was easy to blame others for my losses. I paid high commissions, my brokers weren’t that helpful, and it seemed like every time I made a trade, someone signaled everyone on Wall Street to do exactly the opposite of what Van was doing. But I finally became convinced that no one could produce results as bad as mine without doing something to create it. Somehow, I just knew that I was creating the experience I was having. And my old question popped up, only in a little bit different form – “How did I do that?” 

I’ve been talking about myself so far, so let’s turn it around. Let me ask you a question. What’s your experience as a trader or investor? Is it great? Good? Not-so-good? Is it terrible? And, no matter what your experience is, have you really asked yourself, “How did I do that?”

Answering these questions became a passion and I jumped into research about how people create the trading results they get. I studied Neuro-Linguistic Programming and felt like I “sort of” got a preliminary answer. To find out how people do something well, you need to find a number of people who do it well and determine what they do in common. Those common tasks provide the core to answering the question, “How did they do that?” But it’s not just what they do, it’s also how they think. Thus, for each core task, you must determine the structure of their thinking, the mental states that they use, and the beliefs and attitudes that shape them.

Now I was off to the races. I modeled a lot of good traders; developed the Ten Tasks of Trading Model; determined the mental aspects of each task; and found that I could help a lot of people improve their trading dramatically.

Now I thought I understood the answer to my burning question, “How did he do that?” And the answer seemed to be in the structure of the person’s thinking.

Over the years, in attempting to answer this question more and more, I modeled a lot of things:

How do good traders produce great results? The Peak Performance Course was born out of my research with this question. And, for some strange reason, even though I was just asking myself, “What do traders do to produce good results?” the Peak Performance Course soon became known as an essential work in trading psychology.

But according to some of the best traders I worked with, people like Ed Seykota and Tom Basso, trading was 60% psychology, 30% position sizing, and 10% systems. Okay, I guess I’d covered the psychological part, so now I’ll move onto position sizing.

Modeling position-sizing was my next task 1. But even in this area, so heavily loaded with mathematics, there was a strong psychological component. People seemed to have strong psychological biases to ignore position sizing or practice poor position sizing.

Next, I went on to model how people developed trading systems and wrote an entire book and created a home study program on my findings2. I find it quite interesting that people talk about how psychologically oriented these products seem to be. I’ve seen comments on the Internet that say if you want to read about the psychology of trading, then read Van Tharp’s Trade Your Way to Financial Freedom which I regard as a systems book.

My fourth major effort into answering the “How Did He Do That?” question was to decide that most people didn’t have enough money to practice sound position sizing. In fact, most people have major issues with money. Thus, I wanted to study the wealth process and determine the answer to my key question once again3. What I found was that wealthy people predominantly focused on creating cash flow. Also, there are others who acquire a lot of wealth in other ways, however it is still based on their mindset and attitudes about wealth.

The average person thinks you win the wealth game by acquiring a lot of things. If you have a bigger house and a more expensive car then you are considered to be wealthy. What happens is, the average person attempts to acquire "more and better" by getting deeper and deeper into debt. This is exactly the opposite of what I mean by wealth, but people are psychologically driven to do it.

All of these attempts to answer the question “How Did He Do That?” in areas related to trading success, strongly illustrated two key points for me.

1. Everything I’ve modeled requires that one get deeply into one’s personal psychology in order to change and duplicate success. Understanding oneself is the key to it all.

2. Most people naturally do the exact opposite of what is required for success. And thus a major part of my efforts in helping people is to help them overcome the blocks of self-sabotage.

The blocks of self-sabotage are something I strongly emphasize in the Peak Performance 101 workshop. And the topic is so important that we added an advanced course, Peak Performance 202. In other words, in order to be disciplined and follow the ten tasks of trading, you must overcome your psychological blocks. In order to develop a system that fits you, you must understand your strengths and weaknesses; you must develop your objectives; and you must overcome numerous psychological biases.

Over the years teaching people the “how to” of trading has led me to suggestions that my initial attempts at answering my question of “How Does He Do That?” were certainly a key, but still only a preliminary level of understanding. Instead, there are even deeper levels of understanding about how we totally create our lives. But that’s another story that we’ll explore in more detail in upcoming Tharp’s Thoughts newsletters.

 

  1. Products like the Money Management Report (soon to be replaced by the Complete Guide to Expectancy and Position Sizing), the Secrets of the Masters Trading Game, the Position Sizing Videos, and several software products were born out of that research

  2. The How to Develop A System That Fits You course and workshop, along with Trade Your Way to Financial Freedom were born out of this research

  3. And the result of this research was our “Infinite Wealth Program” and our most recent, “Make Money Work for You” program. You can learn more about any of these by clicking here.

 

Amazing FALL 2005 WORKSHOP LINE UP

 

Van Tharp's Workshops Are Known For High Quality And Value Received 

Workshop Date Location
Systems Development  September 9-11
2005
Raleigh/Durham N.C.
 
Peak Performance 101 September 26-28
 2005
Raleigh/Durham N.C.
Peak Performance 202 September 30-October 2
 2005
Raleigh/Durham N.C.
 
Exchange Traded Funds (ETF) (New) October 7-9
 2005
Raleigh/Durham N.C.

 

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Trading Tip: 

Trading Tip

 

An IPO Caught in a Sector Crunch

by  D. R. Barton, Jr.

Ruth’s Chris Steakhouse has always been a high-end eatery staple in Raleigh for some time now.  (Note to Research Triangle residents – try Ray’s at the old Ruth’s Chris location near the Crossroad’s Mall – great food, atmosphere and service --  and at a great price relative to the competition.)

But we’re not here to talk about EATING food, but rather about INVESTING and TRADING the food purveyors.  Ruth’s Chris Steak House (RUTH) had their IPO (Initial Public Offering), last week, on 8/9.  It had a limited first day range and is trading within 10 – 15 percent of its offering price of $18 per share.

I don’t think this is a specific reflection on the restaurateur’s abilities, but more so a comment on the state of the restaurant business (and an offering price generally considered to be on the high side).  Let’s look at two of the big name chains that have been the darlings of the market over the past year: 

Panera Bread (PNRA) had a great run from the low 30’s to the mid 60’s in just 12 months.  It has since given back a third of that move.

PF Chang’s China Bistro (PFCB) tells a similar tale with a more dramatic drop.  There has been a summer swoon for the whole industry, and the Restaurant Index ($DSQ) doesn’t look much different than the two charts above.

Given this atmosphere, I don’t think Ruth’s Chris has much chance for an explosive follow-up to its IPO.  If you’d like to invest in this chain, it’s prudent to wait for the sector to get healthy again.

 

D. R. Barton, Jr. will be teaching the upcoming Proven Tactics of Swing Trading Course, August 2005 and is a featured speaker in the Van Tharp Institute Course, Make Money Work for You

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.  D. R. has taught extensively in many investment areas including intra-day trading, swing trading, and cutting edge risk management techniques. 

His writing credits include co-authoring Safe Strategies for Fin-ancial Fre-edom and co-creator and contributing author on Fin-ancial Fre-edom Through  Electronic Day Trading

 

Listening In... 


Expectancy (for beginner) 
Author: Greg
Date: 08-10-05 14:18

First... I have to justify these numbers by saying that I am still a new trader and am still trading at a very low risk level per trade. Please know that numbers and arithmetic make my head spin, so hitting your palm to your forehead is okay with me, as long as someone can tell me what I'm doing wrong, hehe.

I had a win % of .44 and loss % of .56
I had an avg win of 46.29
I had an avg loss of 31.83
I had an avg dollar risk of $42 on each trade (on 33 trades)

According to Van's expectancy formula (pw x aw) - (pl x al), my numbers would look like this:

(.44 x 46.29) - (.56 x 31.83)

(20.36) - 17.82) = 2.54

The way I interpret the formula from reading Chapter 6 in the book is that the conclusion to the above formula (2.54) would result in how much I can expect to make on each dollar risked. So, 2.54 (expectancy) x 42 (avg dollar risked) = $106.68. 

However, my total wins & losses added together only equals a $75 gross profit. What am I not understanding?

Thanks for any replies and for patience in helping this new Tharp trader.



Reply To This Message 


Re: Expectancy (for beginner) 
Author: PMK

Greg,

The 2.54 figure you have calculated (correctly, by the way) is the expected profit per trade in dollars. If you multiply this by 33 (trades) you get 83.82, which is much closer to your 75 actual gross profit (did you include commissions in your average profit and loss figures? This may account for the discrepancy)

If you want the expectancy, you need to divide your 2.54 figure by the risk per trade which is 42, and this gives a result of 0.06, which is your real average profit per dollar risked. You should, on average, make 6c per dollar risked i.e. get your dollar back plus 6 cents.

An alternative (easier) way of calculating expectancy is to take the average of the R multiples of all trades. An R multiple is calculated by dividing the Profit or Loss for each trade by the initial risk (as a positive number)

Hope this helps

Paul


Reply To This Message 


Re: Expectancy (for beginner) 
Author: Greg

Paul,

(I was not including fee's in the $75 profit)...

It looks like I was somewhat on the right track, however you put it all into perspective and made it clear to me. 


Very much appreciated!!!

Greg


Participate on Van's Trading Forum. A place for traders and investors to share ideas and learn from each other

 

Special Report

"Does Your System Still Work In Changing Markets." 
By Van Tharp  

Click here to read page one or to order. 

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Quote of the Week

Back To School...


One looks back with appreciation to the brilliant teachers, but with gratitude to those who touched our human feelings. The curriculum is so much necessary raw material, but warmth is the vital element for the growing plant and for the soul of the child. ~Carl Jung

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Van Tharp's Market Update for Period Ending July 29, 2005

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