The Van Tharp Institute

September 21, 2005 — Issue #238

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In this Issue:

ETF Workshop Learn to Spot The Flow of Big Money Quickly!
Feature Article

Success has Nothing to Do with Trying, By Van K. Tharp, Ph.D.

Peak 101  Workshop Seven Money-Making Benefits for Consistent Profits, Smaller Losses, And Less Stress.
Market Update

Special Edition: Mid- Month Update to the Market, By Van K. Tharp, Ph.D.

Special Report Reports by Van Tharp: Self Sabotage Re-examined, Part One and Two 
Trading Tip

Letting Profits Run – What Does It Mean for Your System? By D.R. Barton, Jr.

Listening In Business Plan 

View this newsletter on-line, or read back issues

Exchange Traded Funds Workshop

Exchange Traded Funds are funds that reflect the big sectors of the market. You don’t have to watch a lot of stocks to determine what the big funds are doing.  Instead, you just have to know what a few select funds are doing to determine what’s going on. 

Workshop
Exchange Traded Funds (ETFs)
 

"It's been exhilarating! I found Ken to be extremely clear and structured in his explanation and presentation of his systems, beliefs and techniques. Awesome information for traders of any level of expertise." J. L. Serra

 

Feature

Success has Nothing to do with Trying

By

Van K. Tharp, Ph.D.

Work hard and you’ll be rewarded.  "Do a lot of research, pick the right stocks, and you’ll become rich."  Both sound simple, but they are what people want you to believe.  Such phrases have nothing to do with real success.

My wife is currently taking one course.  She is studying hours and hours to do well on each test that comes up.   I remember being in that same situation, and I would probably have studied for about an hour the evening before the test and I would have gotten an A.  Is that because some people don’t have to study hard to make good grades?  Perhaps.  My wife says, "I’m not you.  I have to do things differently," but I tend to suspect that some of the difference is due to something else besides ability.

I suspect that much of the difference is due to how effectively we use our time.  I have always been incredibly good at getting the structure of things.  When I studied, I made sure that I had mastered the structure of what I was learning and from that structure, I could answer any question.  However, if you don’t master the structure (and instead you just try to learn everything), then I think the process is quite ineffective.

My comments have nothing to do with my wife’s study habits.  Instead, they have everything to do with how we use our time.  People who use their time effectively when they invest/trade are much more likely to make profits than those who do not.

Geoff Carter was a typical investor.  He spent an average of 22 hours working as an investor each week.  What did he do?  He read 15 newsletters each week — some email newsletters and  printed newsletters.  He compiled lists of all the stocks that were recommended.  He then looked at their charts and fundamentals, picking the ones he liked the best.  And then he invested in those stocks.  Somehow, if Geoff bought them, they seemed to go down.

Megan Smith was an atypical investor.  She only averaged 6-7 hours each week on her trading/investing, but Megan always made money.

Each week she did a computer scan for the most effective stocks.  When the market was doing well, she scanned for the stocks that were going up the most.  When the market was doing poorly, she scanned for the stocks that had the most value and for stocks that were going down the most.  While those scans might take three hours each week, they didn’t take more than five minutes of Megan’s time because her computer did it for her.

Each week Megan bought the stocks that were most efficient.  At the end of each day, Megan ran spreadsheets on her stocks and compared the high (from the time she’d owned it).  Since she automatically kept trailing stops for all of her stocks, she'd quickly check her investments each day to determine if it was necessary to adjust any of her stops.  And even this process didn’t take much time because her computer did most of it for her.  Sure, Megan would occasionally need to sell a stock that hit her stop, but the most she would ever lose was 1% of her equity.  This was because she understood that position sizing was the most important factor for her to meet her objectives.

Thus, Megan spent about five minutes each weekend running her stocks screens and about 15 minutes each evening updating her account.  So how did Megan spend the rest of her “investing/trading” time?  She spent it working on herself.  She spent about a half hour each day on the ten tasks of trading, making sure to do her self-analysis, her mental rehearsal, and her daily debriefing.  She spent an hour each weekend reviewing her results for the week, asking herself, “how could I have done better?”  And every quarter she updated her business plan and reviewed one or two of the books in the Peak Performance Course for investors and traders.  And lastly, she’d constantly read books and magazines for new trading ideas that she could easily implement.  However, she seldom had to make changes because what she did worked.

So it’s not how much time you spend at your trading/investing that makes you money.  It’s how you spend your time that’s important.

Van K. Tharp has been coaching traders and investors since 1982 when he first began his studies modeling excellent trader performance. He collected over 5,000 successful trading profiles by studying and researching individual traders and investors, including many of the top traders and investors in the world. From these studies he developed a model for successful trading and investing in which other people can adopt and learn.

Peak Performance Training

Train Your Mind and Learn The Ten-Tasks of Trading at our Peak Performance 101 Workshop 

Workshop
Peak Performance 101
Peak Performance 202

SOLD OUT

 

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Market Update

Mid-Month Update to the Market

By

Van K. Tharp, Ph.D.

While I don’t usually do a mid-month update to the market, something unusual is happening and I wanted to point it out to you.  In the last two weeks, gold has gone up about 7%.  It closed on Monday at $464.50 — up over $31. 

Newmont Mining closed on Monday at $46.21 —  that’s up $6.73 on the month.  That's a gain of 17% on the month. 

Now what’s triggered the upsurgeHurricane Katrina?  A fundamental change in the inflation/deflation picture?  In order to support our economy, the government needs to spend money like crazy.  And now it has several excuses.  First, the War on Terror has been a great reason for our government to spend billions of dollars as an economic stimulus.  And now we have Katrina.  George Bush has said that he will spare no expense rebuilding Louisiana, Mississippi, and Alabama after the worse economic disaster (in my lifetime at least) to hit the United States.  Bush said he’ll also do it without raising taxes.  In fact, Bush is even encouraging NASA to go to the moon again. 

And what is this but a pure economic stimulus to our economy?  But, where is the money going to come from to support this stimulus?  The Federal Reserve will simply print it.  And when the Fed prints money like crazy, it means inflation.  And I suspect that’s what gold has been telling us this month.  Remember, the dollar is not all that weak right now, so this is a real move up in gold. 

The bottom line is that our government is doing anything to spend more money and stimulate the economy.  But when the stimulation stops, watch out!

Trading Tip: 

Trading Tip

Letting Profits Run – What Does It Mean for Your System?

by  D. R. Barton, Jr.

We have lots of great discussions in workshops.  That’s one of the reasons that live seminars are so useful -- for both attendees and instructors!  In the recent Advanced Systems workshop that I had the pleasure of teaching with Van and Chuck Le Beau, we did a section on profit taking exits, including profit targets.

The inevitable question came up:  If you use a profit target for all or part of your position, isn’t that breaking the “letting your profits run” part of the golden rule of trading?

The answer is not simple.  If can be “yes”, “no” or “maybe” depending on one KEY FACTOR.  And this key factor was the one that we kept talking about over and over again at the Systems workshop.

What is this KEY FACTOR that lets us answer this and many other questions about our system or strategy?  It’s this:  “What makes my system work in the first place?”  To know whether or not your system is letting its profits run, you have to know why your system works.  You have to know the beliefs about the market that are reflected by your system.

Let’s look at three different types of systems and see if profit target exits are consistent with “letting your profits run”.

1.      Long-term Trend Following.  If your system works because it catches long-term trends and rides them for big R-multiple wins, then using a profit target is a bad idea.  In this type of system, you most likely have a winning percentage below 50 percent.  Your system compensates for the lower winning percentage by having really big winners relative to the size of the average loss.  All of the confusion about “letting profits run” can be traced to the days when the classic trend followers ruled the trading world and almost all of the books and articles in the trading world related to trend-following.  If you took profits in any other way than trailing a stop, you were not “doing things right”.  And if your system’s edge comes from catching the occasional big winner, then you don’t want to use profit targets.

2.      Channel and Other Types of Counter- Trend Trading.  In this style of trading, you expect prices to stay inside a range.  Your system is based on indicators that allow you to buy the bottom of a range and sell the top of that range.  In this type of strategy, profit targets are imperative.  You expect the price action to retreat when it gets to an extreme, so trailing a stop is not useful or prudent.  In this type of trading, you count on a higher percentage of winners and “letting your profits run” means that your average winner is bigger than your average loser (though R-multiples are probably lower than for trend-following systems).  While this is a different style of letting your profits run, it is an equally valid way to follow the golden rule of trading.

3.      Hybrid Strategies.    There are many useful strategies that merge both worlds.  Perhaps you trade half of a pre-established price channel using a profit target and then trail a stop in an effort to capture more of the price movement if it heads in your favor.  Trend-followers and breakout players can also take profits on a portion of their position in choppier market conditions and revert to using only a trailing stop when technical analysis indicates that markets have entered a trending phase.

As usual, there is no one “right” way to trade the markets.  The most important step you can take is to fully understand your strategy’s core beliefs (why it makes money in the markets) and then make sure all of the individual components of your system -- including the profit-taking exit — are consistent with that set of beliefs.

 

D. R. Barton, Jr. 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.

 

Special Report

Self  Sabotage - Two Reports of Self Sabotage

Click here to read page one of each report, or to order. 

Listening In... 

Business Plan 
Author: Bob
Date: 09-15-05 12:13

Hi All.

Say I have a mechanical trading system that has been tested and found to be profitable (in the past). It agrees with me psychologically and I have the appropriate funds to trade this system in real-time. This is a good start, but I'm still missing a business plan. However, although I see many references to the benefits of having a business plan, I see few examples of what actually comprises a business plan. Can anyone point me in the right direction so I can begin putting together a solid business plan?

Thanks,

Bob

Reply To This Message 


Re: Business Plan 
Author: Greg D.
Date: 09-16-05 12:04

Bob,
The best resource by far for a Trading Business Plan is the CD home study course on the subject that Van offers. Costs about $250 and if you want to move trading from a "hobby" to a business you should invest the $$. I have it and it helped me a lot. Makes you think in detail about a lot of aspects that normally get glossed over or ignored totally. My Plan is a work in progress that I go back and polish up occasionally (probably not often enough). It is a great reference for me when I review it, helps keep me on track.  If you go to the iitm.com website and look under products you will find it [or click here]. Also there is an outline of the course and you can kind of use that to give you some ideas of what you need to think about if you decide to go it alone.
Greg 

Re: Business Plan 
Author: businessman
Date: 09-17-05 16:54

There is a sample plan in FFTEDT [Fin-ancial Fre-edom Through Electronic Day Trading] by Van K. Tharp and Brian June. [click here for more about the book]


Read more, and participate on Van's Trading Forum, a place for traders and investors to share ideas and learn from each other

 

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Quote of the Week

Success is getting what you want; happiness is wanting what you get. 

~Author Unknown

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Did You Know...

Van Tharp is featured among Jack Schwager's original Market Wizards. 

The Market Wizards books are cited by top traders as essential reading. 

Here's a direct link to  Amazon if you want to learn more about it. Market Wizards

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Dr. Van Tharp's Trading Discussion Forum
 
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Ask questions, share ideas, information and feedback with Dr. Tharp and other like-minded traders and investors. 

 

 

 

 

 

 

 

 

 

 

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