The Van Tharp Institute

September 28, 2005 — Issue #239

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Tharp's Thoughts Weekly Newsletter


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In this Issue:

Feature Article

Winners Simply Do What Losers Won’t Do

Peak Performance Peak Performance Traders Know How to Handle Stress
Trading Tip

Internet Companies:  Partying (and Spending) Like It’s 1999

ETF Workshop Learn to Spot The Flow of Big Money Quickly!
Listening In Wrong Thinking Regarding Partial Exits?
Special Report Reports by Van Tharp: Self Sabotage Re-examined, Part One and Two

View this newsletter on-line, or read back issues

 

Two For One

Feature

Winners Simply Do What Losers Won’t Do

Adopting the belief that “winners” simply do what the “losers” will not do is very useful in many aspects of life. After all, that is the case in the field of investing and trading.  So let’s step into that belief and see what naturally follows. 

Here are some winner/loser opposites.  If you find yourself disturbed by any of these, you may have stumbled across a clue to an area in which you need to spend some time.  Use all the tools you have learned from the Peak Performance Course to investigate ways to step beyond and overcome your limitation.

 

A winner crafts a detailed business plan which includes on-going reviews and sticks to the plan.

A loser thinks a business plan is something he’ll get to one day in the future after he has achieved some success trading.

A winner designs systems with high positive expectancy, sound money management strategies, minimal degrees of freedom to avoid curve fitting, and then puts the system into his business plan for implementation. He lets the market determine the outcome. A loser has a continually changing system/methodology based on whether or not the last few trades were winners or losers. He is scared of what "may happen to him" in the markets in the future. His position size is controlled by whims and notions. His exit points vary depending on how fearful he is of giving up open profits or how hopeful he is that a losing trade will turn around.
A winner knows that his method will provide the long term return he is after if he implements it correctly. A loser thinks he has to continually be looking for a new indicator to eliminate having to enter trades that lose money.
A winner knows deep in his heart that he is completely responsible for the outcome of each and every trade. A loser assumes responsibility for winning trades while blaming floor brokers, brokerage firms, hedge funds, international news events, or simply "the market" for losing trades.
A winner is not trying to prove anything about himself through his trading activities. A loser thinks he’s the master of the market, closing a big winning trade, and then gloats in his outstanding success he had "beating" the market.
A winner knows he’s a winner even after an expected 12 losses in a row. A loser is sure he’s almost worthless as a person after 5 losses in a row.
A winner realizes that he produces the emotions he experiences related to trading and assumes responsibility to resolve deep-seated root causes for negative emotions that interfere with his trading business. A loser knows that it’s the market that causes him to feel depressed or angry, and he’s determined to fight this beast.
A winner gladly shares trading advice to less experienced people. A loser thinks that he needs to look cool as a suave trader and talk down to those less experienced than him.
A winner is aware that his methods and systems may require modification as time proceeds, and he develops appropriate boundaries of performance which will indicate whether or not he needs to review his system. A loser is sure that all he has to do is find "the right system or method" and then he will forever more be able to sit back and enjoy easy profits. He feels slighted by professional traders since they claim not to have any great secret indicators, and he "knows" they’re lying to him.
A winner understands the level of capitalization required to successfully implement his trading business plan. A loser thinks that his $5,000 account is a great start for trading highly leveraged commodities, and the day he opens the account he feels like he’s really off to the races now.
A winner knows that it is up to him to develop the skills necessary to create, test and evaluate sound trading systems and methods. A loser knows he just hasn’t looked hard enough to find that special system someone has created which will bring him all the wealth he’s ever dreamed of ("damn those professional traders - if only they would tell me their secret indicators").
A winner looks forward to opportunities to give back to the world some of what he has learned along the way to becoming a successful professional trader. A loser knows he has to keep everything he learns secret since if anyone finds out where he places his one lot stop orders, then they will try to run the market to his stops to hurt him.
A winner who goes long on an upside break-out only to be stopped out at the bottom of the correction of the failed break-out four days later can simply reenter on another upside break-out a few days later. A loser in the same trade gets mad that the market retraced all the way to his stop and then reversed. As prices rally back through to a second break-out he gets even madder since he’s not in the trade he tried to take. Two months later after a tremendous rally, the loser is so angry at the market for what "it’s done to him" that he finally buys (just days from the top of the move).
A winner runs his trading business wisely—carefully managing his fixed and variable costs of doing business and making capital investments which provide a worthwhile return to his business. A loser spends all the money he can afford to buy the latest computer hardware and the hottest (best marketed) trading software he can find—with no understanding of the return expected from his investments.
A winner knows he needs to continually work on his feelings and emotions related to his trading business as he grows in success and equity. A loser knows that he only needs to buy additional software and systems and perhaps attend the "latest guru’s" trading method  to achieve what he’s after.
A winner knows what his goals are and he has criteria established to measure his level of achievement. A loser’s goal is "being rich", and he’s sure that it’s only a matter of finding the "right" answer for how to trade.

The above article is excerpted from an archive edition of Market Mastery, 
written by Chuck Branscomb.

Peak Performance Training

The Peak Performance Home Study Course

When people are over stressed, their capability of doing things well shrinks dramatically. It’s directly related to what happens to the brain.

During stress, the hormone adrenaline is released into the bloodstream. This has the effect of diverting blood from the brain to the major muscles of the body. It means that you can run faster, but it also means you are much less effective at processing information. In fact, the conscious mind, which normally has the capacity to process seven chunks of information, shrinks down to the point of being able to process only one or two chunks of information.

Think what that means to most investors and traders. They get stressed— either by the market or by something going on in their lives—and can no longer effectively function. They either freeze or keep repeatedly doing what they are already doing—only with more energy. Neither response is healthy in today’s fast markets.

One whole volume of Van Tharp's Peak Performance Home Study Course is devoted to stress management. You’ll learn how to measure your stressors and your stress protectors. More importantly, you’ll be able to add enough stress protection so that you can withstand the effects of today’s markets. But the course also helps you deal with stress in many more ways.

 

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Trading Tip: 

Trading Tip

Internet Companies:  Partying (and Spending) Like It’s 1999

by D. R. Barton, Jr.

 

•      Outrageous prices being paid for internet companies with no cash flow.

      Business decisions made with strategic plans that would make a freshman finance major look seasoned.

       Internet start-ups with no business plan being funded with billions of dollars

        AOL in the rumor-mill for making multi-billion dollar deal

Ah, yes.  I remember 1999 well.

Problem is that these stories are from 2005!  It’s true that eBay paid a king’s ransom for internet telephony upstart Skype – a company that is turning no profits.  Microsoft is in rumor-filled negotiations to buy a portion of AOL at a seemingly outlandish valuation.  Yahoo! is investing massive amounts in Chinese internet start-ups.

It’s getting bad enough that articles are showing up with titles like “Internet bubble 2.0” in this week’s The Economist.

Is the Internet sector getting overheated again?  Here’s a chart of HHH, the Internet HOLDRS stock:

This chart topped out in 2000 at around 190.  It’s low was below 20 in 2002.  We are 3x above the lows now, but the sector has made a nice steady move up that may even meet Van’s efficient stock criteria from our Safe Strategies for Financial Freedom book!

I’ve looked at this chart from several technical perspectives and don’t see much that tells me it’s overextended.  But the high-priced deals of the internet companies themselves point to a renewed fit of Chairman Greenspan’s infamous “irrational exuberance.”  This alone keeps me from getting overly excited about the sector.

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.

 

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

 

Listening In... 

Wrong Thinking Regarding Partial Exits? 
Author: Nick

Hi there,

I'm working on a new trading plan and as usual agonizing over some of the money management issues - I thought I'd give TYWTFF [Trade Your Way to Financial Fre-edom] another read for inspiration.

Here's the thing, Van (and other respected trading coaches) puts forward the idea that scaling out of a position on a partial is generally unwise as your exposure is greatest when the risk is greatest (at the start o f the trade). You remove some of your position as the greatest risk has passed therefore negatively effecting results.

Now on the face of it this seems like good advice, but in thinking a bit deeper the argument seems fatally flawed. I think the only realistic way of considering this is as two completely separate trades (albeit with the same trigger). Lets say you risk 2 units at 1R and take one off at +1R and for arguments sake trail a stop on the remaining unit. Lumping the first 'scalp' in with the main part of the trade screws both sets of results. The expectancy is clearly going to be different (and greater) on the first half of the trade it may or may not be more profitable but almost certainly will have a more 'comfortable' profile. The point is unless you run the figures you will not know for sure.

Having run the figures it is possible that the initial scalp to "pay the costs" is actually supporting the system and not the other way round. Just to re-iterate yes you are closing the scalp when the greatest risk has passed but for this you should be getting a greatly improved expectancy.

Am I missing something here?

Cheers,
Nick.


Reply To This Message 


Wrong Thinking Regarding Partial Exits? 
Author: PMK 

Nick,

No amount of debate or logical thinking will actually answer this question for you since the 'right' answer depends entirely upon your system and objectives. I suggest you take all your trades (paper or real) and simulate what would happen with different exit strategies leaving everything else the same.

You can then see exactly how the exits effect profit, volatility, drawdowns, and the overall shape of your equity curve. Then you can choose the strategy that specifically meets your personal requirements.

Paul


Reply To This Message 


Wrong Thinking Regarding Partial Exits? 
Author: Nick A

Hi Paul,

I quite agree, test test and more tests seem to be the answer. I also agree there are no right answers per se. Having said that there are answers that are clearly wrong (often enough its my understanding and could well be in this case).

What I was driving at was the advice given in TYWTFF (and by other quite learned sources) that " partialing" out of a position (lets say at a 1:1 Risk/reward) is likely to be damaging to your equity. This seems one of those "just plain wrong" pieces of advice. I wonder if I have misunderstood or worse misrepresented this suggestion.


Cheers,
Nick.


Reply To This Message 


Wrong Thinking Regarding Partial Exits? 
Author: PMK 

Nick,

I agree that scaling-out of positions may reduce your overall return (I think that is what you mean by 'damaging to your equity'), but it can help smooth your equity curve (i.e. reduce the volatility of results).

Thus, it depends on whether you are going for maximum return, or minimum equity-curve volatility as to whether this technique is suitable for you. As ever, what position-sizing methods are right for you depends entirely upon your trading objectives.

Paul


Reply To This Message 


Wrong Thinking Regarding Partial Exits? 
Author: referrer

About 2 years ago, I followed PMK's advice

"I suggest you take all your trades (paper or real) and simulate what would happen with different exit strategies leaving everything else the same."

What I found for my system and my portfolio and my intestinal capacity to tolerate drawdowns, was that scaling out decreased pain (drawdowns etc.) and it also decreased gain (compound annual growth date etc.) Furthermore it decreased pain FASTER than it decreased gain. In other words, scaling out *improved* the (gain/pain) ratio. So I implemented scaling out in real trading. I'm not unhappy with the results. 

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

 

Special Report

Self  Sabotage - Two Reports of Self Sabotage

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

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Quote of the Week

Winners are those people who make a habit of doing the things losers are uncomfortable doing. 
Ed Foreman

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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
 
www.mastermindforum.com

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

 

 

 

 

 

 

 

 

 

 

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