The Van Tharp Institute

November 16, 2005 — Issue #246

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In this Issue:

Feature Article

Is It Time to Slow Down? By Melita Hunt

Peak Performance

Position Sizing DVD format

Trading Tip

This Guy Just Keeps Getting It Right, By D.R. Barton Jr.

Listening In Portfolio Risk on Expensive ETFs/stocks 
Special Reports Reports by Van Tharp: Self Sabotage, Changing Markets

View this newsletter on-line, or read back issues

 

Feature

Is It Time To Slow Down?

By

Melita Hunt

You may have heard the joke that the world is definitely changing when the best golfer is black, the tallest basketball player is Chinese and the most famous rapper is white! It’s testament to the fact that things continue to change in this complex but beautiful world.

In addition to the world becoming a global community, the advent of technology has certainly been speeding things up. This is exciting to some people, but can be almost unbearable for others. With so much information at our fingertips and no signs that things are going to slow down, how do we cope on a day to day basis when it all just becomes too much and overload occurs?

Many people say that they do not have enough time to slow down and get centered or balanced, but it is exactly during these busy times that we are in the most need of taking time out for ourselves.

Just as we use indicators in trading, being overly busy and stressed should be used as  indicators that things are not right. And if we don’t take the time to see the signs, then they will likely show up in some other less desirable form and we may be stopped in our tracks rather than just slowed down! Whether it is sickness, mistakes, big losses or even an accident, the results of overload will eventually make themselves known.

If we mistakenly believe that the problem that is occurring is not of our own making, then the same lessons will just keep repeating themselves. Therefore, I am going to make the assumption that the readers of this article are responsible people who recognize the signs of overload and are willing to take some time to re-vitalize their mind, body and spirit.

So which of the mind, body, and spirit trio do you use most in your day? Is your mind the most dominant of the three? Is it working the majority of the time? If you are like most traders or professionals, you’re not alone. The “mind” is often leaps and bounds ahead of the other two, constantly racing and thinking. So let’s look at quick and easy ways that you can nurture your body and spirit, while at the same time giving your mind the rest that it needs. Allowing all three of them to work in balance. These simple strategies don’t take much time and they do make a world of difference.

Body 

What is your posture at this very moment? Are your wrists and elbows supported? How long have you been looking at a screen today? Are your neck, your back and shoulder muscles relaxed or hunched? Is your spine straight? Are you using your skeleton properly? Sitting on your “sit bones” with your feet flat on the floor supporting your body? Or are you slouching with muscles and fleshy bits doing a lot of the work?

The skeleton is designed to provide posture and structural support for the body and the muscles provide the body with the ability to move. But often we make our muscles do part of the skeleton’s job, which increases their load and can cause stiffness and other problems.

Observe It

Just by observing the way we use and treat our bodies, we can gauge some indication as to why we may feel stressed and pained in certain areas. If you are at a desk, stop and give your body some undivided attention. Don’t judge or criticize yourself, just stop for a couple of minutes each day and listen to your body. Do an inventory from head to toe. Imagine a hand detector (like they ones they use at the airport) is being run over your body, picking up signals on the areas that need attention. Then whatever needs attention, resolve to do something about it.

Make a simple list and take action on at least one item each week that will look after your body. It could be buying a pair of running shoes (and using them), a visit to the dentist, booking a sports massage, or even cutting down caffeine. You know what you need, and by observing your body and listening to it, you’ll be following the age old adage that prevention is better than cure.

Move It

Here are four separate, but simple, exercises that will get you moving in different ways. Choose one that suits you or do them all on different days.

Exercise 1: The best way to get rid of the cobwebs is to shake them loose, so give your head a shake and let it flop forward. Close your eyes and roll your head to the right while inhaling deeply and then move it to the back, then over to the left as you exhale and finally back to the front. Repeat 10 times in a fluid motion and do not rush. (If you have trouble with this exercise, then perhaps you should go back to “Observe It” and have that massage or see a chiropractor). If something’s tight, then something’s not right!

Exercise 2: If you are sitting down, get up and move for five minutes, 10 minutes or even two minutes. You can go down the hall, around the block, up the street or to a coffee shop. But the key is to focus on the number of breaths that it takes you to get there. There is no hurry, and the less number of breaths that you use the better. Savor them. The fresher air that you can get, the better you’ll feel.

Exercise 3: If you’re stuck in an office, close the door and just walk in a different way. Walk backwards, or walk in place or roll your shoulders backward or lean forward and just “hang” (when’s the last time you did that?). Once again, remember to concentrate on taking long deep breaths, and most importantly, have fun! When did life get so serious?

Exercise 4: Cross your arms as you normally would, with one hand on an upper arm and one hand tucked under. Now cross them the other way, with the opposite hand on top and the other hand tucked under. Focus on your breath and relax until this feels comfortable. Notice the way your breath moves your arms up and down. Now stand up and feel your breath moving down your legs. Are your knees locked? Relax them and let the breath go down to your feet. Do this ten times until your whole body can feel the air circulating within.

Remember that the two important parts in all of these simple exercises are changing your posture or position from the one that you commonly find yourself in and just moving in a new way, while focusing on your breath. Too often we sit in the same position hour after hour and our breathing becomes very shallow.

So these are four easy and simple ways to just let go and relax.

Non-aerobic movement with controlled breathing is a great practice to reduce stress and anxiety, so just have fun with it! You’ll change your emotion through motion and you’ll be bringing more oxygen and life into your lungs and cells.  

You may have realized by now that the key to all of this is personal responsibility. Others cannot hear the incessant noise going on in your head, nor do they have to walk around in your body. It’s yours and yours alone. So you can keep doing what you’ve always done and keep getting what you’ve always gotten. But, if you want something different, then start to make small changes now and allow them to become new habits.

These suggestions take minimal time and effort, and help to alleviate the fast-paced lifestyle that we’re living. 

So observe your body and move your body.

You’ll certainly reap the rewards.

In Part Two we’ll look at diet and easy ways to nurture and look after your Spirit….

About Melita Hunt:  Melita Hunt’s energy and enthusiasm is the cornerstone of her writing and speaking success. She has been associated with the Van Tharp Institute since 1999 and is currently the acting CEO of the company. Her diverse career has led her from an accounting background, to marketing and sales, real estate investing and coaching. She has traveled the world visiting over 30 countries and has worked throughout Australia, in London and now in the USA.

An avid reader and seminar attendee, Melita has a special interest in sharing her knowledge and inspiring people to be the best they can be. She has written a series of children’s bedtime stories and is author of a soon to be released adult parable titled The Wizard Within. You can contact Melita at mel@iitm.com

Peak Performance Training

Van Tharp Didn’t Invent Risk Control…
He Just Perfected it.

Position Sizing DVD Series

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Trading Tip: 

Trading Tip

This Guy Just Keeps Getting It Right

by D. R. Barton, Jr.

 

There are a few people that I really think get it right when it comes to investing.  Bill Gross from Pimco is one.  Martin Barnes from BCA Research is another.

And this week, weighing in with a great Barron’s interview is Joseph McNay.  He runs 4.4 billion dollars of capital in his firm Essex Investment Management.  If you haven’t read the article, it’s worth trotting down to the newsstand to pick up a copy (the November 14, 2005 issue).

Here are a few key issues from his interview that I believe are worth some thought for all traders and investors:

·        Growth is making a comeback.  Since 2000 growth strategies have been out of favor.  McNay likes growth in the Internet, biotech and medical sectors, but only for specific strong stocks.  Google (GOOG) and Intuitive Surgical (ISRG) are names that he likes for continued growth.

·        Growth investing is an early part of the cycle.  McNay sites all of the analysts that got burned in 2000 – 2001 buying high-multiple stocks and says that they are reluctant to invest in anything but value stocks.  But value stocks are “played out” in his mind and there is very little premium to be paid for growth versus value stocks now.

·        Biotech and Oil Services.  Two more sectors that McNay likes are biotech (stocks like GENZ, DNA, AMGN, GELG and AMLN), and he believes that oil services will continue to outperform because they continue to have pricing power due to equipment scarcity.

Whether you invest for the long term or not, the names that McNay mentions in the article are worthy of note because a great many of them will continue to be good momentum plays for day and swing trading.

Great Trading!

 

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.

 

Listening In... 

Portfolio Risk on Expensive ETFs/stocks 
Author: Ken Long
Date: 11-14-05 21:38

A friend asked  my opinion on risk management and position sizing for ETFs (exchange traded funds) that have a high price per share and asked me what I thought was an appropriate amount of the portfolio to invest/trade in those situations. here were my thoughts for what they are worth. 

==================
Position sizing re: ILF and OIH. 

(1) ILF first: 

(a) If you are in it for a short term trade, your stop is going to be closer than if you are in it for a long term trend following position. For example: right now you could have an ILF position because its the corresponding ETF to PRLAX (a Latin American fund) in a particular model portfolio. Our exposure there is about 10% of the portfolio with no hard stop in the market. That generally works out to be a 10% of share price risk, since it takes that much f to trigger a sell in the short run in the model that drives that portfolio. That really equates to about a 2% of portfolio risk. That's not an unreasonable position to take on such a strong sector. A reasonable long term trailing stop is 3x daily ATR [average true range]. Today the ATR of ILF is 2.12 so we're talking about a 6.5 dollar trailing stop. ILF closed today at 118.41 so if you bought the position today, you'd have a stop at 112. If I wanted to risk 2% of a 100k portfolio on ILF, then $2000 risk /$6.5 risk per share = max position size of roughly 300 shares. the 300 shares would cost about 35K.

(b) If you wanted to trade ILF on a shorter term basis, perhaps as a signal from a swing trading system setup, you would expect to see a much closer trailing stop, for example the low of the setup day, which might only be $2. Your position size could go as high as 900 shares in that scenario and still have less than $2000 at risk. Different trade parameters, constant risk level, different position size. You might only want to risk 1% of portfolio on the shorter term swing trade, so you might only have 450 shares and risk 1% rather than 900 shares and 2% risk.

2. OIH: 

a. you might be in OIH as a long term trade as a result of seeing a buy signal on the 100x200 crossover report. A trailing stop of 1monthly ATR is my start point for that kind of a trade. OIH closed at 116.10 and 1monthly ATR is 11 (or a 10% trailing stop). So, for the same 100K portfolio with perhaps a 2% risk ( $2000) and an 11 point stop, you could afford 180 shares of OIH which would cost approx 22K.

b. My last trade in OIH was a swing setup that looked for an entry at 111 with a 6 point trailing stop. I risked 1% of portfolio, and within 3 days it had traded as high as 121.50, and my profit preservation stop exited me at 118 on the 4th day of the trade. If I had set that up as a long term trend following trade, my 11 point stop would never have been taken out and I'd still be in the trade today at 116.10. The difference being, later in that week there was yet another opportunity to re-enter the OIH trade at 112 with a 6 pt stop and another exit vicinity 118 the following day.

3. So, the short answer is, your stop loss point depends on your strategy and time horizon, which is driven by your objectives. The "%risk of portfolio" is a function of your strategy and objectives which reflect your personal risk tolerance. The position sizing math simply tells you how many shares you can buy given the trade parameters you have set up.

In both cases, because of the cost per share you have a large part of your portfolio in a single position which gives the appearance of excessive risk thru lack of diversification. In both examples for both ETFs though, the 3x daily ATR and 1monthly ATR trailing stops would require an extraordinary event to have a gap that would blow through these trailing stops. Not impossible, of course. In the shorter term swing trading systems we offset the tighter trailing stop with a corresponding lower % of portfolio at risk and we are more active in managing the exit.

Cheers, Ken


Reply To This Message 


Re: Portfolio risk on expensive ETFs/stocks 
Author: Terry L
Date: 11-15-05 10:04

Ken,
Do you ever buy deep in-the-money options, especially for a swing trading system, rather than the outright stock? 

I was thinking more in terms of individual stocks where a negative overnight news event could create havoc and subject you to more risk than you want to take. Granted, it may not happen too often, but it does seem to occur more frequently. I was wondering from a risk perspective if options might make more sense (if in fact options are offered on the stock in question)? Also you don't have to tie up so much cash in an option as you would in an outright stock purchase.

Another interesting thing is, it would seem from a position sizing point of view, you could become much more specific regarding the amount of size you want to place on your trade because you know your absolute worst case scenario will be the cost of your options. 

Since you know your absolute risk in advance (you don't have to worry about your stops being obliterated), and you have a system with a good positive expectancy, the size on your trades can be more finely tuned to the degree of risk you want to take.
What do you think?

Regards, Terry


Reply To This Message 


Re: Portfolio risk on expensive ETFs/stocks 
Author: Ken Long
Date: 11-15-05 10:10

I haven't tried that strategy Terry, but you make a compelling argument for doing so, especially since all the high volume (ie more reliable price patterns) are optionable

Cheers,
Ken 

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

Special Reports By Van Tharp

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

Self  Sabotage - Two Reports of Self Sabotage

Does Your System Still Work In Changing Markets

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