The Van Tharp Institute

February 15, 2006 — Issue #258

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In this Issue:

Workshop Special

$700 Discount Offer Expires TODAY on Peak Performance 101

Feature Article

How I Finished 2nd in a World Wide Trading Contest in 2005 By Kevin Davey

Trading Education

Special Reports on Money Management and Expectancy

Trading Tip

Passive vs. Active Investing, Part Two by D. R. Barton, Jr.

Listening In Comments From the Recent 17 Steps Workshop
Special Reports Reports by Van Tharp: Self Sabotage, Changing Markets

View this newsletter on-line, or read back issues

 

Workshop Special

$700 Discount Offer Expires TODAY

Peak Performance 101

March 11-13, 2006

Florida

"Tharp’s disciples swear by the results." -- Forbes Magazine

You’ll leave this investment "Boot Camp" knowing, for the first time in your life, why some people consistently make profits over and over again, while other investors and traders are erratic and unsuccessful. 

More importantly, you’ll be able to overcome self-sabotage and develop rock-solid discipline in your performance in the markets. 

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Feature

How I Finished 2nd in a World Wide Trading Contest in 2005

Part One

By Kevin J. Davey

A Note from Van K. Tharp:

I love to hear from my students and get feedback on how my programs have helped their trading performance.

Recently, Kevin Davey wrote to say that principles he had learned from my books and home study program had helped him turn $15,000 into $37,000 (a 148% return) and he subsequently won 2nd place in a trading competition.

Kevin said that he was happy to share some of what he had learned with other traders and following is Part One of a two part article.

“Overnight success.”  I’ve heard that term quite a few times in the last month, as people learn that I achieved a 148% return and a second place finish in a world renowned futures trading contest in 2005.  Since you’ve never heard my name mentioned in this newsletter before, you might be inclined to think the same thing.  But the fact is the futures markets are littered with overnight failures, and overnight successes are scattered few and far between.

I’ve been speculating in futures for 15 years, and it took me most of that time to become an “overnight success.”  Even though turning $15,000 into over $37,000 in one year entailed some luck, I know I could not have gotten there without following certain steps.  In this series of articles, I’ll detail these steps that worked so well for me.  My guess is that they’ll work for you, too.

Step 1:  Have a Plan

I’ve never seen someone build a house from scratch without drawings, sketches or architect’s renderings, and I bet you haven’t either.  To build a house, you need a set of plans.  The same holds true for speculating in the futures market — without a plan you are destined to fail.  Trust me, I tried to succeed without a plan in 1997.  However, the market did have a plan, which was to take all my money.  And it succeeded.

So what makes for a good plan?  I think there are three major pieces to it.  First, you must know what you want.  Second, you must determine what you are willing to invest to get it.  Finally, you have to know what you are willing to risk to get what you want, as nothing worth having is free.

The first step in a good plan is to know what you want, since your objective will help determine your strategy.  For example, if your goal is 4%, you can find many CDs that yield 4%, but CDs won’t do the trick if your objective is 150%.  In my case, I knew what I wanted: to win the trading contest.  So, after looking at previous winners, I determined that if I achieved their median return, I’d have roughly a 50/50 shot at winning.  This told me I wanted a 200% return in one year.

The second portion of a solid plan is knowing what you are willing to invest to reach your goal.  In the investment arena, this takes the form of time and money.  How much time and money will you spend researching, studying, going to seminars, talking to advisors, etc., to achieve your goal?  For me, my investment was software, Van Tharp’s Trade Your Way To Financial Freedom and Van’s Developing a Winning Trading System that Fits You Home Study Program.  I also dedicated 15 hours a week to study, which didn’t exactly please my wife! The point is to realize that investment on your part is necessary for success.

The last piece of the plan is to determine your risk threshold.  How much money are you willing to put at risk to achieve your goal?  If it is less than 10%, you can’t realistically expect returns of 100%, although I’m sure some people have done that well.  Know your “walk away point,” the point at which your losses cause you to quit.  Back in 1997, I never determined a walk away point, so my money walked away for me.  Knowing this risk threshold will help you as you develop your strategy.

As tough as developing a plan was, it was even tougher to find a system that could help me reach all pieces of my plan.  I did that in step two.

Step 2:  Find a Strategy that Fits You

You might not think it’s true, based on trading ads and infomercials you see, but finding a strategy is very difficult.  If it were only as easy as going to a free seminar in a hotel!  In reality, finding a good strategy involves three areas: skill assessment, research and detailed development.

The first part of finding a strategy is to do an accurate, honest skill assessment.  What are your strengths and weaknesses, trading wise?  Can you program your own system, or do you need an advisor?  This assessment, if done right, will point you towards a strategy.  Without this assessment, you are doomed.  BEFORE I started trading in 2005, I took a long hard look at my abilities, and determined I had the skills to create my own system.  The key is to match your skills to your strategy.

Next comes research.  Before you settle in on a strategy, you need to see what is out there that is working today.  Books, magazines, and websites are a great way to see what is “state of the art.”  Without current information, you may be researching old, tired ideas that don’t even work anymore.  Numerous websites and newsletters (such as this one) give excellent free advice.  It is best to hear what opposing viewpoints are out there before you leap into trading.

Once you know your skills, and you’ve done the research, it’s time to get your hands dirty by doing detailed development.  Of course, the level of detail depends on the trading route you’ve chosen.  Since I decided to do my own strategy development, I’ll share the highlights of what I did.

1.  Determine the basic type of system – trend following, swing trading, etc.  I chose trend following.

2.  Determine basic indicators – oscillators, moving averages, etc. For my system, I chose an x day breakout with oscillator confirmation.

3.  Optimize results – find what parameter values work, without over optimizing.

4.  Walk forward testing – verify system with untested data.

5.  Monte Carlo testing – perform Van’s marble game test, except with walk forward trades.

Of course, I have greatly summarized the work and depth of the five steps above, but all should be done to develop a robust strategy.  Once this is completed, I recommend you check and double check your work.  We’ll cover that step next week, as well as steps four and five, in the conclusion of this article.

Kevin J. Davey finished in 2nd place in 2005 in a world famous trading contest, with a 148% return.  He is continuing that success in 2006, and is currently in 1st place through January 31, with a 48% return.  He can be reached at kdavey@kjtradingsystems.com.

 

Trading Education

Special Reports on Money Management and Expectancy

 $79.95 each. Click below to learn more

Special Report on Money Management

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Special Report on Expectancy

Downloadable format! Learn More...

 

Trading Tip 

Trading Tip

Passive vs. Active Investing

Part Two

by D. R. Barton, Jr.

In last week’s article, we looked at some of the advantages and disadvantages of passive investing.  We also touched on data that has been compiled to show the percentage of cash invested in passive mutual funds compared to the whole mutual fund universe.

Last week I said the following, “Research by the Financial Research Corporation (as reported in The Economist) showed that 13.8% of  mutual fund dollars invested go into passive funds, and that this number is at its all time high.”  Several people have asked about how this number was compiled.  Remember that for this discussion, passive investing is defined as index investing.  Any fund that does not mimic an index would be considered active investing.  This would include growth funds, balanced funds, income, sector, regional funds, etc.  With the wide variety of specialty funds out there, it’s not surprising that only 14% of the money invested in mutual funds goes directly to a index-based funds.  But a new study that’s coming out strongly suggests that this percentage of invested funds doesn’t tell the whole “passive vs. active” story.

A working paper, that has not yet been published, takes a different approach to quantifying the amount of stock market cash invested passively. Messrs Bhattacharya and Galpin of the Indiana University have written a paper with the title Is Stock Picking Declining Around the World?

Cutting to the essence of their research, the IU professors make the hypothesis that the amount of volume traded in any particular stock should be directly correlated to its market capitalization.  If the volume traded matches up with the stocks market cap, then passive investing is the reason.  If, on the other hand the volume is out of balance with what the market cap would predict, active investing has prevailed in that issue.

Armed with these assumptions, the paper does some digging into trading records to come to some startling conclusions.  Stock picking (a.k.a. ACTIVE investing) is dying in developed countries.  In the period from 2000 to 2004, the paper concludes that passive investing accounts for a whopping 76% of volume traded in the U.S. markets, the highest percentage of any of the 42 countries studied.

This seems to fly in the face of the 13.8% that is directly invested in passive funds.  A likely explanation for the discrepancy is that active funds are managed less actively than we might assume.  This data might confirm suspicions that active mutual funds are actually quite passive at the core and only active in a small part of their portfolio.  Next week we’ll take a look the implications of all of this for traders and investors.

Until then –

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...  

Message from Van...

A couple of weeks ago I presented my 17 Steps to Becoming a Great Trader workshop for the first time. The results were better than I could have imagined.  I now believe this course will become one of my core programs. The material covered and the workshop format was a powerful combination! 

I'm looking forward to the next one, May 5-7, in North Carolina.

Below are some of the comments we've gotten from the participants. —Van Tharp

"This is the best conference I have ever attended. This is the hardest conference I have ever attended. I had to ask myself some of the most difficult questions I've asked in a long time...Van and Mel are not just great trading coaches, they are great people. You are a breath of fresh air in a industry full of hucksters." 
S.W., Rancho Mirage, CA

“My self-discipline had been slipping for trading and with it was going my drive. This course delivered the structure for getting back on track. Thank you.”
— Richard Fotiades, Port Jefferson, NY

“The course was very worthwhile for me. I find that the broad summary of the overall process of developing skills allowed me to put things in a better perspective. I have a much better idea of which areas I need to put the most emphasis and work on. I also found the interaction with the other participants invaluable.” — Craig Herdman, Phoenix, AZ

“I really like the workbook. The action step at the beginning of each chapter is great.”
— Tim McGavin, Australia

“... I thought the course was very well-organized and delivered. I especially liked the ordering of the material as it followed the sequential steps necessary to becoming a great trader. The course content will provide an excellent resource, not only in finishing my business plan, but also in keeping me on track in the future. I thoroughly enjoyed it and found the content very useful. I actually feel like I’ve come away with a complete “blueprint” I can use to make sure I’m doing all the necessary steps to become and maintain myself as a great trader. It will be very useful in finalizing my business plan.”
— Rick Freeman, Dublin, CA

“A seminar that covers an enormous range of topics, but all were covered adequately. Very much appreciated Day 3—this was surprising to me as to just how critically important this is. The opportunity to learn this in a “laboratory” environment was terrific: I can’t imagine that my work on PPC [Peak Performance Course] would be the same (I’ll start it later this year) without this seminar. I suspect that I will look back at this seminar as a pivotal career moment (but I suspected this beforehand…)” — Forrest Ciesol, La Jolla, CA

“Challenging and very helpful. The best part was the complete structured program for becoming a great trader, around which the workshop is based, and the 52 exercises and worksheets that we are taking home. I really feel that I have what I need to continue this work at home in the upcoming months.”
— Daniel Fylstra, Incline Village, NV


“Prior to coming to this workshop I had come to a realization in trading that I needed help structuring a business plan, knowing how to approach and measure strategy development and how to deal with personal traits that reoccur and are not beneficial to me and trading. These expectations were met and exceeded. Two things I found particularly valuable 1) How personal beliefs translate through market beliefs all the way to the specifics of each particular strategy. 2) The structure of materials and workbook is laid out to easily take home and continue with the work.”— Jim Sterk, Lynden, WA

“I came to learn/confirm a valuable foundation/blueprint for becoming the best trader I can be. I got that and more. Good sharing of ideas with other attendees. Purpose for existence discussion was an enriching experience that I valued highly. Thank you.”
— Paul Beattie, Canada 

“17 Steps to Becoming a Great Trader is a fantastic course! An incredibly comprehensive plan to take anyone willing to apply the steps taught to the level of a master trader. In fact, so much material is covered it would have been overwhelming if not for the open approachableness of Van and Melita to answer any and all questions. I feel like I’ve just been placed in the fast lane to market success! This seminar is very much worth the investment.”
— Peter Swanson, Lufkin, TX

 

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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Copyright 2006 the International Institute of Trading Mastery, Inc.

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"This being Black History Month, I would like to ask people to celebrate the similarities and not focus on the differences between people of color and not of color."
—Lynn Swann

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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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