The Van Tharp Institute

April 26, 2006 — Issue #268

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In this Issue:

Trading Education

Peak Performance Home Study Course

Feature Article

What Does Van Tharp  Mean When He Says "We Only Trade our Beliefs About the Markets"?

Workshops

17 Steps to Becoming a Great Trader
Peak Performance 101 and 202

Trading Tip

Details of Conviction, by D. R. Barton, Jr.

Listening In Types of Markets 
Special Reports Reports by Van Tharp: Self Sabotage, Changing Markets

View this newsletter on-line, or read back issues

Trading Education

Van Tharp's  Peak Performance Home Study Course

People do not trade the market. They trade their beliefs about the market. 

  • A guide to isolating and understanding your own belief systems in relation to trading.

  • Effective training for all levels of traders, from beginners to advanced.

  • A model that you can follow to emulate the success skills of profitable traders.

  • Discover your trading edge, set yourself apart from other traders.

  • Bring more discipline to your trading.

  • Learn self-confidence, overcome fear and eliminate self-sabotage.

These are just a few of the benefits of the Peak Performance Home Study Program.

Click Here to Learn More About the Course...

 

Feature

Van Tharp Back-To-Basics Series

What Does Van Tharp  Mean When He Says: 

"We Only Trade our Beliefs About the Markets"?

If you are a regular student of Van Tharp's work or reader of this newsletter you hear this a lot: You can't trade the markets, you can only trade your beliefs about the market. Let's explore what this really means. 

As a long time modeler of what makes great traders great, Van understands that to model effectively you have to find out what highly accomplished people do in common.  Once you get the common tasks that produce excellent behavior, you need to get the ingredients of those tasks. Those ingredients include the beliefs, the mental states, and the mental strategies necessary to carry out those tasks. 

Let’s look at some statements and see what you believe about them:

  • The market is a dangerous place to invest. (You are right.)

  • The market is a safe place to invest. (You are right.)

  • Wall Street controls the markets and it’s hard for the little guy. (You are right.)

  • You can easily make money in the markets. (You are right.)

  • It’s hard to make money in the markets. (You are right.)

  • You need to have lots of information before you can trade profitably. (You are right.)

Do you notice the theme?

You are right about every one of these beliefs (whether you said yes or no to any of them).  If you don’t believe in any of these statements, what do you believe instead? You are right about that too! However, there is no real right/wrong answer. Some people will have the same beliefs and agree with you and others won’t.

Therefore, whatever your beliefs about the markets are, they will direct your thinking and your subsequent actions.

What is a Belief?

Beliefs are a primary way to filter information from the world. Beliefs are judgments, categorizations, meanings or comparisons. They determine how we perceive reality and relationships in reality. What you expect (i.e. your reality) depends upon your beliefs and they are largely unconscious.  Every sentence in this document represents one or two beliefs, including this one.

One of the beliefs that is most productive for good trading is the belief that you are totally responsible for your own results as a trader.   When you adopt this belief, then you can learn from your mistakes.   However, if you tend to blame someone else (your broker, your spouse, the person giving you tips) or even the market for the results that you get, then you will tend to repeat the same mistakes over and over again.  

When traders “own their problems” and assume responsibility for the results produced, then they discover that their results come from some sort of mental state that either allowed them to 1) follow their rules, 2) not follow their rules, or 3) trade without having any rules.  

When traders take the time to write down all their beliefs (about themselves, the markets, money, etc.), then they can establish a much better idea of what they want to trade, and how they want to trade. They can also see flaws in their thinking much easier. It is valuable to know which beliefs support you as a trader, and which ones hinder your progress.

What is a Mental State? 

Every task has an optimal mental state that will allow you to accomplish it effortlessly.   For example, to execute a trade you benefit from courage and total commitment.   Fear, in contrast, is a big disadvantage as a mental state for executing trades.

Mental states are primarily what most people call discipline or emotional control. Examples include: being impatient with the markets, being afraid of the markets or being too optimistic about the markets.

Controlling your mental states is just part of the answer, but when you can see that you are the creator of your own results as a trader, then you can really make progress.

What is a Mental Strategy?

To understand mental strategies, you have to understand how people think. People think in their five sensory modalities (that is, in terms of visual images, sounds, feelings, taste and smell).

A mental strategy is the step by step way in which you use these modalities; it is the specific sequence of your thinking.  For example, the most effective strategy for the action step of executing a trade is to 1) see the signal, 2) recognize internally that this is the signal you decided you should take, 3) feel good about it, and 4) take action.   If you do anything else, you probably won’t be able to take action or it will be very slow.

The Psychology of Trading

Once you have a clear understanding of which beliefs, mental states and mental strategies are the core factors in top trading performance, you can then teach the same skills to others and have them perform well too. And when you can see this success duplicated in others, which we have been able to do in most aspects of trading, then you know you have a workable model.

The key psychological traits of top traders are

1. Personal Responsibility

2. Commitment

3. Their psychological “profile”

4. Working on personal issues (e.g., self sabotage)

 

Trading fundamentals include the Ten Tasks of Trading.

1. Self Analysis

2. Mental Rehearsal

3. Low-Risk Idea Development

4. Stalking

5. Action

6. Monitoring

7. Abort

8. Take Profits

9. Daily Debriefing

10.Periodic Review

Traders need to be reminded of these tasks and to eliminate any self-sabotage that keeps them from following the tasks.  Van teaches all of these steps in detail in his various products and workshops.

Van Tharp believes that everything revolves around your beliefs, mental states and mental strategies, so with that in mind, everything about trading is 100% psychological, including why and how you trade and which system you will follow or build.

Many traders have a hard time “believing” this and it is almost the antithesis of what people learn in academic finance. So only you can decide whether it is worth the time to learn more about yourself and the psychological aspects of trading. 

People get exactly what they want out of the markets. Most people are afraid of success or failure. As a result, they tend to resist change and continue to follow their natural biases and lose in the markets. When you get rid of the fear, you tend to get rid of the biases ~ Van K. Tharp, Ph.D.

About Van Tharp: Trading coach, and author Dr. Van K Tharp, is widely recognized for his best-selling book Trade Your Way to Financial Fre-edom and his outstanding Peak Performance Home Study program - a highly regarded classic that is suitable for all levels of traders and investors.

Workshops 

May Workshop

The 17 Steps to Becoming a Great Trader Workshop

With Van Tharp and Ken Long • May 5-7, 2006, Raleigh, NC

Seats Still Available

ENROLL NOW...

 

Coming in June 2006

Peak Performance 101 Workshop 
June 3-5, 2006
Peak Performance 202 Workshop
June 7-9, 2006
 

 

 

Trading Tip 

Trading Tip

The Power of Conviction, Part III

The Details of Conviction

by D. R. Barton, Jr.

“Conviction is worthless unless it is converted into conduct.”  --Thomas Carlyle

I’m still waxing rhapsodic about the wisdom that Ken Long dropped on the attendees at his recent Exchange Traded Funds course in lovely downtown Cary, NC just a few weeks ago.

To bring newcomers up-to-date, Ken’s conviction on the efficacy of his trading and investing systems, along with the ease in which he implements, was absolutely mesmerizing to me.

Two weeks ago, I gave my list of how Ken goes about systematically developing conviction:

1.      Observe a potentially repeatable event in the market.

2.      Check to see if the events fit within your belief structure about the markets.

3.      Break the event down into component parts.

4.      Quantify the component parts.

5.      Build a system from those components.

6.      Test the system on historical data.

7.      Test the system in real-time, with real money.

8.      Trade the system.

9.      Monitor the system against performance benchmarks.

Let’s dig into the first three of these…

1.   Observe a potentially repeatable event in the market.  Ken gave us his application of a famous Yogi Berra saying, “You can observe a lot just by watching.”   And as usual there was some uncommon depth to the things that Ken observes.  For example

a.    You have to spend some time as a student of the market to make some sense of it all.  It’s amazing how many folks want someone to hand them a “ATM machine” system that requires no thought on its application.  Ken has found some really good tradable ideas because he is patient enough to watch, learn and recognize.

b.   Consistent and frequent moves can be modest in size and still be very profitable.  Finding some nice 3 – 7 day moves that repeat predictably can lead to some great systems.

2.   Check to see if the events fit within your belief structure about the markets.  It’s amazingly simple, but you have to trade a style that you like.  If you hate sitting in front of a monitor, don’t day-trade.  If you have very little patience, don’t try to ride long term trends.  When Ken talked about his trading systems, he was having fun.  He was excited and animated.  The little kid in him came out.  Anyone in room could tell that he had no trouble trading the systems he was describing.

3.   Break the event down into its component parts.  In the corporate world there are researchers and there are engineers.  The researchers love to come up with new ideas – things that work in the lab and hold great promise.  It is the engineer’s job to “reduce these ideas into practice.” This means that one has to make the idea  simple enough to be easily repeatable and robust enough to scale up so that you can produce enough to make it profitable.

The trading forums and chat rooms on the internet are full of researchers.  Folks with great ideas that should work.  But people that can “reduce tradable ideas into practice” are few and far between. 

Ken has taken great observations, added his insight to them and broken them down so that they are understandable, practical and useable.  This powerful combination forms the basis for his incredible conviction.  Next week we’ll look at some of the notes and bolts of Ken’s process.  Until then…

Great Trading!

D. R.

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.

D.R. presents the IITM Swing Trading Workshop and Professional Tactics for Day Traders Workshop. Each workshop is only held once each year. 

 

Listening In...  

 Types of markets 
Author: jules99


Regarding the six types of market conditions....

1. Up volatile
2. Up Quiet
3. Down Volatile
4. Down quiet
5. Sideways volatile
6. Sideways quiet

What is the best way to establish if a market is quiet or volatile??

Many Thanks

Reply To This Message 

Re: Types of markets 
Author: Chicken Little

You could just look at a chart and figure if the time frame was quiet or volatile. You could do the same for how the market was moving. That approach was very unsatisfying to me.

Don't know the best way, but one thing I came up with is using calculations of Average True Range for volatility and a Rate of Change measure for market movement. I use xlq and excel. Xlq populates info on a stock market index and excel does the calculations. The key is using the percentile function to have solid endpoints for your definitions of volatility and the type of market environment. You could do it with other markets. It is just a matter of getting the info into the spreadsheet.

Regards,
CL

Reply To This Message 


Re: Types of markets 
Author: Mindanser 

I asked this very question of Van at the recent Systems Development class.

His response was that one way to do it is to look at daily ATR over a very long period of time, say 5 years or more. If current ATR is above that value, it's volatile, if below, it's quiet.

That helped me frame the question. Hope it helps you.

Cheers,
MD

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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102-A Commonwealth Court, Cary, NC 27511 USA
800-385-4486 * 919-466-0043 *  Fax 919-466-0408

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Copyright 2006 the International Institute of Trading Mastery, Inc.

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Quote of the Week:

He who fears something gives it power over him. ~Moorish Proverb

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Press Clippings:

Congratulations Paul Kluskowski! 

A long time student of Dr. Tharp's, Paul, has a feature article in the May 2006 Technical Analysis of Stocks and Commodities, titled, "Synthetically Speaking." www.traders.com

Paul wanted our readers to know that he learned the technique he writes about in the article from one of the Van Tharp Institute workshops.

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Free Trading Simulation Game

A computerized version of Van's famous "marble game." 

It is designed to teach you the important principles of proper position sizing. 

Download the 1st three levels of the game for free. Register now. 

 

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2006 
Workshop Mini-Schedule

May 5-7 17 Steps
June 3-5 Peak 101
June 7-9 Peak 202
Jul 14-16 You and Your Money
Aug 25-27 Systems Development
Sept 16-18 Day Trading
Oct 27-29 Mutual Funds & ETFs

 More Info...

 

 

 

 

 

 

 

 

 

 

 

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