The Van Tharp Institute

July 26, 2006 — Issue #281

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In this Issue:

Workshops

How to Develop a Winning Trading System Workshop
Raleigh, NC & Sydney AUSTRALIA

Feature Article

Procrastination and System Development

Techniques

Day Trading Workshop

Trading Tip

Spreads & Pairs, the Pros and Cons, by D. R. Barton, Jr.

Listening In...

Turning $100k into a Million Dollars

View this newsletter on-line, or read back issues

 

Workshops:

How to Develop a Winning Trading System - Workshops

New Location! SYDNEY AUSTRALIA

 

Raleigh, NC, USA

August 25-26-27

Learn More  --  Register Now

 

 

 

Sydney, Australia

September 27-28-29

Learn More  --  Register Now

Scheduled Back-to-Back with 
Peak Performance 101

 

You cannot improve your trading performance through some indicator that predicts the market. You must learn the art of trading and understand how to create a trading system that fits your wants, needs, desires and lifestyle.

 

Feature

Tharp's Thoughts

PROCRASTINATION and SYSTEM DEVELOPMENT

By

Van K. Tharp

My research suggests that the problems people have in developing a trading system fall into five different categories.

 

The first three areas prevent traders from ever starting (or finishing) the development of a trading system. These include computer/technology phobia, procrastination, and being overwhelmed by the whole process. The last two problems tend to prevent the trader from coming up with a workable system. These include: perfectionism and judgmental biases in your thinking.

 

This week I’d like to focus on procrastination which is big hindrance for so many system developers.

 

So many of us have a hard time getting started—especially when it comes to the task of developing a workable trading system. Yet postponing the task creates even more problems.

 

What is behind procrastination problems of this sort? Often, a major cause is the fear of failure, especially since the result of completing the task is an opportunity to play a risky game like trading. For example, if you’ve tried trading without a plan, you know how risky it is and part of you may be so afraid of the consequences of trading that you are having difficulty starting to develop the plan. Or, perhaps you’ve quit your job to start trading full time, but you’re so afraid of the results of not trading well that you cannot complete the job of developing your system. 

 

If you’re uncertain of your ability to perform, either based on past experience or a general lack of self-confidence, you’ll probably find it difficult to begin. And the greater your time pressure to perform, the more fear you will create.

 

Sometimes the fear of success will produce the same result—continually postponing the development of a trading system. People fear success because it will bring something new. Suppose you become “rich” and, based on your experience, you don’t like all the implications of what it means to be “rich.”  Perhaps your friends will no longer want to be associated with you or perhaps they’ll try to take advantage of you when you have more than they do. Or perhaps you think wealthy people are stingy and narrow-minded. You think "I don’t want to become stingy."

 

Another reason you might procrastinate about developing a trading system is lack of interest in that portion of the task. You don’t like the idea of playing around with computers, testing numbers, and doing all of the work. Maybe it reminds you too much of school. Lack of interest, like a fast growing weed sending out roots in all directions, can strangle motivation and make it impossible to even start a simple task. All you wanted to do is get about the business of trading. As a result, you just trade, but you have never tested what you are trading. You just prefer to make mistakes the hard way.

 

Perhaps the work involved in developing a trading system reminds you of someone you do not like. Someone you dislike told you to do it and you feel resentment—or perhaps someone you dislike always used to do things like develop trading systems. You don’t want to be like that person, even though you know you have to do the work, so you tend to put it off.

 

The more you dislike the idea of developing a trading system, or even doing certain parts of the task, the more you will tend to push it away. This means you’ll leave the toughest part of the job for that portion of the day when your energy is lowest or you are likely to make a lot of mistakes.

 

Lastly, the most important part of developing a trading system is to develop the objectives for the system. Once you have the objectives down, then the task of developing a system really is fairly simple. Getting your objectives down is 50% of the task.  Until you have your objectives written down, you have no way of knowing what you want or of knowing when you’ve got it. How can you even monitor your progress, a major factor in ongoing procrastination, until you know exactly what you want? In contrast, once you know what you want, you can set deadlines for each phase of the project.

 

How to overcome procrastination. 

 

First, you must realize that procrastination comes from you and take control of the situation. Make a commitment to get the job done. Also concentrate your focus on starting the project (or the next phase) rather than finishing it.

 

Next, write down all of your objectives for your trading system. At this point, you should know what you want, the tasks involved in producing it, and standards you will have for knowing when each part of the task is complete. When you know what has to be done next, it’s much easier to concentrate on doing it.

 

Third, divide the task of developing a trading system into steps. Rank the steps in terms of priority and then in terms of your desire to do them. Set deadlines for completing each step and announce those deadlines to the world. If you find that one portion of the job is particularly onerous, then break it into subtasks and give yourself a deadline for each subtask.

 

Lastly, begin the next step. Concentrate on taking each step and then begin. 

Remember that Lao Tse, the great Taoist teacher, once said, “A journey of a 1000 miles begins with a single footstep”

 

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.

Techniques

Day Trading Workshop

September 16-18, 2006 - Raleigh, NC

Presented by: D.R. Barton and Brad Martin

·         Spend three days with master trader Brad Martin – learn his trading beliefs and the intimate details of his trading systems.

·         Top system designer D. R. Barton will reveal the powerful yet simple system that provided a 100% return on equity in difficult markets. (How many systems do you know that did that?)

·         Insight on the special psychological tools that supercharge the performance of short-term traders.

·         Dig into the fine points of winning day trading strategies in this fast-paced course.

·         Become skilled with these strategies using our unique real-time trading simulations that allow you to trade what you learn.

Learn More...

 

Trading Tip 

Trading Tip

A Review of Market Models: Spreads & Pairs Continued

by D. R. Barton, Jr.

We’ve spent a couple of weeks looking at spread or pairs trading.  Last week we reviewed the pros and cons of spread and pairs trading in general.  This week we’ll look at a couple of specific styles of spread trading using market model questions.

Futures Spreads:  Limited Only by Your Imagination (and common sense)

Futures spreads:  As a re-cap, this method looks to take advantage of historical price ratios.  The gold vs. silver spread is a common one.  Recently, gold versus crude oil has been popular.  In general, when the ratio between the commodity prices gets out of its historic norms, like when crude prices appreciated faster than gold last year, traders will sell one side and buy the other, expecting prices to revert to the mean.  In this case, people would buy gold futures contracts and short crude oil contracts, expecting the ratio to return to its historic norms. 

While it is conceivable to trade almost any futures contract against another, there are a great many spreads that have historical precedent and/or physical significance.  For examples, comparing the prices of similar futures is common: corn vs. wheat, T-notes vs. 30 year T-bonds.  Clearly, there are spreads that don’t have physical or historical significance and are even uncorrelated.  It would make little sense to trade pork bellies vs. cocoa for example.

Let’s look at our market model questions for Futures Spreads:

Is it theoretically credible?  Sure. There are historical ratios that have held for decades or centuries for good reason.  And in general the concept of “arbitraging prices” when they get out of whack is very credible.

Who’s it most useful for?  Folks who want to specialize in particular spreads.  If you try this as a passing fancy, you’ll be up against folks who know every little gyration in the supply and technical moves of your chosen pair.

How Fanatic are the fans?  Not crazy really.  Futures spreaders are usually quiet grinders operating under the radar.

Is it being used by real-life traders?  Yes.  But it’s not very pervasive.  Again, this is a specialized discipline.

Seasonal Spreads:  The Compelling and Logical Trade

Seasonal futures spreads:  For re-cap, these spreads try to take advantage of seasonal tendencies.  An example would be going long a spring/summer unleaded gas contract and short a spring/summer heating oil contract.  More driving and less heating takes place in the summer; so if you looked at this spread over a long period of years, there is a positive correlation.  Again, there are many examples based on harvest cycles, freezing seasons, etc. 

Seasonal spreads are very compelling because they make so much darn logical sense.  I know that I traded these a bunch back in the late 1980s and early ‘90s.  There seemed to be many more services touting seasonal spreads and trades back then.

Here’s a look at our market model questions for Seasonal Futures Spreads:

Is it theoretically credible?  Quite.  Many of the seasonal futures spreads are driven by the physical realities of weather and harvest cycles.

Who’s it most useful for?  Again, this is best suited for people who would like to really dig into the seasonal tendencies of particular spreads. 

How Fanatic are the fans?  Seasonal traders tend to proselytize a bit more than most.

Is it being used by real-life traders?  Yes.  But it’s not very pervasive.  Again, this is a specialized discipline.

There are lots of fly-by-night companies that offer all kinds of different research for seasonal trading.  Do your own research on service firms well.  One reputable firm that I have used in the past is Moore Research Center, Inc.

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.

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...  

VAN THARP HAS A NEW BLOG

www.SmartTraderBlog.com

Entry date: July 21, 2006

Turning $100k into a Million Dollars

[In reference to]  comment 1 : "...a trader going from $10k to $250k+, what causes the trader to lose it all and then be able to get it back? If he can trade so successfully and be profitable, what is the psychology that allows him/her to go through these stages?"

I think you are really asking the wrong question. The person who goes from $10,000 to $250,000 or from $100k to $1 million is taking huge risks and doesn't understand position sizing...eventually they will go bankrupt if they keep it up. And yes, they may do it again, but that doesn't mean its wise or prudent. It probably means they love the excitement of the market, which also isn't a good trait because good trading is boring. It comes from having a business plan and treating trading like a business. It comes from having several good, uncorrelated strategies that fit the big picture. And most importantly, it comes from continually working on yourself to avoid mistakes and to keep from repeating them.

That being said, look at the earlier blogs on Tharp fundamentals. It's not that hard to develop a system that will make you 100% per year. But that means that it might take you four years to turn 100K into a million. However, most people cannot do that because they don't have enough self-responsibility or understanding to eliminate their mistakes. So far, our data indicates that each mistake you make averages out to a 4R loss for your system. Most people cannot overcome making such mistakes, no matter how good their system might be.

__________

Entry date: July 24, 2006

Comment 2: Investors always take risks when they invest huge sums but it's really worth that when you get the money back with huge margins of profits. 

Van's Response:

Low risk versus high risk - 
no wonder people get in such trouble in the markets

The key to profits is to take LOW-RISK ideas and I've already defined what that means.

Academia has put out that if you want to make a lot of money then you must take a lot of risk. I think that it's BS and that the academic community has had a hard time justifying it's stance. 

Your comment simply reflects the academic viewpoint.

Participate on our 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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Quote:

"A year from now you may wish you had started today." 
~Karen Lamb

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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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Workshop Schedule

Aug 25-27 Systems Development
Sept 16-18 Day Trading
Sept 23-25 Peak Performance 101
SYDNEY, AUSTRALIA
Sept 27-29 Systems Development
SYDNEY, AUSTRALIA
Oct 23-25 17 Steps
Oct 27-29 Mutual Funds & ETFs
Nov 3-5 Peak 101
Nov 7-9 Peak 202

 More Info...

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