The Van Tharp Institute

August 23, 2006 — Issue #285

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In this Issue:

Workshops

Day Trading Workshop, $500 Discount Expires Next Week
Two Core Workshops in Sydney, Australia

Feature Article

Perfectionism and System Development, by Van K. Tharp

Trading Tip

A Review of Market Models: Donchian Channels and The Turtle Method, by D. R. Barton, Jr.

New Reports

Market Mastery Reports - Now Downloadable 

Listening In...

What is "real money"?

View this newsletter on-line, or read back issues

 

Workshops:

 


Day Trading Workshop

$500 Discount Expires Next Week

September 16-18, 2006 - Raleigh, NC

Presented by: D.R. Barton and Brad Martin

Learn More About the Course...


Peak Performance 101 Workshop Australia

Presented by Van Tharp

September 23-24-25

Learn More  --  Register Now

Combo Pricing Available!


Systems Workshop 
Australia

Presented by Van Tharp

September 27-28-29

Learn More  --  Register Now

Combo Pricing Available!

 

Feature

Tharp's Thoughts

PERFECTIONISM 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: perfectionism and judgmental biases in your thinking.

In earlier articles we’ve covered procrastination and the feeling of being overwhelmed. This week let’s look at perfectionism.

PERFECTIONISM

Perfectionism, in contrast to what some might expect, has an extremely negative impact on performance. People often strive to be perfect in what they do because their parents demanded they be perfect as children. Unfortunately, these lofty standards sometimes keep them from ever coming close to achieving them. Perfectionists waste time with unnecessary tasks. Businessmen make less effective decisions, traders make less money, and athletes perform poorly—all because of the high standards they set for themselves.

But the vicious problem perfectionists have is not just created by lofty standards. You can have lofty standards without being a perfectionist. Instead, perfectionism means those standards are tied into your self-esteem. If you don’t achieve those standards (and for most perfectionists, those standards are all‑or‑none), then you feel like less of a person.  The perfectionist has trouble tolerating a mistake or handling a distraction. Perfectionists tend to have all‑or‑none thinking; so everyday little setbacks lead them into a world of despair.

Here is how the perfectionist mind- set can create lowered performance—the opposite of the desired result. The likelihood of a person achieving any outcome depends on two primary beliefs: 1) the belief that the behavior attempted will produce the outcome and 2) a belief that you are capable of producing the necessary behavior. The perfectionist has extremely high standards, by definition, which suggests their outcome may not be directly obtainable as a result of the behavior. More importantly, the perfectionist tends to be his or her own worst critic when these high standards are not achieved. At first, the perfectionist’s criticism drives him forward towards his goals. But as he repeatedly fails to achieve them, the self‑criticism gets much stronger and the person begins to create a wall around himself making the task impossible. As a result, the desired result of nearly impossible standards frequently creates below‑average performance.

Let’s take a look at Elmer:

Elmer was a perfectionist who was trying to develop a trading system that would win in nine out of ten trades and would make five times as much money as he was risking on any given trade.  When he first tried to develop the system, it was just profitable after commissions and slippage. But when he saw the results—only a 2% gain each year—he wanted to beat his head into the wall.  “How could you be so stupid to think that an approach like that would work?” he wailed. After three failed attempts, he was beside himself. His family found him hard to live with—he was uncivil and didn’t spend any time with them. He just locked himself in his computer room doing more testing and feeling more and more unsatisfied with himself. Normally, Elmer would have just given up after about six months. But in trading, he was exceptionally committed to find something that would meet his standards. He’d abandon a lot of good ideas before testing them because of his self‑criticism. Those he did test, no matter how well they turned out, would not meet his criteria for acceptance. Eventually, Elmer’s wife left him and Elmer found himself broke, without a family, or even a trading system that met his standards.

Poor performance among perfectionists is well documented in many fields. Psychologist David Burns, for example, found that perfectionist insurance agents, those who linked their achievement to their self‑worth, earned on the average $15,000 a year less than their non-perfectionistic counterparts.

Similarly, highly successful athletes tend to show a lack of perfectionist tendencies.  For example, elite male gymnasts who qualified for Olympic competition tended to give much less importance to past poor performance than did a group of highly talented gymnasts who failed to qualify. The latter group, in fact, would rouse themselves into near panic states by dwelling on the images of past failure and turning those failures into excessive self-doubt and thoughts of impending tragedy. Think about it—the best baseball hitter in any given year will only get a hit about 3.5 times out of ten. If that player dwelled on the 6.5 times he didn’t get a hit, his chances of getting exceptional performance would be slim.

Perfectionists tend to find themselves under a great deal of emotional stress. They drive themselves hard, while at the same time, being their own worst critic.  For example, when a perfectionist falls short of a goal, he or she is probably screaming criticisms at themselves for not meeting his/her own lofty standards. 

Joe was a trader on a diet. One day he ate a tablespoon of ice cream and scolded himself by saying, “I shouldn’t have done that. I’m a pig.”  His self-critique so upset him that he went on to eat the entire quart of ice cream. And, of course, by the time the quart was finished, he’d berated himself so much that the whole idea of a diet seemed hopeless.

How does this cycle of lofty standards tie into a person’s self esteem development? One theory holds that perfectionism develops when a child is regularly rewarded with love and approval for outstanding performance, but severely criticized for substandard performance. The child, in order to gain parental acceptance, begins to take on the parent’s high standards. And, in order to avoid criticism from the parents, the child begins to criticize him/herself.  Soon the young child begins to anticipate mistakes that will lead to a loss of acceptance and starts criticizing himself for the slightest mistake. The logic is, “If I criticize myself, I’ll do better and then my parents will love me more”. But, of course, self‑criticism leads to feeling bad and then even poorer performance. And suddenly, the vicious cycle of high standards leading to poor performance, common to almost all people with this trait, ensues. A perfectionist has started down the road to ruin.

Getting out of the perfectionist trap.  The best solution to getting out of perfectionism is probably to seek professional help to get rid of the perfectionist decisions that you made some time in the past. However, there is a five-step program you can do on your own to help you make progress. 

First, make a list of the advantages and disadvantages of being perfectionist with respect to your trading (or in anything for that matter). Once you have the list, notice how the advantages may not be as great as the disadvantages. This should give you some insights about your standards and what you are doing to yourself.

Second, since your perfectionism comes from all‑or‑none standards, spend a day investigating how well the world can be evaluated by such all‑or‑none standards. For example, notice what happens when you decide that food must either be terrific or awful. What happens when you decide that a room is either totally clean or totally messy? What happens when you decide that a person is either beautiful or ugly? Intelligent or stupid? Or fat or thin? And, of course, as you are doing this notice how distorted all-or-none thinking is and then think about your perfectionist standards.

Third, keep a daily written record of self-critical statements you make. You might notice how irrational some of these thoughts are, even though they may seem quite plausible when you think them.  Give yourself a reward for being able to write down at least 50 such thoughts in a day. Your reward, of course, is for your self‑awareness—not the negative thoughts. At the end of the day, examine what you’ve written down and notice the distortions in the thinking.

Fourth, for several days keep a record of the activities you do. Before you undertake each activity, estimate how satisfying you think the activity will be. When you finish the activity, record how satisfying you felt it actually was and how effectively you performed. What will happen is that you will notice your personal satisfaction is not necessarily correlated with superior performance.  When you learn to move toward what gives you satisfaction, rather than superior performance, you will be on the road toward making your life work. And quite often-superior performance will follow.

Lastly, each day while you are developing a trading system, set behavioral standards that are about 10% of what you would normally expect of yourself. When you accomplish those new standards, agree to be proud of your performance and congratulate yourself.   If you achieve more than that, fine!  But always celebrate when you achieve your new standards. If necessary, get help from someone close who is not a perfectionist in setting your standards. Most people, when doing this exercise, find that the lower they set their standards, the higher their productivity suddenly becomes.

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. You can learn more about Van Tharp at www.iitm.com.

Trading Tip 

Trading Tip

A Review of Market Models:  Donchian Channels and The Turtle Method

by D. R. Barton, Jr.

In trading folklore, few stories capture the imagination like that of the original Turtles.

Richard Dennis and William Eckhardt had a widely rumored bet about whether traders were born or could be made.  Supposedly the movie “Trading Places” was based on this rumor…

The interview process for selecting the team is also the source of rumor and legend (and rumor has it that Van was a finalist).

They put together a rule-based, systematic way for their trading team to execute their trades.

The set-up and entry for that system used a very simple breakout concept:  Donchian Channels.  While the name is impressive, it is quite straightforward:  channels are established by the high and low of the last “x” bars.  On a daily chart, a 20 period Donchian Channel would be formed by the highest high and lowest low of the last 20 bars.

In the Turtle’s system, they simply bought a breakout above the upper channel and sold breakdowns below the lower channel.

The key question is "did it work?"  The answer is that yes, it did work and worked well.  Some claim that the original Turtles averaged 80% compounded returns over four years. (Rumor has it that, at least in the early going, the experiment made no money because one of the partners insisted on hedging all the positions of the new traders!)

Now let’s look at our market model questions for the Donchian Channels:

Is it theoretically credible?  Yes – trading breakouts has been an age-old method for making money and will always work in trending markets.

Who’s it most useful for?  Long term trend followers.  Could be useful as a stand alone entry in strongly trending markets.

How Fanatic are the fans?  Very!  There are some websites that make it sound like you’d have to be a real loser to trade any other way.  The strategy has plenty of detractors as well.  Connors and Raschke had a strategy called “Turtle Soup” that fades (goes against) the Turtle entry.

Is it being used by real-life traders?  Yes.  Plenty of folks still trade this.  It works well in trending markets, not so well the rest of the time.  Most Turtle followers are using longer time periods for their Donchian Channels now.

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. 

 

Special Reports By Van Tharp

Market Mastery Reports - Downloadable 


$39.95 each 
[Regularly $59.95]

BUY ALL 4 Reports for $129.00!

Click on any title below to read an excerpt

1. Doing a Spring Cleaning on Yourself as a Trader
2. Understanding Expectancy and the Golden Rule of Trading
3. Are You Doomed to Failure? Yes, but Only if You Avoid Working on Yourself!
4. How Academia Leads Wall Street Astray

More Info...

Listening in...  

www.SmartTraderBlog.com

What is "real money"?


Long term there is only one defense against the debt picture I've painted earlier and that is to own "real money" gold and lots of commodity based assets, which can be in the form of equities. 

As many of you may know, I've actually advocated rare stamps as a great solution. Some of you might be thinking that you should diversify out of the dollar. But the reserves of virtually every currency of the world are in U.S. dollars. When the U.S. sneezes, the world catches the cold. The central bank of Italy recently started buying British Pounds and getting rid of dollars. 

China and Russia are actually starting to increase their gold reserves. Bottom line... I would expect to see an ounce of gold equal to the price of the DOW JONES Industrials within the next ten years, and perhaps much sooner.

To read more on this topic and see comments, visit, www.smarttraderblog.com

Participate on our Trading Forum,  a place for traders and investors to share ideas and learn from each other. 

 

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Copyright 2006 the International Institute of Trading Mastery, Inc.

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Quote:

"When you aim for perfection, you discover it's a moving target." ~George Fisher

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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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