The Van Tharp Institute

November 15, 2006 ó Issue #297

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In this Issue:

Workshops

Swing Trading Workshop $500 Discount Expires TODAY

Feature Article

Market Efficiency Portfolio Update by Van Tharp

Trading Education

The Workshop Hierarchy, Part Two.

Trading Tip

If Push Came To Shove, Swing Would Still Be My Thing, By D.R. Barton, Jr.

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Workshop

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Feature

Tharpís Thoughts

Market Efficiency Portfolio Update

By
Van K. Tharp

Efficiencies clearly show that the overall market can change quite quickly.  In February of this year the market was amazingly strong in terms of efficiency.  We had 406 stocks with ratings above 10 and only 11 stocks with rating below -10.  It was very hard to find a good short candidate.  However, the market was not into new high ground as it is now.  By August, the market moved as low as having 26 stocks above +10 to its current value of +39.  Stocks below -10 moved from only 11, to as many as 91.  Today, things have reversed and there are 116 stocks above +10 and only 25 below -10.

 

There is another way to measure the efficiency of the market.  What percentage of stocks have an efficiency rating above zero? This information has been charted in the second chart.  In February of this year, 80% of all stocks showed a positive efficiency.  By July 15th only 37.4% were positive, but as of November 10th, weíd moved back to 68.5% positive efficiency.  Perhaps weíve finally reached a point where there are some good positive efficiency stocks that will take off. So far, it hasnít been a good time for efficient portfolios, positive or negative. 

Our best stock last month was SYX, but it did a nose dive on Oct 11th  when our last portfolio review came out.  As a result, we exited on the open the next day at $14.38.  None of our shorts did well last month.  We were stopped out of JRC on October 17th at $6.87 and we were stopped out of MLS on October 25th at $19.62.  And since both of our other shorts stopped trending down and were no longer good negative efficiency stocks, I exited them both at the open on November 11th.

The market was a little better for us on the long side.  None of our longs, except SYX were stopped out.  However, only two of them are profitable and two of them are no longer efficient stocks on the positive side.  The two that are profitable are LQU and CXW, which we will keep in the portfolio.  CPY, OMG, and ENR were all exited on the open November 13th.

Since the market is now biased toward positive efficiency by 68% (versus 32% on the negative efficiency side), I decided to add five new long stocks and three new short stocks on November 11th at the opening.

The longs are:

MarkWest Hyrdrocarbon Inc. (MWP) at 17.07 efficiency

Spanish ETF (EWP) with an efficiency of 15.53

Peopleís Bank (PBCT) with an efficiency of 15.48

Northeast Utilities (NU) with an efficiency of 14.16

China Mobile Hong Kong (CHL) with an efficiency of 13.60 

I particularly like CHL from a long-term fundamental view.

The new shorts are:

ASV Inc. (ASVI) with a negative efficiency of minus 10.17

v     Short-term ASVI is just below support, but it has no long-term support until it reaches 5, so on that basis we could get a decline of 60%.

Eresearch Technologies (ERES) with a negative efficiency of 10.12

v     ERES has just fallen dramatically and can fall another 30% before encountering long-term support

Rehabcare Group (RHB) with a negative efficiency of 10.01

v     This stock is in a slight recovery, but it is below any long-term support on my chart and it could fall dramatically.

Once again, I donít like turning over more than half of our portfolio every month, but this is what the system is telling us to do.  We have 23 closed out positions after four months and 20 of them are losses, although very small losses.  Iíve said many times before about how good trading systems can have long losing streaks.  Well, weíve had 20 out of 23 losses and that certainly counts as a bad streak.  However, itís great to see in real trading what we might have to go through if we strongly commit to this type of system.  Currently, the expectancy of our closed trades is minus 0.32R.

Notice that the total loss so far is about 7R. That means that one 10R winner will turn the whole portfolio around and I would expect this system to generate a lot of those over time. We just haven't had any yet, so this is simply a lesson in what we have to put up with trading this kind of system.

Most of our losses have occurred because the stocks stopped being efficient, rather than by being stopped out.  However, why hold positions that no longer meet our ďreason for buying them,Ē especially when there are much better candidates to replace them?

Our closed out loss totals minus $2980.81, including commissions.  All of the closed out positions to date are listed in Table 1.

Stock

Profit/Loss

R-multiple

FAL

-2.28

-0.0057

BSX

-182.82

-0.45705

DLX

-183.56

-0.4589

AETH

-132

-0.33

AYE

-56.95

-0.142375

CG

-66.72

-0.1668

OGE

-51.06

-0.12765

WPI

-315.08

-0.7877

EBAY

-381.78

-0.95445

CHS

-399.78

-0.99945

HOV

-346.09

-0.865225

VTR

-97.51

-0.243775

LEE

64.04

0.1601

43JRCC

873.9

2.18475

GYI

-175.82

-0.43955

SYX

137.24

0.3431

CPY

-303.6

-0.759

OMG

-183.18

-0.45795

ENR

-130.36

-0.3259

JRC

77.84

0.1946

FMT

-268.38

-0.67095

MLS

-655.26

-1.63815

MRCY

-201.6

-0.504

Sum

-$2,980.81

-7.45

Expectancy

 

-0.32

Our active positions, prior to the new buys are shown in Table 2. 

Table 2: Portfolio On November 13th Open
Stock Entry Cost Shares Stop Price  Value Profit R-multiple  
(+$15 commission) Now Loss
Longs                  
LQU $54.05 $1,960.80 36 $43.24 $66.49 $2,393.64 $432.84 1.082*   
CXW $42.33 $1,919.85 45 $33.86 $47.02 $2,115.90 $196.05 0.490*   

 

Thus, we have profits from our two open positions of $629 and closed losses of $2981.  Thus, gives us a net loss of $2352 or 2.3% for the four months.  Iím not happy with that, but thatís what it is. 

The Portfolio on Wednesday October 11th

The new stocks were all purchased at the opening on November 13th.  We now have seven long and three short positions.  Table 3 shows the portfolio values of the close on November 14th with the new positions just listed as being new. 

Table 3: Portfolio On November 14 Close
Stock Entry Cost Shares Stop Price Value Profit R-multiple
(+$15 commission) Now Loss
Longs                
LQU $54.05 $1,960.80 36 $43.24 $66.28 $2,386.08 $425.28 1.063
CXW $42.33 $1,919.85 45 $33.86 $46.70 $2,101.50 $181.65 0.454
MWP $35.54 $1,756.46 49 $28.43 new 11/13      
EWP $52.12 $1,734.96 33 $41.70 new 11/14      
PBCT $44.62 $1,755.18 39 $35.70 new 11/15      
NU $26.52 $1,765.32 66 $21.22 new 11/16      
CHL $42.32 $1,750.12 41 $33.86 new 11/17      
Shorts                
ASVI $14.46 $1,779.12 122 $17.36 new 11/13      
ERES $6.33 $1,774.74 278 $7.60 new 11/14      
RHB $12.41 $1,777.22 142 $14.89 new 11/15      

Some of the Emails Iíve Received on the Portfolio

Read last weeks article on the portfolio if you did not do so already.  It basically explains why Iím doing this sort of testing in a public forum.  In response to that article, I received lots of positive email, so I will continue doing the portfolio until I either feel confident that the parameters are correct or I feel that it is not working and would never trade this way.

Hereís one E-mail  :

Iíve been following your articles on the Efficiency system since you began publishing them.  I write to simply add my vote to those of others who find this ďopen kimonoĒ approach very, very helpful.

I would also like to thank you for the terrific information you publish.  Itís safe to say that you have had by far the greatest influence on my trading and thinking than any other person.  And I spend a lot of time reading and studying trading.  Until I discovered your books and website, I was of the belief that developing a system was beyond me.  Until I happened across your website four years ago, I followed other gurusí systems, usually with very limited success, but I didnít have the knowledge or courage to dip my toe in that water.

But once I learned about position sizing, and proved its value to myself, I was ready to make the attempt.  Along the way I have learned some things that you touched on in your article today.  They are as follows:

Computer testing and real-time trading are just too different.  I have to understand the emotional dynamic of a system in order to trade it, and this simply cannot be duplicated with a computer.  The only way I can test it is to put real money on the line and learn first hand what emotional buttons the system will push and how I will react.

I once shared an email exchange with Chuck LeBeau about trading systems, and he made me understand that most of the good systems heíd ever seen always had an element that considered the overall trend of the market.  Iíve never found a simulation program that provides options for testing that element of a system.  The system Iíve designed, and continue to tweak, considers the overall market trend in the way it sizes positions.  Iíd never be able to simulate/back test it, especially with my limited programming skills. 

I have run across a few simulations that have some options for position sizing, but they are very pedestrian and not terribly useful.  I spend more time on my position sizing formulas than any other part of my system.  Iíve learned that position sizing does more to smooth out my equity curve than any other aspect of my system, so thatís where I invest my time.  Your efficiency model has added a very unique criteria to my own position sizing formula.  Itís still too early to evaluate its impact, but I like what Iím seeing so far.

Well, forgive the long note.  I just wanted to let you know that I greatly appreciate the work you do, and especially for the way you are teaching system development with the Efficiency system. 

Gratefully,

DT

DT those are my sentiments exactly.   Van

E-mail   #2

Hello Van,

I find that your portfolio testing model discussion is very useful because it helps me have a personal discussion with myself.  I have found that my trading ideas have changed as I age.  When I was in my 40's I traded commodities short term, today in my 70's, approaching 80 I am trading on a longer term idea with less day-to-day action.

Your personal comments are helpful because I don't have many people to discuss trading with and I have found that it is useful to discuss ideas.  I do it most days with my buddy and that helps and your stuff is the only  "guru" I read.  John Murphy is OK because he makes no recommendation but sticks with technical data.  The rest seems to be garbage.  Please continue your model discussion and action.

Sincerely,

HD

HD is an old friend of my and Iím really happy to see that heís still reading my work.  Itís also nice to know that old Ph.Ds. can still trade profitably.  Thanks for your comments, H.D.

E-mail   #3

Dr. Tharp

Don't stop the portfolio efficiency update!  I have enjoyed watching your real time market test evolve, and it has given me inspiration to do the same.  I have developed a system using J.M. Hurst's cycles methodology, and added ATR trailing stops for exits.  Based on your experiment I decided that since I couldn't back test this system either, I would do a real time test in actual trading and then quit after 1 month to review the results.  It has been a very educational process, and the results are indisputable because they are what I actually traded.

Thanks again,

JH

Again, there is so much out there that is good, but not testable by computer.  Yet there are so many excellent ways to test that are much better than the traditional back testing.  And I mean working to thoroughly understand your system as I describe in my courses and books, testing with small position sizing, making sure those results are valid in all types of markets and then simulating so you begin to know what you are up against. 

Much success with this JH.

E-mail   #4

Van

Thanks for the update and thoughts on the efficiency portfolio.  The efficiency updates are the main thing I look out for these days.

Iíve found it quiet encouraging to see a Ďguruí with heaps more trading experience than me struggling to make money using a system that I know works at the same time I am struggling to make money with the system myself.  Itís better than the snake oil salesmen who donít tell you that there will be times of drawdown and consolidation before the trending which is where the real reward is.

Iíve done a lot of trade testing on various systems and found the efficiency to perform the best.  Iíve been trading the system for the last three months or so with a high degree of success.

Another key advantage is that trading volatile stocks is emotionally taxing; while smoothly trending Ďefficientí stocks are more relaxing.  Iíve also found that when using a volatility based stop (I use a factor of ATR x ADX) the efficient stock is less volatile overall meaning it represents less risk and therefore you can have a greater amount invested before reaching your optimal portfolio heat.

I have found the same thing as you, that when scanning for efficient stocks the scan returns results where there has been a big jump and then a tight range which donít make sense to trade as efficient stocks.  I had taken this as a given and that you would have to visually check trades before considering them seriously.  Most of the really good and tradeable ideas have come form reading TYWTFF, the special report on risk or the website and forums.  Thanks so much for all your practical and real advice, tuition, inspiration and encouragement. 

MK

This reader also added some excellent ideas about filtering the data which I will look at.  Thanks.  Youíve hit a number of key points on the head and I hope everyone understands them.  Thanks, MK.

E-mail   #5

I would like to thank Mr. Tharp for his emails regarding the Efficiency Portfolio. I share the same beliefs regarding the markets as Mr. Tharp. I believe that stocks moving in a straight line (up or down) do exist, and it is possible to trade them. I am working on a similar system for my own trading. I use some computer tools for finding ways to select stocks and research new ideas. After I build a system that I am happy with, I start trading the system in real time with reduced position size. I believe that there is no better way to test a system than to run it in real time. I want to test not only entry, exit, and position sizing but also the effect they have on me.

Many thanks to Mr. Tharp and his team for the work they are doing and the help I have received through the books, courses and the Internet. 

Kind regards

This is exactly what I was hoping to inspire Ė getting you to think and apply the ideas to work on something that fits you.  Itís the only way youíll make money out of this.  Itís not about what stocks I trade in the portfolio.  Instead, itís about figuring out whatís useful to you and how you can apply it.

Thanks for your comment, S.

Until next months portfolio review, this is Van Tharp.

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 Education

Kick Start Your Trading Career

Workshop Hierarchy Part Two

Last week we shared information about our three foundation workshops Peak 101, Blueprint and Systems. We told you that they are designed to provide you with the core material that everyone who wants to become a great trader should master. We regard them as the starting point for your trading education regardless of your background or trading experience. Also, these core workshops are just as valuable for the short term trader as they are for the long term trader because what you learn is not dependent on the market traded, or the timeframe that you choose to trade. 

However, trading is trading, and the markets can be brutal sometimes, so whether you choose to be a short term or a long term trader or something in between, it is essential that you learn how to integrate the foundation of great trading into the specific trading style that is right for you.

Our second tier courses (Day Trading, Swing Trading, E-Mini Futures, ETF and Mutual Fund Techniques) help you to either master the time frame that you have chosen, or give you the tools to decide what type of trading you are really interested in.  These workshops are packed with great strategies that really work well.  And if youíve mastered the techniques in the Foundation Workshops, then you should be able to adapt some or many of these techniques so that they fit you.  These workshops also go in depth in their specific trading area, while you simultaneously learn how to incorporate the key Van Tharp principles and rules into the trading technique. 

Professional Day Trading Strategies

Would it be of interest to you to trade two or three times a week for only an hour or two a day? Well there are many elements that are required to day trade well: good trading psychology, execution skills and a decisive nature to name just a few. Day traders have lower risk levels (because they do not hold trades over night) and are afforded higher leverage as a reward for this reduced risk.  They can use tighter stops and therefore larger position size.  Successful day traders capture the advantages of increased position sizes by using strategies with positive expectancies and applying good discipline to higher frequency trades.

Day trading has its disadvantages too.  Higher leverage combined with greater trading frequency means that negative expectancy systems get punished faster and harder.  Furthermore, more frequent trading means that you have to overcome much higher trading costs to be profitable.  You really need to master your personal psychology to be a good day trader.  However, weíve seen day traders who can make huge profits that are almost impossible in the other forms of trading. Day traders rarely catch really huge moves, but they exist on smaller more consistent wins.  So in this workshop, co-taught by a professional day trader, you will learn all of the positives and negatives of being a day trader, including how to read the markets, how to set and keep stops, how to use position sizing, expectancy and risk to your advantage. In the day trading workshop, youíll get to watch Brad Martin trade live, which alone is worth the price of the workshop.  However,  you will be learning proven and powerful strategies and tactics that work in todayís markets time and time again.

Proven Swing Trading Strategies 

Swing trading fills the gap between long time frames (position trading) and intra day (day trading), yet it enjoys the benefits of both of these styles.  Swing trading is loosely defined as trading to take advantage of the intermediate trend, typically 2 Ė10 days. Swing trading has the benefit of high trade frequency, which can help to smooth equity curves.  Many types of swing trading capture a higher percentage of winners than the typical position trading strategy, while keeping the benefit of requiring little to no intra-trade baby sitting.  With swing trading, we get the increased frequency with monitoring that can typically be done outside of trading hours and it can also be combined with day trading, or with position trading. 

In this workshop, you will be shown system after system Ė both stocks and futures are coveredóthat work very well. Youíll see dozens of real life computer captured simulations to drive home the application of each trading system. You won't just read and hear about good trading systems, you'll actually apply them in the workshop. You will learn how to use indicator-based systems, discover what technical indicators to use and which ones to avoid and what works in a pattern system. You will also learn the critical components of a Swing Trading System and how to put your ideas in to a viable trading business plan. 

Highly Effective ETF and Mutual Fund Techniques

Imagine being able to jump in front of large mutual funds because youíll have learned the skills to anticipate what they are doing. For example: if mutual fund managers are buying retail stocks, youíd be able to get into those stocks well before they get in and profit greatly as their activity drives prices up. 

Well thatís what this course is all about. It is essentially our course for learning great stock market trading techniques.

What we talk about in this workshop is the movement of big money via Exchange-Traded Funds (ETFs) - one of the most rapidly growing areas in the investment fund industry.  ETFs are funds that reflect the big sectors of the market. For example, you can buy a fund that represents the Internet sector of the market and short another that represents the retail sector of the market.  And you can do this in seconds, as soon as you spot what the big money is doing.  So while big money might take a week to move money around, you can jump in ahead of them and take advantage of money flowing into the sector youíve just bought.  The advantages are huge.   Furthermore, Ken Long, the instructor, has done an excellent job of adopting Vanís model for developing trading systems and some of the systems youíll learn come very close to what Van would describe as ďHoly GrailĒ systems.   However, itís critical that you understand that you probably wonít be able to trade these systems to make big money until youíve mastered the Foundation Workshop material that will allow you to make these systems your own.

Professional E-Mini Futures Tactics

If you like trading futures, the most popular futures contracts are the e-mini contracts.  The low capital requirements combined with extremely liquid markets make this trading style (in derivative futures indexes) accessible to a wide range of people. It offers high leverage and the ability to control high value contracts with very little cash (or margin) but this double-edged sword provides great potential for big profits and equal opportunities for big losses.

So in this BRAND NEW workshop, you will learn which of the e-mini index futures is right for you: S&P, Russell, Dow or Nasdaq. Youíll learn how you can trade them effectively and profitably without losing your shirt. Weíll be teaching you how to prep for the market before the day begins, whether itís a trend day or range day, what indicator and mechanical systems work and weíll show you state of the art execution tools and tactics to help you maximize your profits. This is an exciting opportunity, provided you learn how to do it right!

Thus, once youíve mastered the Foundation material, then we suggest that you begin to learn strategies that really work well in the areas that interest you.   All of these workshops provide excellent systems that you can adapt to fit your own trading style.   So when youíre ready, we have the technical workshops that will meet your needs.

And, remember our special offer: Until the end of November, if you buy two of our foundation workshops (see below) you will get to attend the third workshop for FREE. We look forward to working with you!

We want you to win in the markets, so if you are really serious about taking your trading to the next level, we are offering a time- limited  Three in One Package to these foundation workshops.  You will be paying LESS THAN HALF price for each workshop.

Buy any two of the Foundation Workshops as described in last week's newsletter, and you can attend the third one absolutely FREE. You have 2 years to attend the workshops and some of them will be scheduled back- to- back to help with travel arrangements. 

Learn More About this Offer

Wishing you profitable trades!
Melita

Van Tharp Institute CEO

Trading Tip 

Swing Trading:  

If Push Came to Shove Ė Swing Would Still Be My Thing

by

D.R. Barton, Jr.

In order to stimulate my thinking, I stumbled upon an idea the other day: what if some silly law were passed that mandated that traders everywhere could only trade one style?  (I hesitate to put that writing Ė even in jest Ė lest some bureaucrat think itís a real suggestionÖ)

It took me longer to formulate the weird scenario than it did to come up with my answer:  I would swing trade.  No doubt about it.

I do some long-term trading / investing in my retirement accounts.  And as most of you know, I love to trade intraday in both stocks and futures indexes.  

But if I were forced to choose one style of trading, I would land on swing trading.  The reasons for that are many, but letís go over the main ones:

        Time.  Time!  Time!!!  Swing trading is clearly a most time efficient form of trading.  If we ranked trading styles in terms of return potential per minute spent implementing your system, Iím convinced that swing trading would come out on top.  And you can choose when you spend that time Ė in the morning for the early risers, late in the day for the night owls, or almost anywhere in between.

        Frequency of opportunity.  One of the most difficult problems that long-term trading systems have to overcome is a lack of trading opportunities.  And even if a long-term strategy generates a sufficient number of opportunities, most people donít have accounts that are large enough to fund that many positions given the wide stops that are typically required.  This is one of the issues that Van points out in Trade Your Way to Financial Freedom Ė to successfully trade most long-term systems you need a very large account to overcome the capital requirements and potentially long periods of draw downs.

        Tools for every market condition.  Letís face it, long-term trading strategies do great in upward trending markets and then hold on for dear life in most any other market condition.  But swing trading strategies are only looking for 2 Ė 10 day moves.  So there are systems that work in sideways choppy markets, in down markets and in up markets.

I hope you can join Brad Martin and me in Phoenix the first weekend in December for the best three days of swing trading education that I know of!

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. 

 

Join in the discussions on our blog and forum

www.smarttraderblog.com

MasterMind Trader Forum

 

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Copyright 2006 the International Institute of Trading Mastery, Inc.

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Quote:

"A wise man should have money in his head, but not in his heart." 
ó Jonathan Swift 

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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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Tharp Concepts 
Explained...

Psychology of Trading 

System Development 

Risk and R-Multiples 

Money Management / Position Sizing 

Expectancy 

Business Planning 

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In the Press

Be sure to pick up a copy of the November 2006 issue of Stocks and Commodities Magazine.

Editor, Jayanthi Gopalakrishnan interviews Dr. Van Tharp on Trading Your Beliefs. The article begins by saying:

 "Often imitated, never bested, Van Tharp is an original and a pioneer in the field of trading psychology."

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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