The Van Tharp Institute

January 24, 2007 — Issue #306

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In this Issue:

Workshop

NEW WORKSHOP Professional E-Mini Futures Tactics

Feature Article

Making Leverage and Volatility Your Allies, by D.R. Barton, Jr.

Trading Education

Trade Your Way to Financial Freedom Second Edition

Trading Tip

The Best Stock Tip I Ever Received, by Dr. Steve Sjuggerud

Systems

How to Develop a Winning Trading System Workshop

Mel's Inspirational Corner

Making Things Happen, by Melita Hunt

View this newsletter on-line, or read back issues

 

Workshop

New Professional E-Mini Futures Tactics Workshop

March 3-5, 2007

Raleigh, NC

Presented by D.R. Barton, Jr.

  • Learn how pro traders take consistent profits from the e-mini markets.
  • Don't become one of those traders who tries futures trading and loses a bundle by trading like the herd.
  • Discover the tools and tactics that top traders use to gain a huge edge in these volatile and profitable markets.

Learn More ...

Feature

E-Mini Futures – Making Leverage and Volatility Your Allies

by  D. R. Barton, Jr.

The thought of trading e-mini futures elicits the broadest range of responses of anything in the markets. From “They’re the greatest thing in the world!” all the way to, “I wouldn’t touch them with a ten foot pole,” e-mini futures evoke strong and even polar responses.

Given the right tools, strategies, and mental approach, I believe that e-mini trading is the single most powerful way to deploy trading capital today.

And it’s where I’m spending the majority of my trading time.

Before we jump in and look at the power of e-minis, let’s cover the basics of e-mini futures contracts.

In the futures trading world, e-mini index futures have become something of a phenomenon.  They have experienced growth unlike any other instrument, and for good reason.  But let’s start with a very basic overview.  E-mini contracts were started by the Chicago Mercantile Exchange (CME) in 1998 with the S&P 500 e-mini.  It currently is worth 1/5 of the larger, pit- traded S&P futures contract.

However,  the S&P e-mini has far eclipsed its older and more higher- valued sibling.  Currently, the S&P e-mini trades 4.5 times the dollar volume of the large S&P 500 contract.  There are many reasons for its popularity.  Here are just a few:

      The e-mini contract is traded electronically on a platform called Globex. 

      Trades are executed instantaneously and are basically error-free, especially relative to the pit-traded contracts that may require several levels of human interaction before orders are executed.

      The smaller size and therefore reduced margin requirements of the e-mini contracts allow a high degree of retail participation.

The extreme popularity of the S&P e-mini has led to a number of other equity indexes trading electronically in the e-mini size.  The most popular among traders are the Nasdaq Composites, Dow Industrial, and the up and coming Russell 2000.  E-mini trading has also spread to commodities (gold, oil), bonds, and currencies.

Let’s look at why traders love these instruments so much.  After we review these attributes, we’ll talk about what’s happening now in the world of e-mini trading.

      Leverage.  One of the biggest advantages for e-mini trading is the high amount of leverage they offer.  And for day traders, this leverage is increased still farther.  Let’s look at the actual leverage available:  the S&P e-mini trade unit is $50 times the S&P 500 Stock Index.  Currently, that calculation looks like this:  $50 x 1430 = $71,500.  The margin to control $71.5 worth of stock is around $3,500 giving you leverage of about 20:1 on your money.  However, the day trading margins are dropped significantly with $1,000 margins being common and some reputable firms offering $500 margins.  At these rates, you can increase your intraday margin to greater than 100:1!

But leverage is a double- edged sword that definitely cuts both ways.  While such leverage allows for large returns on very little money, it can also mean that you can lose large amounts as well.   In next week’s “Part II” We’ll cover tools that allow us to use this leverage in a big way, while protecting our downside.

      Liquidity.  Liquidity is usually thought of in terms of volume, and it is the characteristic that gives us the ability to get in and out of a trade both quickly and at a preferable price.  E-mini index trading gives us exceptional liquidity and great fills with little slippage.  And these attributes are very necessary to allow us to take advantage of the available leverage.

      Scalability.  There are certain types of trading that can only be used on a small scale and cannot be translated to larger volumes as success occurs and larger position sizes are required.  But e-mini index trading in general and S&P e-mini trading in particular are highly scaleable.  Getting virtually no-slippage fills on 200 S&P e-mini contracts is an extreme advantage.

      Round-the-clock liquidity.  The S&P e-mini has liquidity 23.5 hours a day which gives another advantage – the effect of overnight gaps are greatly reduced.  You can keep a stop in the market if you are doing a swing trade and have your protection kick in at a time when your IBM stock is still sleeping.

Next week we’ll look at some specific tools and strategies that top e-mini traders are using today to take profits in these markets.

Please note that I’ll be teaching a new, cutting edge workshop on e-mini index trading in Raleigh on March 3 – 5.  Next week I’ll tell you about the incredible market maven who will be joining us for the workshop – it’s one you don’t want to miss!

D. R. Barton, Jr. will be teaching our next How to Develop a Winning Trading System Workshop, January 26-28th in Phoenix, AZ and our New Professional E-Mini Futures Tactics Workshop, March 3-5, Raleigh NC

He 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.

 

Trading Education

Trade Your Way to Financial Freedom

Second Edition

Over the years, I occasionally run across beliefs that seem to help people even more than those reflected in the first edition of this book. And after seven years, I’ve adopted many new, more useful beliefs. As a result, even though most of the core concepts have not changed, I believe that enough things have changed that I can help people even further with a new edition of this book.  ~Van K Tharp~

Now 480 pages with three additional chapters including;  

  • Mental Scenario Trading

  • Evaluating Your System, 

  • Using Newsletters as Trading Systems

  • Tracking Trader Types and How They Approach Their Craft

Learn More...

Trading Tip 

The Best Stock Tip I Ever Received

By Dr. Steve Sjuggerud

When it comes to hot stock tips, it’s either a bum insider tip (which could cost you a bundle) or it’s a good insider tip... in which case you’re then guilty of insider trading.

In either case, you really come out a big loser.

I once wrote in my newsletter about my one and only experience with what I believed was a “hot tip.” I called it, “True Confessions: How I Lost It All in a Day.” It details the story of one of my first experiences in the financial world, when I started out at a brokerage firm...

It went something like this: “Psst... we know IBM’s earnings numbers are going to be bad tomorrow... so we’re all buying put options to capitalize as it crashes,” my colleagues said to me. I caved in to the pressure and bought as well... and soon after I did, I was dreaming of where I would spend the money.

The whispers were right – IBM’s numbers were horrible. AND they were wrong – the share price soared as Wall Street cheered IBM’s restructuring plans. I’d never seen a pile of my own money vanish so quickly in my life. And it was a great lesson for me.

I learned that there is no such thing as a “hot tip” from an insider. I also learned that these guys at my brokerage firm really didn’t know anything. Oh, sure they talked big... but they were just guessing. Time and again, they had great story after great story... and time and again they lost money.

Even the Good Ones Aren’t Worth It.

Then, not long after, some guys in the brokerage office got taken in for insider trading. They actually KNEW something once! (It was very similar to the Martha Stewart case.) And what did it get them? A TON of trouble!

What a great lesson for me to see firsthand. And – fortunately – it didn’t cost me too much in the grand scheme of things.

The first lesson was that no matter how “inside” the story sounds, most hot tips just don’t pan out. The second lesson was that your life gets turned upside down in a hurry if an insider tip you acted on actually turns out to be true. So ultimately, I formulated my own idea of the best investment tip: There’s no such thing as a hot tip.

Either you lose money or you go to jail... those are the only two possible outcomes. So the next time someone passes along a hot tip that smells of insider information, politely thank him. But please, don’t trade on it.

Good investing,

Steve

Reprinted with permission from Daily Wealth, a free daily e-letter focusing on the world's best contrarian investment opportunities, written by Dr. Steve Sjuggerud and Tom Dyson.  They write with a simple belief in mind: You don't have to take big risks to make big money with your investments. Click here to learn more.

 

Systems

How to Develop a Winning Trading System Workshop

Presented by D.R. Barton and Chuck LeBeau

This coming weekend

 January 26-28, 2007 * Phoenix, Arizona 

Learn More

 

Melita’s Inspirational Corner

Making Things Happen

by Melita Hunt

Later today I am heading off for a 10-day whirlwind trip with one of my girlfriends who is visiting from Australia. We’re going to start in LA, go over to Las Vegas, then to New York and finally back to Raleigh to attend a “Bachelor Bid” that I’ve been organizing for charity – yes you’ll hear more about that I’m sure…

And when I asked her if there was anything in particular she really wanted to do, her answer was to be in the audience of a talk show. It was something I never would have considered or dreamed of doing. I had no idea whether we could or not, or even how to do it. Now some people might just stop there and not bother. Not me.

Instead I looked it up on the Internet and even though they said that the tickets I wanted weren’t particularly easy to get, I applied for them anyway.  Others may have even stopped there and thought it wasn’t worth the bother. Definitely not me.

Anyway, we got into both of the shows that I had picked, Conan O’Brien (because I know she’ll love him – she’s a crazy Aussie) and The Daily Show with Jon Stewart (because I love that one).

I love living my life this way, deciding what I want and making it happen. All I had to do was find out how. I didn’t second guess or think too much nor did I stress about it, I just decided it was possible and I was going to do it. So I did it right then and there. And now we’re going to have some fun.

So if there is something that you or someone in your family has been thinking about, talking about, wanting to do or just considering doing, why not just take that first step? Make the first call and put it into action? Then it just might happen sooner than you think.

You can contact Melita at mel@iitm.com

Join in the discussions on our blog and forum

www.smarttraderblog.com and MasterMind Trader Forum

 

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