The Van Tharp Institute

January 31, 2007 — Issue #307

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In this Issue:

Workshop

NEW WORKSHOP Professional E-Mini Futures Tactics

Feature Article

Trading Like the Pros – Not the “Joes,” by D.R. Barton, Jr.

From Van

My Position Sizing Software Experience: Your input could help with my next book

Trading Education

Coming Soon, Exchange Traded Funds

Trading Tip

Trading and Christmas Presents Series Final, by D.R. Barton

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.

Register Now for a $500 Discount

  • 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 – Trading Like the Pros – Not the “Joes”

 

by  D. R. Barton, Jr.

There’s an interesting television program out now called “Pros vs. Joes”.  It’s a reality TV series with an interesting premise – it pits backyard “wannabees” against actual professional athletes. To be honest, the “Joes” almost never stand a chance.

Every once in a while one of the average “Joes” will make a lucky play and beat the professional – but rarely will they win one of the staged events.  The skill and experience of the pro athletes is just too great to overcome.

The same thing happens in the financial markets.  Every day, a different version of “Pros vs. Joes” occurs in trading.  New and inexperienced traders take on the pros.  And the results are the same as in the reality sports show – the Joes have an occasional lucky win, but in general, the pros are consistently walking away with the money.

I want to introduce you to one of the real pros in the market, but first, let’s look at a few of the things that set professional traders apart from the less experienced players in the market:

  • First and foremost, professionals have an understanding of what works in the market.  They turn that market knowledge into a plan, and then stick to the plan in an unwavering manner.

  • Pro traders have a game plan and prepare for the market each day.  This preparation allows them to make money under many different market conditions

  • Pro traders take what the market gives instead of forcing their will (or their strategy) on the market.  They have multiple tools in their toolkit that allow them to participate in different market conditions.

  • And of course, pro traders follow Van’s Ten Task of Trading.  More on this below…

A Market Maven in the Truest Sense of the Word

I’ve had the pleasure of trading with many different professional traders.  My good friend and business partner Christopher Castroviejo is at the top of that heap.

Webster defines the word “maven” as one who is experienced or knowledgeable. But Christopher is more aptly described by the Wordnet definition: someone who is dazzlingly skilled in any field.  Christopher’s depth and breadth of knowledge in the trading world is second to no one that I know.  But that knowledge didn’t come overnight…

Christopher has spent 35 years in and around the markets, and his resume’ and track record on Wall Street became something of legend: stints with Smith Barney, J.P. Morgan, a partnership at Bear Stearns, financial consultant for The Vatican Bank to name a few. Christopher was hot and getting hotter. Highlights including turning $10,000 into $178,000 in four weeks, 8 straight years of 43% compounded profits as a top hedge fund manager, a sleek Manhattan brownstone and a spacious summer getaway in the fashionable Hamptons.  Christopher even struck up a friendship with his money making idol, billionaire George Soros. 

Along with multi-million dollar wins, there were a few huge losses: in just six short weeks, $10,000 became a cool million, and quickly nothing but air. And, in one monumental transaction gone wrong, Christopher lost $15 million dollars in just a few months…$1.5 million of it his own money. But, unlike the Vegas poker player who can’t leave the table, Christopher learned from the missteps as well as the wins. He says, “You have to reinvent your performance all the time. I used to see the business as just about orchestrating wins, but the rational way of thinking about it is really about controlling your losses.”

Today, Christopher is an active intraday and swing trader and continues to manage money for a select list of Wall Street insiders.

Christopher is a master at several aspects of intraday trading and is particularly skilled in the application of key level support / resistance and Market Profile.  We will be covering these topics in depth at the upcoming Professional E-Mini Futures Tactics workshop.

Christopher will join me in teaching this new, cutting edge workshop on e-mini index trading in Raleigh on March 3 – 5.  This will most likely be the only time we teach the workshop this year -- it’s one you don’t want to miss!

D. R. Barton, 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.

 

Request for Feedback

My Position Sizing Software Experience

By

Van K. Tharp, Ph.D.

My history of working with position sizing software involves first working with Trading Recipes (which was DOS based and would do some basic position sizing, but nothing that was based upon making a decision with time).   Correct me if I’m wrong, but my understanding is that Trading Recipes is pretty obsolete now and that if Bob Spear has anything new, he’s just working with a few select clients.

I then worked with a software developer to develop our own position sizing software, Athena.   Athena was great in that it did everything that is described in the Money Management Report.   It wasn’t so great in that it was expensive ($12,500) and the developer really didn’t support the traders who bought it.   I owned 50% of the software and helped the developer sell the software.   However, all the money went to the developer and I eventually just gave back my share of the ownership.   Athena, as far as I know, is also no longer a viable option.

We did a workshop with Athena once, and it became clear to me that it was very easy to optimize position sizing algorithms to fit past data.   Thus, I became convinced that if you could adequately determine the population of R-multiples that your system generated that simulation was the way to go to find the right “position sizing” algorithm to meet your objectives.   However, even that is a problem because simulation assumes that 1) your R-multiple distribution is accurate, 2) that you only make one trade at a time, and that 3) you do not have a large portfolio of correlated positions that could all go against you at one time.   I have a great simulator that I love, but the Van Tharp Institute is not a software company.  This means that my staff could never begin to solve the technical issues that would come up if we sold the software on any level that made economic sense.

As a result, I’m a bit perplexed about helping people solve the issue of getting the right software for research that will really handle position sizing and a portfolio of trades. Traders are always asking me, “What software do you recommend for position sizing?”  And, at this time, I really don’t have the answer.   First, any software that is relatively inexpensive would have to meet the needs of what the average trader wants, which is 1) to optimize and 2) to find the perfect investment vehicles.   In my opinion, these biases would turn that software into fairly useless software.

The second option for those with trading businesses is to develop customized software to run your trading business and this ends up taking a lot of time and costing more than most traders can afford.  Thus, the software situation is very messy, at best.

I’m always getting asked to review new software, and I’m not interested in doing that because I don’t have the time or the inclination.   I’d only make an exception if I thought the software was truly exceptional and would really help my own trading research.

The Problem and a Request

So here is the problem:  I’m currently finishing up a new book, The Definitive Guide to Expectancy and Position Sizing.   In order for that book to really be “definitive,” I believe I have to at least address the software issue.  Thus, I’m devoting one chapter of the book to the topic.  So perhaps you can help.

What software do you use for position sizing?  What, in your opinion, are the strengths and weaknesses of that software?  I’m looking for real users who really know the software to share their opinion about what they are using.   If you have such software, please let us know what it is and what your experience using it has been like.

What I’m looking for is about a 1000 to 1500 word review of your software.   What does it do?   What doesn’t it do that you wish it did?   Does it handle R-multiples well?  Why do you like it?  How much programming skill is required to use it properly?  What’s automatic and what requires programming? What’s the situation with data for this software?  How easy is it to use?

If you’d like to write such a review about a software please let us know what the software is and when we can expect your review.   Ideally, I’d like it within the next two weeks as this is the only incomplete chapter in the book   If I use your review in the book, you’ll get a free copy of the book when it comes out and, if you’d like, an advanced copy of the book to comment on.

If you are interested, email book@iitm.com

Thanks,

Van K. Tharp

Coming Soon

Highly Effective ETF and Mutual Fund Techniques

March 16-18, 2007

Raleigh, NC 

Presented by Ken Long

"Ken Long is one of the few people I know of, who has a graduate major in systems design.  Because of his training, Ken can spot ideas that most people never think of."--V.T.

Learn More...

 

Trading Tip 

Trading and Christmas Presents: 
The Last (# 6 for those who are counting)

By D.R. Barton

    “Life is so constructed, that the event does not, cannot, will not, match the expectation”--Charlotte Bronte (English Novelist)

I have really enjoyed writing this six-part series that was really less about Christmas presents (though I like those) and more about understanding the emotional response that accompanies the discovery process.  For those who have missed the first five parts of this series, you can access them below, if you so choose (as Mad Magazine used to say, “Suitable for reading or wrapping fish”).

Trading and Christmas Presents (Part 1) 

Trading and Christmas Presents (Part 2)

Trading and Christmas Presents (Part 3)

Trading and Christmas Presents (Part 4)

Trading and Christmas Presents (Part 5)

There have been some key lessons for me in this exercise.  I have always been one of those people who can really nit-pick an idea (such as a new trading system) to death.  So I’ve tried to include some of the thought process that I’ve used to overcome this “perfectionist bias” in these articles.  Here is a summary of the key learning points for me:

  • A large part of the joy in receiving a new Christmas present or a new trading idea comes from the possibility that lies undiscovered beneath the surface.  That present (or system) could be ANYTHING.

  • We almost always have an interesting emotional response of disappointment when the present or trading strategy is “unwrapped.”  This comes when the  gift or system is transformed from the great hope that could be ANYTHING to the stark reality of finiteness – it becomes SOMETHING.

  • This transformation is the embodiment of the change from hoping to knowing.  And with knowing comes a keen awareness of the shortcomings of the thing that we once placed on such a high pedestal.

  • This disillusionment that often accompanies the discovery of a trading system's inherent trade-offs leads traders to discard many a good strategy.

  • As traders who want to make informed decisions about the relative merits (or lack thereof) of new trading ideas, systems and strategies, we need a process to overcome the initial disappointment.

  • We start with setting proper expectations through the use of good goal setting techniques for our trading activities.

  • With goals and revised expectations clearly in hand, we can then look at the performance measures of the trading system with an objectivity that leads to good decision making.

I hope this unique view into the process of trading system evaluation has given you some thoughts on how to approach your next trading idea.  All the best in your trading activities!

A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena where he is one of the most widely read and followed traders and analysts in the world. 

D.R. Barton received his B.S. in Chemical Engineering from Virginia Tech and his MBA from the University of Delaware and he is a registered Professional Engineer in the state of Delaware. 

He is a regularly featured guest analyst on both Report on Business TV,  and WTOP News Radio in Washington, D. C., and has been a guest analyst on Bloomberg Radio.  His articles have appeared on SmartMoney.com and Financial Advisor magazine. 

 

Join in the discussions on our blog and forum

www.smarttraderblog.com and MasterMind Trader Forum

 

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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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