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Tharp's Thoughts Weekly Newsletter

April 23, 2008 — Issue #369
  
Coming Soon

Blueprint for Trading Success

Article

YOU are the Holy Grail by Libby Adams, Ph.D.

Trading Education

Peak Performance Home Study

Trading Tip

The Nobel Laureate and the Rice Trader – Psychology’s Role in Trading Strategies Part II by D.R. Barton

Melita's Corner

Thanks to Well-Wishers

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Van Tharp's Blueprint for Trading Success

Through his modeling work with top traders, Van Tharp has discovered the blueprint for trading success that will ensure you consistent prosperity as a trader.

This course is a complete structured program that will launch you to a more advanced skill level in your trading.  You’ll learn strategic, focused steps that will serve you throughout your entire trading career whether you are a beginner or have years of trading experience. 

Two locations to choose from!

 
NEW Advanced ETF 202 May 17-19 Cary, North Carolina 

Dinner at Dr. Tharp's Home, Monday, May 19th

Excel and XLQ Programming (one-day) May 20 Cary, North Carolina 
Blueprint for Trading Success May 21-23 Cary, North Carolina 
Blueprint for Trading Success August  4-6 Germany
Peak Performance 101 August 8-10 Germany

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Feature

 

YOU are the Holy Grail

by

Libby Adams, Ph.D.

What more common theme is there in trading than people looking for the Holy Grail?    How many times do we hear these remarks from traders: “If I could JUST find the right system.” “If the market would just stop going sideways.”  “If I could just get the right entry.”

The market goes up—some people are making money while others are losing money.

The market goes down—some people are making money while others are losing money.

How do we explain the discrepancy in results?  The market is the market.  How does one person make money while another is on the other end of the trade, losing money?  Same market.  Same day.

Or how about this one: Two people are at the same workshop; they learn the exact same system and buy the same software.  One goes out and makes money, and the other loses.

What is the only variable in all of these examples? The individual.

We can’t expect the market to behave a certain way, but we can expect YOU to behave a certain way.  The only variable is YOU.

But the definition of “you” is not as clear as some might think.   Let me explain.   Most people have some awareness of a variety of “yous” that are talking in their head.  Perhaps we could call them “me, myself, and I.”  Let’s examine these three more closely.

I.                                The “Big I”  (The Scout Up in the Crow’s Nest)

In our “me, myself, and I” equation, this would be the “I”.    We could say that when it leaves your body, you’d be considered dead.  One of my 28-day course graduates, who was an ER doctor, told a story of a woman who had flatlined on the table.  When she came to, she was recounting details of what the doctors and nurses had been doing in their attempt to revive her.  The doctor said there was no way these things could have been seen from any vantage point other than floating above the scene.

Many people refer to this “I” as their Soul, Spirit, Higher Self, or Conscience.  It is a power source that is invisible and undeniably powerful.   An example of how this “I” operates is when we say, “I am happy to return this wallet to the lost and found.”  Or “I know that Fred was being rude, but I am going to be the bigger person.”  This “I” always takes you along the path of the high road.

If we were to use a ship metaphor, this “I” would be like a scout up in the crow’s nest of a ship who has a broad vantage point and can then communicate his observations to the captain below.  This “bird’s eye view” assists the Captain to make good decisions that generate desired results.  The ship steers a good course, as opposed to ending up on the rocks.

II.                               The Conscious Mind or “regular I”  (The Captain of the Ship)

In our triad of “me, myself, and I” this would constitute the “me” aspect.  We refer to this as your conscious mind.  It uses logic and analysis to make choices and has free will.  It might be what you call the captain of the ship.  You make decisions such as “Should I trade the S&P or do I prefer the Russell.  Your conscious mind is your “decider.”  You use this aspect a LOT in trading. 

III.                              The little “i”  (Some Members of the Crew Having a Mutiny)

This is the “myself” portion of our “me, myself and I” equation.   I write it as “my self”, separating the words.   This “separated self” or little “i” is actually a program that has separated from the Big I during our formative years as a result believing faulty and erroneous information.  This misinformation might have come from the outside when a parent remarked, “You’ll never amount to anything” and you believed it.  From that time forward, this person might not try out for the school play or go out for track thinking" I won’t make it anyway, so why try?"

Another source of faulty information has its origin in our own self-talk:  things we tell ourselves.  For example, when we volunteered a wrong answer in school and the teacher loudly proclaimed that our answer was way off track, we might have thought “How could I be so stupid?” and decided never to participate in school again.

These programs continue to fire off unconsciously until we do our inner work.  That is exactly why Van’s curriculum includes the so much education about trading psychology. Traders need to know how to discern which “I” is pulling the trigger when they trade and what to do if the wrong one is running the show!!

The Holy Grail, then, is trading with the scout and the captain in alignment—that is, the “I and me” in agreement.  In our ship metaphor, this translates to the scout shouting down sound information from the crow’s nest followed by the captain making good decisions based upon it.  That IS the Holy Grail.  You need look no further than within. 

The catch is that we must clear out and rid ourselves of the little “i”s steering us into the rocks. It is not useful to hear thoughts like, “What if this is another loser like the last two?” and then miss an opportunity by not taking the trade.

About Libby Adams: Carol "Libby" Adams, Ph.D., D.D., author of Voices of Selves, is the Executive Director of the Academy of Self-Knowledge. She is a highly skilled presenter and educator, having taught many years in the public school system. She is a Master Practitioner of NLP (Neuro-Linguistic Programming) and specializes in Transformational Meditation™, a process she has developed and used successfully with hundreds of students over the past ten years. To learn more, visit, www.transformationaltrading.com.

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Education

Peak Performance Home Study 
for Traders and Investors 

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Peak Home Study

Trading Tip

The Nobel Laureate and the Rice Trader – 
Psychology’s Role in Trading Strategies Part II

by

D.R. Barton

“Doubt is not a pleasant condition, but certainty is absurd.”  --Voltaire

I was hit upside the head, metaphorically speaking. Here’s how:

I actually started writing this series on Nobel Laureate Daniel Kahneman’s concepts several weeks ago.  It was to be a single article, but has grown as literary influences have popped up.

But I must say that one huge revelation came out of all of this study of high-minded thinking.  Kahneman's and Taversky’s prospect theory gets at the heart trading.  The golden rule of trading is to cut losses short and let profits run.

Good old fashioned “Expected Utility Theory” says that traders and investors should do that automatically.  According to that theory, humans make decisions based on what choice will give them the best benefit in the long run.

But Kahneman's and Taversky’s prospect theory says that people don’t make decisions based on “expected utility.”  In short they experimentally determined that people are hard-wired to violate trading’s golden rule.

Our decision making short-cuts or heuristics drive us to do the wrong thing in the world of trading and investing.  When faced with certain gains or losses, we do the wrong the thing.  They dubbed this the “certainty effect.”

The “certainty effect” causes us to cut profits short and let losses run.  Let me explain.

Kahneman and Taversky found that when faced with sure gains, people overwhelmingly become risk averse, and when they have sure losses, they do the opposite – becoming risk seekers.

Here’s how it works.  When faced with the choice between a sure gain of $450 or a 50% chance to gain $1,000 a statistically significant number choose the sure win (even thought the 50% chance to win $1,000 has a higher expectancy).  When certain gains are offered, people become risk averse.

In the opposite case, when faced with a sure loss, a people choose to avoid the sure loss by going after a riskier alternative with the chance of no loss at all.

This is a very striking set of facts for traders and investors.  This is the proverbial board upside the head.

Whether through nature (our genetic make-up) or nurture (our training and experiences), we are programmed to do poorly in the markets.

The same problem is clear for traders. When faced with a sure loss (a trade that goes to our stop loss point), people become risk seeking and would rather “let it ride” to see if it can become a smaller loss or at least get back to break even.

And when faced with a gain in a position, we tend to choose this time to be risk averse and close it out immediately, cutting the profit short.

So, as traders and investors, we have to do things to overcome our inclination to do the opposite of trading’s golden rule.

The first step is to take a systematic approach to trading.  The second is to realize that uncertainty is part of the trading game and we have to make sure that we don’t pay too much to avoid it.  We’ll dig a bit deeper into the overvaluing of uncertainty next week.  And we’ll also take a look at how a rice trader dealt with (and wrote about) these issues several centuries ago.

Until next week…

Great Trading!

D. R.

About D.R. Barton:  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.  He is a regularly featured guest on both Report on Business TV,  and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio.  His articles have appeared on SmartMoney.com and Financial Advisor magazine. You may contact D.R. at  “drbarton” at “iitm.com”. 

 

Melita's Inspirational Corner

Thanks to Well-Wishers

Melita is out this week. She thanks everyone for their well-wishes and hopes to be back soon. In the meantime, check her blog, listed below, for updates. 

Melita Hunt is the CEO of the Van Tharp Institute. If you would like to keep up with Melita’s progress regarding her recently diagnosed lung cancer (she is a never-smoker). Please feel free to read her blog at www.myleftlung.com. You can contact Melita at mel@iitm.com

 

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