Home Workshops Products Contact Us

View this newsletter on-line, or read back issues

   

Tharp's Thoughts Weekly Newsletter

May 21, 2008 — Issue #373  
  
Trading Education

Van's Two Core Home Study Programs

Article

A Dialogue with Van about Market Type by Van K. Tharp, PhD

Coming Soon

Van Presenting in Munich, Germany This Summer!

Trading Tip

Oil and Gas –Crudely Speaking by D.R. Barton

Trading Education

Van Tharp's

Peak Performance Home Study

 AND 

Developing a Winning Trading System That Fits You Home Study

 

Peak Performance Home Study

The Ultimate Home Study Course for Traders. How you think when you make and lose money. Stress reduction. How not to repeat your mistakes. Trading unemotionally. Contains five books and four CDs.   
...more info

 

The Developing a Winning Trading System To Fit You Home Study

Who should study this program? Anyone who wants to develop their own trading system or anyone who wants a better understanding of how to make more profits trading any market under any conditions. 
...more info

 

Feature

Tharp’s Thoughts

A Dialogue with Van about Market Type

by
Van K. Tharp

Over the last few weeks, I’ve been talking to you about market type. Those articles (see back issues) have stimulated a series of questions from readers along with some confusion due to a mistake that I made.  My goal in this article is to revisit this topic by answering some of the questions generated, and to correct that mistake which was in how I explained the data calculation. The data itself was correct.

Question: Van, are there not a lot of ways that you could calculate market type?

Answer:  Yes, there are as many ways as there are systems. Your way of calculating market type should depend upon how you trade.  My original goal was to visually look at markets by quarter and then define each quarter with respect to how a long- term position trader might experience them.  For example, if you visually inspected each quarter it should be obvious whether it was up or down.  And if you could not tell, then the market was sideways.

However, I wanted to be a little more flexible when I reported it in the monthly update and basically did rolling 13 week windows (quarters).  In addition, I wanted things to be automatically calculated.

As a result, I elected to do the following.  I looked at the average gain (from 30 years of data) for the absolute value of the 13 week change.  That average amounted to 5.646%.  Then on a weekly basis, I asked the question,  “Is the absolute value of the 13 week change greater than 5.646%  (or whatever the number is since it is updated weekly but doesn’t change much since we have 30 years of data).  If the answer is no, then I consider the last 13 weeks to be sideways.  If the answer is yes, then I determine whether the real 13 week change is greater than +5.646%.  If it is, then the 13 weeks are called bullish.  Otherwise, the real 13 week change is going to be a drop of greater than -5.646% and I’d call the 13 weeks bearish.  That’s how I classify the market on a rolling 13 week window.

I also have a daily market classification, where I look at the 5- day change (i.e., weekly) in the same manner to classify the short term market as up, down, or sideways.  The absolute weekly change over 30 years is about 2.3%.  But I’m not reporting that in Tharp’s Thoughts because my update is monthly, not weekly.

Question:  So how do you classify whether the market is quiet or volatile?

Answer:  This is where there has been a little controversy.  I basically look at absolute value of the weekly change and compare the absolute value of the weekly change with the historical absolute value which is 2.3%.  If it is above the historical norm then it is volatile and if it is below, then it is quiet.

Question:  When I calculated the weekly change it was not the same as yours.  What gives?

Answer:  There was the mistake in the way I reported it.  I actually don’t calculate the weekly change, I calculate the average absolute value weekly change over the last 7 weeks.  It’s sort of a moving average.  I do that for several reasons.  I’m not interested in market classifications that change violently from week to week, so using a moving average makes the changes a little slower.  In addition, there could be some weeks where the market is volatile but the weekly change is not.  That’s not likely to happen often, and by using a rolling 7 week window, the market would have to do that many times to mask the data.  That just doesn’t happen, so I feel pretty accurate about what we are getting.

Question:  Still the market could be all over the place on a daily basis with huge changes of 3 to 4% each day, but the weekly change could be zero.  If that happened, we’d have a volatile market but your system would say it was quiet.  Shouldn’t you use the ATR instead?

Answer:  As I said, I think the rolling average of the last seven weeks covers us there.  But what you say is still possible.  However, to do ATRs I’d have to gather a lot more information than just the close and that would make a huge database that would take a lot longer to process.  As a result, I prefer this method.

I do plan to look at ATRs and see how that changes our results.  I plan to publish a special report that will include 1) long term market classifications with both the rolling 7 week windows and also the ATR.  I’m also going to publish the daily changes in that special report so that short term traders can see what’s going on in terms of market classification.

For example, the market right now is much quieter on a daily basis classification than it is on a weekly basis classification.  And day traders would need to know that.

Question:  Are there not a lot of ways to do market classification?

Answer:  Yes, and what I do might not be right for you.  For example, Ken Long publishes a market classification and he has 9 categories – up, sideways, and down vs quiet, normal, and volatile.  For volatility, he looks at the ATR and considers the mean +/- one standard deviation to be normal.  More than one standard deviation is volatile and less than one standard deviation is considered quiet.  And with his classification, by definition, about 2/3rds of his days will have a normal volatility.

In addition, Ken only looks at a look- back period of 100 days.  Thus, his statistics are only relative to the last 100 days.  Thus, in a very volatile environment, he might suddenly classify the market as quiet, simply because it is quiet compared to the norm of the last 100 days.

Ken actually uses his market classification as a screening tool to know what to expect from the market and what systems he should be using.  I’ve developed my classification so that longer term traders can know how their systems work under various market conditions.

Question:  I could not match up your dates with the weekly close in the market type presentation.

Answer:  I think we will be able to fix that in the future, but it is an XLQ problem.  XLQ gives the Monday date and then the weekly close on Friday when the week is over.  And if the week is still going, it gives the Monday date and the last closing data as the weekly close.  In the future, we’ll make adjustments to fix that.

About Van Tharp: Trading coach, and author, Dr. Van K. Tharp is widely recognized for his best-selling book Trade Your Way to Financial Freedom 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.

 

Coming Soon

Attention Europe!

Van Tharp Is Presenting in Munich, Germany this August

Book now to ensure your seat at the workshops.

Blue Print for Trading Success August  4-6 Germany
Peak Performance 101 August 8-10 Germany

Click here for more information, pricing and hotel information

 

Trading Tip

Oil and Gas –Crudely Speaking

by
D.R. Barton

 “Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble... to give way to hope, fear and greed.” 
—Benjamin Graham
    

Crude oil continues to punish non-believers.

From the outset, let me say that my market perspective tends toward the “reversion toward the mean” side and when things are in strong trends (especially parabolic ones), I tend to look for pullbacks and corrections.

But time and again, the market shows us that things can stay overbought (or oversold) for longer than we can expect.  Crude oil is teaching some unfortunate short sellers that lesson again (and again and again and…).

Shoot – while researching and writing this article, crude prices have gone $128.50 to $132 a barrel! And in just 90 minutes!!

This could be a blow off top.  Or it could just blow through all expectations.

Let me get to the bottom line early on – traditional analysis, whether it’s technical, fundamental or sentiment, breaks down at the extremes.  And crude oil is at an extreme by any measure.

I’ll get back to that line of thought a little later.  But for a moment I want to reflect on all of the gas price rhetoric going on in the world.

A temporary top in crude prices is eminent, because everyone is talking about energy prices.  (There’s some sophisticated sentiment analysis for you.)   But that topping action could be today, next week or next quarter. 

Here’s what I mean by everyone talking about this:

  • The school teachers at Josh’s school

  • The wait staff at the Embassy Suites this past weekend

  • Every freakin’ talking head on TV (and some, like Bill O’Riley, can’t even grasp the simple concepts that I teach my 3rd grade economics team…)

  • Every presidential candidate has a plan more ludicrous than the next

  • Folks filling up at the gas station.

Now this last one may seem out of place because people are thinking about gas prices when they fill up.  But I distinctly remember hearing folks talk about the stock market on during more than one fill-up during 1999-2000.  And Steve Sjuggerud wrote a fascinating article about three different real estate conversations in one trip to the mini-mart in 2006 on Amelia Island.  People doing routine things (filling their gas tanks) talk about what’s on the top of their mind.  And right now, it’s the cost of gas.

And I saved sentiment analysis pièce de résistance for last.  I received a “chain e-mail” encouraging people to take back control of gas prices.  The e-mail explained that if we all boycotted Exxon for just a week, the integrated oil giant would be forced to lower prices due to reduced demand and then all of the other oil companies would have to follow suit.  Before you know it 99 cent gas!  (Okay, that last sentence was my editorial comment…).

For Pete Sake, people, this piece was sent to me by a very intelligent, well-read woman.  It shows the mania around us when stuff like this start showing up.

But, my-oh-my, parabolic tops are a difficult things to time.  I have talked with seasoned pros and greenhorns alike who have gotten a kick in the pants (or worse – much worse) trying to short crude oil over the past few months.

Next week, we’ll dig into some analysis of oil and gas prices (I’m having some fun digging into some details and doing some myth busting), and we’ll talk about manias for a bit.

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

Melita is being released from the hospital today. She hopes that by next week she'll feel well enough for an article. 

Check her progress at the blog address below.  

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

 

Feedback

Feedback to Dr. Tharp and the Van Tharp Institute

Everything that we do here at the Van Tharp Institute is to help you improve as a trader and investor. Therefore, we love to get your feedback, both positive and negative!

Feel free to click below to leave us any comments so that we can serve you better.

Click Here for Feedback Form

 

Do Not Reply to this email using the reply button as the email address is not monitored, your email will not be seen. Please click this link to contact us: suggestions@iitm.com

The Van Tharp Institute does not support spamming in any way, shape or form. This is a subscription based newsletter.

If you no longer wish to subscribe, Unsubscribe Here

To change your e-mail Address, click here

Or, paste this address in your browser: http://www.iitm.com/privacy_policy.htm

 

The Van Tharp Institute
102-A Commonwealth Court, Cary, NC 27511 USA
800-385-4486 * 919-466-0043 *  Fax 919-466-0408

Back to top

Copyright 2008 the International Institute of Trading Mastery, Inc.

.

.

.

.

..

Quote:

 “Prepare yourself for the world, as the athletes used to do for their exercise; oil your mind and your manners, to give them the necessary suppleness and flexibility; strength alone will not do” 
Lord Chesterfield

.

.

.

.

.

.

.

.

..


Trade Your Way to Financial Freedom

.

.

.

.

.

..

.

Back to top

.

.

.

..

.

.

.

.

Tharp Concepts Explained...

 

- Psychology of Trading

- System Development

- Risk and R-Multiples

- Position Sizing

- Expectancy

- Business Planning

Learn the concepts...

 

.

.

.

.

.

~

~~~~~

.Back to top

~

~

~

.

.

Free Downloads

Handbook for Traders and Investors

 

~

~

~~

~

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.

~

.

.

~

~~~~~

.Back to top

 

..

.

.

.

.

.

.

Check out Dr. Tharp's Blog:

smarttraderblog.com  

~

.

.

.

.

.

Share this newsletter with a friend!

..

.

.

.

..Back to top

.

.

.

.

.

.

.

.

 

.

.

.

.

.

.

.

.

....

Share this newsletter with a friend!

~.~~~

~