Tharp's Thoughts Weekly Newsletter (View On-Line)
Workshops HUGE Combo Discount Just Announced for May!
Article Procrastination and System Development by Van K. Tharp
Trading Tip Don’t Ignore the Reaction to News: Revisited Theme after Goldman Sachs Charges by D.R. Barton, Jr.
Mail Bag Entering Multiple Markets Simultaneously
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How to Develop Your Own Systems that Fit Your Unique Trading Style
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Procrastination and System Development
My research suggests that the problems people have in developing a trading system fall into five different categories.
The first three areas prevent traders from ever starting (or finishing) the development of a trading system. These include computer/technology phobia, procrastination, and being overwhelmed by the whole process. The last two problems tend to prevent the trader from coming up with a workable system. These include perfectionism and judgmental biases in your thinking.
For this article, I’d like to focus on procrastination, which is big hindrance for many traders developing systems.
What Is Behind Procrastination Problems?
So many people have a hard time starting projects—especially traders when it comes to the task of developing a workable trading system. Yet postponing a task creates even more problems. Sometimes people are aware of the reason(s) they procrastinate and other times they may not understand their delay tactics.
One major reason behind procrastination is the fear of failure, especially since the result of completing the task is an opportunity to play a risky game like trading. For example, if you tried trading without a plan and learned the hard way how risky that is, you may have a strong memory that is unpleasant to think about. Because of that experience, a part of you is afraid of similar consequences so you have difficulty starting to develop the plan—even though the plan will help you generate very different results. Or, perhaps you’ve quit your job to start trading full time, but you’re so afraid of the possibility of not trading well that you cannot complete your system.
If you’re uncertain of your ability to perform, either based on past experience or a general lack of self-confidence, you’ll probably find it difficult to begin. And the greater your time pressure to perform, the more fear you will create about progress and completion.
Sometimes even the fear of success will produce the same resistance to starting work on system development. People fear success because it will bring something new. Suppose you become “rich” and, based on your experience, you don’t like all the implications of what it means to be “rich.” Perhaps your friends will no longer want to be associated with you or perhaps they’ll try to take advantage of you when you have more than they do. Or perhaps you think wealthy people are stingy and narrow-minded. You think, "I don’t want to become stingy."
Another reason you might procrastinate on developing a trading system is lack of interest in the overall task or in some portion of it. You might not like the idea of using computers, testing numbers, or doing all of the grunt work associated with system development. Maybe it reminds you too much of school. Lack of interest, like a fast growing weed sending out roots in all directions, can strangle motivation and make it impossible to start even a simple task. All you wanted to do is get about the business of trading. As a result, you just trade, but without ever having tested your system. You prefer to make mistakes the hard way— even if they are very expensive.
Perhaps the work involved in developing a trading system reminds you of someone you do not like. Someone you dislike told you to do it and you feel resentment—or perhaps someone you dislike always used to do things like develop trading systems. You don’t want to be like that person, even though you know you have to do the work, so you tend to put it off.
The more you dislike the idea of developing a trading system, or even doing certain parts of the task, the more you will tend to push it away. This means you’ll leave the toughest part of the job for that portion of the day when your energy is lowest, and you are likely to make a lot of mistakes.
The most important part of developing a trading system is to develop the objectives for the system. Once you have the objectives down, then the task of developing a system is fairly simple. Getting your objectives down is 50% of the task. Until you have your objectives written down, you have no way of knowing what you want or of knowing when you’ve got it. How can you even monitor your progress, a major factor in ongoing procrastination, until you know exactly what you want? Once you know what you want, you can set deadlines for each phase of the project.
How to Overcome Procrastination
First, realize that you created your procrastination and you can take control of the situation. Will you choose to be fully responsible for creating the results you want rather than what you are getting now?
Make a commitment to get the job done. Concentrate on simply starting the project or the next phase right now rather than worrying about finishing it. Remember that Lao Tse, the great Taoist teacher, once said, “A journey of 1,000 miles begins with a single footstep.”
Next, write down all of your objectives for your trading system. Identify why you want this system and what you want it to do for you. When you know why you are working on your system and what it will generate for you when it’s complete, you can remember the benefits of your labor rather than just the work involved.
Divide the task of developing a trading system into steps. Rank the steps in terms of priority and also in terms of your desire to do them. Which steps are you most resistant to? Do you know why? What resources can you call on to help you complete those steps? If you find that one portion of the job seems particularly onerous, then break it into subtasks and give yourself a deadline for each subtask. For all of the steps, set deadlines for completing each one and announce those deadlines to the world. That not only helps you make the deadlines real but helps you stay accountable for them.
Take the next step. Commitment is not a once and done decision. It’s a choice each and every step along the way. Again and again, simply concentrate on taking the very next step. Take enough steps and you’ll find yourself at the end of a 1,000 mile journey . . . or with the great trading system that you wanted.
Peak Performance Home Study
"You don't trade the markets. You trade your beliefs about the markets." —Dr. Van Tharp
What does that mean? How do you even find out what your beliefs are? Use this course to learn how to identify your beliefs and find out which ones are useful and which ones cost you money in the markets.
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Don’t Ignore the Reaction to News
Revisited Theme after Goldman Sachs Charges
When words tell us different things than actions, a disconnect forms in our minds. This phenomenon happens so often that our culture has many sayings about it, but perhaps the most common phrase is “Actions speak louder than words.” Like many idioms that have made their way into common usage, the origins of that particular phrase are a bit fuzzy.
Origin studies typically cite the following earlier versions of the phrase (in chronological order):
- St. Francis of Assisi (12th – 13th Century): “Preach the gospel at all times. Use words if necessary.”
- Michel de Montaigne (16th Century): “Saying is one thing and doing is another.”
- A.M. Davis (1736): “Actions speak louder than words, and are more to be regarded.”
Likewise in the markets, when the news says one thing but the market does another, we have one of the biggest clues we can get about market’s future direction.
When Bad News Is Ignored
Two weeks ago, right after the market ignored renewed Greek sovereign credit problems, I wrote the following:
“A market that is so consistently shrugging off bad news is giving us critical information. It’s not ready for a big pullback yet. In the past six weeks, the market has shrugged off bad employment numbers, weak housing numbers, multiple renditions of the Greek credit problems, and other shaky economic reports, only to continue a relentless (if somewhat staid) march higher.
"Many of my trading and investing friends and colleagues keep looking for a place to short this overextended market. And that will come. But for now the market is telling us the short term picture is strength upon strength.”
When Bad News Is Ignored (Again!)
And the strength has continued, with the market up 236 Dow points since then. The continued show of strength includes last Friday, or “Goldman Sachs Day” as we call it in our trading conversations. On that day, the market dropped 180 Dow points before an afternoon rally ended the day down only 125 points.
Then, a funny thing happened on Monday and Tuesday this week: the market went up. It shrugged off the Goldman Sachs fraud charges like they weren’t even there.
Let’s be clear: The charges against Goldman are very serious and even groundbreaking. Creating and selling instruments designed for failure is about as bad as it gets in terms of business ethics. The Wall Street Journal called this “…the biggest clash between Wall Street and regulators since junk-bond king Drexel Burnham Lambert succumbed to an insider-trading investigation in the 1980s, helping to define the era.” Many fear that this is the tip of the iceberg since indictments against other firms could follow. Even more seriously, the SEC case could form the template for private law suits against Goldman and others.
Against the backdrop of the fraud charges and their ramifications, i.e., much stricter regulations (read, “profit limiting”) on the financial industry, the market keeps…going… higher.
Strength Upon Strength
Expect more of the same. The “Goldman Sachs Day” drop gave the market a small reset from its overbought technical condition. And that may be enough to lead to a blow off top or merely further grinding higher.
Next week (finally) we’ll look at a really long term indicator that goes back 90 years and gives us some useful market insights into why a top will eventually form. Until then . . .
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Entering Multiple Markets Simultaneously
Q: I have read and implemented the position sizing™ and R model in the book Trade Your Way.... I utilize the percentage position sizing model. I primarily day trade. Can you please delineate the method to position size multiple entries essentially entering multiple markets simultaneously.
A: First, read the Definitive Guide to Position Sizing, which discusses how to position size correlated positions. Second, assume that all trades are correlated . . . so you need to determine group heat and portfolio heat, manage the related risk, and not deviate from it.
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