Tharp's Thoughts Weekly Newsletter (View On-Line)
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Making Changes: A Project Marathon Update by R.J. Hixson
Looking at Debt Conceptually and Practically by D.R. Barton
Monte-Carlo Simulations and T-Tests
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Making Changes: A Project Marathon Update
For the newer readers, let me introduce the typical progression of people’s understanding of trading. Initially, most people see trading as an easy way to make a lot of money. They figure out that’s not the case either by losing a lot of money or not earning a lot of money. The persistent ones then go explore the question "How do I make money in the markets?" Usually, people in this phase are looking for trading systems or technical solutions to trading profitably. After some traders find that even with good systems, they have trouble making money consistently, they may eventually find their way to Dr. Tharp who tries to help them realize that trading success comes from internal control. This year and especially this last month have reinforced abundantly the internal control lesson to me.
Liar! That was my only thought as I was updating my trading log in late July with a bunch of trades I made in early June. Liar! It was right after the last project marathon article came out in Van's newsletter. Liar! I thought I hadn't traded in June and that's part of the reason why I hadn't bothered filling in my trading log. As I was filling in the cells in my log spreadsheet though, I saw I had traded actively in early June—and not well either. I was down about 15 R. I had lied to myself, and I'd lied to you, the good readers of this newsletter. (I’ve got some emotional charge around lying, and I felt it when I was filling in the details of those trades).
In early June, I gave back a good deal of the gains I had made in May. After early June, I really did take very few trades (5) until the last week in July. For some of those weeks, our family traveled and other weeks we hosted family visitors. The kids started back to school in the first week of August; they are on a year-round schedule school.
As I got back to trading that week, the 131R goal was top of mind. I started with sound and fury—much as in early January. Also like early January, my results were poor. In my vigor to reach my goal, I allowed my discipline to fall off and took trades outside of any system rules. I was also making and logging about one mistake a day—clearly a sign of not being ready to trade.
Later, I was filling in my trade results in the trading log and looking at my weak or absent notes in my trading journal about some of the trades. I wondered, “What was I thinking on that trade?” As a result, I have a new name in my system ID column in my trading log: “WING,” which stands for winging it. As you might imagine, rather than soar away, the WING trades tended to end up under water.
After four straight days of trading badly with a number of mistakes, I decided to stop trading and not trade again until I was ready. Each morning through the next week, I did an intensive self-analysis and checked in with my mental board of advisors. Day by day, I decided not to trade while I reoriented myself around what I was doing, reviewed the big picture, watched the tactical picture and reread system rules. About a week later, I felt ready to trade and to start digging myself out of the little hole I had dug.
During that week off, I also decided to make two significant changes. I started coming to the office an hour and a half early so I can focus entirely on trading the opening session. I also started taking day trades only on days that I participate in Ken Long’s trading chatroom.
I had been considering joining Ken’s chatroom for awhile and concluded that kind of support would be useful now. It has proven to be extremely useful. Trading in the company of other professional traders raises my expectations of myself. Calling my trades out in public keeps me accountable for making smart trades rather than making WING trades. Watching the other traders allows me to learn at an accelerated rate. My trades made in the chat room have averaged more than 1R a day. Now if I can just keep up that kind of performance . . .
I never wanted this series of articles to be a simple scorecard of R-multiples earned and lost. So far so good on that point probably. My most recent week of profitable trading recovered the losses of my costly first week of August. Because of my early June performance, however, I am still down from the May high. I've got 109R to make by the end of the year. I have about 55 trading days left in the year, which translates to an average 4R per week from my swing trading and more than 1R on average from my day trades. Rather than feeling sorry for myself, I feel more like “Let's go!”
Getting to 131R
Several people have e-mailed recently asking if setting a goal that was so far out of my comfort zone was discouraging. If I totally believed I was unable to achieve the goal and I was willing to accept that belief completely, then, yes, it would be a very discouraging effort. While I have no personal experience to base achieving 131R, I’m willing to let go of the belief that "I can't" do it. Pursuing the goal completely with the idea that "I could" means that I'm open to doing whatever it seems to take without the added weight of disbelief.
As I mentioned to the group that was here for the Peak Performance 101 workshop last week, I am actually more energized about reaching my goal than I was earlier in the year. The time is shorter and the distance is still great, but I am highly focused. 131R isn't the pinnacle of trading success in my mind, it's but one step. This is more like a decade-long marathon in which the goal 131R is just one leg of the race. I’ve already finished the “easy money” and “how to make money” part of the course. Now I’m in the “internal control” part of the course. A few more laps here? Perhaps a lifetime—with a few valleys and some plateaus along the way.
Take care and trade well.
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Looking at Debt Conceptually and Practically
The “dog days” of summer have turned into the “down days” of summer with the Dow Jones Industrials off more than 600 points since the early August highs.
However, the current, bigger story is the parabolic rise in the price of Treasuries that started way before the August down leg in the market.
Before we delve into that parabolic move, let’s look at the bigger debt picture of which Treasuries are but one piece. Taking a broader view yields (pun intended) two useful results:
- It provides a context for the day-to-day price movement of U.S. Treasury bonds.
- It reminds us that there is a completely different game (that comingled game of debt and credit) playing out across the globe in different spheres:
- municipal state and sovereign debt,
- corporate debt from junk to AAA, and
- asset-backed debt (mostly mortgage debt).
Most of you know how much I love a well-designed graphic. A good friend and trader in Texas passed this one on to me. I found it especially helpful in looking at the debt big picture.
View Larger Image of Graphic
Here is Elliot Wave International’s (www.elliotwave.com) explanation of the graphic:
“Essentially, this configuration graphically depicts current 10-year yields from various issuers. What's special about this chart is that it shows sovereign, municipal and corporate issues on the same spectrum, so that we can see, for example, how high-yield corporate bonds compare with Greek debt. We chose a parabola to depict the situation of debt issuers because debt gets exponentially harder to repay or refinance as the interest rate rises, especially for large debtors. So problems tend to intensify exponentially the higher up the curve one goes—just as the angle of a parabola's ascent grows steeper.”
Japan’s long term debt costs remain quite low. This is not because of the perception of economic strength as the Elliott Wave article writer mentioned in his accompanying text but because Japan funds more than 95% of its debt internally.
Short-term debt for highly-rated countries like Japan, the US, Germany and the UK is extremely cheap and has very little room to the downside. The bond market sees longer term debt as less safe. That is, the farther up the parabola you go, the harder it is to repay the interest over time; hence, the higher probability of default.
Back to a Current Trading Extreme
This brings us back to the current price extremes. The long term US Treasuries have had a monster move up over the past few months. The following chart shows how far and how fast this move has accelerated.
Like all parabolic moves, this one is unsustainable. The last time I drew a chart with progressively accelerating price moves like this was in the summer of 2008 and we were talking about the unsustainable move up in crude oil prices.
While Treasuries may not have quite reached “bubble” status yet, they are close. That being said, short sellers beware! Thanks to the strong tendency recently for the government and quasi government agencies to add liquidity in the near and intermediate terms, this market can remain irrational for longer than shorts might remain solvent. Still, this parabolic uptrend must soon come to an end. After the snapback begins, look for price to break the support lines drawn on the chart above one by one. Until then…
Monte-Carlo Simulations and T-Tests
Q: I have developed a trading system using many of your suggestions and it is almost complete. After many trials, errors, and losses, I now understand that exits/stops are more important than entries.
I have two questions:
- In your books you mention using Monte-Carlo simulations to test your system. Can you expand on that? Can you point me to any articles that you wrote in the past regarding this topic in other newsletter issues?
- Do you think doing t-tests (statistical distribution models) to detect whether or not if your trading system is failing (accumulated profits
dropping) is a valid approach? I usually use daily stock price data over 10 years and/or 18 years to do backtesting. In this case, would t-testing between the past 170 trades and the most recent 10 trades have any meaning to see whether the average R per trade is falling so one should stop using the system?
A: We have simulator built into the Position Sizing Game in which you can enter your system's results and then play the game by trading your system.
That's an easy way to simulate trading your system.
As for testing systems and deciding whether to trade it, you have to determine first your criteria for trading a system:
- What market types does it work in?
- Does it fit my beliefs?
- What kind of performance do I require?
- How will I measure the performance?
These are a few of the many personal questions you need to ask to decide when to trade and when not to trade a particular system. —Van
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