Tharp's Thoughts Weekly Newsletter (View On-Line)

  • Article Achieve Balance in Your Trading by Van K. Tharp, Ph.D.
  • Trading Education Peak Performance Home Study
  • Trading Tip Sector Action Since the March 2009 Bottoms by D.R. Barton, Jr.
  • Workshops Germany Workshop Dates Announced
  • Mailbag More Feedback from The Definitive Guide to Position Sizing

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Achieve Balance in Your Trading

This certainly would rank as one of my top ten tips to you. I know some of you have read this one before, but it's worth repeating.

We live in a world of polarities: good vs. bad, up vs. down, young vs. old, happy vs. sad. The "win and loss" polarity is just one example of many. In most cases, we tend to judge the polarity in that we prefer one side and dislike the other side. However, one of the secrets to life is to make both sides of the polarity okay. But, what does that mean?

That’s a hard one for most people to understand, but perhaps it will be easier when I explain it in terms of profits and losses. You cannot be a successful trader if you are not willing to have both profits and losses. As the mechanical trader in book 5 of the Peak Performance Course says, "It’s like only wanting to breathe in and not wanting to breathe out." Both are a significant part of the trading process.

Most people don’t understand this concept at all. They want to be right all the time. They want to make money on every trade. Yet that will not happen because losses are a part of the trading process. When you understand the relationship, however, you can come to terms with losses and make them okay.

A natural part of the trading process is to have a point at which you must unload a position or trade at a loss in order to preserve your capital. Those losses will happen to most people about half of the time or more. And you must make them okay or neutral.

If a loss is not okay, you will not take it. When you’re not willing to take a loss, it usually gets a little bigger. When it rains, it pours. As a result, it becomes even harder to take—much more painful. If you didn’t take it the first time, as it becomes bigger you will be even less likely to take it. What’s likely to happen? It probably will become even bigger. The cycle typically continues until the loss becomes so big that you have to take it. This typically occurs when you get a margin call from your broker.

However, investors might never get a margin call if they are not margined. Instead, they tie up valuable capital in a falling investment that might last forever. There are probably millions of investors right now who are hanging on to losing investments, just because they are waiting for it to come back. Consequently, you must make it okay to take losses.

The other half of the equation is also important (and equally puzzling). You can’t put too much importance in gains. People who value profits too highly, tend to take them quickly. Why? Because if they don’t take them, they are afraid they will get away.

An example of this was once pointed out to me through real estate investors. A group of investors got into a real estate deal that started to lose money. Instead of getting out and taking their loss, they elected to stay in and ride it way down. When asked why they didn’t get out of a bad investment, their comment was, "We haven’t gotten our money back yet."

These same investors subsequently got into another real estate deal. It started to become profitable very quickly. In fact, it rose to 100% profit and more. But the investors who were holding onto the bad investment, sold out quickly at a small profit. When they were asked why they sold, the reason was, "We lost money on the other deal, so we wanted to make sure we got our money back on this one."

This concept of balance is very important and it applies to any polarity you can think of—not just profits and losses. It's equally important for traders to find balance in their emotions. If you want to dig into this topic, it's covered thoroughly in my Peak Performance Home Study Course.

About the Author: Trading coach, and author, Dr. Van K. Tharp is widely recognized for his best-selling books 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.vantharp.com.  


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Trading Tipdr

 

Sector Action Since the March 2009 Bottom

 

While lovers celebrated each other on Valentine’s Day on Monday, the S&P 500 made a new post-real-estate-bubble high.  The cash index hit 1332.96—less than a point from a doubling of the March 6, 2009 low of 666.79.

This level was a key “hidden” resistance level identified by W.D. Gann.  It will be very interesting to see if this resistance level can hold the bull market that has been steaming ahead.

To commemorate the S&P doubling off the bottom, I thought it would be intriguing to take a quick look at how sectors have fared since the gloom and doom of March 2009.

The Sector View

Below is a busy little chart from one of my favorite sites: stockcharts.com.  This performance chart shows percentage moves from a specific period and includes the S&P 500 sector SPDRs commonly refer to as “spiders.”

You may have trouble reading the color key for the lines so here’s the order for the sectors from top to bottom: financials, consumer discretionary, industrials, consumer discretionary, materials, technology, energy, healthcare, and utilities. 

drchart1

It should come as no surprise that all of the sectors are up for this period.  With the financial sector taking the biggest losses heading into the March 2009 lows, it’s also logical that they would rebound the most on a percentage basis (the financial sector is the top brown line). 

Conversely, one would expect the sectors that weathered the big crash the best to rebound less gingerly—this, indeed, was the case.  Utilities, health care and consumer staples have had the most tepid responses and are represented by the three sectors clumped around the 50% line.

Most surprising to me, the tech sector has basically mirrored the broader S&P 500  with a gain of about 100% off the lows.

The Geographic View

Worldwide, emerging economies have not fared as well as the established rank and file.  Let’s look at another comparative performance chart to see the percent gains of some regions and countries on a more recent timeframe—since the November 5th, 2010 swing high in the markets.

drchart2

Here is the order from top to bottom: Japan, US S&P, and EAFE are above the zero line, while Latin America, Emerging Markets, China, and India are all below the zero line. 

Since November 5th, only Japan, the US (SPY) and EAFE (first world regions) made new highs.  Latin America, China and especially India have swooned since then.  It will be very hard for the bull market in the first world regions to keep charging ahead if the rest of the world maintains its downward slide.

I’d love to hear your thoughts and feedback on this article or about trading and investing in general at drbarton “at” iitm.com.  Until next week…

Great Trading,
D. R.

About the Author: 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".

 

Disclaimer »


Workshop

2011 Spring Workshop Schedule

Dates Announced for Germany!

 
April
2-3
$195

Oneness Awakening Workshop

Only a few seats remaining

Cary, NC
April
5-8

$3,995
$3,295

Peak Performance 202

Cary, NC

April
10-12

$3,995
$3,295

Peak Performance 203
aka The Happiness Workshop

Cary, NC
May
9-11

$2,995
$2,295

Blueprint for Trading Success

Cary, NC
May
13-15

$2,995
$2,295

Peak Performance 101

Cary, NC
June
28-30
$2,995
$2,295
Blueprint for Trading Success Berlin, Germany
July
2-4

$2,995
$2,295

Peak Performance 101

Berlin, Germany

 


Mailbag

Feedback About the Definitive Guide to Position Sizing

"I appreciate the conversational style you use in the book to convey insights and perspectives about SQN™ calculations and systems. When drawn from your personal experience and expertise, the book communicates these ideas and concepts with good impact."

"Just a word of thanks for all that you do. I started trading just 2 months before the 2008 downtrend and have learned a lot through the 'school of hard knocks' since that time. I have read over 65 books during that time and place this book, Trade your way to Financial Freedom, and Super Trader within the top 5. My education process would have gone much smoother if I had read these three books in 2008 instead of 2010. However, my conviction remains very high to continue learning through trading and study. Thanks again."

—Both comments from a recent survey sent to Definitive Guide to Position Sizing Readers.

  


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February 16, 2011 - Issue 513

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