Tharp's Thoughts Weekly Newsletter (View On-Line)
How to Face the Current Market Climate by Van K. Tharp, Ph.D.
Stocks in Your Pocket or Purse: The Market Goes Mobile, Part 5 by D.R. Barton, Jr.
NEW! Forex Workshop Offered in June
Comparing the Markets Using ATR vs. ATR Percentage (ATR%)
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How to Face the Current Market Climate
Dr. Tharp will be speaking at a conference in Poland in June. This is an excerpt from an interview they had with him to promote the conference. We wanted to share it with our readers as it gives additional insight into Van’s thoughts and opinions about what a trader needs to face the current market climate.
What are your thoughts on the current recession? How are your traders doing in this climate?
If you believe the US federal government statistics, the recession has been over for some time. I don’t believe the government figures, however, so I think we are still in a recession. The recession is merely a symptom of several fundamental economic truths and those fundamentals are fueling risk in the markets right now.
Banks do not understand risk and their traders don’t even know how much money they are trading. This is why rogue traders keep appearing. Banks generate revenue by making markets and they lose money trading so they mostly concentrate on developing new products.
Banks seem to think that risk is related to volatility, so they create products focused on keeping volatility low. One such set of products they created packaged many subprime mortgages together. No one knew how to price these because they didn’t understand them or the potential risk involved. Once it was clear that these mortgages were defaulting, no one would buy them at any price. The owners of these subprime mortgages were holding these positions with a lot of leverage (30-40 to 1). The losses in those highly leveraged positions meant the holders were suddenly bankrupt. Holders who were not bankrupt had to sell whatever was liquid because of the selling pressure going on at the time. As a result in 2008, the world lost about 40% of its equity.
The traders in my Super Trader program, however, have been and are doing very well. They have methods that can make money every day, regardless of what the market does, and they know they’ll make money by the end of the month. Most of the Super Traders share their trading results with me and, of those, not one of them was hurt much—if at all—during 2008. It doesn’t take a Super Trader to do that though. In fact, we have a lot other clients who say that the principles that I teach saved them during 2008.
Tell us a little bit about what you do as a trading coach.
If trading were easy, big money would make it almost impossible for people to enter the markets. But trading well is very difficult, so the entry requirements are easy. Big money makes money regardless of what new traders or the average trader does because they wrote the rules and structured the markets for their benefit.
Most people spend years training for their profession. Then, after they accumulate a little money, they just open an account and expect miracles. Trading success doesn’t happen like that; it only happens when you get training that would be equivalent to preparations for any profession. I’ll share with you a few training essentials, which are further covered in my book, Super Trader:
- Understand basic Tharp Think terms such as R-multiples, position sizing™ strategies, and risk control.
- Work on yourself until you have accomplished at least five major transformations. (This could take one to two years; however, this step will not only improve your trading but your life.)
- Create a personal working document that guides your trading business (this is usually 100 pages or more).
- Develop three, non-correlated, high-quality systems.
- Be 95% efficient at trading those systems (i.e., not more than one mistake in 20 trades).
What are the primary traits of your Super Traders?
First, I believe that certain personality types make it easier for some people to become successful as a trader. To find out what type of trader you are, visit www.Tharptradertest.com and take our free test for information on your trader type. The ideal personality for trading is what I call the strategic trader type. A strategic trader is focused on the big picture rather than lots of facts and details; he is also more logical than emotional; and he is organized but not compulsive. Trying to trade with two out of three of these traits is probably okay, but the fewer you have, the more personal work you’ll need to do to be successful as a trader.
Second, you must be open to working on yourself and to taking personal responsibility for anything that happens.
Third, you must be committed to do what it takes to be a successful trader. It’s a lot of work.
Fourth, you should be good at math and understand basic probabilities and statistics.
Fifth, you should be good at strategizing and playing games that require such skills.
Sixth, while it’s not necessary, good computer skills are very useful.
Can those traits be learned?
It depends. I have a basic belief that if one person can do something, then anyone can. But commitment is not learned. Personality traits are not learned. It’s more difficult to be a successful trader without a strong commitment and complementary personality traits.
Can financial market speculation be unethical? Are there reasons to be ashamed of it?
Not the way I teach trading. In fact, many of my traders now use their trading success as a measure of their spiritual development. However, one might argue that the way big money uses the markets is unethical.
Is it possible to make money in the market on a consistent basis without having a trading system? What are the benefits of creating and maintaining a set of trading rules?
Anything is possible, but consistently making money without a system is not probable. Traders need a set of rules to guide their actions.
While many traders equate being right to making money, I believe that you are right if you follow your rules, regardless of your results. If you don’t have any rules, I would consider everything you do to be a mistake. I define a mistake as not following your rules. So when I mentioned earlier that you must trade at 95% efficiency, I meant that you follow your rules 95 out of 100 times.
Does an individual investor (speculator) stand a chance when facing institutional investors with access to tools, information, analytical capacity and low transaction costs that an individual can only dream of?
Most institutional investors have no idea what they are really doing. They make markets and sell products, but few of them really know how to trade. Some funds may know what they are doing, but I wouldn’t give them any more credit than that.
As I said, trading isn’t easy; however, if you are willing to go through the five steps I’ve outlined, you probably will have a big advantage over any institutional trader.
What is the future of capital markets, especially the stock market, in terms of national regulators, laws and regulations, growth and participation of individual investors? Will it become more and more difficult to make money in the market?
I think there is a good chance that much of the capital market structure could collapse. We still have money in the hands of very uneducated people whose only advantage is that they make the rules. That’s a huge disadvantage to the rest of us.
The value of derivatives surpasses the entire wealth of the world and those derivatives could collapse. I think there’s a good chance of that happening. In the long run, I’d also expect the dollar and the euro to collapse. Such crises, however, imply opportunity—with the proper education, you can thrive in this sort of atmosphere.
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Stocks in Your Pocket or Purse:
The Market Goes Mobile, Part 5
In this series, we’re looking at mobile phone apps that are available for the iPhone/iPad/iTouch. With an installed user base of over 100,000,000 iPhones, this is the logical platform on which to start our app reviews. We’ll move on to the Android platform in a subsequent series of reviews.
Today we’ll dig into CNBC’s offering and next week we’ll look at Bloomberg and some of the other apps from “old school” companies.
The Current 800 Pound Financial Gorilla in the Financial World: CNBC
I still remember walking into a sports bar in my home town on a weekday back in 2000 to get some lunch with a friend. I looked up at the closest TV, fully expecting to see an early afternoon baseball game or at least some version of ESPN Sports Center. What I saw instead was CNBC with Bill Griffith on Power Lunch. The world had changed—everyone was talking about the stock market (even in a sports bar!) and CNBC had grown from a merger with a fledgling network called Financial News Network into a prominent opinion shaper.
Fast forward to today. While no longer the “must-see TV” that it was in 2000 (when viewership peaked), CNBC is still the go-to channel for business and financial news.
Oh, and now they have a phone app, too…
CNBC RT: Killer Real Time Data...
CNBC’s iPhone app stakes its claim to fame in its name: RT stands for “real time,” as in real time data. With this app, you get real time data from the NYSE and NASDAQ exchanges for regular trading hours plus pre- and post-market trading. CNBC RT also provides 24-hour data for commodities, currencies and world market indexes, though this data does have a 15 minute delay.
And as one would expect from a well-funded corporate entity, the app has a smooth interface and a rich visual feel. The tools inside the app, which include watch lists and news feeds though, are fairly pedestrian.
...Amidst Bugs and Average Tools
There are, unfortunately, some negatives on the ledger. The app contains links to various clips from CNBC TV shows that you can watch and even does a nice job of indexing those clips to individual stocks. Surprisingly, however, the video handling—especially for the Apple OS—is atypically poor. The videos get caught in a buffering loop if you exit the app without closing the video first. This happened to me twice—closing and re-opening the app would not reset the app, neither would a hard reset. I resorted to uninstalling and reinstalling the app. This was such a tedious process that I wasn’t able to test the video problem often enough to make any finer distinctions. Suffice it to say that this was less than an optimum experience.
Business Model Notes
This app is fueled by banner ads at the bottom of each screen. Unlike some other apps, the banner ads on CNBC RT don’t disappear after a set time. Also, all of the videos are preceded by commercials. To be fair, this model is used on many Internet no-cost sites, but it warrants a mention.
I’d love to hear your thoughts and feedback on this article or about any other stock market apps that you’ve found useful. Please email me at drbarton “at” iitm.com. Until next week…
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Comparing Markets Using ATR vs. ATR Percentage (ATR%)
Q:I would like to understand better the ATR% concept. In the newsletters, I read that ATR% is the ATR divided by the closing price. I also read that ATR% allows you to fairly compare an asset against itself through time or to compare different assets at the same time.
I could pick one of two stocks, with one at about $10 and the other at $200. The ATR for the first market is $1 and the ATR for the second is $10. ATR% for market 1 should be 1/10 = 0.1 or 10% and ATR% for market 2 should be 10/200 = 0.05 or 5%.
In case I'm correct with the formula above, how would I use ATR% to compare trading these two stocks?
A:The ATR% can be very helpful to compare the volatility of instruments, markets, or the same market or instrument over different periods. You have the basic math right, so let’s consider another example and see what it tells us.
ATR measures the average price movement of an instrument over a certain period of time (with many platforms, the default setting is 14 periods). For example, a ATR of $1 says that this stock moves an average of $1 per period. On a $5 stock, that would be a big deal because the ATR% is 20%. If you then compare that to an ATR of $1 on a $500 stock, in ATR% terms, that stock’s average daily move is only 0.02%. While both stocks in this case have an ATR of $1, the ATR% tells you the percentage of average movement and allows you to compare the volatility of two differently priced stocks in an apples-to-apples fashion. In this case, the $10 stock is much, much more volatile than the $500 one.
Here’s an example of how the ATR% can be useful in analyzing a market over a long period of time. We have at about 60 years of S&P 500 data in house here. At the beginning of the data set, the index was about 40 and now it's about 1,250—those two levels are hugely different. If we were to try and use daily ATR alone to judge market volatility for the 60 years, then the market turned “volatile” somewhere around 1991 and it has been volatile ever since. If, however, we divided the daily ATR by the daily price to determine the ATR%, we can now see periods of volatility at various times throughout the 60 year period.
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