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

  • Article Five Ways to Improve Your Market Performance by Van K. Tharp, Ph.D.
  • Trading Education NEW E-Learning from Van Tharp
  • Trading Tip Stocks in Your Pocket or Purse: The Market Goes Mobile, Part 7 by D.R. Barton, Jr.
  • Workshops Early Enrollment for June Workshops Expires Soon!
  • Mailbag A Thousand Names for Joy: A Commentary

Five Ways to Improve Your Market Performance

I'd like to take some time this week and review a few Tharp Think basics. If you're an experienced trader or long-time reader of this newsletter, you should view this material as an important reminder, even if you have seen it before.

From a big picture standpoint, I believe we entered a secular bear market back in 2000. Secular bear markets historically last on average about 15-20 years, so we still have quite a ways to go with this one. Being in a secular bear market doesn’t mean that prices decline for 15-20 years; however, it does mean that the price-to-earnings ratio for the stock market tends to decline into the single digits by the end of the cycle.  In between, there are multiple down market phases and bear market rallies.  Rallies in bear markets can be some of the most dramatic around—look at what the markets have returned on a percentage basis since March 2009. The current bull market rally, however, may be nearing an end soon so the simple steps below take on some importance. 

1. Invest with the current trend of the market.

Before you enter the market in any way, you need to know what the market is doing. Is it going up or down? You should avoid having a major long position in the stock market unless you can safely say that the market is going up. But how do you determine that?

First, look at what the S&P500 index is doing. This index is a composite of the 500 largest companies in America. To determine how well it is doing, compare the close of the market today, with the average price of the market over the last 200 days. The latter is called a 200-day moving average. You can easily create a free chart of the S&P with a 200-day moving average on any number of web sites with charts.

When the stock price is above the 200-day moving average, the market generally goes up about 12.6% each year. When the stock price is below the 200-day moving average, the market generally goes down by 1.6% each year. Isn't it better to have that moving average on your side?  At the moment, we have the average on our side—but maybe not for long. 

If you were hurt in the 2008-2009 bear market, go back and look at that S&P 200-day moving average.  It helps to be out of the market when prices go beneath it.

If you want to know what I think the markets are doing, read my Market Update in this newsletter at the beginning of every month.

2. Never enter a position in the market without knowing where you will get out.

Most people enter a position with the idea of holding onto it for a long time. The investment industry heavily promotes "buy and hold" as the best strategy for investors to follow. I believe buy and hold is a strategy for disaster in a secular bear market.

If you do want to enter long-term positions right now and don’t know where to get out, I recommend using a 25% trailing stop as a bare minimum.  A 25% trailing stop is big enough to allow you to catch a good trend move up, but most importantly, it gets you out before a major drop hurts your account. 

3. Never expose more than 1% of your portfolio in any given position. 

Suppose you start out with $25,000. Based on this rule, we would not risk more than 1% of that or $250 on each position.  If we like MSFT right now at $25, but want to get out if it drops $2, we would be able to buy 125 shares.  Our total risk for the position is $250 and our risk per share is $2, so we divide $250 by $2 to get 125 shares. 

Let's look at a second example. Suppose you want to buy XOM at $80 per share, and you use the 25% trailing stop rule I mentioned above.  25% of $80 is $20, so you are willing to risk $20 per share—this means you will set your stop order at $60. Your portfolio, again, is worth $25,000 and you will risk only 1% on this position. If you divide 1% of equity ($250) by your risk per unit ($20), you can buy 12 shares. The actual number is 12.5; however, you must round down to the nearest whole number as buying half a share is not an option.

In our first example, our risk per share was $2 and we could purchase 125 shares. In our second example, our risk per share was $20, so we could purchase only 12 shares.  In each case, however, we limited our exposure to the market by the same small amount. If we are wrong about the stock price moving up, we only lose 1% of our portfolio or $250 per position.

If you risk more than 1% of your equity per position, you take on a higher risk of burning through your equity.  Stay safe to live long enough in the markets so you can learn and improve. 

4. Continually observe yourself and notice your patterns, habits and emotions. Self-awareness is the key to improvement. 

I once asked one of the world's greatest traders, "What's your secret to handling your emotions and psychological problems?" His response surprised me at the time. He said, "I just notice that I'm emotional and then I continue to trade the system."

Most people allow their emotions to control them. They get caught up in those emotions and don't even realize what is happening. The great trader, in contrast, stays aware of those emotions as they occur. Awareness is the key to any personal change process and is essential if you want to improve. People who are unaware of their emotions and thoughts are victims of their own repetitive patterns. They are psychological robots.

Become aware of what goes on inside of your head. Keep a diary of your trades and record what you are feeling and thinking as you enter, manage and exit your trades. Look for habitual thoughts, emotions or actions in your diary that might indicate self-destructive patterns.

5. Take responsibility for everything that happens to you.

One of the problems in down markets is that people found lots of other people or things to blame. For example, in 2009, people blamed the market fall on, among others sub-prime mortgage lenders, derivatives dealers, Lehman Brothers or Bear Stearns or Goldman, the Fed, TARP and on and on.  People blamed their broker or mutual fund manager or analysts. People who blame someone else or anything external always repeat their mistakes and avoid personal responsibility.

Some years back, an investor sued a large mutual fund because his account went down 90%. This person received an account statement every month and watched his account drop bit by bit. Only when his account was down 90%, though, did he decide to finally take action—by initiating a lawsuit.  But who was really to blame for his losses? The investor! He risked too much of his portfolio on one investment and he didn't have a predetermined exit point. He probably never had any idea that he made those mistakes, so he has likely made them again and will likely do so in the future.

No matter what happens to you, you must be completely accountable for your results. That’s the only way you can learn from the markets.

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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Stocks in Your Pocket or Purse:
The Market Goes Mobile, Part 7

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’ve uncovered a hidden gem from broker thinkorswim.

A Brokerage That Gets a Lot Right

While researching brokerage companies, my brother Douglas made the following observation about thinkorswim, “It seems like a bunch of college computer geeks got a couple of cases of Red Bull and pulled an all-nighter to build a great trading platform and form a brokerage.”

The company and their advertising has always had an “edgy” feel (for brokers, anyway).  Their technology (charting, etc.) has always been top-notch, and they are very customer-centered all the way up to highest level of management.  Their commissions are competitive, though not at the lowest level out there.  And interestingly enough, they have kept most of this culture and identity intact despite being acquired by TD Ameritrade last year.

From this tech background and customer-centered culture has now created the most comprehensive iPhone charting app on the planet!  There’s even good news for folks who don’t have a thinkorswim account.

thinkorswim Mobile: A Great App Limited Only by a Tiny Screen

thinkorswim Mobile is really head-and-shoulders above all of the other brokerage apps I’ve tried. 

Let’s take a look at all this app has to offer:

  • Stocks, futures and Forex charts! (thinkorswim account holders get realtime data)
  • Technical analysis studies galore!  There are 180 indicators that you can add to a chart. This would be impressive for any web-based charting system.  In the app world, 180 indicators is unprecedented and unmatched.
  • Amazingly fast display options chains for all optionable instruments.  Plus a very easy, iPhone-friendly way to change expiration months and strike prices.
  • Excellent watch lists.  While you can custom configure favorites and multiple different watch lists,  the app comes preconfigured with over 20 watch lists including indexes, commodities, forex, multiple slices of ETFs, and complete index component lists (for example, all of the S&P 500, Russell 2000, etc.). For options traders, this app has one watch list that shows all weekly options.
  • One of my very favorite features?  This app remembers your last page!  I hate leaving other apps to look at something else and then having to navigate through a homepage, favorites, select stock, select chart, etc. to get back to where I was a moment before.  thinkorswim Mobile returns you immediately to the last screen you were viewing. It’s an app that’s meant to be used!

Before I get too enthused, there are some downsides:

  • Non-account holders have 20-minutes delayed data.
  • Non-account holders see a constant banner strip that reminds you that you are not logged in and that data has a 20-minute delay.
  • The news feed is fairly pedestrian.
  • The biggest current downside is that with all of that analytical power available, you can only view one indicator at a time on a chart.  Say you want to look at a chart with Bollinger Bands and a MACD, the app will show one or the other.  This is probably due to the lack of screen real estate, but I would hope in future versions, it would let you view at least one on-chart study (moving average, bands, etc.) and one below-chart study (momentum indictor, ADX, etc.)
  • The app has no landscape functionality.  I would hope (again) that in future revisions they would add a landscape view.  This will help maximize the use of a small screen.

I mention the business model for these each of the apps we review so traders can know what to expect to see.  Keep in mind that thinkorswim developed this app primarily for their brokerage clients to use for trading.  If you don’t have a thinkorswim account, some functionality is limited (delayed data for example).  For all that this app offers for free, however, the limitations seem very minor indeed.

The bottom line: if you’d like an app with the most charting power available on a small screen and can live with delayed data, then get thinkorswim Mobile.  People who only need end-of-day data should "run" to the app store and download this very sophisticated tool.  Now, if it could add the analytics engine of the previously reviewed Chaikin Power Tools app and find a way to allow to multiple technical analysis studies, it would be just about perfect. 

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…

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".

 

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Mailbag

A Thousand Names for Joy: A Commentary

The book A Thousand Names for Joy is Byron Katie’s take on The Tao Te Ching as translated by Stephen Mitchell.  Byron Katie’s view of the world is simple; and it is the way to truth. She considers “God” to be simply what is. God is reality; she does not judge it to be good or bad, kind or unkind.  Most people live in a dualistic framework, which she believes causes suffering in the world.

You can read Curtis's full review here.


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May 18, 2011 - Issue 526

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ST expanded

The New Expanded Edition is Here!

Includes Four New Chapters and an Improved Layout!

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Tharp Concepts Explained...

  • Psychology of Trading

  • System Development

  • Risk and R-Multiples

  • Position Sizing

  • Expectancy

  • Business Planning

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