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

  • Article Trading System Exercise Leads to Introspection: A Project Marathon Update by R.J. Hixson
  • Trading Education NEW E-Learning from Van Tharp
  • Trading Tip Stocks in Your Pocket or Purse: The Market Goes Mobile, Part 8 by D.R. Barton, Jr.
  • Workshops Early Enrollment for June Workshops Expires Next Week!
  • Mailbag Calmly Follow My Plan

rj

Trading System Exercise Leads to Introspection: A Project Marathon Update

One day last month, Ken Long facilitated a fascinating conversation in his chat room. While I didn’t have the specific entry challenge that prompted the chat room conversation that morning, I read Ken Long’s process suggestions intently. The focus of Ken’s conversation follows as well as the thoughts and ideas it brought up for me in two somewhat different areas.

The Trading System Challenge

There had been an oversold pattern that generated a number of setups one day; however, at that morning’s open, prices gapped above the max entry price for all of the setup candidates. After the open, the chat room conversation consisted of what to do in that situation: enter them long anyway, go short instead, or wait for other setups?

Ken suggested that a thorough trader should complete the following form.

The Event:
  Reasons
(Beliefs, Emotions, Assumptions)
Rewards
(Potential Gains)
Risks
(What could go wrong? How would I know?)
How would I trade it?
(Based on reflections from 1st 3 columns.)
Why I want to be long...

 

 

 

 

 

     
Why I want to be short...

 

 

 

 

 

     
Why I want to stand aside...

 

 

 

 

 

     

To fill out this chart, work your way from left to right and top to bottom listing appropriate amounts of detail and insights in each cell.

Now consider all your answers and craft a strategy that connects your assessment of the opportunity, your objectives, and your risk tolerance. Without such an exercise, you might be chasing trades external to a system and unconnected to your "center." You can add your notes to the rules you have for a current system or they can become the basis for a new trading system. (Ken has a self-admitted tendency to chase ideas, so he recognizes the symptoms. He has found this method to be the only way he can really commit to trading a system’s rules.)

Questions for Further Reflection

  • What would happen if you decided to follow your system's rules and stand aside? (The appropriate answer is “No loss.”)
  • What's the worst thing that can normally happen if you instead go long or short? (The answer had better be "-1R.")
  • What would it take for you to commit to a trading system/plan? If you are not committed to the plan, is the shortfall due to knowledge or feelings?
  • How would an observer know you are committed to a trading system/plan? What would they see?
  • How much of your capital should you commit to a trading system/plan? Capital in this context refers to money as well as your time, focus, and energy.
  • Does commitment to a trading system/plan include putting your identity and self-image into it? Is that part of your trading capital? Will you tie the system results to your self-image and feelings of worth? Or will you let the system just be the system, with its results being the relationship between the rule set and the market?
  • Can you decide what amount of capital to apply to a rule set while remaining detached, professional, and managerial?
  • Opportunity cost is what you pay for not taking a trade. If you believe the market offers infinite opportunities, then letting a trade go is costless and meaningless. Could you let a trade go? Even a great one?
  • Can you learn to live without the regret of letting a great trade go to someone else? Regret is the result of evaluating a past decision with the benefit of the new information in hand. That’s unfair to the person who made the decision at the time with the facts available in the context of that moment.

Those last few questions, the final question in particular, really got me thinking. Two recent events had been on my mind and hinted at regrets: a memorable loss in March and my quarterly periodic review in April.

A Memorable Loss

The loss occurred on March 16th, which was the bottom of that mid-month dip. I was trading an adapted version of one of Ken's intermediate term systems. I had added an exit that was supposed to get me out of the long positions in case of a volatile drop. For the first two weeks in March, it seemed like there had been some pretty volatile days but the exit never triggered. Finally, on the evening of March 15 (a huge up day), I decided to research the stop further and see what kind of volatility it took to trigger it. I had done this before, albeit briefly, and at the time it seemed like a good idea to help me avoid drawdowns. That evening I saw that if the price decline happened in a somewhat orderly fashion, the exit could trail the price for a very long ride down and never trigger.

With that discovery in mind and the failure of the next day’s big decline to trigger the exit (I was definitely feeling the volatility that day), I decided to take a hit and exit the positions manually. My mistake log documented the mistake as two-fold: 1) not understanding the volatility exit as well as I should have and 2) not having a second exit. Exiting those positions manually that day, however, was the right thing to do in the moment with the information I had. I chose to limit my risk by taking a smaller loss than risk a larger loss in the absence of other exit rules.

As prices recovered over the next few weeks, that manual exit on the 16th seemed less and less smart to me. This was exactly Ken’s point about the unfairness of regret; I was judging my actions on March 16th in light of the subsequent recovery. (Mind you, this wasn’t heavy suffering on my part, more like recurring thoughts, which I did not believe and was not attached to firmly.) Here’s the fairer assessment: I did the best I could and learned from the process.

April Quarterly Review

Last quarter, I had a very slight net loss—close enough to zero to call breakeven. Ken’s questions had me wondering about my trading an results:

  • Am I committed to a plan and to actions that generate breakeven results?
  • I believe the markets offer unlimited opportunity, so I’m willing to let trades go (and I do). What does that say about my commitment to my plan and my objectives? How does that affect my results in the end?
  • How long is it going to take for me to move from consistently breakeven to consistently profitable?

Like the lightness of my regret mentioned earlier, these questions were not heavy either. I believe that’s one of the benefits of having done and continually doing the self-work that Van stresses. My trading and life have taken on a lighter, easier quality since going through the Super Trader Program. I can completely love my trading results just as they are. I can also just as easily completely intend to generate different trading results. My trading results are my responsibility and they are the consequences of my beliefs, my thoughts, and my actions. My current mix of beliefs and actions has generated basically breakeven results for some time. I am very thankful for that. Consistently profitable is the trading that I intend to achieve.

Now What?

Well, I keep trading. Ken is adamant about working on the craft by doing. As he says repeatedly, “Traders trade.” I also intend to do some additional self-work. Van’s re-invention model has traders ask, “What’s missing?” and “What’s next?” To discover what’s missing, I’m putting 500 of my beliefs through Van’s Belief Assessment Paradigm. I expect to have a better sense of what’s next after that exercise. I’ll let you know how that turns out.

About the Author: R.J. Hixson is a devoted husband and active father. At the Van Tharp Institute, he researches and develops new products and services that will help traders trade better. In the spirit of the company's mission, he's about to undergo a personal transformation over the Memorial Day weekend. He can be contacted at “rj” at “vantharp.com”.  


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Stocks in Your Pocket or Purse:
The Market Goes Mobile, Part 8

In this series, we’re looking at mobile phone apps that are available for the iPhone/iPad/iTouch. The installed user base of over 100,000,000 iPhones makes it the logical platform for the first round of our app reviews. We’ll move on to the Android platform in a subsequent round of reviews.

As a follow-up to the excellent thinkorswim Mobile app we reviewed last week, we’re going to look at some other broker apps today to see how they stack up.

After hitting a relative goldmine with the richness of thinkorswim Mobile, it disappoints me to report this week that no other brokerage apps even come close. In bulleted fashion below, let’s review the major online brokers’ apps. Keep in mind that I’m looking for what the app offers users who do not have an account with the brokerage firm.

Big Time Brokers, Mostly Small Time Apps

E*Trade: This app has a few interesting features. A briefing.com pane on the dashboard gives the latest update from that very good news source. However, I found no way to get more than the single update, which limits the usefulness of this feature. Watch lists and charting seem very “vanilla.” Data is delayed, but to E*Trade’s credit, no nag screen or banner takes up screen space unless you try to turn on the “streaming function.” In general they have an easy to navigate app with modest functionality.

Fidelity: Once again, we see very perfunctory functions for the watch list and charting. However, there are two cool chart features. If you put your finger on the chart, a vertical line appears that gives you the closing price for any day (or period) on the chart. And in landscape mode, an additional chart appears that contains five times as much historical data giving you a longer term perspective for any chart you view. Finally, the news feed is above average with entries from Reuters, TheStreet.com and Market Watch for any symbol.

Charles Schwab and Trade King: Both of these apps require that you log in to be able to use the apps.

Scottrade: No app.

The Lone Exception: Interactive Brokers

The Interactive Brokers app has the standard watch list and some charting along with a couple of very useable features. One is a built-in stock scanner, which comes with six preconfigured scans. Their app also allows you to build your own scan with about 50 potential criteria including most actives, biggest percent gainers, etc. And there are some really useful scan criteria: stocks hitting quarterly and yearly highs or lows, halted stocks, options ranked by implied volatility, etc. You can apply these criteria to a number of available instruments including US Stocks, futures, and indexes, as well as European and Asian stocks. For a free app, this scanner is a very useful feature.

The most useful feature from Interactive Brokers is their real time alert function. You can enter almost any instrument and get an email alert if your criteria for breaking above or below a price are met. And it even has some sophisticated criteria for triggering the alert (hitting the price twice, for example). I tested this and it worked fast and flawlessly. This is another great feature in this free app.

If you have any thoughts and feedback on this article or about any other stock market apps that you’ve found useful, I'd love to hear them. 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

Calmly Follow My Plan

Just had to send you a note to thank you for the reminder summation for improving market performance, and for all I have gotten from you in the past. 

Regarding my personal investment psychology, I have been aware recently of how much it means to me to have a system in place that is working for me, which I developed with your encouragement.  I find it extremely important to my psychology to be continually analyzing my system, particularly by backtesting it. 

For the past few days the market has been going down; in the past I would have panicked and sold everything just at the wrong time before the market improved again.  By backtesting my system I see the wisdom of sticking with my plan because I can see how it has worked in the past and can then confidently expect it to continue working. This soothes my psyche and allows me to calmly follow my plan until I get a clear, predetermined sell signal rather than selling whenever the market moves against me. 

Knowledge is power.  Thank you.


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May 25, 2011 - Issue 527

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Tharp Concepts Explained...

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  • Risk and R-Multiples

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