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

  • Article Our Mission at the Van Tharp Institute: Part I of Trading through a Financial Metaphor
  • Trading Education Gain Peak Performance in Your Trading
  • Trading Tip Stocks in Your Pocket or Purse: The Market Goes Mobile, Part 9 by D.R. Barton, Jr.
  • Workshops Early Enrollment for Berlin Workshops Expires Next Week!
  • Mailbag A Hurricane Is a Hurricane


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Our Mission at the Van Tharp Institute: Part I of Trading through a Financial Metaphor

I believe that the engine that makes The Van Tharp Institute (VTI) work is our mission of transformation through a financial metaphor.  Recently, I began to look more closely at our mission statement and realized that we actually take people through three levels of transformation. 

The first level we offer is transformation of the trading game—from rules that assure big money wins to rules that give the astute trader a huge edge.  These new rules consist of the Tharp Think concepts that I require all Super Traders to know and understand as the first part of their program.

In one of my advanced workshops I teach the concept that we all play "games" in life. A game can be defined as any dynamic consisting of two or more players with a set of rules that generally define how the game is won or lost. I’m using the concept of the “trading game” to symbolize a big picture description of all aspects trading.

Level I:  Transformation of the Trading Game

I believe the financial markets are part of a huge game and at the top level, where the rules get set, made, and changed, there is big money.  Big money makes its own rules and profits no matter what you or any individual trader does—they are so much bigger than that.  Big money controls the US government—notice where US Treasury leadership comes from so often and where they go afterwards. Big money also has created a two party political system in which people argue over everything except what is really going on. 

Trading is not easy; however, becoming a trader is very easy.  There are no obstacles whatsoever to anyone opening a trading account. I have long said that if trading were easy, big money would make the entry requirements so steep that it would be impossible for an average person to trade.  Big money might do this through an education and exam system that would weed out most people.  Even today, brokers have to take a Series 7 exam; however, passing this exam has nothing to do with success in the market.

Big Money’s Rules 

Generally, big money believes the more people that play the trading game, the easier it is for them to make money.  And, as I said before, big money has a set of rules for how it makes money, which has little to do with you making money. I’ve listed some of the rules created by big money here.

  • They profit on commissions, which they take whenever you make a trade, whether or not you make a profit.  In fact, the industry considers it unethical for a broker to take fees based on the profitability of his clients.
  • They make markets and get the bid/ask spread on every transaction.
  • They continually invent new products for you to buy and they profit when you do so.
  • They get paid a fixed fee based upon the amount of assets that they are managing without respect to their performance.

They also get you to believe that you have to follow a certain set of rules for success in the market.

  • Selecting the right investment (i.e., picking the right stock) is everything.
  • When you find the right investment, buy it and hold it for the long term.
  • Spend a lot of time analyzing the market to find the right investment.
  • Listen to experts for advice, including newsletter writers, brokers, and the investment gurus on television.
  • The market will determine whether or not you make money.  You are at the mercy of the market in the short term, but if you hold on, you will prevail.
  • If you do lose money, it’s not your fault.  Find someone to blame and a good lawyer to help you sue them.
  • The market is efficient.
  • Asset allocation is very important (even though most people are not sure what that means).

The New Rules

The new rules are born out of the idea that trading is as much a profession as is any other profession.  Most people spend many years learning their profession, but anyone can start trading today.  Can you imagine walking into a hospital and saying, “I think I’ll try some brain surgery today.”?  It just won’t work.  Yet you can open an online brokerage account, transfer in $100,000 and, suddenly, you are a trader.  Trading with no preparation, however, could be as fatal to your account as performing brain surgery would be on that unlucky patient in the hospital.   

It takes significant time (several years) and a deep commitment to become a successful trader.  I hold a similar belief to author Malcolm Gladwell that the best people in every field usually excel because they have successfully practiced their craft for 10,000 hours.  That means they know enough about their field to produce success.  By working on your personal psychology (which we’ll cover in the second level of transformation), you learn how you produce your own trading results and how you have tended to make everything much more difficult than it need be.

Learning the key rules is an essential part of this process.  Here are some of the new rules that make up the first level of transformation:

  • You are totally responsible for your performance as a trader; therefore, you should devote significant time to working on yourself in order to be successful.
  • It’s important to know your initial risk in a trade before you enter a position—this allows you to ensure that your trade has a favorable probability for a sufficient reward-to-risk ratio.  In other words, it will help you cut your losses short and let your profits run.
  • Calculate the R-multiples of all your trades; this allows you to think of a trading system by the distribution of R-multiples it generates.
  • Measure the quality of a trading system by its SQN® score.  The SQN score tells you how easily you can meet your objectives through position sizing™ strategies.
  • Position sizing strategies help you meet your trading objectives.
  • There are as many objectives as there are traders.
  • You can easily develop a Holy Grail trading system for any one market type; however, it is impossible to develop a system that will perform well in all market types.
  • Your trading system must fit you.  In fact, trading a good SQN system that fits you is probably better than a great SQN system that doesn’t fit you.  Trying to trade a system that doesn’t fit you will likely cause you to make a lot of mistakes and see poor results—regardless of the system’s SQN score. 
  • Great performance is a function of the market, your system, and you as shown in the diagram below where the three circles intersect.

pic1

  • Minimize your mistakes and trade at 95% efficiency or better.  You make a mistake when you don’t follow your rules.  If you don’t have rules, everything you do is a mistake.  When traders do have rules, most of them have trouble trading above 70% efficiency (3 mistakes every 10 trades) simply because they haven’t worked on themselves.  Trading at 70% efficiency will destroy the results from a good trading system.
  • Trading is a process that can be statistically measured and described if you understand probability and sampling theory.  Within one market type, the mean and standard deviation of your system’s R-multiples will give you a good idea about the future performance of that system under those same market conditions. 
  • Winning is a function of planning, so write a business plan to guide your performance and keep working on that document as you evolve as a person and trader.

Can you see how the first set of rules can lead to disaster while the second set of rules are a major transformation of the trading game and can lead to success?

My next book will be about trader transformations.  The book will cover the three levels of transformation and include stories from five or six different people who have accomplished a major transformation on each level.  We are accepting submissions now, and we’ll be paying $250 for any chapter that we publish in the book.  If you think you’ve made a major Level I transformation, as described in this article and would like to write a chapter-length article (3000-6000 words), we would love to see it. Submit articles in MS Word to book@vantharp.com.

Next week, we’ll take a look at the second level of transformation: Understanding the Matrix.

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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drTrading Tip

Stocks in Your Pocket or Purse:
The Market Goes Mobile, Part 9

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.

Today, we’re looking to see if the any of the money behind the big financial news outlets has found its way into their app development departments.

Apps from the Major Financial News Outlets—Predictably Plain

Here’s a summary overview of the apps from the media giants:

  • CNN Money: CNN has a CNN news app and a CNN Money app. I held out hope that the money app might have some interesting features.  Alas, as I spent some time with the app, that hope was only met with disappointment.  The app has a watch list with very limited functionality.  It has a video news tab that provides business and finance oriented clips, but only holds the most recent six clips with no way to get any others.  The written news section, however, has a novel and useful feature: it allows you to save articles that you find interesting.  Regardless, compared to the relatively slick and rich standard CNN news app, the CNN Money app comes across as very pedestrian, with little reason to recommend it.
  • Fox Business: Like the CNN Money app, this one brings little to the table. It does have more articles and videos available at any one time than its rival network’s app, but still significantly fewer than most other apps.  The watch list is vanilla.  When you click on an individual symbol, you get a data screen that has a cool rotate-to-landscape feature that automatically brings up a chart.  Unfortunately, that charting function is marred by a very prominent Fox Business watermark that actually detracts from the chart’s readability!  Again, little reason to take up space on your device with this app.
  • Thomson Reuters News Pro: Thomson Reuters has long been a high-quality financial market data and news stream provider.  If you want to use your preferred iDevice for up-to-date business and international news, this is an excellent app.  Articles and videos from minutes ago are available; however, as a stock app, it really doesn’t offer much.  The watch list is very basic with the exception that there is, as one would expect, a very good news feed for individual stocks.  It also has a pretty nice interactive charting feature with data that goes back five years providing the closing price and volume for any day with the touch of a finger.
  • CBS MoneyWatch: MoneyWatch was once the most visited financial web site on the Internet.  Oh, how the mighty have fallen.  Their app is probably the most disappointing of all.  It does not even have a watch list function for stocks, though it does allow you to look up prices for individual symbols, albeit with no charts. And the “latest” news tab has its most recent article from 18 hours ago.  Clearly, they are not putting much effort into the development or upkeep of this app.

Sometimes the best that research can do is to reveal approaches that show little promise or reward.  Looks like today’s bunch of apps mostly fit into that category.  For completeness, we have already reviewed two other major media outlet apps: CNBC Real Time and Bloomberg in previous articles.  Both had features to recommend them, especially CNBC’s real time stock data.

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” vantharp.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 Hurricane Is a Hurricane

Q: I'm clear about the world being only what we represent to ourselves and also about how everything we feel, our thoughts, even the emotional Hurricane Katrina, are all in our head. They are not reality. The chapter in your Peak Performance Home Study Course about the "dissociated" state of mind is a GREAT tool in controlling emotions.

However, here is my question: what do I do when reality IS Hurricane Katrina? When something really IS happening in reality? For example, an accident, an illness or a sudden death.
 
Please do not tell me that we deal with the emotions generated by such facts the same way we deal with any other  emotion. How about when somebody we trust did something really bad to us?

After all, where does good end and evil start? How can we try to progress and build civilizations and do amazing things if all we do is simply survive and adapt ourselves instead of always setting a higher life standard?
 
A: When a hurricane happens, it happens. “What is” is perfect.  However, you could have all sorts of beliefs that come up about an event.   If you believe those thoughts, you create an artificial reality. 

Byron Katie is someone I consider to be an “awake” person. She tells a story of a visit to a friend in the hospital.  Her friend was miserable and when Katie asked why, she showed her legs, one of which was twice the size of the other one.  Katie said something like, “Oh, now I see.  You think that both of your legs should be the same size. You are arguing with reality, thinking that things should be a certain way when they are not."

Arguing with reality causes all suffering.  Until you understand this, you don’t understand the material you are reading.

So, you have a big loss in the market.  A big loss is a big loss. You only suffer when you believe that it shouldn't be that way.

Van


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June 08, 2011 - Issue 529

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