The Van Tharp Institute

February 22, 2006 — Issue #259

Home   | Workshops  | Products  | Contact Us

www.vantharp.com


Do Not 'Reply.' Click Here To Email Us.

Tharp's Thoughts Weekly Newsletter


Thank you for subscribing to "Tharp's Thoughts"

In this Issue:

New Teleconference

Free, Peak Performance Trader Teleconference- Must Register

Feature Article

How I Finished 2nd in a World Wide Trading Contest in 2005, Part Two, By Kevin Davey

Workshop Special

$500 Discount Offer Expires next week

Trading Tip

Passive vs. Active Investing, Part Three by D. R. Barton, Jr.

Trading Education

Special Reports on Money Management and Expectancy

Listening In What to Put in The Trading Journal
Special Reports Reports by Van Tharp: Self Sabotage, Changing Markets

View this newsletter on-line, or read back issues

 

New

FREE Teleconference

Becoming A Peak Performance Trader

Monday, February 27th, 8:00PM EST

Join Van Tharp and one of his Super Traders as they discuss the following topics:

  • How your beliefs about yourself control your performance as a trader.

  • How mental states shape your trading.

  • The Ten Tasks Model -- what all good traders do.

  • Understanding how you sabotage yourself.

  • Ways to overcome self-sabotage.

Followed by a Question and Answer session.

Enroll now for this FREE teleconference

 

Feature

A Note from Van K. Tharp:

I love to hear from my students and get feedback on how my programs have helped their trading performance.

Recently, Kevin Davey wrote to say that principles he had learned from my books and home study program had helped him turn $15,000 into $37,000 (a 148% return) and he subsequently won 2nd place in a trading competition.

Kevin said that he was happy to share some of what he had learned with other traders and following is Part Two of the two- part article.

How I Finished 2nd in a World Wide Trading Contest in 2005

Part Two

By Kevin J. Davey

In part one of this article, I discussed how a solid plan and a good strategy helped me finish in second place at a World Wide Trading Contest in 2005, with a 148% return.

In this last installment, I will discuss how to check and double check your plan, plus how to execute a strategy and monitor it on an ongoing basis.

Step 1:  Have a Plan (see part one)

Step 2:  Find a Strategy that Fits You (see part one)

Step 3:  Check and Double Check

Remember when you were in school and the teacher always said “remember to check your work?”  If you were like me, you thought doing the work was the hard part, and checking it was something you didn’t need.  Well, if you avoid checking your work before trading a strategy, you can easily fall into trouble.  In fact, I think checking and double checking is so important that I made it a separate step!

The degree and type of double checking you do depends on the strategy you determined in step 2.  Below are some double checking steps to consider if you selected an advisor, a black box system or built your own system.

  • If you are using an independent advisor,
  • If you bought an off the shelf system, or trade off of daily signals,
    • Ask for a real time results history.
    • Look for independently verified track records, such as worldcupadvisor.com or Futures Truth.
  • For systems you develop yourself,
    • Be suspicious of results that are too good to be true.
    • Create a mirror system, reversing buy and sell signals (Does it perform well too?  If so, you might have a programming error).
    • Paper trade, and see if the results mimic your test results.

Step 4:  Execute Your Strategy

At this point, you are ready to trade your strategy with real money.  In my experience, there are five areas to concentrate on in this area.

First, determine your level of involvement.  If your strategy requires you to enter trades or speak with a broker during the day, you better make sure your work schedule can support it.  If you are auto trading on a home PC, do you have the support infrastructure?

The second key is finding a broker.  The choice of broker (eg, full service, discount) will depend on your strategy, and the amount of help you need.  Most brokers have 24 hour desks, and excellent order entry software with varying commission rates.  I use different brokers depending on my particular needs.

The third execution key, and possibly the toughest, is to pull the trigger when your strategy signals “trade.”  Frequently, you’ll have signals that you want to ignore.  My experience has shown that these trades can be the best ones.  For example, currently I am very profitable in Copper.  This signal was AFTER Copper hit new highs, when it felt much easier to go short!  Uneasiness at the start may be a VERY good thing.

The fourth key to good execution is not to overrule your system.  If your system has been proven to give you an edge, it does not make sense to overrule it, since you will inevitably do worse on your own.  This is another rule that sounds easy, but is EXTREMELY difficult to follow.

The last key to executing your strategy is proper money management.  This is an enormous topic, which this short article cannot do justice.  Money management will not make an unprofitable system suddenly profitable, but mismanagement can make a profitable system HUGELY unprofitable.  Van has some excellent products on this topic. The key early on is to stay in the game.  Don’t overtrade.  Profits may come, but only if you have the capital to trade!

Once you have started to execute your strategy, work still continues in the ongoing monitoring phase.

Step 5:  Monitor and Adjust as Necessary

In manufacturing, an essential part of any robust process is process control.  This tells you whether or not an operation is in control, and when corrective action is necessary.  The concept of process control can be adapted to your trading, keeping your system on the right path.

In 2005, when I finished in second place in a trading contest with a 148% return, I monitored each trade, compared fill prices, etc., to my theoretical system.  When discrepancies came up, I determined the reason, and fixed the process.

Another technique I found useful was keeping a trading log.  Recording the details of trades, along with my thoughts, helped me review my performance.  This log is especially powerful when you violate your system, as all of us have.

A final way to monitor results is to complete a year end review.  You might find, for example, that one or two markets were consistently poor because of slippage.  This might lead you to trade those markets differently.  The point is to look at the big picture (How did I do overall?) and the small picture (What happened on certain trades?).

Even with my outstanding performance in 2005, I still did a full year end review.  Based on that review, I made a few minor enhancements that should improve my 2006 performance.  So, no matter how well you do, monitoring and adjusting has to be part of your overall game plan.

Conclusion

So there you have it, the five steps to trading that I used to achieve a 148% return in 2005: 

Step 1:  Have a Plan

Step 2:  Find a Strategy That Fits You

Step 3:  Check and Double Check

Step 4:  Execute Your Strategy

Step 5:  Monitor and Adjust as Necessary

Don’t be surprised if it takes a year or so for you to complete these steps.  My advice is to not rush, and revisit the steps as necessary, until you feel totally comfortable.  I obviously can’t guarantee that you’ll have the results I had, but I can tell you the steps work, and work well.

Kevin J. Davey finished in 2nd place in 2005 in a world famous trading contest, with a 148% return.  He is continuing that success in 2006, and is currently in 1st place through January 31, with a 48% return.  He can be reached at kdavey@kjtradingsystems.com.

 

Workshop Special

$500 Discount Offer Expires Next Week

Peak Performance 101

March 11-13, 2006

Florida

"Tharp’s disciples swear by the results." -- Forbes Magazine

You’ll leave this investment "Boot Camp" knowing, for the first time in your life, why some people consistently make profits over and over again, while other investors and traders are erratic and unsuccessful. 

More importantly, you’ll be able to overcome self-sabotage and develop rock-solid discipline in your performance in the markets. 

Learn More...

Register Now

Trading Tip 

Trading Tip

Passive vs. Active Investing

Part Three (and final)

by D. R. Barton, Jr.

In the past two weeks, we have looked at some new research that sheds some light on investment habits.  We saw that 13.8% of all the money invested in mutual funds goes into purely passive funds (those that directly track an index).  This percentage is at an all time high.  Then in last week’s article, we talked about new research that shows that as much of 76% of the trading volume on the U.S. stock exchanges could be attributed to passive investing.  Again, this percentage ranked as an all time high.

Both reports show that passive investing is on the rise.  And one of report shows that the U.S. exchanges generate the highest percentage of their volume from passive investing than any other country!  Are there any useful conclusions that we can draw from this data?

       Passive investing is pervasive in the U.S. (and other developed countries).  This data seems to confirm suspicions that active mutual funds are actually quite passive in the majority of their activity and only do active stock picking in a small part of their portfolio.

      Outperforming the indexes may be tougher that you planned.  Even if you invest in funds that describe themselves as using an “active” style investment, you may see that returns are not significantly different than index funds.  Most funds are only looking for a small edge, not absolute returns.  Study the investing philosophy and physical holdings of a fund to understand how they are generating returns before diving in.

      Passive investing is no panacea.  If you’re not going to touch your money for 20 years, then passive investing (index investing) has proven over time to be a useful vehicle.  However, it should not be your only investment!  Year-to-year volatility is rather high for the indexes, so any intermediate or shorter term investors need to beware that the reward-to-risk ratio of index investing isn’t that great. Most investors would do well to include some investments in their portfolio that are not correlated to the U.S. markets.  These include gold, country funds from Asia, Europe and South America and some sector investing (note that some sectors are highly correlated to the overall markets, such as tech stocks, while others are relatively uncorrelated, e.g. pharmaceuticals).

      As a general rule, large cap issues track the market.  Traders should continue to monitor which large cap stocks are highly correlated to the S&P 500 index.  Most of the 25 biggest stocks track the S&P very closely, with the notable exception of the oil and pharmaceutical stocks and Google (which has dropped to #25 in market cap among the NYSE, AMEX and NASDAQ stocks).  Use this information to your advantage to help time entries and exits, and to make sure that you’re not “swimming against the tide”.

Great Trading!

D. R. Barton

Editors note: Last week's article incorrectly stated that stock picking was a.k.a Passive Investing. The correct wording is: stock picking (a.k.a. active investing) is dying in developed countries.

D. R. Barton, Jr. is the Chief Operating Officer and Risk Manager for the Directional Research and Trading hedge fund group. D. R. has been actively involved in trading, researching, and teaching in the markets since 1986.  D. R. has taught extensively in many investment areas including intra-day trading, swing trading, and cutting edge risk management techniques. 

His writing credits include co-authoring Safe Strategies for Fin-ancial Fre-edom and co-creator and contributing author on Fin-ancial Fre-edom Through  Electronic Day Trading.

 

Trading Education

Special Reports on Money Management and Expectancy

 $79.95 each. Click below to learn more

 

Special Report on Money Management

Learn More...

Special Report on Expectancy

Downloadable format! Learn More...

 

Listening In...  

What to Put in The Trading Journal 
Author: PureSymmetry
Date: 02-16-06 07:53

Hello Chaps,

I was wondering what I should be putting in my trading journal...currently I just record what I buy or short and why.. is there anything else which Van recommends or you fine fellows have found to be particularly useful?

Your insights as always are gratefully appreciated.


Reply To This Message 


Re: What to put in the trading journal 
Author: Ken Long
Date: 02-16-06 12:04

For what it is worth, here are my fields below:

Cheers, Ken

 

trade#:

 

Open:

(logical field, yes/no) * to filter for open positions for portfolio mgt)

Ticker:

 

ShortLong:

(*indicate short or long)

DateIn:

 

DateOut:

 

DaysInTrade:

(calc) (DateOut-DateIn)

Shares:

 

BuyPrice:

 

Buy$:

(calc) (Shares x Buy Price)

InitStop:

(*initial Stop loss)

InitRiskcalc:

(*this gives you 1R) (BuyPrice-InitStop)

CurrPrice:

 

Net$:

(calc) (Shares x (CurrPrice-BuyPrice))

CurrentR:

(calc) (CurrPrice-CurrStop)

CurrStop:

(*current stop)

OpenRiskcalc:

(Shares x (CurrPrice-CurrStop))

ATR:

(*current Average TrueRange )

HighestHi:

(*highest high while in the trade)

3xATRstop:

(calc) (HighestHi-(3xATR))

25%stop:

(calc) (HighestHi x 0.75)

ExitPrice:

(image) (screenshot of buy decision)

Exitchartimage: 

(screenshot of exit decision)

EntryCmt:

*why I got in

EntryGrade: *

Letter grade A-F

ExitCmt: *

why I got out

ExitGrade:

*Letter grade A-F

FinalNet:

( calc) (ExitPrice-BuyPrice)

FinalNet$:

(calc) (Shares x (ExitPrice - BuyPrice))

FinalR:

(calc) (FinalNet / InitRisk)

TradeCmt:

(*a sentence about the trade "goodness ie "note to self)

TrdeGrade:  *Letter grade A-F


Reply To This Message 

Re: What to Put in The Trading Journal
Author: PMK
Date: 02-16-06 12:59

In addition to Ken's thorough list I would add that I track implementation errors - specific cases where a deviation from 'perfect' implementation from my systems occurred. I record what should have happened with the trade versus what did happen, determine if it cost or made me money, and identify a specific measure to put in place to attempt to prevent it from happening again (if applicable).

The errors report is then an input to my periodic reviews to see whether implementation errors are 'within acceptable parameters' for my trading this period.

Paul King
www.pmkingtrading.com


Reply To This Message 


Re: What to Put in The Trading Journal
Author: Terry 
Date: 02-16-06 21:22

Because I place a large emphasis on psychology, my end of day trade analysis, resembles a psychology brief as to my state of mind in addition to some of the parameters Ken and Paul have already mentioned. Looking back in review, there is a definite correlation between a "clear" mind and successful trades. If I am holding on with too much "baggage", I find it pays to take the day off.

Terry

Reply To This Message 


Re: What to Put in The Trading Journal
Author: Denise 
Date: 02-20-06 19:02

I try to keep track of what I am feeling before and during the trade - and then create a chart if you will - of my own emotional tendencies. I just think of it as "Charting my mental game." 

I think even if it is a word or two about whatever ancillary thoughts/feelings are happening, it can be helpful to understanding your own trading patterns. 

Time in the trade is also a good piece of info IMO.

Participate on Van's Trading Forum, a place for traders and investors to share ideas and learn from each other. For the post above look for the title: What to Put in The Trading Journal

Special Reports By Van Tharp

Click below to read page one of each report, or to order. 

Self  Sabotage - Two Reports of Self Sabotage

Does Your System Still Work in Changing Markets?

Do Not Reply to this email using the reply button as the email address is not monitored. Please click this link contact us:  suggestions@iitm.com

The Van Tharp Institute does not support spamming in any way, shape or form. This is a subscription based newsletter. If you no longer wish to subscribe, Unsubscribe Here. 

Back to top

Copyright 2006 the International Institute of Trading Mastery, Inc.

.

.

.

.

 

.

.

Quote of the Week

"I hope I shall possess firmness and virtue enough to maintain what I consider the most enviable of all titles, the character of an honest man." 
— George Washington (1732 - 1799) 

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

Back to top

.

.

.

.

.

.

 

Share this newsletter with a friend!

.

.

.

.

.

.

.

.

.

.

.

.

Did You Know...

Van Tharp is featured among Jack Schwager's original Market Wizards. 

The Market Wizards books are cited by top traders as essential reading. 

Here's a direct link to  Amazon if you want to learn more about it. Market Wizards

.

.

.

.

Back to top

 

.

.

.

.

.

 

.

.

.

.

Back to top

.

 

.

.

.

.

.

Dr. Van Tharp's Trading Discussion Forum
 
www.mastermindforum.com

Ask questions, share ideas, information and feedback with Dr. Tharp and other like-minded traders and investors. 

 

 

 

 

 

 

 

 

 

 

CONTACT US

ph: +1 919-466-0043

fx: +1 919-466-0408
email: info@iitm.com

Mail: 102-A Commonwealth Court, Cary, NC 27511

 

Back to top