The Van Tharp Institute

March 22, 2006 — Issue #263

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In this Issue:

Back-to-Back

Systems Development and Mutual Funds/Exchange Traded Funds Workshop

Feature Article

Interview with Systems Expert, Ken Long, Part Three, By Van K. Tharp, Ph.D.

Trading Education

People Don't Trade the Markets, They Trade Their Beliefs About the Markets.

Trading Tip

Short Selling: Useful Tips and Tools , by D. R. Barton, Jr.

Listening In Coping with Success
Special Reports Reports by Van Tharp: Self Sabotage, Changing Markets

View this newsletter on-line, or read back issues

 
Back-to-Back Workshops

Two Workshops— Only One Trip!

Develop a Winning Trading System That Fits You

April 1-3, 2006 Raleigh, NC

How to Trade Mutual and Exchange Traded Funds

April 5-7, 2006 Raleigh, NC

 
$700 Early Enrollment Discount Off Either Workshop

Offer Expires Today  

Register Now

 or

Register for both and save even more

What past attendees have said about the ETF/Mutual Fund Workshop:

"One Word: Excellent....I learned how to fit ETF's into my current strategy. The 'world model' created by Ken helped me identify macro trends much easier." Ferdinand Ledesma

"It's worth the time and money." Vito Pinto

"It's been exhilarating! I found Ken to be extremely clear and structured in his explanation and presentation of his systems, beliefs and techniques. Awesome information for traders of any level of expertise." Jordi Llobet Serra

"Extremely comprehensive 'top down' approach to trading ETFs. Superbly presented... I give this course a 10 out of 10. Good job! Ken is clearly a man of great integrity and because of this, he had my trust in the material he was presenting immediately." Tim Ridge

"It was quite comprehensive with a good blend of basic background material and application." Joe Pleasants

 

Feature

An Interview with Ken Long

By Van K. Tharp, Ph.D.

Part Three

Through this series of interviews with Ken Long it is my objective to highlight important points about trading system development.

Thus far in Parts One and Part Two we have discussed the importance of defining what you want from your system before you design it, in addition to the importance of who you are as a trader and the important role your objectives play. 

We have revealed the steps one follows in the decision making process and how it makes a big difference in the outcome of the system, how market conditions change and why the trader must keep pace with changing markets.

We continue this week, starting with the topic of assessing one’s opponent.…—V.T.

Van: I also seem to remember that there was a step that involves assessing your opponents.  How is that important to trading or to trading system development?  And why did you include that in your game development strategy?  What difference does it make what your opponents are going to do?

Ken: Remember that in the game, our big payoff depended upon us being the top group.  As a result, it was important for us to know our opponents’ performance and to anticipate our opponents’ strategies.  We knew that the other groups might adjust their strategies based on relative performance after each ten turns.  Anticipating their probable reactions to our performance we believed would give us an advantage when choosing our performance strategy.  For example if they saw we were far ahead of them, they would be likely to increase their risk profile in order to catch us.  In that case we would be able to reduce our risk and still maintain a comparative advantage.

We conducted that kind of analysis for three different conditions: (1) if we were far ahead of other groups, (2) if we were about the same, and (3) if we were far behind.  Since we had developed a number of strategies we were able to match strategy to conditions before the events occurred.  Our rehearsals of these decisions turned out to be great stress reducers in the actual play of the game.  This concept of rehearsal and contingency review is a big part of a trading system model and has a tremendous practical benefit.  That’s exactly what professional basketball players do prior to shooting foul shots.  By visualizing and rehearsing their actions, they program themselves for success.  That’s exactly what we were doing in the trading game.

Again, you are talking about one of the ten tasks of trading—mental rehearsal. That’s all about the importance of not making decisions in the heat or stress of the moment and about how your system takes that into account.  Any comment?

If your trading system requires you to analyze a great deal of data and make difficult decisions in the heat of the moment, then you’re setting yourself up for failure. You will take short cuts, make decisions in ways you haven’t planned for, or freeze up and not act because of system overload.

Our group conducted all required analysis while we were calm and had plenty of time.  We anticipated all the decisions we would likely need to make.  We also identified the information needed to make the decisions and rehearsed a variety of contingencies.  So, when it came time to actually make a decision, we faced little to no stress because we had rehearsed what we needed to do ahead of time.  Then it was simply a matter of executing the well-rehearsed plan, like an audible in football.

People feel trapped and have a sense of losing control when they don’t see options in a given situation.  Take your time during system development to give yourself the options that you’ll need to navigate troubled waters.  This will keep you from making critical decisions under stress when your resources are most at risk.

Of course, part of the mental rehearsal task is thinking of what might go wrong.  And most people don’t like to do that.  They call it negative thinking.

There is an art form to playing the role of the Devil’s Advocate, to see how many circumstances, disasters, events you can dream up that challenge your system. By working through the responses to these events you can reduce most of the stress you might otherwise face during the trading day. Too many times however, we work backwards by inventing a system we really like, and then focus only on the conditions required to make it successful, and then try to make it work everywhere and at all times. 

I also need to stress continually the importance of comparing your results with your goals and objectives throughout the process.  And, of course, you must have objectives to do this.

Precisely, no system works as originally conceived and implemented from day one.  I firmly believe you have to have a plan for regular and systematic feedback beginning in the design phase.  You have to make certain that the environmental conditions (market conditions for traders) for which you’ve designed your system still exist and that the system is operating as designed.  This is an important issue that is beginning to come to the front in the business community.

I’m scheduled to participate in a number of business seminars later this year.  We call this the “After Action Review,” where we methodically and in detail compare the plan and the standard to what actually happened, and try to determine the lessons learned from the results.  This technique of comprehensive self-review may the single most important reason for the success we achieved as a fighting force in Desert Storm. 

Can you recommend any good books on the process of system development?

I’ve already mentioned Walton’s book on Dr. Deming as a must read.  The two best books that I’ve seen on the subject are Breakthrough Thinking by Dr. Gerald Nadler and Systematic Systems Approach by Thomas Athey.  Both are textbooks but do a great job of making theory work in practice.  Diligently applied, their methodologies make sure that you address total system development from the inside as well as the outside.  They also help you overcome the bias of your own expertise.

I can’t tell you how many times I’ve seen the systems development process dominated by a senior leader or expert who came from a technical background, and whose personal point of view influenced the system design in a negative way by emphasizing his particular expertise to the exclusion of other points of view.  A systematic approach, as outlined in these two books forces you to consider alternate points of views and competing priorities on a more objective basis.

I also have to plug two other books which contribute greatly to cultivating an open fresh mind when designing systems: The Complete Murphy’s Law edited by Arthur Bloch, and The Wit and Wisdom of Mark Twain edited by Alex Ayres are essential for helping us remember that the best plans of mice and men must be operated by our peculiar and eccentric species.  They help remind us why it’s best to keep the systems simple and robust with plenty of margin for error and safety. As Twain might say: you can make things foolproof, but not “damn-fool” proof. 

Remember, the secret of the McDonald’s hamburger sales system is that it delivers a high-quality, consistent, inexpensive “good-enough” hamburger that any 16 year old public school student named Murphy can operate well enough to keep the franchise owner out of court and at an acceptable profit level.

Next week in our fourth and final installment, we will get into some of the issues of multiple trading systems. 

About Van Tharp: Trading coach, and author Dr. Van K Tharp, is widely recognized for his best-selling book Trade Your Way to Financial Fre-edom and his outstanding Peak Performance Home Study program - a highly regarded classic that is suitable for all levels of traders and investors.

 

Trading Education

Van Tharp's  Peak Performance Home Study Course

People do not trade the market. They trade their beliefs about the market. 

  • A guide to isolating and understanding your own belief systems in relation to trading.

  • Effective training for all levels of traders, from beginners to advanced.

  • A model that you can follow to emulate the success skills of profitable traders.

  • Discover your trading edge, set yourself apart from other traders.

  • Bring more discipline to your trading.

  • Learn self-confidence, overcome fear and eliminate self-sabotage.

These are just a few of the benefits of the Peak Performance Home Study Program.

Click Here to Learn More...

 

Trading Tip 

Trading Tip

Short Selling:  Useful Tips and Tools 

Short Selling  (Part IV)

by D. R. Barton, Jr.

In this last installment on short selling, we’ll look at some useful items that will help make short selling easier. (Click these links if you missed any, Part I  Part II, Part III.)

First of all, the short selling tick rule (requiring an up tick before you can short stocks) is not applicable to commodities/futures trading, currency trading on Foreign Exchange (forex) or to Exchange Traded Funds (ETFs – the most well known are symbols QQQQ, SPY, and DIA – a complete listing of these can be found at www.amex.com ).

Some key changes have been made over the last year or two to make short selling an easier task for traders.

The first change is that Archipelgo (formerly just an Electronic Communication Network (ECN), through its relationship with the Pacific Stock Exchange, now operates on its own exchange rules.  

As part of this new-found freedom, Archipelego does not require an up tick to sell a NASDAQ stock short.  (More correctly, the NASD’s “bid test” rule does not apply to NASDAQ stocks executed on the Archipelego exchange.)  This means that you can short any NASDAQ stock at any time there is a bidder to take the shares that you’re offering, just by using the ARCA ECN route.  (The shares, of course, must also be borrowable from your broker.)

The second change is that the Securities and Exchange Commission (SEC) has finally realized that short selling is a necessary part of the balance of buying and selling securities in a secondary market.  Therefore, the SEC is conducting a pilot program where one third of the largest 3000 stocks traded in the U.S. are allowed to trade without short selling restrictions.  The stocks have been selected and the pilot program is being run under SEC temporary Rule 202T.  

It has been running since last spring and will end on April 28, 2006.  This should provide evidence that unimpeded short selling provides extra liquidity and, in fact, reduces extreme volatility.  (There is evidence that blow-off tops occur more frequently when short selling is restricted.)

For a list of stocks that are taking part in the pilot program you can check out the following links:

http://www.nyse.com/regshopilot

ftp://ftp.nasdaqtrader.com/regshopilot
 
(Nasdaq will provide Pilot lists in ftp format only. Please note that ftp links may not be accessed through the Commission’s web site.)

http://www.amex.com/amextrader/?href=/amextrader/tradingData/RegSHO/TrDa_RegSHO_Pilot.jsp

Great Trading!

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.

 

Listening In...  


Coping with Success 
Author: TrendTrading 

Hi:
I wanted to discuss this issue - "How does one cope with success?"

The issue is dear to me because I'm having a tremendous time playing my game. The previous difficulty consisted in canceling most of what I had learnt from these so-called "masters". 

I invented my own methodology, which is basically a KISS type of thing and which works up and down and sideways.
I don't know what to do with all the money I have and it's quite a lot of it. I have a 5- year old small car, I needn't anything else really! 

I'm at the core of the issue of being vs having or doing.

In karate I'm having a tremendous time too. I'm very strong, technically very sharp despite my 46 years of age, am preparing the 5th dan exam and am discovering new aspects of the art especially the more esoteric aspects like Funakoshi's famous affirmation that "karate isn't technique".

In trading, I've mastered it according to my method, my rules, my expectations, the market itself, the profits.

Is this it? Wow?!!!!! It's no big deal ...

Does anyone relate to this? No hope, no fear, no wish ...

Thanks
TT


Reply To This Message 


Re: coping with success 
Author: Pumpernickel (---.hsd1.ca.comcast.net)
Date: 03-19-06 20:45

Standard advice includes "Keep a journal!" Write down the decisions you've faced, your reasons for and against, and the choices you made. Write down the final outcomes and your post-mortem analysis.

Also write down your general state of mind, your feelings (in this case, euphoric omniscience may be among them), and your approach to the day.

Later, if trading is still going well, you can review today to see if anything has changed. Maybe your approach will evolve and you'll get steadily better. Or if, heaven forbid, you begin to take losses, you can go back to today and analyze what is the difference in your approach between today, when you're winning, and some other time, when you're losing.


Reply To This Message 


Re: coping with success 
Author: bruce 

Trendtrading, 

Well done to you, sounds like things are going very well for you. One thing I could perhaps suggest is: how does your current trading success and profit relate to your trading objectives? Have you reached where you are aiming for, or are you still some way off?

Keeping objectives squarely in front of you should help you maintain your focus and do the right things to keep your success going.

Re: coping with success 
Author: MelitaH 

Hi Trendtrading

I found reading your thread quite interesting because I wasn't quite sure whether you were using the phrase "tremendous time" from an "everything is great" standpoint or from a HARROWING standpoint. 

If you are coming from - everything is great - then why would you use the word success in the context of coping? I would think you would write something more along the lines of Enjoying my Success....rather than having to "cope" with it. So that is something to look at. 

On the flip side, if you are having a "tremendous time" dealing with the fact that you have successfully made money and that you are accomplished in karate, yet these things have not given you any satisfaction, then you could be looking outside yourself for validation. Were you expecting bells and whistles or to be heralded a hero when you did these things? What were your expectations? If you had none, then it should be okay to just be okay about what you've done. 

Satisfaction certainly doesn't come from the things we "do" - which is what I believe you are saying.

However, "beingness" is not something that is VERSUS doing and having.

When we are "being" what we want to see in the world, then we will naturally do and have the things that support that. 

Sir John Marks Templeton is a great example of someone who is peaceful, spiritual, a philanthropist and incredibly rich both in spirit and monetarily. By being one he is naturally the other. 

Best, Melita 


Participate on Van's Trading Forum, a place for traders and investors to share ideas and learn from each otherFor the above posts, look for the title, Coping with Success.

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?

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Copyright 2006 the International Institute of Trading Mastery, Inc.

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Quote of the Week


The commonest mistake in history is underestimating your opponent; it happens at the poker table all the time. ~David Shoup

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A computerized version of Vans famous "marble game." 

It is designed to teach you the important principles of proper position sizing. 

Download the 1st three levels of the game for free. Register now. 

 

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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. 

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2006 
Workshop Mini-Schedule

April 1-3 Systems
April 5-7 ETF/Mutual Funds
May 5-7 17 Steps
May 19-21 Swing
June 3-5 Peak 101
June 7-9 Peak 202
Jul 14-16 You, Your Money

 More Info...

 

 

 

 

 

 

 

 

 

 

 

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