The Van Tharp Institute

October 26, 2005 — Issue #243

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Tharp's Thoughts Weekly Newsletter


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In this Issue:

Feature Article

What are Your Key Beliefs About the Markets? By Van K. Tharp, Ph.D.

Peak Performance

Psychology of Trading CD Series

Trading Tip

Housing Bubble Update, Part Three (and final), By D.R. Barton Jr.

Listening In Predicting the Markets
Special Reports Reports by Van Tharp: Self Sabotage, Changing Markets

View this newsletter on-line, or read back issues

 

Feature

Trader Self-Evaluation

Part Two

What are Your Key Beliefs About the Markets? 

By Van K. Tharp, Ph.D.

Last week I asked you to begin a process of self-evaluation, mentioning that in my work with traders and investors I believe the most significant work that anyone can do to increase market returns is self work. Really understanding yourself and how you think can give you an edge that others in the market don't have. 

As part of my Super Trader Program, I give a long questionnaire to each trader to do an evaluation of themselves.  Some of the feedback that I get is that taking the test is like doing a Ph.D. program! It's that involved.  

I consider that answering the ten questions, the essence of this self-evaluation process, to be a minimum starting point for this type work  

This week we'll continue  this process with a second important question to explore. Remember, my advice to my Super Traders is to spend at least an hour on each question—a day is even better. These questions are meant for you to really dig deep and come up with responses from your core belief structure. 

 Question of the week: 

 What are your key beliefs about the markets?

It is important for you to remember that you can only trade your beliefs about the market.  So what are the key beliefs that are guiding you?

To really understand what’s guiding your trading, you should list at least fifty beliefs.  However, at least ten is a good starting point.  

To help you get started, I’ve listed twelve of my most important beliefs about the market.  Some of these are core principles that I teach everyone and some of them are just things that fit me.  Also I just came up with these twelve off the top of my head.  Like I mentioned, you’ll probably need to discover at least fifty beliefs to thoroughly cover the key principles that guide your trading.

  1. Cut your losses short and let your profits run!!!!!!!
  2. Risk, as it relates to how much you can lose in a trade, is much more important than risk as it related to how much volatility you can have.  Both are related though.
  3. You must understand the R-multiple distribution of your trading system and the average R it produces (expectancy) and the variability of that distribution (i.e., how volatile it is).
  4. You must know the objectives you wish to accomplish.  What would you like to accomplish and what can you tolerate in terms of drawdowns?  In my case, I’d like to make 10% per month in my trading.  
  5. To achieve your objectives, you must understand and use position sizing to your advantage. 
  6. Fill your portfolio with a core position that you might adjust weekly or monthly.  However, then find efficient stocks and use leverage with those stocks to achieve peak performance.  (Again, remember that these are my beliefs and they might not fit you.)
  7. When I have a large down day, thoroughly investigate what happened and how I might have caused it or made any mistakes.
  8. Keep a trading diary on every trade.
  9. Follow the ten tasks of trading.
  10. When I cannot be actively trading, remove all speculative positions.
  11. Understand the risk reward of each trade before you enter it.  For example, your potential reward should be at least three times your potential risk.
  12. Keep stops loss levels with my core positions and actively monitor the market for my speculative positions.  (Again, this one is my personal preference.)

I want to caution you again that these 12 beliefs are my personal beliefs.  Your beliefs might be different.  However, certain beliefs are universal for good trading.  These include beliefs 1- 4 (knowing your objectives), and 8-11.   These are just ideas to get you going. 

So be honest with yourself, and start to look at what you truly believe about the markets. You may surprise yourself.

About Van Tharp: World–renowned trading coach, author and psychologist 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.

 

Peak Performance Training

Psychology of Trading Series

Presented by Van K. Tharp

Eight Part Audio CD Series

Learn the tools and techniques that you need to transform your trading and investing results. 

Make bigger, more consistent profits with less stress.

The Eight CD Series covers the following topics:

  • The Psychology of Discipline

  • Belief Change and Mental State Control 

  • How to Fix Mistakes and Two Tasks of Trading--Rehearsal and Daily Debrief 

  • Games People Play 

  • Self-Sabotage 

  • Creating Your Future by Goal Setting and Manifesting 

  • Personality Type and Trading

Learn More...

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Trading Tip: 

Trading Tip

Housing Bubble Update, Part Three (and Final)

The Attack of the Killer “G’s”

by D. R. Barton, Jr.

This final piece on the housing market goes to the heart of the final question about a housing slow down: When will it happen?

The last two articles (Part I & Part II ) talked about the qualitative and quantitative input from your two Killer “G’s”: Messrs. Greenspan and Gross.  They are, of course, the Fed chairman and the Pimco Bond King, respectively.

The summary of the input we have received:

·        Mr. Greenspan’s main input was the fact that Americans pulled $600 billion out of their homes in 2004 in the form of home equity loans.  This is a number equal to about 7% of total disposable income for the U.S.

·        Mr. Gross chimed in with a process that used Mr. Greenspan’s stunning (and unsustainable) home equitization as a piece of a four-part puzzle that will knock down housing prices.  Mr. Gross said there was a 99% probability for this to happen.

Mr. Gross also gave us some insight as to when we might see a major pullback in housing prices.  Citing yet another Federal Study that looked at housing markets in 18 major countries, Mr. Gross sees the U.S. adhering to the pattern of a housing price top that occurs after 200 – 300 basis points of tightening by the central bank (to date, the most recent tightening by the Fed has been 275 basis points).

In addition, there have many good articles written comparing the U.S. market to the recent bust in both Japan and then Great Britain.  So a three to six month time frame for a housing contraction is very reasonable.

The effect that this will have on the economy, and hence our trading opportunities is a bit more subjective.  If energy prices stabilize at a lower-than-current rate, the ripple effect a housing price drop could range from mild to moderate recession.  If energy prices continue at their elevated levels, the combination could send us into a deeper recession.

How can be so sure than a housing contraction will take us into an economic recession?  Mr. Gross estimates that a reduction in spending due to a drop in home equity borrowing will drop the U.S. GDP by 1%!  And his calculations are conservative.

The bottom line is that traders and investors need to be tuned into important housing stats (such as new home sales, housing starts, building permits, existing home sales, etc.) to make sure you don’t step in front of a freight train.  These will be increasingly important releases on the economic calendar.  Heavily leveraged real estate investors may find it prudent to start looking for hedging mechanisms.  This is certainly no time for panic.  But prudent preparation should be made for a housing price correction that is now almost inevitable.

 

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... 

Predicting the Markets 
Author: Van 

Some people say that because I say we are in a secular bear market I'm predicting the market. That's hogwash.

First, a secular bear market has to do with value, not prices. What it means is that stocks will become a better and better value over time during this period. However, that could happen even if prices go up slightly.

Second, a secular bear market is a long term bear. It has nothing to do with the short term. Since the bear started we have had three down years (2000-2002), one up year (2003) and two flat years (2004-5).

Third, I have no idea what the market could do next. I think there are tremendous forces against the market (such as long term debt), but that says nothing about the short term.

Fourth, one of the keys to success is to be clear enough so that you can see what the market is telling you. That's why I do a monthly update. And it has nothing to do with predicting. It has to do with helping you see what the market is actually doing. Right now it is flat 1) with a slight upward bias and we have 2) a number of tremendously efficient stocks that are tradable -- both long and short.

Fifth, during a secular bear market there is almost no chance that we'll see the kind of markets like we had during the 1990s when it was pretty easy to make money. It takes more skill to do that.

Van

Re: Predicting the Markets 
Author: Bert 

Statements about whether we are in a bull or a secular bear market are essentially forward looking. A secular bear obviously doesn't think the next 3-5 years are going to bring a steady dose of equities trending higher and higher. If you are a secular bear you expect the opposite and that expectation is predictive in nature. No one has much of a clue about what's going to happen in 3-6 months.

By the way, I love reading predictions and forecasts--I just never use them in my trading. 

Bert

Re: Predicting the Markets 
Author: Terry Lesniak
Bert,
I too enjoy predictions and forecasts only because they are usually wrong-headed and inaccurate at best! I was thinking in particular of the Nasdaq bull market of a few years past. How often did you hear of the new "business paradigm" being touted meaning this time was different? You would have thought one product companies with multi-billion market caps and no earnings records would have raised a red flag for the inevitable implosion that occurred. I guess some heeded the information, others didn't.
I have to disagree with you though regarding the idea that one's "expectation is predictive in nature". An opinion of the market can be concluded from a variety of information sources that in no way implies prediction. Market generated information in the present tense suggests what is, not necessarily what will be in the future.
If the market evolves to the point where last weeks opinion becomes next weeks validation, then it may appear to be predictive.... but I wouldn't fall in love with that fallacy too quickly!
Regards, Terry 


Participate on Van's Trading Forum, a place for traders and investors to share ideas and learn from each other

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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Quote of the Week

"I am always doing that which I cannot do, in order that I may learn how to do it." ~Pablo Picasso

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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. 

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

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Dr. Van Tharp's Trading Discussion Forum
 
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