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

  • Article Reflective Learning, Part Two, by Ali Moin-Afshari
  • Trading Education Van Tharp's Breakthrough Workshop in US and AU
  • Trading Tip The Leaders and the Underlings by D.R. Barton, Jr.
  • Ken's Class Trade of the Week Video by Ken Long

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Reflective Learning, Part Two

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In last week’s article we looked at the idea of talent and we considered methods for increasing the effectiveness of the learning process for any subject.  We applied Gibb’s reflective learning methodology to a trading challenge—my interest in avoiding false exit signals from a regression line crossover trading system that I use.   Last week, I described the problem, provided a short evaluation of it, and presented the first step of the analysis.  This week, we’ll pick up with the second step of analysis on the RLCO false exit signals and then draw some conclusions from this experiential learning process case study.   


What else can I do to improve my method?

Visually observe the price and indicator interactions on many charts in order to statistically measure and quantify my approach. If I find statistically significant results, then I will be able to trust my approach.   

For this section, I will reference the chart below. This is a five minute candle chart of the ES e-mini futures contract. On this chart I have the following indicators:

  • One-standard deviation Bollinger band (BB1): 30 period look-back in grey.
  • Bollinger Band Mean: a 30-period simple moving average (SMA), in dotted green line.
  • Two-standard deviation Bollinger band (BB2): 30 period look-back in grey.
  • 30-peiod continuous Regression Line (RL30), in blue.
  • 10-period continuous Regression Line (RL10), in orange.
  • 20-period Exponential moving average (EMA20), in blue dashes.
  • VWAP (Volume-Weighted Average Price), in purple.
  • Full Stochastics.
  • Volume bars, in the background.

Each of these components supports one of my trading beliefs. This means there is a reason, i.e. one or more beliefs, for having each one on the chart and configured as they are. However, due to space limitations I will not be able to explain the supporting beliefs in detail. I will simply focus on following our discussion with respect to exiting RLCO positions in a strong trend.

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The price structure of this bear trend is a classic ABCD measured move. Each leg in itself is another measured move, also referred to as a nested pattern.  There are a total of four small legs in the bear trend.

  • Section – 1: ends at point C. During this entire move price bars are below RL30. Strong trends keep price bars below RL30. Usually the next leg, which is slightly less strong, allows bars to move to the space between RL30 and BB1. However, this trend was so strong that it quickly pushed out the bars under the RL30 for the second time, after point C retracement was complete.
  • Section – 2: price is pushed under RL30 again, but this time bar lows stayed within BB2. This is the first sign of bears losing strength.
  • Section – 3: Three of the five bars of the last micro-trend are over RL30. Lows are well within BB2 except the last bar. On a lower time frame chart, this bar will show up as an exhaustion bar and a two-bar reversal pattern (one bar down immediately followed by a bar up). On this 5-min chart, it shows up as a reversal bar that closed above its mid-point producing the long tail. Also, the last five bars have minimal to no overlap, which is the hall mark of exhaustion when it occurs towards the end of leg 4 or leg 3.

I adopted most of these beliefs from Dr. Al Brooks mostly because they work. I don’t know if they are real or not but to paraphrase Dr. Tharp, “You trade your beliefs about the market.”  Useful beliefs, therefore, are worth installing in your trading mind without holding any feelings or biases towards them. Simply accept them, feel happy about them, and install them. 


After a number of trades and observing many more charts, open positions in the RLCO system generally occur with three types of regression line patterns:

  • RL10 and RL30 moving in parallel: section-1 from the chart above is a good example. A parallel RL setup indicates the spike phase of the trend. It is a sign of strength of the side (bear or bull) that is in control. This pattern is usually almost parallel with other moving averages and price bands.
  • RL Overlap: section-3 shows the overlap. It occurs in the channel phase of the trend. There is some two-sided trading going on in this phase, which causes the two RLs to overlap.
  • Stretch: In a prolonged trend, RL30 and other moving averages start to diverge. It is also called a stretch, which could be measured using Bollinger Bands and its relative location to the SMA.

Personal Action Plan

Reliable RLCO cross signals occur in a certain price action context. I will look for significant clues in the context to validate the signal. RLCO cross is reliable:

  • At measured move targets.
  • Along with a good reversal bar.
  • After a fully evolved trend channel preceded by a completed spike phase.
  • At a significant daily range target or even better, at a multiple of average daily range where you get maximum stretch.
  • With an oscillator (such as Stochastics) to confirm the low.

If price action context does not support a RLCO exit signal, then I disregard it.

This plan of action is now ready to go into a new test phase. I prefer forward testing it in new market situations which helps me repeatedly execute the plan and generates thoughts or feelings which I record and on which I reflect later. The test results and reflections about them help me to further refine and optimize the plan which I will then test and continue the process.

Speeding Up the Process

The model I depicted last week can be summarized more simply into a four step process:


In this model:

  • Experience: Consists of all the activities from which a trader may learn (readings, simulated trading, chart analysis, observations, etc.).
  • Reflection: the trader thinks about the experience (what was seen, felt, thought about) and integrates the new experience with past experiences. (Keep a journal or log your work to help with this process.)
  • Generalizing: the trader develops questions and theories and attaches meaning to the experience.
  • Applying: the trader tests out new ideas, attitudes and behaviors and the cycle continues.

Final Thoughts

Understanding how to run your brain efficiently is an enabling skill in reflective practice. Dr. Tharp’s Peak Performance Home Study Course and Peak Performance 101 Workshop provide practical models, necessary skills, techniques, and knowledge. Everyday practice is another important component to the learning process which solidifies these models as regular working tools of trading research. 

When you understand that you only trade your beliefs about the market, you will also learn that the only beliefs that will function for you in action are those beliefs with which you are comfortable – or as Dr. Tharp puts it, beliefs that fit you. Therefore, your trading research must focus on creating customized methods for the trader that you are. But, do you know who you really are?

“Until you make the unconscious conscious, it will direct your life and you will call it fate.”—Carl G. Jung, Psychologist, Founder of Analytical Psychology


About the Author: Ali is an IT architect based in Toronto, Canada who holds degrees in linguistics and education. He started trading options in 2006 and despite early success, realized he needed a deeper understanding of himself and of trading to ensure continued success. Reading Dr. Tharp’s books brought him to Cary to take part in various Van Tharp Institute workshops. In his spare time, he’s pursuing his childhood dream of learning to fly.

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The Leaders and the Underlings

A friend of mine made a trip recently to Wilmington, Delaware and related an interesting story. Before I get to the story, realize that Wilmington is not a large city. Thanks to the corporate offices of one particularly large chemical company, quite a few banks and other sundry corporate concerns, it does boast a fairly impressive skyline and the downtown area gets quite busy during workdays

As my friend stood on a downtown street corner last summer waiting for the light to change, a number of Boy Scouts all dressed in full uniform, dashed by him and ran around the corner. As Boy Scout troops go, this one was particularly unorganized—but it was clear the boys were having the time of their life amidst their freedom in the “big” city.

Not long after the last boy bounded around the corner, a rather bedraggled middle-aged man,dressed in the Boy Scout attire of a scout master, stopped in front of the group of people waiting for the light to change. In an out-of-breath staccato he asked if they had seen a Boy Scout troop come by. “I must catch them”, he said, “because I am their leader”.

A similar story is playing out in the U.S. Stock market. The underlings are by no means following the “leaders.”

S&P 500 Earnings Growth – Top Heavy in the Extreme

This week’s Barron’s includes a striking chart from the folks at Factset and Morgan Stanley research. In short, it shows that 88 percent of the earnings growth in the S&P has been generated by just 10 companies. That means that 490 companies had to split up the remaining 12 percent. I’ll show you the graphic from two sources – first the one that appeared in Barron’s and the second one from the Morgan Stanley research piece:

Is there any shock that Apple has been the main contributor? But it is quite surprising that six of the ten leaders were financial companies! Bank earnings had a great rebound year – it’s not hard to see what sector is benefiting the most from the QE driven cash orgy.

More importantly, however, this is a classic case of the troops not following the generals! And when only a handful of companies are driving the earnings growth for the whole S&P 500, that growth cannot be sustained

For comparison, let’s look at that second representation of the same data:

Is there any shock that Apple has been the main contributor? But it is quite surprising that six of the ten leaders were financial companies! Bank earnings had a great rebound year—it’s not hard to see what sector is benefiting the most from the QE driven cash orgy.

More importantly, however, this is a classic case of the troops not following the generals! And when only a handful of companies are driving the earnings growth for the whole S&P 500, that growth cannot be sustained

For comparison, let’s look at that second representation of the same data:

Here we see a bit more clearly how out of proportion the earnings growth is between the top 10 and the remaining 490 companies in the index.

From a fundamental perspective, this striking study of market breadth should give those bullish on the macro economic outlook a bit of a pause. There is little hope that the top few companies can sustain the whole economy for very long. Either the Boy Scouts have to line up behind their leader, or the party will take an ugly turn for the worse.

As always, I welcome your comments and feedback. Send them to drbarton “at”

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 and Financial Advisor magazine. You may contact D.R. at "drbarton" at "".



Ken's Class

Ken highlights several of his trades from last week in this nine minute video.  Volatility and price action played key roles for his trades and he frankly admits how some of them were executed less than optimally though they remained in the money.  His commentary provides another example of applying the reflective learning process to trading.



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Dec 19, 2012 #608


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