Did you get your $700 discount?
#878 February 21, 2018
  • Feature: Designing My Trading System: Part 2: Creating Asymmetric Returns, by G
  • Workshops: Ken Long Returns with Advanced Adaptive Trade Systems in April, Cary NC
  • Tips: The Collision of Two Narratives: All You Need to Know in One Chart, by D.R. Barton, Jr.
  • FREE BOOK!: Trading Beyond the Matrix
March Workshops
Don't miss your chance to meet Van in person and learn in 3 of his most popular workshops this March in Australia. If you register now, you will get $700 off. The discount ends next week so don't delay. Seats tend to fill up quickly before the discount expires.

Feature Article

Designing My Trading System:
Part 2: Creating Asymmetric Returns
by G
Van Tharp photo
Editor’s Note: G (who requested anonymity) is a client with an engineering background who has been working on developing trading systems for the last several years. He details his observations and insights from that process in this five part series of articles.

Asymmetry in trading returns fuels profitability. A trader producing a consistent positive Expectancy has created an executable approach to trading where potential gains are a stable multiple of potential losses, hence an asymmetric return. The higher the multiple, the greater the asymmetry.

As noted in Part 1 of this series, the most common way in trading to create a mathematical asymmetry in returns is to cut your losses early as Van teaches and in a “ruthless” fashion as Ken Long says – while letting your winners run as far as they can.

A less obvious path to asymmetric returns exploits the remarkably wide distribution of returns available in the market. Trends often persist much longer than most traders expect and in doing so, offer returns that are far more asymmetric than most traders think possible.

Financial returns from trading are not accurately modeled by the use of Gaussian (‘normal’ or Bell-Curve) distributions. Want proof? Using ‘normal’ variances on the S&P 500, a 5-sigma event is a daily percentage move of 4.86%. That means such a move should happen once every 6,900 years. Since 1950, there have been 50 moves greater than this 5-sigma level compared to a Gaussian expectancy of zero occurrences. Q.E.D.

Power Law Distributions

Most people have heard of the 80/20 rule. In trading, if you find that 80% of your gains are produced by 20% of your trades, you are dealing with a ‘Pareto Distribution’, a member of the broader class of ‘Power-Law’ distributions. Compared to Gaussian distributions, Power-Law distributions do a much better job at explaining what really occurs in the market. Graphically, the differences between these distributions are clear: Power-Laws offer more upside potential as the line keeps going to the right in the graph below.
G Chart 1
Why is a Gaussian distribution (a normal bell curve) and the Power Law distribution so different? A Gaussian distribution assumes each point of the data is independent from the other points and the points are additive. Power-Law (Pareto) distributions have data points which are usually interdependent and/or interactive and/or multiplicative in nature. Often, the data show signs of small positive feedback loops at work. Financial markets are interdependent, highly interactive, and often have multiplicative processes at work from growth-rate compounding and use of leverage.

The distributions of R multiples that trading systems generate usually fall between Gaussian and Power-Law distributions. Referred to as ‘Log-Normal’ distributions, they have data points (trade results) that are usually independent of each other but often have multiplicative processes going on, e.g. ‘Market’s Money’ being put to work.

Superb control over losses and letting winners run will produce a distribution of gains that are roughly ‘normal’ in appearance to the right of zero R, with a skinny ‘normal’ distribution of losses to the left. In stark contrast, other traders’ R-multiple distributions might look more like an 80/20 Pareto distribution because highly asymmetric returns typically produce a Power-Law distribution of returns.

The log-log plot below highlights the dramatic differences in the tails of these three distributions of returns, differences which are obscured when plotted on linear scales using a small number of trades.
G Chart 2
Symmetrical Gaussian distributions can be well described by a mean that is stable and meaningful and it has a variance that is finite. Power-Law distributions are not so fortunate: their means are unstable due to the effects of extreme outlying data points moving the mean around and worse, their variance is often infinite. Trying to compute confidence intervals for Power-Law distributions using traditional calculations is a waste of time. Confidence in characterizing Power-Law distributions can only be dependably generated through collecting thousands of out-of-sample data points at a minimum or running lots of Monte Carlo simulations.

How does a trader exploit Power Law distributions? Here are seven methods I employ in my trading system.

  1. Trading trends have a natural asymmetry advantage over mean-reversion: trends have a less restricted upside relative to mean-reversion. More frequent use of trend strategies can increase the asymmetry of returns.
  2. Setting your expectations that there will be a few, infrequent trades that produce the majority of gains will lead you to think through how your trading system can insure that you safely participate in all exceptionally large movements.
  3. Use of leverage (futures, options, ETFs) multiplies upside returns when they occur.
  4. Scaling-In based on meaningful price progression is the obvious way to increase cumulative position size during a favorable run. Briefly increasing entry size when the odds of success are higher than normal is an additional way to scale-in.
  5. Availability of Market’s Money can enable ramping up position sizes quickly and “safely.”
  6. Spreading a high number of small bets over plays with very high potential payoffs tends to keep losses small relative to long-term gains.
  7. Consciously letting go of high win-rates as a priority and instead focusing on ways to improve Reward-to-Risk Ratios can result in far better returns.

By design, my trading system produces a highly asymmetric return with 80% of my total gains coming from 20% of my trades. Since the majority of profits from the system come from a minority of trades, missing out on just one could be a costly error as it could become one of the most profitable trades. I use a combination of tiny probe positions and buy/stops to make sure I have a position on during every trade that matters.

In Part 3 of the series, I’ll explore the ranges of possible win-rates and of reward-to-risk ratios from a trading system. These ranges are key to thinking about ways to eliminate costly ‘errors of omission’ when dealing with Power-Law distributions.

– G
Did You Miss The Offers Following Van's Cryptocurrencies Webinar?
Click on the image below to get coupon codes for additional discounts on upcoming workshops (including Sydney events which you can use in addition to the early bird discount).
CryptoCurrency Offers page

Trading Tip

The Collision of Two Narratives:
All You Need to Know in One Chart
by D.R. Barton, Jr.
D.R. Photo
I wrote to you several months ago about the wonders of Venn Diagrams. Last week, I wrote that there was a narrative waiting in the wings to take the place of the Trump Growth narrative. This week, I combine those two ideas.

As a reminder, a market narrative is the overarching concept and the most important driving influence in the markets. Since the U.S. Presidential election in November, 2016, that narrative has been the Trump growth agenda based on three pillars: lower taxes, less regulation, and more infrastructure spending.

With the new tax reform bill signed into law late last year, one of those legs is firmly in place. The reduction in regulations is ongoing but enough changes have been made (largely through executive orders) to say that the second leg is largely in place also. Trump’s infrastructure plan was re-introduced last week but will take some tweaking (maybe lots of tweaking…) before it makes much progress.

Outside the bursting of the short volatility bubble that we discussed in this space last week (which seems to be largely resolved — it wasn’t that big of a market in dollar terms), the main short-term market mover has been the new narrative — the Fed Great Unwind. This will be the foundation of tightening monetary policy and will be accompanied by rising interest rates.

Here’s a reminder of that narrative transition in visual form:
As you can see, I expect the narrative to transition over time until “The Great Unwind” is all that matters to the market. For now, however, we’re in an “in between” state so let’s look at the two key mileposts that will tell us which narrative is exerting more influence:

  • How does the market digest important economic news? In the Trump Growth narrative, good economic news sends the market higher while bad news sends the market lower. “The Great Unwind” Fed narrative will have the opposite be true. Good economic news will be bad for the market (because traders and investors will fear quicker or bigger action by the Fed) and bad economic news is good because market participants will anticipate this will push Fed tightening actions further back.

  • How does the market react to news about the Trump administration or Congress? In the Trump Growth narrative, any news about lack of efficacy in the White House or on Capitol Hill will push the market down. News that makes the president look more “presidential” or that is supportive of key staff members will push markets up. In “The Great Unwind” Fed narrative, news about the Trump administration in particular will have little to moderate effect on the market.

Indeed, the market shows a “blended narrative” already where both of those mileposts are showing up — and we can we see that in one chart:
Stay tuned for more volatility as the market gets skittish every time news comes out that might entice the Fed to raise rates quicker and then recovers every time traders remember that corporate earnings are strong, the full benefits of tax reform have not yet been fully priced in and the global economy is doing well… Lather, rinse and repeat.

Your thoughts and comments are always welcome — please send them to drbarton “at” vantharp.com

Great Trading,
D. R.

Workshop Schedule

March 2018 - Sydney, Australia
$700 Early Bird Discounts Expire Next Week!
Do You Answer Yes To Any Of These Peak Performance Questions?

Peak Performance 101 not only helps you implement Dr. Tharp’s model for peak performance trading, it also helps you overcome self-sabotage. You’ll be able to free yourself from internal conflicts that keep you from performing at a peak level. For example:

  1. Are you always looking for a new trading system? Or, are you always trying to improve the one you have?
  2. Do you find your trade setups never quite fit all of the personal criteria you need, so you have trouble entering trades?
  3. Do you get anxious about the market or about risking your money, so that you have trouble pulling the trigger?
  4. Do you get excited about the market, or do you get distracted and fail to follow your system's rules?
  5. Does a losing trade take your energy away for the next trade, or conversely, does a winning trade make you confident about the next trade?
  6. Is your trading (or your life) ruled by the "negative" emotions of fear, anger, or greed?
  7. Are you constantly losing money because you don’t have a strong plan to guide your trading, or because you simply don't follow the plan you created?
  8. Do you have a performance ceiling where you fall apart or stop doing well? Do you earn $100,000 and then just seem to stop trading? Or, do you reach the million-dollar plateau and then start losing heavily?

If you answer "Yes" to any of these, then this is the workshop for you.
Do you want bigger and more consistent profits from the market?

If you want consistency and would like to make profits from the market, you'll want to attend this three-day workshop. We'll show you little-known, closely guarded secrets that you're not likely to find unless you accidentally stumble upon them yourself.

Are you a low-risk investor who just wants to make small, consistent profits each month with only an occasional loss? We can show you how to develop a system that will allow you to develop a unique methodology that will give you that kind of consistency!

Are you a gutsy trader who'd like to make yearly profits of 100%, 200% or even 1,000% per year? Although risky, it is possible, and we can show you how to do it! The interesting thing is that you can do it in such a way that the only money you're risking is the money you've already made from the market. That's real leverage!
What You Will Get In This Course

Beginning on Day 1, you’ll learn what the real Wealth Game is and, more importantly, what it isn’t. You will discover:

  • Who decides the rules in the wealth game
  • What money really is and why it doesn’t even matter
  • What is holding you back from creating infinite wealth in your own life
  • How different people think about money and why it matters
  • The single greatest method for infusing positive beliefs about wealth into your being
  • How to achieve infinite wealth in 7 simple steps

We’ll finish the day by playing a game that’s designed to get you thinking about the game of wealth in a much different way and to look at your patterns of behavior when it comes to money. You’ll learn more about yourself…your beliefs about money, and what’s possible (or not) just by playing this game.

On Day 2, we’ll start with a quick review before I share with you the exact same steps I took to create infinite wealth for my family and myself. You will learn how to model my success and achieve real freedom for yourself. We begin by discovering how to:

  • Become debt-free in less than 7 years, including your home, cars, credit card debt, student loan debt and more, all on your current income
  • “See yourself” infinitely wealthy with the same visualization techniques my Super Traders use
  • Invest in yourself to increase your income by 1000%
  • Use tax expectancy to your advantage as a trader and investor
  • Create inner wealth to achieve the freedom you seek

At the end of the day, we’ll again play the game to reinforce new wealth-building concepts while continuing to think of infinite wealth as a game to be played.

Day 3 begins with a review of the previous day’s notes and discoveries before we cover more in- depth inner work. Before you leave the workshop, you will know how to:

  • Overcome your weaknesses while fostering your strengths with SWOT analysis
  • Come back from a set-back, all with a unique mental resilience tool
  • Begin each day with a clear intention, simply by removing your limiting money beliefs
  • Use the matrix model to achieve infinite wealth
  • Get your life purpose in alignment with your financial goals
April 2018 - US
Participating in the Oneness Awakening Course is an extraordinary opportunity to benefit from some of the important journeys Dr. Tharp has taken to transform his life.

The course has become a fundamental tool in Dr. Tharp's mission to help his clients succeed. Don't miss a chance to learn more about how you can become more aware, positive, calm, centered, and successful. Plus, this is one of the few courses in which you can apply for Super Trader Program after completion.
April is for Systems Traders
Attend the NEW Futures Trading Systems with 3 all new systems,
plus several advanced swing systems in Ken Long's
Adaptive Swing Systems workshop!
Do you remember the big swings up and down lasting over several months in metals and energies (such as precious metals and oil)? Why don’t you trade moves like these in your preferred timeframe at a time during the day that fits you? I have a strong belief that in these trending markets following the trend is key. Why? The stronger the trend the more counter-trend traders are attracted into the “Market Traps” that are set-up by the specific patterns of my three systems.

Getting stuck in any of the traps can be a very painful experience – benefiting from it is a lot more fun. Do not miss the big number of opportunities presenting themselves to you now and in the years to come. Take your trading to the next level! Join us for this three-day workshop and leave prepared to trade the system right away.

Plus, we will offer Two days of live Futures trading so you can trade the systems live!
Check out Ken's 4-minute video referenced in our feature article today where he touches upon a variety of trading edges to consider.

In this new three-day workshop, Dr. Ken Long presents a series of advanced, adaptive trading systems that work well in the swing period holding timeframe — from two days to two weeks.

In addition to the robust seven patterns found in the RL Framework, Ken will also teach at least three other swing trading systems:

MaxPain Range Compression System

In any given two-week period, some stocks and ETFs will be down. If you compare all of the issues that are down, some of them are down more than others. These are the issues with “max pain”. Of that max pain group, some of them are very near their 10 day lows — they have not yet started to recover. These are the ones who have range compression. MPRC symbols have a higher probability of popping than other groups and Ken has effective and simple ways to take advantage of these situations.

Autoframer System

For this system, Ken starts with the assumption that every symbol has a reward to risk relationship with its 10 day high and 10 day low. The potential long reward is the distance from its current price to its 10 day high and the risk is the distance from its current price to its 10 day low. Ken will stalk very closely those symbols with the greatest reward to risk ratio within those parameters. That idea is so simple that you might not think this system would work well but if you thought that, you would miss out on nearly daily opportunities.

Daily Squeeze Play System

While prices do not move reliably in a cyclical pattern, volatility tends to move much more cyclically. Periods of low volatility are typically followed by periods of high volatility. With an effective way to find symbols that have had low volatility recently, Ken has developed an effective system that captures those volatile moves out of the narrow price ranges.
May 2018 - US
June 2018 - US
July 2018 - US
August 2018 - US
September 2018 - US
October 2018 - US
MORE 2018 TO COME...

Free Book

FREE Book!
We pay for the book, you just pay for shipping.
When you add the free book to an item already being shipped there is generally no extra shipping charge (of course, depending on your location).

Read Van’s Latest Book —
The Red Pill for Traders and Investors

Eleven traders tell their stories about transforming
their trading results and lives, in this 400 plus page book.

Below is a brief video on how powerful this book is to traders.

Cary, NC Workshop Information
For a list of nearby hotels for our Cary, North Carolina locations, click here.

Book your flight arriving to the Raleigh-Durham International Airport (RDU).

When traveling to a three-day course, it's best to arrive the evening before.
To help determine your arrival and departure times, see:

Questions? Click Here to Ask Van...


This is a supplement to our subscription based newsletter, Tharp's Thoughts.

800-385-4486 * 919-466-0043 * Fax 919-466-0408
Share this email with your network on LinkedIn