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Achieve Balance in Your Trading/Investing
Van K. Tharp
This certainly would rank as one of my top ten
tips to you because balance is so important. First, we�ll
talk about balance between profits and losses. If you can understand
that, then it will be easier for you to understand the
importance of balance in other areas.
We live in a world of polarities � good vs.
bad, up vs. down, young vs. old, happy vs. sad. The "win vs loss" polarity is just one example of many. In most cases, we
tend to judge the polarity in that we prefer one side and dislike
the other side. However, one of the secrets to life is to make both
sides of the polarity okay. But, what does that mean?
That�s a hard one for most people to
understand, but perhaps it will be easier when I explain it in terms
of profits and losses. You cannot be a successful trader if you are
not willing to have both profits and losses. As the mechanical
trader in Book 5 of the Peak Performance Course says, "It�s
like only wanting to breathe in and not wanting to breathe
out." Both are a significant part of the trading process."
Most people don�t understand this concept at
all. They want to be right all the time. They want to make money on
every trade. Yet that will not happen because losses are a part of
the trading/investing process. When you understand the relationship,
however, you can come to terms with losses and make them okay.
A natural part of the trading process is to have
a point at which you must unload a position or trade at a loss in
order to preserve your capital. Those losses will happen to most
people about half of the time or more. And you must make them okay
If a loss is not okay, then you will not take it.
When you�re not willing to take a loss, it usually gets a little
bigger. When it rains, it pours. As a result, it becomes even harder
to take � much more painful. If you didn�t take it the first
time, as it becomes bigger you will be even less likely to take it.
What�s likely to happen? It probably will become even bigger. The
cycle typically continues until the loss becomes so big that you
have to take it. This typically occurs when you get a margin call
from your broker.
However, investors might never get a margin call
if they are not margined. Instead, they tie up valuable capital in a
falling investment that might last forever. There are probably
millions of investors right now who are hanging on to losing
investments, just because
they are waiting for it to come back. Consequently, you must make it
okay to take losses.
The other half of the equation is also important
(and equally puzzling). You can�t put too much importance in
gains. People who do value profits too highly tend to take them
quickly. Why? Because if they don�t take them, they are afraid
they will get away.
An example of this was pointed out to me
through real estate investors. A group of investors got into a real
estate deal that started to lose money. Instead of getting out and
taking their loss, they elected to stay in and ride it way down.
When asked why they didn�t get out of a bad investment, their
comment was, "We haven�t gotten our money back yet."
These same investors subsequently got into
another real estate deal. It started to become profitable very
quickly. In fact, it rose to 100% profit and more. But the investors
who were holding onto the bad investment, sold out quickly at a
small profit. When they were asked why they sold, the reason was,
"We lost money on the other deal, so we wanted to make sure we
got our money back on this one."
This concept of balance is very important and it
applies to any polarity you can think of � not just profits and
About Van Tharp: Trading
coach, and author, Dr. Van K. Tharp is widely recognized for his
best-selling book Trade Your Way to Financial Freedom and his
outstanding Peak Performance Home Study program - a highly regarded
classic that is suitable for all levels of traders and investors.
You can learn more about Van Tharp at www.iitm.com.
Fall Workshops in the USA
and Gas � Crudely Speaking Part
More Fundamental Considerations
In the short-run, the market is a voting machine; in the long-run, the market is a weighing machine.
We begin to wrap up our series on oil and gas this week with some additional thoughts on fundamentals and then a quick look at a current chart that is truly stunning.
Thanks for the e-mails that you sent. Most talked about fundamentals of the market and how, regardless of what�s happening now,
the fundamentals of supply and demand will dictate price.
I agree � in the long run. Like Benjamin Graham said in our quote today, in the short term, the market is a voting machine. Or a subjective beauty contest. All of these analogies are provided to say that at any given moment, the whims of buyers and sellers dictate the price of the moment. In hindsight, we can often see where buyers have gotten overly enthusiastic (manias, bubbles) or where sellers drove prices to unrealistically low levels (extreme value periods).
But those periods of exuberance are very difficult to identify in the moment! For example, Wall Street was littered with folks talking about the Internet bubble � in 1997 and 1998, let alone 1999. Some who acted on the courage of their convictions lost fortunes shorting into the top; others merely lost face.
Indeed, calling market tops (or bottoms, for that matter) is a treacherous game, at best. The perils of timing tops is best summarized by John Maynard Keynes who famously said that markets can remain irrational longer than we can remain solvent.
This brings us back to the oil markets; in two or five years, we may look back and say that $145 per barrel was a bubble or mania price. OR
we may look back and say that it was the right price on the way to $200+.
In 2000, there were competent analysts who said that Internet stocks were properly priced because there was a new market model taking over. And almost all institutions and individuals agreed, voting with their dollars in the stock market. Of course there were other competent analysts that had the opposite view.
Today, in the oil market, there are also two camps. And in the heat of the moment, it�s almost impossible to discern who�s right. The peak oil/limited supply camp, argues effectively that global oil production will begin to decline at some future date and that the current prices reflect this view. Others make valid arguments that temporarily higher oil prices will bring on new spending that will lead to technological advances making it easier/cheaper to extract existing oil deposits and those that are hard to reach (or find). This, in turn, will increase supply and drive prices back down.
For now, the markets participants are voting for alternative �A� and prices are hovering at all time highs. And it�s impossible to know how long the �weighing phase� will take.
When will we know �the fundamental fair price� for a barrel of oil?
One can argue that it will take much longer than figuring out the Internet company valuations. In the Internet company case, those companies were publically traded and information was mostly easy to access. In the case of oil reserves and production numbers, solid information is much harder to come by; a majority of the world�s known reserves are controlled by state-owned entities who only have to disclose what they want.
This makes the puzzle all the more difficult to piece together. Let�s jump back into some details to see just how multilayered the oil pricing problem is.
Last week we talked briefly about commodity fund indexing by large institutions, which has grown 20 fold in the last five years, according to
Here is a striking chart that shows the magnitude of what�s been happening in
the crude market:
To be honest, when I looked at the chart for the first time this week, I was shocked.
The volume of crude oil futures contracts traded today is more than 56 times greater than it was four years ago! And dollar volume of crude oil futures traded has increased by 222 times. That�s a 22,000% increase! It boggles the mind.
In our next oil article, I�d like to take a look at energy market speculation and why government intervention in that area is a very bad idea indeed.
One final note (erratum for last week�s article): the levels listed on last week�s charts were clearly areas of support and were mismarked.
Please keep those comments coming to drbarton �at�
D.R. Barton: 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 SmartMoney.com and Financial
You may contact D.R. at
�drbarton� at �iitm.com�.
Melita's Inspirational Corner
I decided that I wouldn�t write anymore about the hair
loss and decided that I should �be over it� by next
week and could probably write an article about laughing at
it�s funny how life turns out. It doesn�t always
present itself in the way that we expect it or want it to
and my laughing week didn�t just occur as expected. I
guess I should let go of expectations and let things be as
they are. How about that for a concept huh?
gripping truth of my reality right now is that the hair
loss isn�t the problem per se � anybody can get
through a physical change. It is the identity change that
goes with that transformation that is the difficult part.
It is looking in the mirror and seeing that I look like a
cancer patient. It is no longer able to be hidden. So the
actual loss of the hair wasn�t the difficulty that I was
going through. It was a much deeper shift in my beliefs.
It was the change in identity that the hair loss
represented, and it is a change that I don�t want or
didn�t choose to have. Or did I? On a much deeper level
somewhere I can ask myself "How did I choose this and
I am torn
at the moment because there is a part of me that believes
that we choose everything that happens to us and yet,
there is another part of me that is unable to identify
with this belief. Why on earth would I choose cancer and
if I can choose it, then how can I un-choose it?
identify so strongly with our beliefs that we have to be
really careful about how they shape our lives. If I
identify too strongly with being a cancer patient, then
what does that mean? And if I claim that I am not a cancer
patient, then am I acting from denial?
now, there is a lot for me to work on. I certainly don�t
know all of the answers, but I am willing to look and
explore. Thankfully I also have an identity belief that I
am a very healthy person, so that gives me the energy to
get up and do things instead of wallowing in my present
many identities that we associate with ourselves, and we
subsequently create our lives around these roles. It could
be father, mother, husband, trader, engineer, housekeeper,
breadwinner, sick person, stressed person, law abider,
rebel, loser, and winner; just to name a few. The list is
endless. Have you ever taken the time to look at your
identities? Do they serve you or are they a burden?
the time to look at how you identify yourself, you may get
some insight into why you do some of the things that you
do and subsequently un-identifying with some of these
roles could make a huge impact on your life.
that you may notice a shift in your identity could be
after a divorce, no longer being a husband or a wife. It
could be after a job loss or completely blowing up your
trading account. Does that mean that you are no longer
your job description or no longer a trader?
As per my
article last week about transitions and transformations, I
now realize that I wasn�t talking about something as
simple as walking outside with no hair, I was talking
about walking outside as the new me, with a new identity
and a new way people perceive me, but more importantly, a
new way that I perceive myself. If I walk out the door as
a cancer patient, then that is how I will be perceived.
Instead, I am choosing to be a hot young woman who just
happens to wear hats and scarves at the moment. No
identity crisis here.
Melita Hunt is
the CEO of the Van Tharp Institute. If you would like to
keep up with Melita�s progress regarding her recently
diagnosed lung cancer (she is a never-smoker). Please feel free to read her blog
You can contact Melita at [email protected]
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