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

  • Article The Trader's Journey: A Four-Stage Cycle by D.R. Barton, Jr.
  • Trading Education 2011 Fall Workshop Schedule
  • Trading Tip Looking at Your Trading from Multiple Angles by Ken Long
  • Mailbag The Definitive Guide or the E-course: What's the Difference?

$700 Early Enrollment Discount Expires Next Week
on Peak Performance 101

This workshop provides the foundation for every trader who wants to earn bigger and better profits, consistently, all with less stress.  It’s not a technical workshop with lots of numbers and analysis but rather an exploration of the underlying role that personal psychology plays in trading success.  This is the last time this year that Peak Performance 101 will be held. Peak Performance 202 has already sold out.

To learn more about Peak 101, as well as the rest of our fall schedule,
visit our workshop page.

The Trader's Journey: A Four-Stage Cycle

Purely by the numbers, the best trader of the last decade is the hedge fund manager of Advantage Funds, John Paulson. As the real estate bubble began to burst, Paulson set the record for money made in one year by a single hedge fund manager—an astonishing $3.7 billion according to at least one ranking source.

He followed up that performance by earning $2 billion in 2008, a number that landed him in only second place among hedge fund managers. With more than a billion made in both 2009 and 2010, he has been on a performance run that is spectacular by any measure.

It probably wouldn’t surprise you that this “king of markets” shares some characteristics in common with top performers in other fields: musical composers, performers, athletes from Michael Jordan to Tiger Woods and others in between.

We like to think that once our heroes or gurus find the key to top performance, they then remain masters of their domain. In reality, we find that most top performers in any difficult endeavor experience a cycle of performance. Almost everyone who reaches the pinnacle sees a pullback at some point from that extreme level. True masters then find the resolve to climb back to peak performance.

Earlier this year, John Paulson’s fund was down 34%, and it certainly has gone lower since then (that drawdown figure was reported before the August drops in stocks and gold). But Paulson isn’t the only one struggling in 2011. An article in the Financial Times listed a host of huge names in the industry who have been slammed this year, including the revered bond king Bill Gross of Pimco.

Looking beyond the trading world, however, is this pattern unusual? Michael Jordan went from the “top of the world” with three straight NBA championships to traveling by bus from stadium to stadium fighting against his amazing athletic prowess on minor league baseball team. He then returned to basketball to win three more championships.

Tiger Woods was undeniably the best golfer in the world for more than a decade. Now Woods is clearly fighting against his golf game: injuries and swing inconsistencies have taken their toll. It’s tough to argue though that his once iron-clad mental game has fallen significantly since his very public indiscretions. Whether he will rebuild himself remains to be seen and is one of the great debates in all of sports right now.

That well-known top performers (traders, athletes, etc.) show a similar pattern of achievement and struggle should not come as a surprise as we all share a very real cycle of performance. Those who have had difficult times in the market this year have lots of company.

Let’s explore one way to look at this performance cycle and how understanding it can help us spend more time flowing with the markets and less time fighting them.

The Performance Cycle

Performance in complex or competitive endeavors often follows a sine curve.

chart 1

Let’s look at the four phases briefly and relate each one to a trader’s ongoing experience in the market.

  1. Flow. This is probably the easiest phase to recognize. It’s John Paulson in 2007 and 2008 managing a portfolio that was designed to take advantage of market conditions. It’s Michael Jordan in 1989 sinking the shot over Craig Ehlo in the Eastern Conference finals. It’s Tiger Woods at Augusta in the 1997 Masters or at Pebble Beach in 2000 making the best golfers in the world look insignificant for a weekend. And most importantly, it’s YOU taking that trade or making that investment when the idea matches the market. This is when success seems effortless.
  2. Fall. This is toughest part of the cycle to identify as it’s happening. Statistically we fully expect it—the return toward the mean after a period of outperformance. The fall, however, can often be a hazy time when bits of that flow feeling still linger, but the results start to decline. We may find it easy at first to ascribe the changes to outside influences: news affecting the market or distractions affecting our performance. But as we continue to fall, we begin to realize that things aren’t like they were when we were in the flow. Results drop, and things don’t seem easy and effortless like before. Uncertainty starts to dominate and lack of confidence begins to creep in.
  3. Fight. Quite simply, this is when nothing seems to fit—our trades don’t match the market. It’s when hedge fund managers invest heavily in the rebound of financial stocks and they drop lower, or portfolio managers bet on rising rates and a catastrophic drop in US Treasuries that just never seems to come. This is when a golfer can’t find the fairway with his driver or the cup with his putter. This is the time when you and I fight the trend trying to pick a top or bottom for a turn. Or when we keep praying for a breakout or breakdown that seems to never come as the sideways market keeps on going.
  4. Fume. Eventually we realize that we have been “fighting against” instead of “flowing with.” Different people react in different ways during this phase: some people withdraw, and some fight even harder for a while. While the name I chose for this phase may seem negative, it strikes me as truly necessary. We need to break our pattern of fighting. We need a time out. For those that truly recover and head back to the Flow state, this Fume phase usually ends in a cathartic moment when we realize why and how we were fighting against the markets, our natural tendencies and abilities, or our golf swing. And we free our minds once again to flow with what works.

And then, like the instructions on the shampoo bottle, we “Lather, Rinse and Repeat”: we go back to the Flow state and the cycle continues.

In the past week, I found myself going through this cycle in full. Fortunately, good position sizing™ strategies and risk management practices instituted over many years allow me to manage my Fall and Fight stages within a framework that limits my downside.

So last week, my Fuming phase took place in its entirety during one exercise session. I just couldn't see what was happening, and I didn't know why. I felt remorse all the way to my light-switch epiphany: I had been stuck looking at the markets in one time frame and not seeing the bigger picture. With that realization, I made both a mental adjustment (a mental state change that I use when I am fighting against a trade) and a physical adjustment (putting a higher level time chart on my main trading screen). Making those two changes put me back into the flow of the markets.

As traders and investors, we will have ups and downs. Even the great ones do. The way to spend more time in Flow phase and less time in the Fall, Fight and Fume phases is to recognize where we are in the cycle. Self-awareness will allow us to react quicker, break our fighting pattern, make adjustments and move back towards the Flow phase. With practice, we can reduce our cycle time and spend more time flowing with the markets and enjoying our trading and investment activities and results.

I’d love to hear your thoughts and feedback! Just send an email to drbarton “at” Until next week…

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 "".

Disclaimer »


Next Wednesday, look for Dr. Tharp's Monthly Market Update.

Trading Education

2011 Fall Workshop Schedule

Sept 16-18



Peak Performance 101
Early Enrollment Expires in 2 Weeks!

Cary, NC
Sept 20-23



Peak Performance 202

Cary, NC
Oct 1-2 $195

Oneness Awakening

Cary, NC
Oct 14-16



Mechanical Swing and Day Trading Systems Cary, NC
Oct 17-21 $4,999 Discretionary Swing and Day Trading Systems Cary, NC
    Click here for combo pricing details on Ken Long's workshops.  
Nov 12-13



Core Trading Systems: Market Outperformance and Absolute Returns Cary, NC
Nov 14-16



How to Develop a Winning Trading System That Fits You Cary, NC

Click here to see our full workshop schedule with details

Click here to see locations, logistics, etc.

Ken Long

Trading Tip

Looking at Your Trading from Multiple Angles

Even after many traders make their trades, and record and analyze their data, they still look for ways to improve their results. Beyond the traditional measurements, here are a few ideas that have helped me evolve my trading practice.

Exit Efficiency

Chuck LeBeau is a master trader and teacher who at one point wanted to examine the quality of his exits based on the belief that exits are far more important than entries in a trading system. Since he knew of no measures to analyze his exits, he developed a powerful tool called the exit efficiency index.

This concept evaluates the actual exit against the perfect exit—which you can identify only in retrospect by looking at all possible exits during the timeframe for the original trade and beyond it. Comparing the perfect exit to the actual exit allows you to adjust your exit rules to perform optimally in market conditions where you seek to exploit your edge.

Calculating Your Exit Efficiency

First, define the time period between your actual entry and your actual exit as the variable t. Now double t so that you can examine all the price action in the period 2t from your actual entry. Find the highest possible price at which you could have exited in the 2t timeframe. In retrospect, that would have been the perfect exit. Then divide your actual profit (in $ or in R-multiples) by the profit from the perfect exit. Because we are creating an index of efficiency, the scores will range between 1.0 for perfect and 0.0 for the worst. Convert these figures to a percentage to see an efficiency rating for your exits against perfect exits.

Based on Chuck’s analysis, a trading system does very well if it can extract 30% to 40% of the perfect trade on average. This important information can lift traders who may be depressed about leaving too much profit on the table. Regretting missed profits is one of the most powerful psychological forces at work to make you change your trading plan. Armed with the knowledge that his system has a decent exit efficiency, however, a trader can maintain the willpower and discipline to stick to good trading rules in the future.

Entry Efficiency and Other Refinements

One variation to this measurement makes it possible to examine the quality of the entry as well as the quality of the exit. In this way you can consider how well tuned your trading system is to the market conditions you seek to trade.

With a simple refinement you can also look at the worst possible exit in the same timeframe to determine how well your profit preservation and capital preservation exits are protecting you against losses.

The same refinement can also show you if there are profit opportunities by reversing your trade direction and going the other way when the first trade is over.

Taking the Other Side of the Trade

Maybe the hardest piece of analysis to do is to look for opportunities on the other side of the trade. When you have a positive expectancy system, it would not normally occur to you to see if you are missing profits by trading in the exact opposite direction.

By doing so, however you may open yourself up to some real surprises concerning new profit opportunities from your normal trading. You may discover that you can trade both sides of your idea in sequence. An example of this would be to stop and reverse instead of just stopping out of your trade.

I have found that there are certain market conditions that favor stop and reverse strategy, while in others it is appropriate to simply stop and scan for new opportunities.

By examining your trading results from multiple angles you can improve your bottom line as a trader.

About the Author: Ken Long is a retired Lieutenant Colonel in the U.S. Army with a Master's Degree in Systems Management. He is a doctoral candidate researching the management of uncertainty and an active trader. He is a proud father of 3, a husband, teacher, student and martial artist. Ken is also a dynamic workshop instructor for the Van Tharp Institute. The above article was reprinted from Ken's blog. Read more of Ken's essays at

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The Definitive Guide or the E-course: What's the Difference?

Q: How much does the Introduction to Position Sizing e-course differ from your Definitive Guide to Position Sizing book?

A: The e-course is an introduction to position sizing strategies.  It covers basic material and offers a great start to the process of understanding and utilizing the concepts.  The Definite Guide covers a very extensive array of position sizing topics and goes into technical depth in many areas.  It is indeed quite definitive.  A number of people find position sizing strategies a complicated topic and have a hard time grasping and applying the ideas from the book. We developed the e-course for two primary groups of people: auditory/visual learners who learn more effectively from an instructional format that is full of interactive features and those who are not interested in the deeper technical aspects of position sizing strategies but realize an introduction to the topic would still help their trading. 

We see a natural course of study starting with the e-course and then moving up to the Definitive Guide at some later point.

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August 31, 2011 - Issue 541

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