Tharp's Thoughts Weekly Newsletter (View On-Line)
"I Was Lucky Enough to Be Prepared"
Troubling Signs for the Real Estate Rebound? by D. R. Barton, Jr.
Systems and Position Sizing Questions
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First, Ken will teach the systems classroom style. Next, you get to 'trade' the systems via a combination of simulations and case studies. You will have a thorough understanding of these systems before you leave the workshop.
Third, if you choose, you can stay for two additional days and take your training to the ultimate level by live trading the systems alongside Ken.
And last but not least, all workshop attendees also get free membership into Ken's ongoing chatroom forum. This is a unique way for you to keep in touch with other traders who also trade the Frog and RLCO systems. Ken has so many examples of phenomenal trading discussions, ideas and executions of high win trades that resulted from the forum. You can't buy a membership. The only way to join is by attending one of his workshops. If you missed Ken's vision statement about the chatroom, check that out here.
For more information about both systems, click here.
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"I Was Lucky Enough to Be Prepared"
“The key is not the will to win... everybody has that. It is the will to prepare to win that is important.”
This quote remind me of something a trader said in one of our live trading workshops, as we conducted an after-action review of their trades for that day. She was commenting on her instantaneous reaction to an unlikely price movement that day, which came out of nowhere and went completely against the long term and short term trend. It was a price move in one of her favorite trading targets, and she had done her homework to understand just how quickly the symbol could reverse direction, and what the magnitude of the move might be once the momentum started. She understood the RangeStat, which we define as the “maximum reasonable intraday move”.
The Rangestat is a statistics–based answer to the question: “What’s the largest intraday move that wouldn’t be surprising?” It provides an adaptive, disciplined way to frame trades intraday when compared to our “minimum manageable risk” (MMR), which we define as an initial stop level that we have reason to believe we can execute properly in order to never take more than a 1R loss. Taken together, these two concepts allow us to frame intraday trades on the basis of reward to risk ratios.
In this case, the trader had internalized the Rangestat and the MMR for the trading target which had an extreme price move away from the Bollinger Band mean and then began reverting to the mean. The price spike occurred without warning or news and was quickly shared across the workshop room. Some of the traders began searching through news feeds to see what might explain the move while the prepared trader decided to trade what she was seeing. In a few seconds, our trader had:
- estimated the reward:risk ratio in her usual way
- framed the trade with a manageable entry, initial stop, and target profit point
- placed her entry and initial stop orders
- determined where she would add to the position if it took off wildly in her favor
- decided if she would stop and reverse if it went against her
- closed a separate trade that was open, near her price target but not moving, so that she could concentrate on this opportunity (span of control)
- reinforced her “zero state” mental condition with a quick cleansing breath followed by several deep breaths, and made herself comfortable
- shared her plan with her trading and accountability partner in order to review her key decision points, with her verbalizations acting as a quick rehearsal
I have seen this trader perform this ritual repeatedly and so I wasn’t surprised that she went through her normal “battle drill” for intraday opportunity trades. There was no wasted motion, and though she moved quickly and decisively, there was no sense of being hurried. She radiated calm attention; she was “on point” and ready to trade. She was “in-the–zone.”
So how did the trade unfold?
Her entry order was hit and the price moved sharply in her favor, followed by her trailing stop. She moved her stop to “no lose, plus dinner for two” at a moment when the trade was clearly working, while leaving her a comfortable and manageable noise buffer. When the price stalled at the “far-side of the river” (the Bollinger Band  average plus 1 standard deviation), she routinely cashed her 2R profits, made some quick notes in her trading journal, briefly enjoyed the professional feeling of doing what she had planned, prepared and rehearsed, got back into the zero state, and resumed stalking the targets on her daily trading plan list.
A number of the traders in the workshop applauded her trade with enthusiasm. What happened next really struck me as important and prompted me to write this essay. In her typical modest way, she thanked them for the kind words, and said:
“I was lucky enough to be prepared”
There’s a lot of wisdom and hard work contained in that phrase which has really stuck with me.
The other thing I observed about this trader was a memory from a year earlier when she had managed a 2R trade intraday and could hardly contain herself at locking in a win in a new system. After a year of focused work and practice, she had internalized her excellent practice and what had once been exceptional had now become part of her routine, part of her unconscious competence. I noticed in the moment that she felt the positive feelings of the winning trade, processed the energy, recharged her emotional batteries, and got quickly back into her calm, attentive “zero-state” for trading.
At the end of the day, within seconds of the closing bell ringing, she calmly and systematically went through her daily debriefing and integrated her insights from various trades. She prepared her comments about what she wanted to sustain and improve about her planning, preparation and execution as well as her commitments to action on what she was determined to improve the next day. Within thirty minutes of the closing bell, she was ready for her face to face collaboration with her accountability partner and was ready to begin her review of the daily reports for her planning of the next day.
That’s one of the most important daily tasks of trading—the daily debriefing. It provides an opportunity to conduct reflective thinking about both process and content. It’s how we find ways to improve on things that are working, and how we self-assess between our plans, our preparation and our execution. It provides us with the insight to write the most important book on trading we can ever read: our own trading and learning journal.
A Roman observer of the legions talked about preparation and discipline this way:
“Think thou that these magnificent, victorious Legionaries became what they are through some arbitrary stroke of fortune? Nay! They do not sit around congratulating themselves in the wake of every victory. Nay! They spend every moment refining and improving their craft. Without apology, they pursue excellence. Each one knows and understands that he alone stands between the Empire and oblivion. Watch them! Indeed, they appear to have been born with weapons in their hands!”
Wanting to win is a good start but not enough. Ask yourself:
- Can you systematically turn the energy of that intention into a disciplined program of action and reflection that improves your practice?
- Can you aim for excellence each day and systematically follow-through with the reflective learning process of daily debriefing with an accountability partner?
- Can you write your own trading book?
- Can you improve the environment of excellence that will support you on your journey?
- Can you be the accountability partner for others undertaking the same journey?
- And if you believe you can, will you?
Here are a couple of links that I hope may be of some help for you along the way.
Click here for a 15 minute video summary of my daily trading process of Plan/Prepare/Execute.
Click here for an 4 minute video description of a simple 1 page form that may help with the daily debriefing task.
Finally, here are a set of questions we use in the live trading workshop to make sure we have thought through the key decisions of every trade frame we build:
|On a trade frame:
What do you see?
What could it do?
Which way would you trade?
Where would you enter?
Where would it fail?
Would you stop and reverse?
On a winning trade:
Where would it stall?
Where would you preserve profit?
Where could it then go?
Would you stop and reverse?
Where would you reenter?
About the Author: Dr. Ken Long retired from the Army as a Lieutenant Colonel and teaches at the U.S. Army Staff College. He is a proud father of three, a husband, teacher, student, martial artist and active trader. Ken also instructs dynamic trading workshops for the Van Tharp Institute. Watch this video to hear two testimonials from students of Ken Long.
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$700 Discounts Expire Next Week
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Troubling Signs for the Real Estate Rebound?
This week, we’ll take a look at the most eye-opening chart I’ve seen in the new year — and it comes from the real estate world. Long-suffering readers of these articles will know that I don’t trust the real estate market. It is seen as such a bell cow of the economy that all sides defend it, all the way up to and including the Fed. Because of regular intervention, we have never gotten too close to anything like a market-clearing price. Still, there’s no way I would bet against the real estate market in the short term. Taking an objective look at the government reported numbers for housing prices starts shows growth or stabilization. And all around me, new houses are being built and moderately bigger projects are popping up.
But as QE infinity starts to taper, will the real estate market be able to hold onto the modest gains it has made since the Great Recession? If all is peachy-keen in the real estate world, then someone forgot to tell the real estate ETFs, the publicly traded builders, and most important, the mortgage originators.
What the Price Charts Say
Let’s start our data review with a look at IYR, the real estate ETF based on the Dow Jones Real Estate Index:
Since the May highs (note that this chart has weekly bars), the ETF has had a healthy 20% pullback, and more importantly, this represents a 50% of retracement of the strong move up from the October 2011 lows.
Few individual home builders have done much better. The chart below shows the percentage change since the May 22nd highs — here we see that only two of the nine have recovered above breakeven since the big drop:
What the Mortgage Charts Say
The most disconcerting graphic that I’ve seen in this young new year comes from the big three mortgage originators, who have all recently reported earnings (and the associated data). From this data, MarketWatch.com has put together the following chart:
Wells Fargo’s biggest quarter for loan originations was the one prior to this chart’s data (3rd quarter of 2012), so we’ve had five straight down quarters at the nation’s three biggest mortgage lender. In short, year-over-year mortgage originations dropped 46% at BAC, 54% at JPM and a whopping 60% at WFC. From the perspective of overall bank earnings, all three were able to make up for short fall from mortgage originations in other parts of the business, and all three have seen very healthy stock price appreciation.
In spite of the healthy prices for bank stocks, troubling facts abound as we focus back on the real estate market. The rate of mortgage originations for WFC in Q4 of 2013 ($50 B) was the lowest of the last five years which includes the depths of the recession in 2008.
“This Is All About The Bump in Interest Rates.” Really?
Representatives from the banks stated in their earnings releases that the mortgage origination falloff was due to rising interest rates and the traditional seasonal winter slowdown. But interest rates don’t tell the whole story; the persistent downtrend and low absolute volume of Q4 numbers for mortgage originations could be a warning sign that the prospects for a continued real estate rebound are less rosy than industry insiders would like.
Your thoughts and comments are always welcome — please send them to drbarton “at” vantharp.com
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 SmartMoney.com and Financial Advisor magazine. You may contact D.R. at "drbarton" at "vantharp.com".
I have read many of Dr. Tharp’s books and the videos and, after watching the Tharp Think Webinar, I have several questions about the information presented.
Prior to viewing the webinar I already knew about the importance of position sizing, and believe this is the reason, after three years of trading, that I have never gone bankrupt.
So, why am I so confused? After working through each level of the Position Sizing game, I have varying SQN results between 0.99-3.33 and am unclear as to if this is a good Trading System. I interpret this as a negative year, because there is a 50% overall probability that your system will be negative.
Also, after testing more than 100 systems, I couldn’t find a system with SQN greater than two. I am sure I have some flaws in my calculations, but after three years I don’t have a positive expectancy.
Right now, if I answer the question. “What is my objective?,” it is to have 3 to 6 months of positive expectancy in all of my trades with 5% profit and max draw down of 5-10%.
I have found it more difficult to find a strategy that fits my objectives than to apply a position-sizing strategy that I am familiar with.
Mr. Tharp says one of the most important aspects of trading is the position sizing as mentioned in his book, The Definitive Guide to Position Sizing. It states how much easier it becomes to use position sizing to meet your objectives with a better SQN. Meaning, if your system is good, it is easier for you to achieve your objectives. Does this mean the system is just as important?
Thank you very much for your time.
The system that our trading game uses in the first three levels has a low SQN — though probably better than the ones many people try to trade. As you seem to understand, trading a low SQN scoring system makes it very hard to use position sizing strategies to meet your objectives.
It is not unusual that people have trouble developing a trading system with a high SQN — it is a challenging task. You can make that task easier, however, by knowing what kinds of systems tend to work — and what kinds of systems do not work so well. What does not work so well are adding some indicators in backtesting software and hoping something good comes out. You would be much better off trying to understand where you can find an edge in the markets and then developing a system around that. Systems and systems development are exercises in beliefs. People who have not traded a lot may not have well developed beliefs about the market and trading systems. Van’s book “Trade Your Way...” has the seven kinds of trading system ideas that seem to work in the markets. There is also a lot of information about trading systems in that book. It is one of my favorites from Van. There are also other books that have trading ideas though there are a lot of books with ideas that just don’t test out either. It can take a lot of time to find a book with genuine good ideas. Larry Connors has some good ideas as does John Bollinger and Michael Covel to name just a few. You can look on the website for Van’s recommended book list on his page but those books are not primarily system oriented.
I would also encourage you to consider working your way through the Peak Performance Home Study course. As important as position sizing strategies are to trading success, your psychology is even more important. In fact, Van will not allow his Super Trader candidates to work on any trading systems until they are finished doing their psychology work — which is based on the Peak home study course. Understanding who you are and what you believe has a very large effect on your trading system development work — but right now, most of that is unconscious.
New, Second Edition, The Definitive Guide To Position Sizing Strategies is Now Available!
The name Van Tharp is often synonymous with the term Position Sizing. In fact, Van invented and coined the term. It's one of the most important concepts that a trader can understand, yet so often, traders misjudge how critical a role it plays in your results. To help traders, Van set out to create the definitive compilation of this weighty subject some years back. Based on the feedback from the book’s first edition readers, he was quite successful and now he is releasing the second edition.
If you think your systems are more important than your position sizing strategies in meeting your objectives, we strongly encourage you to study this book. Understanding position sizing topics will have more impact on your trading results than any other single “technical” subject. After reading it, you'll understand why many traders keep the book close by as desk reference.
It's a substantial book, well worth its $249 price tag.
Learn More | Order Now
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