Tharp's Thoughts Weekly Newsletter (View On-Line)
$700 Early Enrollment Discount Ends TODAY on Ken Long's Day Trading Workshop
In this workshop, Ken Long teaches the FROG trading system and the RLCO system using a format that includes short lectures, a number of case studies, and lots of hands-on trading in a simulator.
Ken has been an a long-time active trader and observer of the markets. He's noticed the consistent habit of prices for particular issues to move a certain amount. Much like a frog jumps when it hears a loud noise, prices tend to move a certain amount before they pause or move again. Different frogs are able to jump different distances, but each one tends to jump about the same distance as it did last time. Would it be possible to know about how far a stock’s price would move on any given day? Ken’s frog system is a useful — and tradable — guide. Attend the day trading systems workshop and learn the frog and his RLCO systems. Stay on for two more days and trade those systems live alongside Ken!
For more information about both systems, click here.
To register, click here.
Learning From Each Other in Our Community of Practice
Sometimes on our walkabouts through life, we pick up interesting things along the way that don't seem to be connected until we've had a chance to reflect on them and see how they might fit into the larger picture. Often, fellow travelers can help realize connections and see what we might have missed on our own. With that in mind, here are several insights that came from dialogues over this last week in our chatroom.
1. Know your edges:
Whether your edges are conceptual, procedural, experiential, personal, emotional or collaborative it's really important to deeply understand what your edges are, where they come from and why they add value so that you can structure your trading environment around your strengths. At the same time your deep understanding of these edges should include their limitations so that you don't go off the deep end. Another way of saying that is "this far, and no further." Remember that there are fat tails on either end of the distribution and that sometimes our expertise can create blind spots that are just as dangerous as those caused by inexperience. A hungry bear doesn't know or care what your level of fieldcraft is; he is going to do what he does best, and leave the explanations to others.
2. The virtue of simplicity:
At one point a while back, my wife decided she wanted to try trading. She has had no training so I thought up one of the simplest possible set of rules she could execute that would produce positive expectancy, I call it the Frog. The Frog intraday trading system makes a virtue of simplicity, arising from an effort to reduce the amount of information required to make an intraday trade. Opportunities are based on the direction and magnitude of price movement in statistical relation to recent movements in price and magnitude. It applies to a limited universe of instruments – though that continues to expand. How well the simple system can work still surprises me (as it did last week) and I continue to use it to inform my RLCO intraday trades.
3. Finding synergies and efficiency:
Trading systems with rule sets that have been back tested, forward tested, forward traded, and continually refined can not only provide a positive expectancy edge in the market, but the signals themselves are sources of information about other opportunities that can be leveraged. Using the approach "swing trading, one day at a time," a trader can find synergies between trades that can develop into different time frames, both weeklong swing trading and short-term intraday trading. While the characteristics of the trades can be very different, there is some useful information content that comes out of each time frame which can be helpful in other timeframes.
4. Remember the market:
Last week's price action which terminated with a large selloff on Friday was wildly against the long-term bull quiet trend. This was a perfect reminder to never forget that the market votes on how your swing trading intraday trades are going to shake out. Tolkien's advice about planning and respecting risk speaks to us in this situation just as when Gandalf reminded Bilbo Baggins:
“It does not do to leave a live dragon out of your calculations, if you live near him.”
― J.R.R. Tolkien, The Hobbit
5. Network and collaborate on many different levels:
Learnings like some of those above often can’t be found when trading in isolation but instead arise from a regular dialogue within a community. The trading chat room is an opportunity for like-minded and not so like-minded traders to share insights and experiences as well as reflective learning with other traders that are motivated for self-development and effective trading. These are the kinds of insights that can emerge when a group of people get together and decide to collaborate for the common good.
Keep your risk measured and your powder dry!
For additional insights relating to these topics, watch the following videos:
1. Edges — Deep understanding of common tools can be an edge. The following discussion compares two different indicators and how the difference between the two provides opportunities for efficiency and effectiveness. (21 min)
Williams %R vs Tortoise "NDX"
2. The virtue of simplicity - Here's an eight minute video that discusses the kinds of typical targets that are well-suited for the simple style of trading. (8 min)
Targets that make great frog trading candidates
3. Finding synergies and efficiencies – This video discusses some examples of using swing trading system signals to inform day trading opportunities. (15 min)
Swing trading, 1 day at a time
4. Remember the market – This is an executive summary of our weekend report review for 1/25/2014 where the main topic was appreciating the current market condition. (21 min)
Weekend report review
5. Network and collaborate on many different levels - Each of the following videos is a collection of case studies, concept explanations and examples of reflective learning.
Jan 22, 2014 (17 min)
Jan 23, 2014 (18 min)
Jan 24, 2014(25 min)
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Learn Ken Long's RLCO and Frog systems and trade them live at Day Trading Systems and Live Day Trading in February.
If you would like to attend, register now! This workshop usually sells out and the $700 early enrollment discount is ending today.
Click here to see the full workshop schedule or to register.
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Three Interesting (and Useful) Graphics
“A picture is worth a thousand words.”
— Early 20th Century U.S., Multiple Attributions
Long-suffering readers of these articles know that I have a real soft-spot for cool graphics. (Please keep sending your favorites in! — drbarton “at” vantharp.com) Today’s charts may not have that big of a cool factor (see this link for examples of really cool charts), but today’s graphics are definitely interesting, timely and useful.
First, A Market Check
The tenor of the market has certainly changed since last Wednesday. As of right now (Monday evening 1/27), the S&P 500 has gone back to test the Bernanke/tapering announcement low (12/18) on a reversal bar that launched the markets to new highs. The following chart does not count as one of our three cool ones today, but then again, it’s still pretty useful:
A break of the key support level shown in the graphic above (which may or may not have happened since this article was penned on Monday evening) would be bad news for the bulls. As of Monday’s low, this pullback has dropped the S&P by 4.2%. A full blown correction is still a far ways off (10% off of the highs would take us down to 1,665.76 on the cash index chart above and would almost reach the October 2013 lows).
Those Three Other Charts…
Apple reported 4th quarter 2013 earnings on Monday along with a bunch of additional data. While the quarter’s global iPhone sales, iPad sales and total corporate revenues were at all-time highs, they missed analysts’ estimates and Apple sold off more than 8% in aftermarket trading.
The bigger story, though, is that Apple's growth story has been slipping and will continue to slow. Take a look at the daunting year-over-year line on this graph from Business Insider:
Here’s the practically inevitable conclusion: from an investor’s perspective, I believe that Apple is destined to be the next Microsoft. By this I mean that the company will soon become a world dominating cash cow that has no way to significantly grow their revenues in their existing markets. Massive innovation and market share gains are giving way to modest upgrades and serious doubts on gaining further market penetration. The next big rumored things out of Cupertino; a TV, payment gateway, and a watch(!?!) elicit few “oohs” and even fewer “ahhs”…
The next chart from is interesting both for its scope and usefulness —
First of all, let’s realize that Russell Investments put together this handy chart so that they could encourage investment advisors to steer clients toward their wheelhouse — small cap stocks. With that said, the chart does give us four pieces of useful data for a broad range of investment assets: the minimum and maximum returns for any given year during the data period covered (grey bar); a typical 12-month range for the asset (blue bar), the average for the asset class (vertical white bar) and lastly the 2013 calendar year return for the asset.
For me, the most useful way to use this chart is to look at the current year’s returns and compare them to the typical range. Regression toward the mean is inevitable, though it may take more than a year to realize. If you’d like to see the verbiage that the folks at Russell Investments provide to help investment advisors help their clients you can view the full page here.
Our last chart today is from Balyasny Asset Management’s third quarter 2013 letter to investors via the Zero Hedge blog. It shows the firm’s amount of assets under management (light blue) and how much purchasing power the firm has used (dark blue):
In the letter, the hedge fund says that they are allocated at a 1 to 5 ratio — more than double the allocation from the 2007-2008 bubble years! It doesn’t take a rocket scientist to figure out how much the market needs to drop in order to wipe out all assets levered-up at 5x! Caveat emptor, indeed.
As always, 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".
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