Tharp's Thoughts Weekly Newsletter
: Resistance to Issues by Van K. Tharp, Ph.D.
: Back to Financial Issues Driving the Markets — Whew! by D. R. Barton, Jr.
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Resistance to Issues
by Van K. Tharp, Ph.D.
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When Jack Schwager visited Ed Seykota to interview him for his book Market Wizards, Jack found that he was the person being interviewed, not Ed. Jack would start to say things and Ed would indicate how the assumptions behind Jack’s questions revealed his psychological issues. As a result, Jack returned to New York with no interview. Instead, he mailed a set of questions to Ed to answer. Again, Ed turned the questions around to focus on Jack’s issues. However, once they’d done this process about five times, the result was one of the best interviews in Market Wizards.
Ed’s approach is full of danger as a teaching tool. Socrates was well known for turning questions back on people (now called the Socratic method of teaching) and he was sentenced to death. Socrates was poisoned even though he didn’t usually enter into the most dangerous of areas — asking questions about the psychological assumptions behind what people do. Most people don’t want to know their issues. Indeed, they interpret anything designed to get you to look inward as a real threat.
Let me give you an example.
Consider the following exchange with a trader —
How do I develop a system in which
can win on at least 60% of the trades?
Van: Why do you seem to have a fascination with being right?
What do you mean? I just asked a reasonable question can’t you answer it.
Van: What if you could make money being right 40% of the time? Would that be acceptable?
You’re not answering my question. I want to know how to develop a system that’s designed to be right 60% of the time. But I will answer the last question—no I want to win 60% of the time or better.
Van: I was looking at the assumption under your question. You seem to have a strong need to be right. You’d probably be a much better trader if you didn’t have that need. What would happen if you were wrong? How would you feel if you were wrong?
How can I learn anything? Why are you asking all of these silly questions? I’m not interested in being wrong, I’m interested in being right. Understood? You want to turn everything into a psychological issue. Not everything is psychological. It’s really hard to learn anything from you when you are always throwing out all of this psychological stuff. Can’t you just answer a simple question?
That trader provides an example of resistance to the issue and the exchange doesn’t go anywhere. But what if the conversation went a little differently?
How do I develop a system in which can win on at least 60% of the trades?
Van: You seem to have a fascination with being right?
Well, I do like to be right, naturally, doesn’t everybody?
Van: Why do you want to be right?
Well, I’ve always worked to do a good job, to get good grades, and be successful. To accomplish that, you have to be right.
Van: Do you? What if you could be right 20% of the time and make huge profits – just because you cut your losses short and let your profits run? If you had eight 1R losses and two 10 R wins, you’d only be right 20% of the time, but you’d be ahead by 12R…that’s pretty good.
I never thought about it that way.
Van: So what if you just accepted losses when you got them, allowing them to be small losses and let your profits run when you have a good trade? Don’t you think that might be a good idea? And you’ll have trouble doing that if you want to be right all the time. For example, if you had nine 1-R gains and one 10R loss, you’d be right 90% of the time and still lose money.
Again, I never thought about it that way.
Van: So why don’t you just play around with the idea that you can be wrong and still be successful. Being right or wrong is a meaningless invention of your mind. Instead, what if you just developed a good system and practiced following it? A loss has nothing to do with being wrong. Instead, a loss has everything to do with following your system and not making a mistake. Doesn’t that put losses in a different framework?
When you start looking at yourself, you’ll find that there are lots of things that come up for you. You’ll start noticing the patterns that you repeat over and over again. And that’s one of the most valuable lessons you could ever learn.
So, let me ask you a simple question: How do you respond when someone turns what you say into a question about your psychological assumptions? Here are a few more examples to help you observe your reactions:
Q: What do you consider good performance in a system? How does my system compare?
Response: Why haven’t you set objectives? Do you have a need to be the best?
Q: I am considering purchasing a system. Do you have a recommendation for one that works and that allows me to see code?
Response: What you really mean is that you don’t feel comfortable developing your own system. Why not?
Q: Here’s my strategy. What do you think of it?
Response: You appear to need other people’s approval to determine if your strategy is any good. Why? How about testing it and live trading it to see if meets your objectives?
About the Author: Trading coach and author Van K. Tharp, Ph.D. is widely recognized for his best-selling books and 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.vantharp.com. His new book, Trading Beyond The Matrix, is available now at matrix.vantharp.com.
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Back to Financial Issues Driving the Markets — Whew!
by D. R. Barton, Jr.
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The European “powers that be” have kicked the Greek debt bomb down the road one more time. Meanwhile, China’s central government has temporarily slowed the bleeding in that country’s equity markets. (which goes along with the squelching of a good bit of trading volume and standard price discovery — but that is all grist for another article).
All of this brings us to a week where the news flow effecting financial markets is all about — surprise! — financial matters.
Three recent items have been front and center:
||Google’s impressive earnings report and stock price response (jumped),
||Apple’s impressive earnings
and the stock price response (slammed),
||The curious case of markets making highs (and all-time highs in the case of the NASDAQ) with fewer and fewer individual stocks joining the party (we’ll cover this issue next week).
Let’s dig in and see what’s going on with Google and Apple.
Google Blows It Out
Last Thursday’s Google earnings and revenue increases were better than expected leading to a much ballyhooed single session gain in market cap of $65.1 billion.
Fortune reported that co-founders Larry Page and Sergey Brin each added a mind-blowing $4 billion to their individual net worth last week. Not a bad day at the office.
I trust that long-time (and long-suffering) readers of this space were ready for both the volatility and the “day after” follow-through of the GOOG earnings after reading my past article, Google's Monster Earnings Moves.
Armed with the stats that GOOG follows through in the direction of the earnings move more than 80% of the time, you could have scored big last Friday as the stock once again powered after the open for a big intraday move to add to the earnings gap jump:
The boom in Google has helped fuel the rally in the NASDAQ to new all-time highs, the NASDAQ was knocked off those highs a bit by this:
Apple Not Giving Enough Great Earnings News
||AAPL beat earnings estimates.
Earnings Per Share numbers were up 44.5% year-over-year.
|| AAPL beat revenue estimates
by an astounding 32.5% year-over-year
|| And the stock price got absolutely hammered because iPhone sales
did not meet expectations. Specifically, they were 2.6% less than expectations. The fact that iPhone sales in China were way down (off by 21%) also added to the drop.
It has become clear that this world-dominating company has to smash expectations in all categories or get punished for it. I guess the psychology of wanting to knock the top dog down a notch is alive and well on Wall Street.
Interestingly, AAPL is one of the few major stocks that has the opposite tendency of GOOG on the day after earnings. AAPL had a high probability of fading the post earnings move or having its stock price move in the opposite direction of the overnight gap. This morning’s action has followed this pattern quite nicely:
As you can guess, this drop in Apple stock has taken the wind out the NASDAQ index’s sails, at least temporarily.
Next week we’ll look at how market breadth (participation rate) has been giving “non-support” signals during the recent run up.
Until then, please let me know your thoughts and opinions on the article. Send your comments to drbarton “at” vantharp.com – I always enjoy hearing from you!
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 analyst on Fox Business’ Varney & Co. TV show (catch him most Thursdays between 12:30 and 12:45), on Bloomberg Radio Taking Stock and MarketWatch’s Money Life Show. He is also a frequent guest analyst on CNBC’s Closing Bell, WTOP News Radio in Washington, D.C., and has been a guest on China Central Television — America and Canada’s Business News Network. His articles have appeared on SmartMoney.com MarketWatch.com and Financial Advisor magazine. You may contact D.R. at "drbarton" at "vantharp.com".
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July 22, 2015 #743
Van's Top-Twelve Favorite Trading Books
Van's Favorite Non-Trading Books
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