Tharp's Thoughts Weekly Newsletter
: Scaffolding: A New Tharp Think Concept, by Van K. Tharp, Ph.D.
: Forex Live Trading Has Been Expanded
: Signs that U.S. Markets Trade in Crisis Mode –
Even at All Time Highs: Part 3, by D.R. Barton Jr.
New This August!
The Trading in a Bear Market and Down Markets Workshop helps you learn how to think about trading broad bear markets or trading a specific asset class, sector or even single symbol that is in bear mode. For a major bear market, think equities in 2008-2009. For a move limited to a sector move, think oil in 2014-2015. Imagine having had some ways you could have traded those periods effectively. Major bear markets come only once in a while but “lesser” down moves can be found almost any time — including during bull markets. Start using the information from this workshop when you return back home — and also be prepared for the next big bear market. Click here to read how Bear markets present traders with a unique set of opportunities.
For more information on this workshop check out this short 3-minute video from instructor Kirk Cooper.
System Quality NumberSM — A New Workshop! In response to long-requested help from our trading clients, Dr. Tharp developed his SQN theories for his book The Definitive Guide to Position Sizing Strategies. Since then, many traders have asked for more information on applying theory for developing effective position sizing strategies that help you meet your objectives — in other words, just HOW to do this. For the first time ever, RJ Hixson will spend two days showing you how to do this through a series of lectures, case studies, individual exercises, and group work.
For an overview of this workshop watch our short 3 minute video.
$700 Early enrollment discounts expire soon on these two events.
Register now to get these discounts and secure your seats!
Scaffolding: A New Tharp Think Concept
by Van K. Tharp, Ph.D.
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One of my Super Traders is almost finished with the program and just submitted his three trading systems for approval. His three different systems each trade a particular market under various conditions. There was nothing unusual about his systems until we got to his SQNSM scores — they were all in the “Holy Grail” range — mostly above 10. Now those results were based on paper trading and thus they could change considerably with real money. Actually, I am somewhat skeptical about him achieving those SQN scores in the live market. Nevertheless, I had him take me through his systems’ trades bar by bar and I was impressed. In the process of going through his systems, it suddenly dawned on me that he had developed “scaffolding” that supported his systems. I now believe that idea of a good scaffolding structure might be what makes the difference.
The idea of scaffolding comes from Dr. Ken Long, who has been teaching technical workshops for us for nearly 20 years. His Core Trading course and Swing Trading course are both available online as e-learning courses. He also teaches a number of workshops here with Day Trading and Live Day Trading workshops coming up in November. Two weeks back, he taught two new workshops — Advanced Adaptive Swing Trading and Systems Thinking for Traders. I mention all of these courses and workshops to show you the breadth of Ken’s trading knowledge as well as to point out that all of them are about trading systems except one — Systems Thinking.
Why did I ask Ken to develop the Systems Thinking for Traders workshop?
Ken has a unique systems thinking oriented approach to the markets and to trading. About 80% of the general population, however, lack a systems thinking mindset. I believe all of the Super Traders have the potential to develop their abilities in this area so that’s part of the reason I asked Ken to teach a workshop about systems thinking. Based on the insights I gained and based on the feedback forms, the workshop was very useful for helping the traders in attendance understand a systems thinking approach to the markets.
Ken is a true systems thinker. He earned a master’s degree in Systems Management and his Ph.D. dissertation was about decision making under uncertainty. During the recent three day workshop, he covered many systems thinking concepts but I want to focus on just one right now — the concept of scaffolding. Ken defines scaffolding as:
A structure that one builds to support other activities. Good scaffolding
is light-weight, adaptable, flexible, durable, modular, multipurpose, cost-effective, and provides both structure and security.
Scaffolding is useful across a wide variety of typical problems or opportunity areas in business, education, the military, etc. In construction for example, scaffolding can be used to fix a roof, wash windows, paint a wall and all sort of other things. Using the metaphor in trading, you can set up various rules to serve as your scaffolding.
Here is one way that the idea of scaffolding might apply in the trading context:
- You can look at prior highs, lows, supports, and resistances on various time frames.
- These can be used to set up risk levels and targets.
- When you have both of those elements of a trade, you can make informed decisions based upon your potential reward-to-risk levels — which should be at least 2 to 1.
Ken constantly monitors the market type, the opening gap size, the daily range, and other statistics which help him develop probabilities for price to move to certain points. All of this data helps him make information-based reward to risk rules and decisions. We know that these concepts are just made up but they support strong decision making so they are very useful.
Let’s look at another example of some scaffolding you could create to help you manage your general reward and risk relationship:
- Never lose more than 1R,
- Attempt to make at least 2R in every trade, and
- In an open trade, never put yourself in a position in which your potential risk is bigger than your remaining potential reward.
So what’s the scaffolding here? Well, these three Tharp Think principles support your trading well and provide you some security. The Tops Tasks of Trading are another form of scaffolding — they help you prevent and eliminate mistakes. A structure that helps you define the specific reward to risk ratio in each trade is scaffolding also.
Here’s an example of that last point. About 10-12 years ago, D.R. Barton and Christopher Castroviejo taught a technical workshop on e-mini futures trading. Part of their approach was to build a ladder of critical prices using a combination of pivot points, Fibonacci numbers, highs, lows, and other signs of support and resistance. At the time, I thought the approach was too discretionary so we stopped giving that workshop. When you think about their price ladder as scaffolding, however, it makes more sense. That ladder gave them a framework to define their risk and their potential targets (potential reward).
So here is a new Tharp Think principle:
Develop scaffolding to support your trading, especially your decisions about reward-to-risk. Scaffolding might be the difference between a Holy Grail system versus a useful, tradable system.
Ken and I are going to co-teach one more Systems Thinking Workshop in December 2016 as part of the Super Trader Summit. At that presentation, we’ll cover the topic of scaffolding in more detail because I want the Super Traders to really "get it." If you aren’t a Super Trader but want to learn more about how systems thinking can help you trade better, don’t worry, we are going to record this workshop and offer it as an e-learning course sometime in the first half of 2017. Then, you can learn about scaffolding and all of the other important systems thinking approaches that will give you new edges for your trading.
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.
We Basically Just Reduced the Price of the Super Trader Program By 25% And You Have Until THIS Friday to Get The Old Pricing
Interested traders have until July 31st to take advantage of a huge reduction in the price of the Super Trader program. In the old Super Trader program, students paid for three years of Super Trader 1 upfront, and then paid for at least one more year when they started Super Trader 2. Thus, the minimum cost of the program was $66,750. Now, however, students can finish the program in three years for a total investment of only $50,250. For motivated and committed traders looking to transform themselves and their trading, that’s a huge effective discount of $16,750.
If you have been considering joining the program but have been putting off your decision, you have until the end of July to seize your opportunity to act and save big. On August 1st, the price of the program will increase by several thousand dollars (but the ability to finish in three years will still be available.) The longer you wait, the higher the cost - in 2017, we will raise the price of the program tuition to $20,000 per year.
I recently wrote an article on the change in the structure of the program which you can read here.
If you'd like to see the most updated information on the new Super Trader structure click here to view it online, or click here to download a PDF of the new program overview.
Combo Discounts available for all back-to-back workshops!
See our workshop page for details.
Two Signs that U.S. Markets Trade in Crisis Mode —
Even at All Time Highs: Part 3
by D. R. Barton, Jr.
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Well, the market did drive up quite decisively to new highs after the recent Brexit drop but — not by much. The S&P 500 Index overshot its previous high from 15 months ago by only 1.9% and since then, we’ve been stuck in a tight (~1% of price) sideways box for nine trading days:
“But wait, D.R.”, I can hear you say, “why do you say that the market has inched to new highs?”
Well, the market did drive up to new highs quite decisively after the recent Brexit drop but — not by much. The S&P 500 overshot its previous high from 15 months ago by only 1.9% and since then, we’ve been stuck in a tight (~1% of price) sideways box for nine trading days:
The Crisis Mode Signs
In the first part of this series two weeks ago, we talked about how this all-time-high market had some underlying characteristics of a market that thinks it’s in a crisis. One characteristic of a crisis mode is leadership by “risk off” assets which have been outperforming “risk on” assets. Two weeks later, the current rally is still being led by the broad S&P 500 and the DOW blue chips. Meanwhile, the “risk on” Nasdaq and Russell continue to lag. At the sector level, we also see that utilities and consumer staples leading the market even though they are traditionally defensive (“risk off”) sectors.
In Part 2 of the series last week, we looked at some nice work on market correlation numbers from Renaissance Capital. Their research shows that correlations across the spectrum of capital markets more closely resemble the “crisis mode” in 2008-2009 rather than the much lower correlations found during the 2000-2007 bull market period.
With today’s market prices “at the top of the page” and the market trading defensively in many ways, let’s consider one useful metaphor of what might be happening. And then we’ll finish up this series of articles with some actions to consider moving forward.
The Status Quo and Market Capacitance
I was just talking with a friend and fellow stock market analyst about several aspects of the markets right now. We noted that market prices are staying near the top of the page even while yellow and red economic flags pop up all over the globe.
I talked about the central bank safety net narrative. The world’s central banks have the conviction and the wherewithal to prop up markets in hopes that a real economic recovery will come along and save us — or at least investors and traders still seem to believe that.
Then we speculated about how long excess liquidity could really prop up the markets. At that point, our conversation turned to the concept of capacitance. In electrical devices, designers use capacitors to temporarily store electrical energy so that it can be discharged when needed.
This concept of capacitance applies to the financial markets as well. In early 2005 I wrote a six part series on the housing bubble and followed up in late 2005 with a four-part series about the same topic. In early 2006, housing prices peaked. The equity markets, however, lagged the real estate and credit markets. So much stimulus had poured into the financial system that it took a year and a half (or more) for it to work its way through the economy and manifest fully with the stock index peak in late summer 2007.
Now consider another period that showed the idea of stored financial energy — between 2011 and 2015. During that period, Europe’s unity was coming into serious question and member country banks were in crisis (Remember Ireland, Greece, etc.?). In addition, China’s growth continued to slow and their debt ratios worsened — even as the equity markets were in bull mode.
Fast forward to mid-2016 when one of the EU members has decided to actually leave the union and big bank troubles (Italy) are making headlines again. Also, China’s economy has gotten worse — even by their official government numbers. China’s growth has slowed significantly and their debt figures far exceed anything we saw in the U.S. in the years leading up to 2007-2008. While these factors are worse now than they were in 2011-2015... the markets are trading at all-time highs.
So regardless of what signals we’re seeing (or not seeing), recent history tells us the current upward momentum can continue for a long time in the stock market.
When defensive sectors like utilities and consumer staples lead the charge to new highs, I believe that the market is hoisting a yellow flag. BUT — prudence dictates that we continue to participate in the equity markets until price tells us that something is awry. Investors and traders can buy sensibly during pullbacks until we see major chinks in the narrative that “central banks are still in control”.
Most importantly, know your stop loss point when you say “I’m scaling back” or “I’m heading to sidelines.”
Please send your thoughts and comments to drbarton “at” vantharp.com — I always appreciate 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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