#807 October 19, 2016
Tharp's Thoughts
Weekly Newsletter
  • Feature: Part 2 Albert Einstein on the Markets, by Van K. Tharp, Ph.D.
  • Workshops: Dates Set for January 2017 Schedule
  • Tip: Hold That Line: Revisiting an Important Support Level, by D. R. Barton, Jr.
  • FREE BOOK!: Trading Beyond the Matrix
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Ken Long's Day Trading Systems

Day and Live Trading Workshops
This powerful three day workshop teaches you two distinct day trading systems, The Frog and the RLCO (Regression Line Cross Over). Below Ken explains why he combines The Frog with RLCO For This Workshop:
  • Each system is standalone and independently tradeable.

  • For traders who want to minimize complexity and embrace simplicity, the Frog system is best. It reduces the entry and exit decisions to the simplest distinction between signal and noise in price action and combines that with clear simple rules. There are enough optional decision points to fine tune the system to suit your taste.

  • For traders who are interested in trading a conceptual framework and apply some level of discretion, the RLCO fits better. RLCO requires some interpretation of price action, volatility, time, time of day, and seeks to find critical moments when price is prepared to move sharply. RLCO can incorporate the previous day’s price levels as well as a number of additional indicators to suit each trader’s taste.

  • Operated together, Frog and RLCO reinforce each other. The Frog number can help fine tune RLCO entries as well as inform decisions on when to exit after a particularly good run based on the range stat. The RLCO framework can provide additional decision points at various times in the day for a Frog trader to apply that system’s simple analysis of signal versus noise.

You'll see example trades from both systems as you follow our series of trades from the chatroom over the next few weeks.

About the Chatroom

Inspired by the powerful networking Ken has seen develop over the years at VTI, both through the Super Trader program and workshop attendees, he created and leads a group of traders with a shared interest in swing trading and intraday trading which he calls the Chatroom.

As an attendee of this Day workshop, you will get free membership and access to this chatroom forum. The value of this ongoing interaction and learning is likely as valuable the workshop itself!
To Follow Ken's Market Commentary and Trade Recaps, CLICK HERE
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If the Day Trading Workshop is the classroom training course, then the Live Day Trading Workshop is the in-the-field learning experience where students have a master trading coach by their side and have the chance to apply their newfound trading knowledge in the real world.

This is not a sit-back-and-listen kind of workshop—it’s hands-on.
In this workshop, you will craft your own daily trading plan based on Ken Long’s Frog, RLCO, or swing system signals and trade your own platform with your own money—all under the guidance of Ken, who will offer thorough direction and individualized feedback.
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Feature Article

Part 2: Albert Einstein on the Markets

By Van K. Tharp, Ph.D.

Van Tharp

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Editor's Note: In Part One of this article we explored how Einstein might view the markets based on a few of his beliefs. I used the insights of one of my favorite NLP teachers, Robert Dilts, as he outlined them in his series of books entitled Strategies of Genius. There were three volumes in this fascinating series on how legendary geniuses thought. Unfortunately, Series Two on Einstein is now out of print.

This week we continue with examining how Einstein might have thought about the markets. If you missed last week be sure to read it as well. There is an exercise at the end of this article which will include the ideas from both parts.
Belief Four: The Universe is One

One of the key beliefs of most scientists before Einstein—indeed many still do hold such a belief—is that the universe is composed of large bodies and that there are certain interactions between these bodies. They also believed that any act of measuring something is separate from the individual doing the measuring and this was the model of the universe developed by Sir Isaac Newton. Even today, many scientists still assume that they can look at aspects of the universe, measure it and describe it, without having any influence at all. This assumption even holds for studying other living things or other human beings for that matter. Many scientists seem to feel that they can measure psychological process while ignoring the effect that their own presence has on the creatures or persons that they are measuring.

In contrast, Einstein completely took apart that long held model of discrete measurer and discrete measurements. He stated:

“A human being is a part of the whole called by us ‘universe’. . . a part limited in time and space. He experiences his thoughts and feelings as separated from the rest—a kind of optical delusion of his consciousness. This delusion is kind of a prison for us, restricting us to our personal desires and to affection for a few persons nearest us.”

Einstein is saying that we’re all a tiny piece of a holographic universe. If you keep one limited perspective of a tiny corner of that universe, then you will have the delusion that it is just one separate piece of the universe. But when you can look deeply enough into it—when you can look at it from enough perspectives—you will see what it really is. The whole is contained in each piece.

Once again try this belief on for yourself. Think about the implications of this statement for any observations you might make about the market. Is there really such a thing as the market or is it just a theoretical construct? What happens when you attempt to observe the market and study the causes of up and down price movement? What do words like Bull Market, Bear Market, Correction, Overbought, etc., mean? Can you even give them meaning or even study them?

Belief Four Implications for the Markets: The Universe is One

This particular belief tends to relate to all of the others. What if the whole is reflected in every piece of the universe? What if you are totally reflected in the market? Can you observe the market without in some way influencing it? Perhaps to the extent that you can be totally neutral with respect to the market — but most people are filled with judgments and emotions. When they view the market, they typically get exactly what they expect to see.

Let’s look at an example of Joe, who has an issue with anger. Joe has a system that enters a trade when the market reaches a 30-day high, however, he also fully expects the market to stop him out. It always does. On one day, the market does make a new high, Joe enters a position and he puts a stop just under yesterday’s low. About an hour later, the market starts to creep down below his entry point. It keeps going down and down and Joe starts to get upset. Sure enough, Joe is stopped out at his initial stop which is also the low tick of the day so far. From that point, however, the market starts moving up. Joe is now furious— he believes the market makers got him again. The market keeps moving up and soon it’s near the 30-day high again. Now, Joe is really furious. As the market starts moving up to new highs, Joe is beside himself. The market is always picking on him. After the market closes, Joe calculates he would have earned a $3,000 profit had he not been stopped out. Of course, Joe can’t even sleep that night. The next morning the market continues to move up and in the end, Joe calculates he missed out on another $2,000 in profits. Joe resolves to never enter another trade. The market proved him right.

What Joe never realized is that another entry signal fired when the market made a new high for the second time. He had been so angry that he missed a second trade. True, he lost $800 on the first stopped out trade but the second trade would have given him a $5,000 profit. What was in Joe’s mind was perfectly reflected in the market.

Once again, I don’t ask you to accept these beliefs as reality. Just start to notice how useful they might be. And if they are more useful than the beliefs you currently hold, then begin to think about their implications.

Five: “Our thinking creates problems that the same type of thinking will not solve.”

This belief is a direct quote from Einstein. Essentially, Einstein assumed that all human thinking makes certain presuppositions or hidden assumptions. These hidden assumptions are like unconscious beliefs that are just assumed to be true.

For example, Einstein believed that we could not really perceive what was going on in the universe because we were probably overlooking something simply because it was part of us or part of our thinking. For example, a fish in the ocean might not be aware of the ocean because it is so much a part of that ocean.

Einstein made this same assumption about many of the concepts that we use to explain the universe—gravity, time, space, etc. He made the assumption that we were ignoring a critical background element in the equation—light—because light was simply a part of everything we did. Indeed, most of Einstein’s most famous discoveries came from making the assumption (remember, it’s still an assumption) that there was only one major constant in the universe. That constant was the speed of light. When that assumption was made, time, space, and any number of concepts that had always been assumed to be fixed and real, suddenly became relative.

Now begin to think about the implications of this last belief for your reality of the markets. When you think about any belief you have about the markets, what are your presuppositions? You’re probably assuming certain things about time and price, aren’t you? What are those assumptions? And what are the implications if those assumptions are not true?

Belief 5 Implications for the Markets: Our Thinking Creates Problems that the Same Type of Thinking Will Not Solve

When you are thinking about the market, what are you assuming to be true? What influences your thinking, because you are a part of it, that you just assume to be true? Make a list of your beliefs about the market that is the basis of your trading. For example, you might say, “markets trend and I can profit from those trends.” Now take the statement apart and take a look at your assumptions.

“Markets trend.”

This makes the assumption that you know what markets are and what trends are. It makes some assumptions about price and time— that both are important and that both are relatively stable at least in the moment. However, we’ve already discussed how both are relative.

“I can profit from those trends.”

This makes an assumption about yourself. You can profit. But what does profit mean? Make money? How are you assuming that you can make a profit? Who are you? Who are you with respect to the other market players?

This analysis is just beginning to scratch the surface with respect to the presuppositions that you are making. Let’s just look at a few more presuppositions just to illustrate the point. You are assuming that profit means something and has some value. Value compared to what? Is it worthwhile to make some profit? What about the person who might take the other side of the trade? Do they want to make a profit? Perhaps you make a profit in the unit of measure you are thinking in terms of—dollars—but would you make a profit in Euros? Perhaps the dollar is going down dramatically in terms of the Euro and as a result you are really losing money with regards to your “international” wealth.

These are simply examples of some of the presuppositions in a statement you might reflect on with respect to your trading. What about problems you face with the market? What are your presuppositions? Try listing some of your problems with trading and then list the assumptions that are hidden in your problem statements.

One Final Suggestion

I hope that this exploration of Einstein’s beliefs and their application to the market has stretched your imagination. I would suggest you work on the following process.
  1. Adopt the belief that you will learn a great deal about yourself through this exercise.
  2. Get five blank pieces of paper. Write one of Einstein’s five beliefs in the middle of each blank sheet and draw some lines radiating outward from the belief. Reread each of the belief sections of these articles slowly and along those radiating lines on each sheet, write your thoughts and feelings about each belief (create a mindmap).
  3. As you reread each section, also record your answers to these questions somewhere on each sheet:
    • Is this belief useful?
    • Is it useful to me? Why or why not?
    • Am I limiting my success by not holding this belief? If so, how?
  4. Review the completed sheets and notice what they tell you about yourself and your trading.
Through doing this exercise and the ideas suggested throughout the article, strive to reach a totally new level of understanding of how you relate to trading and the markets.
Van’s note: While Volume Two of Strategies of Genius is out of print, Volumes One and Three are still available on Amazon. In them, Robert Dilts modeled the cognitive strategies of some of the great legends of the past. These include (in Volume 1) Aristotle, the fictional character of Sherlock Holmes, Walt Disney, and Wolfgang Mozart. Volume 2 is devoted to entirely to Einstein and Volume 3 covers Sigmund Freud, Leonardo da Vinci, and Nikola Tesla. I personally believe this work shows the genius behind NLP modeling. While these books are not about trading in any way, I think they are excellent and I recommend them to anyone inspired by great thinking.
About the Author: Trading coach, and author, Dr. Van K. Tharp is widely recognized for his best-selling books and his 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 www.vantharp.com.


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October 28-30
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January 2017
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Presented by Van Tharp with co-presenter RJ Hixson
January 20-22
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January 24-26
More 2017 dates will be announced soon!
Other first quarter selections will likely include How to Develop Winning Trading Systems, Forex and Forex Live.

Trading Tip

Hold That Line: Revisiting an Important Support Level
by D. R. Barton, Jr.

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Some traders and investors had hoped that the early September mini-swoon would return U.S. markets to some state of “normal” volatility. Whether the upcoming American elections or uncertainty over the Fed’s interest rate guidance or some other reason is causing the markets’ directionless posture, volatility is tapering off once again.

For long term investors, these weeks are just a blip on the radar screen. With the major U.S. indexes within only a few percent off of their all-time highs, this kind of waiting game happens often.

On the other end of the spectrum, day traders are having a much better time of it than just six or seven weeks ago. And even though the air has been leaking out of the volatility tire very recently, there are still very good intraday moves almost daily.

Ah, but in between those two time frames stand the swing traders. Going from all-time extreme narrow ranges to a very brief volatility breakout straight back into a volatility contraction caused stop losses to be hit and then to be too far. The market now has found a steady rhythm of exactly no directional moves. Let’s look at a chart that shows hourly bars of the S&P 500 exchange traded fund SPY over the last 15 days:

Out of 15 days, we had 8 up closes, 7 down closes and price landing within 1% of where it was three weeks ago - the very essence of a directionless market. When the markets lack a trend, we can usually put down some relatively simple support and resistance zones to help us identify the markets’ most like next move. In fact, I drew the “Line in the Sand” in articles four and five weeks ago.

Back in the September 14th article, I included the chart and description below:
“As you can see, this 2111 – 2119 zone in the S&P cash index is a good line in the sand. If the index breaks that line to the downside on a closing basis for a couple of days, it’s easy to see a test of the Brexit lows down around 2000 on the chart. But if this zone holds, expect us to grind up for a while.”

After that article was published, the “Line in the Sand” held and then we had three weeks of a grind up before the European Central bank gave in last week which started the market down. Once again price tested the “Line in the Sand” which, once again, held.

So What?

The “Line in the Sand” that was resistance for a long time and became support in the last two months is the top technical formation on the equities charts right now.

For some additional information, take a look at the down sloping blue trend line that I drew connecting a series of several recent lower highs.
The combination of the support “Line in the Sand” with the down sloping trend line forms a developing descending triangle. Descending triangles are traditionally bearish chart patterns so given a choice of breaking above the top of the triangle and testing all-time highs or breaking down through the “Line in the Sand”, I give a higher probability to the breaking down scenario.

We live, however, in the age of central bank omnipotence and any significant news from one of the global central banks could change the tenor of this analysis. Absent such news, however, this triangle could become our best friend in terms of determining the markets next directional move.

Please send your thoughts and comments to drbarton “at” vantharp.com – I always appreciate hearing from you!

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 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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