Most people don’t understand that they need a trading system if they are to make money in the markets. Most importantly, that system must fit you, your objectives, your psychology, and your beliefs, for you to be able to trade it effectively.
Furthermore, that system, at minimum, needs an abort signal (when you know you were wrong about the trade), a profit taking exit, and a position sizing strategy to meet your objectives. Without those criteria as a minimum, you don’t have a system.
Money is made by cutting losses short and letting profits run. It’s made not by being right most of the time, but by always thinking in terms of the reward-to-risk ratio throughout the trade. What is my potential reward right now? What is my potential risk? If the reward-to-risk ratio is not favorable, then you should not be in the trade. That’s why I always recommend that you think of your profits and losses in terms of the initial risk in the trade (or the trade R-multiples). When you understand that your system is characterized by the distribution of R-multiples that it takes on, then you start thinking reward-to-risk, and that’s the road to success in the markets.
In addition, there are other key aspects to systems. You must know your objectives. What do you expect to achieve with your system? What can you tolerate in terms of drawdowns while you are trading? When you understand yourself, then you can come to terms with objectives that will fit you. When you do that, then you can begin to design a system that fits you, however, most people don’t think about their objectives and thus, they can’t design a system that fits them.
Another key aspect of a system is that you don’t trade the market. Instead, you should trade your beliefs about the market. Until you have useful beliefs or can find useful beliefs, then you won’t be successful in trading. However, even when you have useful beliefs, you still must develop or find a system that fits those beliefs. To try to design or develop a system without knowing the beliefs that it must fit is a recipe for disaster.
For example, suppose you believe that you should buy something when it’s undervalued and sell when it’s overvalued. The first thing you should do with this belief is determine if your understanding of value has any validity. Is it useful? My impression is that most market analysts have non useful definitions of value when they assess the market value of a stock. For them, determining value is a mental exercise for which they get paid six-figure salaries, but it has nothing to do with the future price of the stock.
Suppose your definition of the value of a stock is the liquidation value of the company. What would it sell for if you could liquidate it in a year? And if you subtract the company’s debt from that amount, is it still a positive value? What’s that liquidation value expressed per share of stock? What if the actual value of the stock is so depressed that it is selling for, say,70 percent of the liquidation value of the stock? Now, that to me is a reasonable definition of value. I talked about this strategy in my book Safe Strategies. Another good definition of value might occur when a stock is carrying some assets on its books at $2 each when their real value is $20,000, and the stock is selling for only book value; again, that translates into real value.
Instead, most analysts determine something like (1) what the value of some new product might be to the company (such as the latest iPhone), (2) what the growth factor of the company would be with this new product, and (3) what price-earnings (P/E) ratio it should command with that growth factor. This, to me, has no real validity, but analysts get paid six-figure salaries to play this game. Who am I to argue with a game that pays so well? You might consider subscribing to some of the e-mails from “Seeking Alpha” for good examples of this. About twenty percent of e-mails I receive now tell me why Apple stock is overvalued and another twenty percent tell me why Apple is undervalued.
If you have beliefs about value that are useful, then you could probably translate them into a reasonable trading system. However, if you have such beliefs, could you buy a stock that just kept going up in price—all the way from $50 to $200—even if according to your definition, it didn’t have “value” at a price of $50? You probably couldn’t because you can only trade your beliefs. Thus, for a system to fit you, you have to assess your beliefs about the market, the usefulness of those beliefs, and whether you can find something that fits those beliefs.
Most people don’t make such assessments. They don’t even understand the impact of their beliefs. Thus they purchase a system and wonder why they cannot trade it — it doesn’t fit them.
Developing Your Edge
You need to understand that a system is a collection of beliefs about the market.
That collection of beliefs should give you:
Setup conditions that must exist before you will enter the market.
A specific well-defined entry signal.
A worst-case exit that tells you when you are wrong about the trade and that defines what a 1R loss will be for you in that trade.
Your profit taking exit methodology.
Your objectives for that system; those objectives should say something about what sorts of gains you are looking for, what sorts of drawdowns you can tolerate, and the relative probability of each (e.g., you are willing to tolerate a 50 percent chance of a 15 percent drawdown).
A position sizing algorithm for meeting those objectives.
Last, an understanding of the various market conditions for which you should trade the system and the market conditions for which you should avoid the system.
When you understand your beliefs about each of these parts of a system, then you can run those beliefs through my belief examination paradigm to see how those beliefs affect your trading as discussed in my new book, Trading Beyond the Matrix: Taking the Red Pill for Traders and Investors.
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.
Special event for Swing and Core home study users!
Swing and Core Systems Update!
May 4, 2017
The first 25 students who qualify, attend at no charge! Heads up, we are close to reaching the first 25. Act soon to secure your seat at no charge.
Ken is excited to meet his elearners in person and update you on the latest developments to the Swing and Core systems you have studied, and maybe are already trading. Ken’s extensive market knowledge and energetic, dynamic teaching style offer attendees much more than just the one-day event. Read on for more details. . .
Very Special Benefits
Attendees will also receive:
A pre-workshop preparatory video lecture,
A homework package,
Ability to submit specific questions to Ken before the course, and
A follow up webinar afterwards.
This gives you numerous ways to learn the system updates and clarify any questions you have with Ken directly.
Students should walk through the VTI classroom door having studied each of the courses, and with some knowledge and experience with the systems contained within. Dr. Long will have a lot of new ground to cover during the course so he will concentrate on intermediate and advanced questions relating to the systems. To maximize everyone’s time in the classroom, Ken will focus on his latest discoveries, and as such he will be unable to re-teach content readily available in the elearning courses.
Ken will present the elearning course update, and on the following day, he will launch into teaching his new Adaptive Swing Trading Workshop. In this three-day intensive workshop, Dr. Long presents a series of advanced, adaptive swing trading systems and strategies that work well for holding periods from two days to two weeks.
Some Traders Have Already Had the Opportunity to Trade These Systems,
Here's What a Couple of Them Have to Say:
"I can’t say enough good things about Ken’s new adaptive swing trading systems. Ken provided the systems, strategies, and tips to help me take my trading to a professional level. I don’t want to sound cheesy but the swing systems’ trades were able to pay for the course within about two weeks. I highly recommend this workshop to anyone who is serious about swing trading."
—Terry H., Buckingham County VA
"There have been so many golden nuggets from the adaptive swing course. And it's not just learning the rules — it's also managing the exits, the “off field” preparation, trade framing, developing my skills, and more. And every single one of those lessons transfers directly to the markets outside the US that I trade.
I couldn't say exactly how many R multiples all those lessons learned have saved me on the downside. I couldn’t say either exactly how many more R I will make on the up side. I can say that I have doubled my trading returns already as a result of doing this course. The course was a key part of my trading success that I didn't know was missing."
— Dave C, Cairns Australia
In this new three-day workshop, Dr. Ken Long will present a series of advanced, adaptive trading systems that work well in the swing period holding time-frame — from two days to two weeks.
What is an Adaptive Trading System?
An adaptive trading system has rules and rule parameters that adjust to market conditions and price conditions rather than remaining constant.
As Van urges traders to watch the big picture and describe market character with some sort of classification system, Ken has such a system that he will teach at the workshop. He monitors a handful of standard and homegrown statistics to help him interpret the market and consider possible scenarios. He will describe both the calculation of the homegrown statistics and the usage of them so that the workshop traders understand them and can consider how to adapt them for their own use if they like.
What About “You?” Your Most Important Asset
Even though this is a technical workshop and not a Peak Performance event, Ken will talk a lot about what he does and what you can do to help yourself generate better results through various strategies.
One of the most effective self-development strategies Ken uses personally and many of his chat room traders also follow, is keeping a learning journal. A learning journal follows a specific format that was developed by leaders in the area of adult learning theory. The format and process employ some simple steps that better integrate your experiences, reflections, and follow up plans than anything else available right now.
If you ever get a chance to join Ken in the chat room, you will see him and the other traders make a nice win, endure a loss, and in either case — talk about getting to the “zero state.” This idea of state management is critical for being able to take the next action you need to — without lingering emotion from the last trade. Ken will go over some strategies he uses to manage his mental state and trade from the zero state.
Coaching from Ken After the Workshop
Once you are back home and studying or trading the systems you learned at the workshop, inevitably you will come up with some important questions.
After each Adaptive Swing Trading Workshop (and Day Trading Systems Workshop — coming in August), Ken provides three follow up coaching sessions to answer your latest questions.
In these online sessions, Ken interacts with the participants by sharing ideas and answering questions.
Also, Ken will host three coaching calls following the workshops, approximately one per month and if you can’t make a session, you can watch the recording when it’s convenient for you. These sessions are more than just Q&A as traders also share what’s working great for them and collaborate on ideas to make the systems even more robust.
The Super Trader Program has several openings available at our current rate. However, at the end of July the rate will increase. If you are considering joining we encourage you to get your application in now to "beat the rush" of new applicants that come in as the deadline approaches.
During my three decades trading the financial markets, I have worked with all types of market players but some of the most fascinating people I have run across have been value investors. The great ones have an intriguing combination of curiosity, knowledge and patience that allows them to play the value game well. In fact, one of the best value investors that has all of those qualities co-authored Safe Strategies for Financial Freedom with Van and me — Dr. Steve Sjuggerud.
A very brief but insightful and useful interview earlier this week reminded me of the unique perspective some value investors possess. So with that in mind, I’m going to do something different in today’s column, I’ll share a little about the interview.
A Modern-Day Value Investing Icon
Jeremy Grantham is the co-founder of GMO, an investing firm in Boston (he’s the “G”). Some of his public fame comes from making two great valuations calls — in 2000 before the dot.com bubble burst and near the end of the real estate bubble in late 2008.
So from the perspective of extensive market experience and spot on calls, it’s pretty easy to conclude that Grantham’s practical knowledge of bubbles elevates him to the status of a bubble expert.
When a WSJ reporter confronts Grantham with the question of whether or not U.S. equities are getting into bubble territory, he gives us his truly insightful thoughts in a video that has a run time of just three minutes and 53 seconds.
Bubbles and a Decent Difference
Grantham details his requirements for a bubble scenario succinctly:
Perfect fundamentals (he says we’re far from that ideal)
Those fundamentals are irrationally extrapolated
With accompanying euphoria (he says there’ none of that)
Equities do not meet any of his criteria right now for being in a bubble.
He also busts the reporter’s chops (in his very understated British way) about the “is it different this time” question. Responding, Grantham says that this time is decently different. He says that since 1997, U.S. corporate profit margins are 30% higher than they have been in the previous 70 years. That extra cash flow is not going into investments (via capital expenditures), therefore, the extra cash flow is being reflected in stock prices, which are 75% higher. And those higher prices are reflected in the 10-year average Schiller-based P/E ratio that is also 75% higher than the average of the previous 100. He implies that equity prices are therefore believable and not a reason in themselves for a serious correction.
Grantham is keeping some cash “up his sleeve” to invest after the next 15 – 20% drop — a drop which by the way, he labels as “just an ordinary day at the office.”
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 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
QUIZ — This is a screen shot of a trade setting up. Your assignment is to decide how the price might move from here, where you would enter and where you would put your initial stop. How would you mark this chart up?
FRAME SOLUTION — This is a screen shot of how the trade would be framed according to Ken’s guidelines. How close did it match to yours?
If you had played along on these trades, how would your trade have worked out? Collect your notes, results, and any questions you might have for Ken and send them to longke “at” yahoo “dot” "com" with the title "trade frame clarification."
Watch Ken's video below with a seven-minute discussion about this quiz.
Click on the image below to view the video.
Below is the “QUIZ.” It's a case study situation where a trade is setting up and needs to be “framed.”
Click on the image for a larger view. The link to the solution is below it.
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.
Ken's next workshop is just around the corner. Watch this video to hear two testimonials from students of Ken Long.
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"The Peak Performance Home Study Course is the most comprehensive guide ever written about achieving peak performance trading and a peak performance life! It is one of the most challenging things I have ever done, but also one of the most rewarding. The comprehensive planning and discipline acquired through the course has improved my life on a physical, mental, and spiritual level. The improvement in my trading by reducing mistakes and maintaining the discipline to follow my trading rules has been invaluable. I have learned so much about myself and look forward to continuing to apply what I have learned to my trading and continuing to review the course at least once a year. No matter how new or experienced you are, if you commit
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