The Van Tharp Institute

July 14, 2005 — Issue #228

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Tharp's Thoughts Weekly Newsletter


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In this Issue:

Feature Article

Becoming the Whole Trader, By Melita Hunt

Coming Workshops Learn Swing Trading from Two Pros
Trading Tip

When Traditional Price Relationships Break Down, By D.R. Barton, Jr.

Listening In What Happened To The On-line Trading Game?

View this newsletter on-line, or read back issues

 

Feature

Becoming The “Whole” Trader

By
Melita Hunt

Four traders are sitting together at lunch discussing their plans for wealth. Each one of them had been working diligently on what they knew best. They had been applying the success formula that they were sure would lead them to a life of riches, freedom and inner peace.

Guy Number One was adamant in his belief that it was his innermost thoughts that created his reality; Psychology was the key and he worked diligently on ensuring that all of his thoughts, beliefs and actions were in alignment with abundant thinking. He focused on using positive re-affirming words and declaring to the world that wealth was a state of mind. He spoke confidently of wealth and prosperity, ensuring that any thoughts of scarcity or lack were dealt with through inner contemplation and “right” thinking. He was going to keep working on his beliefs and think his way to wealth and he was sure that this was the key to manifesting wealth into his life.

Guy Number Two was too busy reading to hear anything that guy number one was saying. He was on his fourteenth book about options and had three more lined up to ensure that he knew the subject thoroughly. He was a subscriber to over forty different emails, newsletters, magazines and periodicals that enabled him to “keep up with everything there is to know.” Every day he followed his routine of checking in on world events, following all of the markets, watching the pre-trading, during trading, after-trading news as well as the late night update, the early morning update and the weekend summaries and forecasts. He knew the P/E’s, the dividends, the winners, the losers and everything that should/would or could work – in theory – and he had the spreadsheets to prove it. He knew that learning and gaining knowledge was surely the key to wealth.

Guy Number Three was showing everyone his latest business plan. In fact, this was the fourth version of his business plan that he had written in as many months. He had his wealth plan all mapped out. He knew what he wanted, what he was going to work on and he had put together the ultimate plans to achieve it. He had covered every aspect and followed all of the rules and he just needed to add a few more things. He was analyzing data, re-checking numbers, comparing charts and trying new systems, looking to create the ultimate plan. He would back test and tweak it, forecast and tweak it, analyze and tweak it, talk about it and tweak it. He wanted it to be just perfect and would check with other people. And of course, everyone had an opinion, so as soon as he made the necessary changes; then surely he would implement it. He had put so much time and effort into it already, but first he just had to make a few more changes. Ensuring that he had the right plan and knowing how it would perform was surely the key to wealth.

Guy Number Four was in a hurry. He didn’t have time to eat lunch, he had taken a brief break from one of his jobs but he desperately needed to get back, he was also watching the markets and had two computers going at once, his telephone was ringing off the hook and he even got stock quotes sent directly to his phone. One day he would be able to quit his jobs, but right now he had so much to do that he couldn’t think about that. He was important! He was involved in stocks, bonds, futures, options, real estate, and currencies; he didn’t want to miss out on anything. He was sure that if he just invested a little bit here and a little bit there in lots of different things, then surely something would finally hit the jackpot. It was all about action. You had to be “in the game” to win it, he said. In the meantime, he would keep working two jobs, work hard and stay involved. Working hard and doing lots of things is surely the key to wealth.  

So which one of these “enhanced” characters has traits that remind you of yourself?

Are you the idealist, the thinker, the planner or Action Man? Or are you a bit of all of them?

And who is right?

They all are!

Okay – they were a bit extreme, but let’s take a look at what they represent:

Idealist: Beliefs and Thoughts  (Manifest it)

Psychology plays a huge part in the trading/wealth game. Your beliefs about yourself, the markets and money, will surely guide your actions and behaviors. If you do not believe that you deserve to be wealthy, that you are not good with money that the markets are going against you – then how could you possibly win at this game?

Understanding who you are and how you tick is an ongoing discovery but thinking and wishing for it alone, is probably not the most effective way to reach your financial goals. Learning skills, planning and executing are also necessary.

Thinker: Gathering Knowledge  (Learn it)

How do doctors, lawyers, accountants, and painters excel in their fields? They study and learn as much as they can about their vocation. To win at anything, we need to learn the skills of that particular endeavor. Trading and investing is no exception to the rule, in fact it has a vocabulary of it’s own and there are certain rules and timeless principles that increase your chances of success, so it is important to take the time to learn and study the subject and it’s key components.

But reading and studying it alone, is probably not the most effective way to reach your goals either. If you have worked on your mindset and beliefs, studied effectively and learned enough to know what it is that you want to do, then planning and executing comes next.

Planner: Creating the Plan  (Organize it)

And so we start to develop our plans. Deciding what it is that we want to do and putting together the strategy of how we’re going to do it. Along the way, something else crops up and we decide that we’re going to add that to the plan or re-start the plan with this fresh new idea. Perhaps we have ten more things to do to complete our plans. We have been thinking about, tweaking and changing the plan – organizing ourselves to be prepared for that time when we will actually start trading.

But this is where analysis paralysis can kick in. At some stage, we’ve just got to take some form of action. If you’ve done your psychology work, your study, your planning and due diligence, then taking action with limited risk is the next logical step.

Action Man: Taking Action (Just Do it)

So what are you working on? Are you engaged in an exhausting job? Leaving you little or no time to work on your psychology, studying and planning? Are you spread so thin that you just throw caution to the wind and take chances on trading and investing, hoping that you’ll pick a winner and that will catapult the change? Or are you in the markets because it’s exciting and you just can’t wait any longer?

Taking action is crucial, but working smart and not hard or smart and not foolishly, should be the mantra in this area.

So the moral of this story is that each guy was right but each one of them represents only one piece of the puzzle. All four parts are equally important and necessary and until the trader embraces all four parts, the wealth/trading picture is incomplete and the desire for riches, freedom or inner peace may always elude.

Melita Hunt is a Senior Executive at the Van Tharp Institute. Keep an eye out for her upcoming parable "The Wizard Within" written in conjunction with Van K. Tharp.

Editors Note: Throughout the issues you will see certain words with odd spellings, such as Fre-edom and mort-gage. This is because spam filters are likely to block message that contain certain words and this is one solution.

 

Suggested Educational Materials:

Learning about you: 
Trading/Investing Knowledge: 
Creating a Plan:
Taking Action:
Coming Workshop...

Proven Tactics for Swing Trading Workshop

  • Learn the Pro Traders' Secrets for Capturing Huge Profits in Bear or Bull Markets
  • Become Skilled at Swing Trading - the Trading Style That Fits Into YOUR Schedule
  • Don't Lose a Bundle by Holding Stocks During The Last Market Decline! Find Out the Master Traders' Alternative to "Buy & Hold"
  • Discover the Detailed Trading Strategies that Win in Today's Markets

Learn more...

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Trading Tip: 

When Traditional Price Relationships Break Down

by  D. R. Barton, Jr

 “Markets can remain irrational longer than you can remain solvent"

                                                            --John Maynard Keynes

 

There are some classic pricing relationships that many traders and investors follow.  Certain relationships attract trading attention and arbitrage.  Traders certainly keep their eyes on some key relationships:

·                                            The NASDAQ 100 vs. S&P 500

·                                            Gold vs. Silver

·                                            Cash Price vs. Futures Contracts (for any number of vehicles)

One price relationship that is currently getting some air time is the crude oil inventory-to-price ratio.  Analysts are lamenting the fact that the “old benchmarks are being ignored by the futures markets” – as reported in Barron’s this past weekend.

History is typically on the investor’s side when tried and true ratios get out of whack.  But the story of Long-Term Capital Management (LTCM) has taught us that the traditional ratios can stay out of line for very long periods of time.

If you’re not familiar with LTCM, I highly recommend the book When Genius Failed by Roger Lowenstein.  An oversimplification of the failure of this monster hedge fund was that they bet on price ratios that approached extremes of their historical levels.  When these benchmarks failed to return to the mean and instead got further from it, LTCM kept adding to their position, fully expecting the price relationships to correct themselves to historically accepted levels.  When a series of outside influences kept this from happening, LTCM ended up leveraged to the hilt and not only blowing their own fund up, but took the whole market on a ride toward to the edge of tearing down the whole financial infrastructure.

The Barron’s article this week highlights the relationship of crude oil inventories to the price of crude itself.  Typically (and logically) when prices go up, inventories go down and vice versa.  But that has not been the case over the past two years. 

The article argues that once the market realizes how much inventory that energy companies have, prices will take a major dip.

One could argue that energy companies are betting that future prices are going to be even higher (the same prognosis longer-term futures contact pricing would have us believe).

When a traditional price relationship stays out of whack for two years, we could also argue that it may indicate a potential structural change taking place.  I have written recently about the bottleneck in refining capacity that is contributing to higher oil prices.  Other issues such as monstrous demand growth in China and India, ongoing terrorist threats and political instability in the areas that are sitting on the biggest current oil producing fields are keeping oil prices elevated. 

Those that want to bet on the inventory-to-price ratio returning to its old levels may be disappointed for some time to come.  Even if this relationship eventually corrects itself, we may be waiting for a considerable time for that to happen.  And as Keynes said, staying on the wrong side of an irrational market has destroyed many a trading account.

 

When Genius Failed

D. R. Barton, Jr. will be teaching the upcoming Proven Tactics of Swing Trading Course, August 2005 and is a featured speaker in the Van Tharp Institute Course, Make Money Work for You

He is the Chief Operating Officer and Risk Manager for the Directional Research and Trading hedge fund group. D. R. has been actively involved in trading, researching and teaching in the markets since 1986.  D. R. has taught extensively in many investment areas including intra-day trading, swing trading, and cutting edge risk management techniques. 

His writing credits include co-authoring Safe Strategies for Fin-ancial Fre-edom and co-creator and contributing author on Fin-ancial Fre-edom Through  Electronic Day Trading.

Listening In... 


Position sizing game 
Author: Guy
Date: 07-13-05 10:55

Hi

I used to play the above on oneminutetrader.

I see it is no longer there does anyone know where I can play this game on the internet?

Regards
Guy

Reply To This Message 


Re: Position sizing game 
Author: cathy 

Hi Guy

It's downloadable from the Van Tharp Inst. site, but you can't play it on-line. You download and load onto your own computer. 

You just register for the free download: http://www.iitm.com/regform.asp


Do Not Reply to This Email using the reply button as the email is not monitored. Please click this link contact us:  suggestions@iitm.com

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