Tharp's Thoughts Weekly Newsletter (View On-Line)
An Interview with Ken Long
Ken Long loves to trade and to teach. He happens to excel in both of those roles so this week we thought we’d ask Ken to share a little bit about how he thinks and what makes him successful. As an example of Ken’s self-awareness and his sense of service, he emailed us back this note after he had completed the interview questions:
After reflecting on the questions, a particular theme stood out: network-centric, collaborative learning. I am convinced that this is an edge for individual traders going into a market dominated by institutional money, algorithms, and unprepared lone rangers. This is strongly connected to my doctoral research: how to prepare leaders and managers to thrive in uncertainty and chaos.
Here’s the interview that prompted that response.
You have a lot going on between your position at the US Army Staff College, pursuing a Ph.D., coaching your daughter’s soccer team, and running an on-line trading chat room. Why do you trade?
I have to trade because of the intellectual and emotional challenge and the satisfaction I get from trading well. I love to trade because I find it interesting, and it challenges me every day to discover who I am and what I can do. I like to trade because it combines my passions for action, research, intellectual challenge and adaptation. Trading directly supports my personal and financial goals and rewards me for the time and effort invested compared to other things I can do with my time.
Where do you get your trading ideas and how do you develop those into trading systems?
Constant working and reworking of my production systems and seeking to understand them better often leads me to new pathways. I review a wide range of literature every week, quickly scanning for ideas that capture my attention at a deep level. Our mastermind chat room is filled with so many excellent traders and deep thinkers who freely share their ideas that I would need 10 lifetimes to explore all the ideas I get just from their sharing.
Our live trading chat room, our collaborative learning environments in the Tortoise mastermind and our periodic live trading workshops and research weekends are a testimony to the power of creative and critical thinking that can occur when a group of collaborative learners get together and share.
Based on how closely the beliefs of a new trading system prototype match my current set, I am often willing to start forward trading the system at very low levels of risk to quickly find out if the new style or system is suited for my psychology. The further the systems are from my current belief sets, the more carefully I will study previous patterns and back test results before committing to forward testing. Once I'm satisfied with the basic idea and I have conducted forward prototype testing, I will scale up risk levels until they reach production levels.
We have heard you enjoy flying to North Carolina to teach workshops. Why is that?
In the month before I come to teach workshops in North Carolina, I make an extra effort to more carefully define and refine my systems, review my results, and reflect on my material. I read as much as I can, and think about it on long walks at night with my dogs. I re-read one of Van’s books before every workshop and carry one with me on the plane. By the time I actually get on the plane, I am so mentally saturated that I quickly fall into a dream state that quite often generates some of my best new trading ideas. I've learned to keep a notebook and voice recorder handy to describe my stream of consciousness and dreaming for later analysis. It happens even more so on the return trip because the workshops are a fertile learning laboratory for me even though I am teaching my familiar material. The plane rides are becoming my favorite part of the workshops.
What does your big picture look like right now?
I believe that the big picture must be related to the particular system you are trading. For an intraday trader, the big picture might be the average daily volatility of the last 10 days and where the price is within the 10 day price channel. For a long-term retirement account that seeks to adapt on a monthly basis, the big picture might include an estimate of the secular trend, the three-year trend, the relative strength of the last six months and the targets performance relative to the population of available targets.
I host a weekly webinar where I update my intermediate- and short-term market big picture to frame my trading plan for the next week. My market classification system has the market, defined as the SPY, in a bearish volatile condition this week (Sept. 12). It is nearly oversold on a weekly RSI basis, and oversold on a 10-day basis as of this writing (again, the week of Sept. 12). The last 20 days have been in a 6% sideways channel with an improving regression line slope. Within the last 90 days, the market (SPY) has been in a trading range between 137 and 112.
Under these conditions I'm prepared to make short-term trades on the long side with upward momentum when the SPY price is less than 120, and I am prepared to go short instantly upon failure of the previous day's low. I will not carry any short-term trades overnight in either direction because of the increased volatility, and I have favored targets for both the long and short side in large-cap stocks and broad ETF indexes.
Should newer traders avoid trading in these market conditions?
Traders should trade in markets whose conditions are favorable for their systems and their psychology. If a new trader has a system that is suited for current market conditions, and they have a good read on market action and have done the necessary self-work to operate the system, then they can trade this kind of market at a risk level appropriate for their objectives. You can always find an infinite number of reasons not to trade any market. It takes an effective intersection of system, self and market to create the conditions for good results.
Given the recent volatility, are you trading different systems or are you trading your systems differently?
I am focusing more on shorter-term systems to take advantage of the increased volatility since that's when they perform best. My longer-term systems move to cash in periods of increased volatility simply because I designed the rules to preserve capital in unfavorable conditions. In periods of increased volatility, I tend to reduce my span of control to just a couple of my more favorable targets and pay close attention to them in order to not be distracted or overcome by sharp changes of direction.
How are your systems performing?
All of my systems are performing as intended and designed in their respective long-term, intermediate-term and short-term time frames.
What are your insights about the performance of your various systems—longer term, short term, intraday—in volatile conditions?
Except for intraday trading, my research has shown that increasing volatility is inversely related to long-side profits. In a volatile market, my longer-term systems are protected with trailing stops, my swing trade systems tend to take profits more quickly when they are in hand, and my short-term systems actually do better when volatility is rising.
You have a mix of experienced, intermediate and beginner traders in your chat room. Have they had noticeable reactions to the recent market conditions?
I would say that most of their experiences echo my own: increased volatility favors shorter-term systems and rewards simplicity, discipline and risk management above all else.
What level of market experience is needed for someone to trade your systems?
Sometimes market experience can get in the way of trading new systems, other times market experience helps us find ways to make them our own. I am constantly trying to find ways to simplify the rule sets and make them more specific and concrete so that new traders can quickly pick up the rules and begin making them their own. A recent experiment with my wife and a group of local soccer moms showed me that some of my systems for intraday trading can be applied after as little as 30 minutes of instruction and only two or three days of supervision. It really comes down to the traders’ ability to master themselves, trust the systems and apply those systems in markets that are favorable.
What has surprised you recently about: trading, your systems, or yourself?
I was very surprised at how easily my wife and her friends were able to trade futures intraday successfully during some of the most volatile days of the past 20 years. They had no ego involvement in the results—their job was simply to execute the rule sets I had given. All of the pressure to be right or wrong was offloaded onto the rules and was not internalized as part of their self-concept. This freed them to focus purely on execution and that was a very powerful insight for everyone who witnessed it during our live trading workshop.
I have also been pleasantly surprised at how effectively the monthly rebalancing and weekly rebalancing systems protected capital when the volatility conditions changed.
I'm very pleased with a research project prompted by a request to automate my systems at the last set of VTI workshops. We hired one of the best platform programmers in the world to code a dozen of my swing trade systems and a dozen specialty market indicators into two bundles. I usually use Excel to develop my ideas because I'm comfortable in that environment. Adding automated technology to the mix allows us to study numerous variations of parameter combinations quickly and back test across multiple market conditions and trading targets. I was really amazed with the power and flexibility of these ideas and the ease at which they adapt to individual preferences. I was especially surprised at how easily these trading strategies adapt to futures and Forex markets.
Have you had another 100R week lately?
I have been spending more time this past month finalizing my Ph.D. dissertation than trading full-time, so I haven't had any 100R weeks this month, but I've had a number of days where I was rewarded for being prepared. The better I prepare, the luckier I get.
About the Author: Ken Long retired as a Lieutenant Colonel in the U.S. Army and now teaches at the Army Management Staff College. He holds a Master's Degree in Systems Management and has been writing his doctoral dissertation on managing in uncertain environments. He is a proud father of 3, a husband, teacher, student and martial artist. He trades actively and also leads dynamic workshops for the Van Tharp Institute.
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"Ken Long evolved from one of my best students in the 1990s
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to one of the best intra-day and swing traders that I know today.
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R-Multiple trades on a daily basis. Systems he teaches
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We Can't Go Sideways Forever
For the past 30+ trading days (about a month and a half on the calendar), the S&P 500 has been traveling sideways in a wide trading range—129 S&P points. Thanks to the recent volatility, the range since the August swoon has been greater than the range for the first seven months of the year. So while there have been opportunities to grab profits during the market’s recent wild swings, there certainly has been no trend to jump on.
Let’s look at two charts that may give us some clues as to the market’s most probable next directional move.
The August drop was quick and deep. Here’s a chart of SPY, the S&P 500 ETF, showing the range for the first half of the year and how that range doubled to the downside in August.
By itself, this chart doesn’t tell us very much; however, it could imply that the bears have enjoyed much of their downside already.
For most traders, trading is a game of probabilities. Two technical/analytical factors loom larger than most other factors right now: the possibility that the risk-off trade is nearing an end, and the approach of a traditionally strong seasonal period for the market.
Hints from Risk Off
Let’s look at the risk off factor to see if we can draw some useful conclusions.
The “risk-on/risk-off” terminology has been in vogue for a while in investment circles. Risk-on investing means that money managers are seeking higher returns and are willing to accept more risk. At these times, they will gravitate to equities, even high-growth equities (e.g., emerging markets and small cap stock). This type of allocation happens when sentiment about the equities market is generally positive. In more worrisome times, managers move to “risk off” when they care less about absolute returns and look to minimize or even take risk out of the portfolio. Traditional risk-off plays include bonds, gold, counter-cyclic stocks and other perceived safe havens.
The early August market drop caused managers to move to risk-off investments in record numbers. And while the market has moved sideways during the past 5 – 6 weeks, managers have stayed on the risk-off side. Here’s a chart that shows the ratio of the price of the long-term bonds ETF (Symbol: TLT) to the SPY ETF.
The circled peaks in early July 2010 and late August 2010 coincided with significant equities market lows. We have maintained that same high, relative bond price during this risk-off period. So this factor could help us conclude that the market’s inevitable breakout of this six-week congestion pattern has a higher probability for an upside break as the bond/equity ratio reverts to a more traditional (i.e., lower) level.
As always, however, significant news will trump any technical probabilities.
Let’s just say that the old adage, “Sell in May and go away!” proved to be valid again this year. Next week, we’ll look at the upcoming change from negative to positive in a key seasonality pattern for equities.
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 guest on both Report on Business TV, and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio. His articles have appeared on SmartMoney.com and Financial Advisor magazine. You may contact D.R. at "drbarton" at "vantharp.com".
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Q: I just finished going through your material from the Peak Performance Home Study, the System Development Home Study and the Definitive Guide. Thanks for the insight given on all of these materials. It really opened my eyes on the right way to approach market and create new thinking about life.
In the creative money management section of the Definitive Guide, you talk about pyramiding. Let's say I increase a position 3 times including the first trade.
How can I measure the R-multiple for these trades? Will I take the R-multiple for each scale in entry or do I make the three trades into one R-multiple number?
A: I would treat each of the three buys as three trades and three separate R-multiples. That way you'll get a pretty good
idea how well pyramiding in 3 times works.
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