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Tharp's Thoughts
Weekly Newsletter
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Feature: Revisiting Tom Basso: How Important
is Your Entry Really? by Justin Paolini
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Workshops: $700 Early Enrollment Discount Ends Today on Peak Performance Workshops!
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Trading Tip: Hold That Line Plus Year-End Seasonality, by D.R. Barton, Jr.
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FREE BOOK!: Trading Beyond the Matrix
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$700 Early Enrollment Discount Ends Next Week
On Van Tharp's Infinite Wealth Workshop
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$700 Discounts End Today On Peak Performance Workshops.
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Van Tharp started teaching this workshop more than 15 years ago with Robert Kiyosaki who then went on to become famous for his Rich Dad, Poor Dad book. In time, Van became dissatisfied with the structure of that course as it was so externally focused. Recently, he pulled the course “out of storage” and reintroduced a much more internally focused version with so many updates that it’s effectively a new workshop. In his new version, Van shares multiple careers’ worth of knowledge — both his and his colleagues — about wealth concepts, wealth creation modeling, being wealthy inside, and infinite wealth processes. Most importantly, however, the new workshop helps you see how your many conscious and unconscious beliefs about money have dis-empowered your ability to generate more wealth than you have now. Attend this workshop and completely reshape your attitudes toward money, work, paychecks, income, wealth, scarcity, and abundance. Your paradigm shifts in this three day workshop will amaze you and release you from your current beliefs about wealth that have been running in your unconscious and holding you back.
Workshop Objectives:
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To determine where you stand with respect to wealth accumulation and infinite wealth.
To show you how different people think with respect to money.
To teach you a procedure to help you become wealthy inside.
To illustrate the elements of the money game so you can begin to awaken to how winners play the game.
To show you how to be debt-free in seven years.
To help you understand your life’s purpose as an incentive for wealth building.
To help you find the “stem” beliefs that have limited your success.
To help you create a plan to be wealthy inside and out.
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Our $700 Early Enrollment Discount for the Upcoming
Peak Performance Workshops Ends Today!
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Students will learn and begin to understand each of these objectives after attending Peak Performance 101:
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How great traders approach their craft and learn a daily procedure that resembles what they do.
How you create your own experience in the market and how you are responsible for the results that you get.
Become more aware of some of your own psychological issues that affect your performance as a trader/investor.
Learn about expectancy, position sizing strategies and the power of big R-multiples through a simulation game. This game is also designed to help you observe your emotions in a setting in which only a small amount is at stake compared with what you will face in the market.
Learn some of the variables that affect your emotions and how you can gain control over them.
Learn to overcome self-sabotage through exercises done in the class.
Students will get guidance on how to develop an ongoing program to work on themselves using the Super Trader Program as a model.
Students will leave with a plan to make the maximum use of the workshop.
Participants in this course will get to meet and network with some really great people who have a lot in common with each other.
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This workshop has a team of instructors who will be focused on meeting these objectives:
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- To teach you how to obtain greater control of your life and to give you a broader perspective of what is possible.
- To teach you how to create your own experiences and how you are responsible for the results that you get.
- To help you use “Big I” to solve what seem like issues and keep you on course. To make you aware of some of your own psychological issues that affect your performance as a trader/investor.
- To teach you about games and the factors that affect games:
- Level of awareness
- The ability to make up rules
- Game domains
- Game rules
- To teach you your “Winning Strategy” and how — although it has been responsible for your successes — it holds you back from doing even more.
- To give you a procedure to re-invent yourself using advanced psychological principles.
- To allow you to meet and network with some really great people who have a lot in common with you.
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Revisiting Tom Basso: How Important
is Your Entry Really?
By Justin Paolini
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Many aspiring traders focus on setups and entries. I would say 90% of their time is actually dedicated to perfecting entries. That is one way to miss the forest for the trees. Back in the 1990’s, Tom Basso and Van Tharp had already issued research conclusions on the relative unimportance of entries in producing good trading results. Their “Coin Flip” study showed that across 10 futures markets, a simple random entry with a trailing stop made money.
Assuming they did not cherry pick the situations for the test, is the relative unimportance of entries still valid now? Does the random entry still work or have the markets changed? We decided to answer that question with a research project using current Forex data.
Tom Basso’s Coin Flip Study
In his book Trade Your Way..., Van Tharp explained how he and Tom Basso came up with their idea to test a trading system using random entries:
"I was doing a seminar with Tom in 1991. Tom was explaining that the most important part of his system was his exits and his position-sizing algorithms. As a result, one member of the audience remarked, 'From what you are saying it sounds like you could make money consistently with a random entry as long as you have good exits and size your positions intelligently'”. – Van Tharp, Trade Your Way...
Here are the very simple rules Tom Basso used to test the viability of a random entry system:
1) Hypothetical $1 Million account → this is required in order to simulate diversification amongst futures contracts, withstanding margin requirements and drawdowns.
2) Select markets that have more of a tendency to trend so at that time, this meant commodities and futures markets. In particular, the markets tested were Gold, Silver, US Bonds, Eurodollars, Crude Oil, Soybeans, Sugar, Deutsche Mark, the Pound and Live Cattle.
3) The exit is 3X Average True Range (10 day period) subtracted from the close. The trailing stop can only get closer to the current market price, not further away.
4) Position sizing strategy: risk 1% of equity per position
5) Selected markets must be liquid (so that trades can be entered and exited immediately with low slippage).
6) Always be in the market (so as soon as one trade closes, another is opened).
We used these same rules to run simulations in MT4 with the help of our resident programmer Craig Drury. We tested the six FX Major pairs along with Gold from January 1st 2014 to June 30th 2016 (except for NZDUSD which because of data errors, was tested only until the end of February 2016). Effectively, we tested the random entries through trending and range bound environments over the entire test period. Unfortunately, MT4 doesn’t have a Monte Carlo generator so we had to do all the runs manually (20 runs) and it was a lengthy process.
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Random Entry Trades taken as per Basso’s Rules in EUR/USD coded by Craig Consulting on MT4
Our findings? We found no significant deviations from the core concept: Tom Basso’s system’s rules using the Coin Flip entry remain as sturdy today as they were back in the 1980s/1990s.
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An example of the output in Excel —
Tom Basso’s Random Entry is in fact profitable in most cases.
As you can see, the random entry method ends up with a profit in most cases (and this was a robust finding across all runs). While the profit factor is also interesting, there were very few trades overall and the system produced a very low win rate. Van talks about the psychological part of trading and even with robust statistics at your disposal, you can see how traders would find it very hard to stomach this kind of a system in reality.
It was at this point that additional questions and possible complications to the test arose. We asked ourselves: just how random was Basso’s system?
To keep the discussion short & sweet, here are our thoughts:
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Truly random entries should be random in both direction and timing. Being in the market at all times is not really random. Basso’s “randomness” simply asked the algorithm to be “long or short” randomly at a given starting date and then randomly picked long or short after each trade closed. So this means the starting point and initial conditions were likely very influential in the results.
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The markets weren’t randomly selected. Forex and commodities exhibit autocorrelation (trendiness) just like the futures contracts used in the original study. This is another bias to Basso’s test as stocks do not exhibit the same degree of autocorrelation in returns.
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The exits weren’t random at all, are they? The rules for exiting were very clearly defined as to not be random at all. Basso was not testing a purely random system — and neither did we. So we’re not saying that it is possible to obtain decent results simply flipping a coin in the market as to when to get in and flipping a coin as to when to get out.
In fairness, Basso was not testing for profitability of a system with completely random entries and exits. Instead, he simply devised a test to see if exits were much more important than entries. That test was positive but even then, Van said traders can do a lot better than using just a random entry — and still not spend most of their effort on entry refinement. Our initial research results got us wondering about the possibility of putting additional randomness into the test and seeing what came out. When we did, we found both confirming results on some fronts and surprising results on others.
One of the confirming conclusions that will emerge in next week’s part 2 article of this series is that the exit strategy influences returns more than the average trader expects. In particular, we used a trailing stop which is particularly suited to trending markets. When random entries were paired with trailing stops in range-bound environments, positions were “chopped up”. In a trending environment, though, they really “bucked the trend.” The importance of the environment (or as Van labels it — market type) turned out to be one of the more surprising results from the tests.
Join us next week for more about the additional research results and the rest of our conclusions.
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Editor’s Note, Van added this comment: "One key to getting the random entry system to work was the 3 times volatility trailing stop (which I think I remember as 20 days). That kind of stop meant that positions could go through a lot of chop before a trend started. If the stop was shortened to 2 times ATR, even with a 200-day period — it really wouldn’t do it (my guess but I’m not sure). Another key to the system — it was ALWAYS in the market with the random part being long or short. And yes, the starting point was important, but I remember the study using 10 years’ worth of data — so then the starting point wasn’t that important in the end. I actually thought the system would have stopped working because the big commodity trends ended so I’m surprised they got it to work."
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About the Author: Justin Paolini has 10 years of experience trading FX. He has studied Van Tharp’s trading principles and incorporates many of those in the weekly blog posts he writes. He currently works for Forex signal provider FX Renew as a trading coach.
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October
(Early Enrollment Discounts Ending)
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Presented by Van Tharp
with co-presenter RJ Hixson
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Sept. 30-October 2
Friday-Sunday
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Presented by Libby Adams
and RJ Hixson
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October 4-7
Tuesday-Friday
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October 9-11
Tuesday-Friday
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October 28-30
Friday-Sunday
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October 31-November 1
Monday-Tuesday
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In this three day workshop, Dr. Ken Long lectures on the first day about his general approach to intraday trading and about two specific day trading systems — the Frog and RLCO. You will learn the why behind each system and the rules for each. Over the next two days, you put your knowledge to work learning these trading systems the best way possible — actually trading them. Ken will review a series of case studies with you and then you make trades in a simulator — using historical price data. You’ll get plenty of practice so that before you get back home, you have already made numerous trades.
After three action-packed days of instruction and hands-on trading, you can opt to stay an additional two days and trade these systems live! See how these systems trade in real-time in the live markets with a successful, experienced coach in the room guiding you the entire way.
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Exclusive Event for Super Traders
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December 3-12
Saturday-Monday
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These three workshops are likely choices for what's coming in January:
- Peak Performance 101
- Blueprint for Trading Success
- How to Develop Winning Trading Systems
More information and confirmations coming soon!
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Hold That Line Plus Year-End Seasonality
by D. R. Barton, Jr.
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As I write this, we await the results from the Federal Open Market Committee (FOMC) meeting (tablets are to be handed down from on high at 2 p.m. EDT, Wednesday Sep. 21), the market is frozen. Indexes are barely moving as we wait for the Fed’s interest rate announcement (very little chance for an increase) and more importantly, the language the Fed will use to pronounce the state of the financial world.
Back to The Line in the Sand
Last week, I shared a chart of the S&P 500 showing a “line in the sand” support level that had to hold if the market was going to head back up toward the top of the page. That line held (as we see in the chart below) and the market has been inching up into the FOMC announcement. As I explained this chart to some clients, it occurred to me that it’s actually a really good support/resistance primer. Let’s take a look:
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That chart is so clear that it needs very little commentary . . . however (there had to be a however), the Fed’s language in Wednesday’s afternoon pronouncement could change this technical picture in a hurry.
If the Fed sounds accommodative or “dovish”, that tone will give the markets reason to be happy and we are likely to leave the “line in the sand” in the rearview mirror.
On the other hand, more “hawkish” language from the Fed will insinuate an increased chance for a rate hike in December — because no one thinks they’ll raise rates in November, just one week ahead national elections. With any hint of a December rate hike, the market is likely to test that key support level again. By the time you read this newsletter, you’ll know how the announcement went.
Interesting End of the Year Data
If you were to average the monthly price movements of the S&P 500 going back to 1950, you’d find that September has the worst average return of all the months. You’d also find that the period October through December is historically the strongest three month stretch on average.
With that data in hand, I found the analysis of Ryan Detrick from LPL Financial quite interesting. Again, going back to 1950, Detrick looked at price movement for the last four months of the year using one filter: where the S&P 500 started the month of September in relation to its 200 day simple moving average (MA). Here are some of the results from that research:
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- The S&P 500 opened September above the 200 day day MA 47 times.
- A drop of 10% or more into the end of the year happened only 3 times in those 47 years.
- The S&P 500 opened September below its 200 day MA 16 times.
- A drop of 10% or more into the end of the year happened 6 times in those 16 years.
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Basically, this interesting data says “strength begets strength” or argues for momentum carrying the last part of the year. Historically we’ve had a market correction (drop greater than 10%) more than a third of the time (37.5%) when September begins below the 200 day MA but only 6.4% of the time when the index opens September above the MA. This seasonal tendency is by no means foolproof but it is fairly compelling.
FYI - this year, the S&P opened the month of September above its 200-day MA.
Please send your thoughts and comments to drbarton “at” vantharp.com – I always appreciate hearing from you!
Great Trading,
D. R.
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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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FREE Book!
We pay for the book, you pay for shipping.
Read Van’s Latest Book —
TRADING BEYOND THE MATRIX
The Red Pill for Traders and Investors
Eleven traders tell their stories about transforming
their trading results and lives, in this 400 plus page book.
Below is a brief video on how powerful this book is to traders.
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Swing Trading Systems E-Learning Course
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Ken Long's systematic approach to swing trading with 5 distinct trading systems. This course has over 10 hours of instruction with significant follow-along documents included for students to download.
Review the videos as many times, and as often as you like, for one full year. Plus, you receive a bonus workshop at no extra charge—Dr. Van Tharp's Tharp Think Essentials!
You can complete this course at your own pace, from the comfort of your own home or office, and access the materials as many times as you wish during your 1-year subscription period.
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Take a look at this video from Ken to learn more about this course.
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We have extensive information about the Swing Trading System e-learning course, including how to purchase...click the link below!
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Cary, NC
For a list of nearby hotels for our Cary, North Carolina locations,
click here.
Book your flight arriving to the Raleigh-Durham International Airport (RDU).
When traveling to a three-day course, it's best to arrive the evening before.
To help determine your arrival and departure times, see:
Questions? Click Here to Ask Van...
CONTACT US
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This is a supplement to our subscription based newsletter, Tharp's Thoughts.
800-385-4486 * 919-466-0043 * Fax 919-466-0408
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