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You cannot improve your trading performance through some indicator that predicts the market. You must learn the art of trading and understand how to create a trading system that fits your wants, needs, desires and lifestyle.

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Tharp's Thoughts

BEING OVERWHELMED and SYSTEM DEVELOPMENT

By

Van K. Tharp

My research suggests that the problems people have in developing a trading system fall into five different categories.

The first three areas prevent traders from ever starting (or finishing) the development of a trading system. These include computer/technology phobia, procrastination, and being overwhelmed by the whole process. The last two problems tend to prevent the trader from coming up with a workable system. These include: perfectionism and judgmental biases in your thinking.

In an earlier article we covered procrastination. This week let�s take a closer look at the feeling of being overwhelmed.

Being Overwhelmed

The most difficult thing to overcome, at least when you are in the middle of it, is being overwhelmed by any particular task. And when it comes to developing your own trading system, I see traders get overwhelmed again and again. In this case, your energy is probably low and your head is just swimming with details. Moreover, you don�t understand all of the concepts you need to and you don�t know what to do next. Here�s an example,

John was in the process of developing a trading system. He�d read about ten books on systems and indicators that are used in futures and stock trading. All the indicators confused him and when he thought about varying the parameters of each indicator his mind started spinning. He�d also attended several seminars in which various systems were recommended and taught, but he was not sure they were for him. He was feeling even more confused. The costs were mounting up and taking a toll on his trading capital and that added more pressure. He�d just bought a computer system with all the software to make developing a system easy. But there were so many details to learn. There were at least three manuals to read for him to operate the computer system and they didn�t even tell him where to begin his own development work.  The details just kept piling up. John was feeling more and more stressed and soon all he found himself doing was going over everything he had to do without seeming to accomplish anything. He felt desperate to get something done soon or he�d run out of money!

John�s problem is typical of what happens when people are overwhelmed. However, the problem can be solved when you realize there are basically three aspects to being overwhelmed:  1) the concentration on details as opposed to the big picture; 2) being out of balance in your life in some way so there is undue pressure on you; and 3) the lack of a plan to get out of the mess.

The average person has a processing capacity of seven, plus or minus two, chunks of information. When people start concentrating on details, then their capacity is quickly exceeded. When your focus on the details becomes uncomfortable, because of pressure from some source, the feeling of being overwhelmed really starts to set into the mind.

Most people can easily handle a lot of details. In fact, you do so all of the time. However, if your life is out of balance and conflict is created because your needs are not being met, then the details take on a different meaning. Small details that were once trivial seem very important.  The pressure to sort out the details multiplies because you create more details as a result of your imbalance. Soon it all builds into a vicious cycle of being overwhelmed!  Yet it all started from the pressure of life being out of balance in some area. Maybe just one area is throwing your life out of balance? Is it your finances? Your relationships? A family crisis? A health problem?  Balance your life and you�ll be amazed how overwhelming problems suddenly disappear.

Lastly, when people are overwhelmed it is because they don�t see the big picture and thus lack a plan to get away from the details. Probably the sense of being overwhelmed just came over you. You didn�t realize how much your financial pressure (or whatever the pressure) was taking a toll on your ability to think. You also didn�t realize how much you were getting bogged down by the details of system development. Because you don�t have an overall plan, you don�t know how to deal with the details.

Getting Out of Being Overwhelmed.  

If you are in the process of developing a trading system and are currently feeling overwhelmed, then the first thing to do is take a break from the task that is giving you the feeling. Take a day off, or perhaps even a week, and just relax.  Go to a beach or a lake and just relax looking at the water.

The next step is to determine what aspect of your life is giving you so much pressure. Where is it coming from? (Finances? Relationships? Health? etc.)  

Find out what part of you (aspect of your personality) is responsible for the pressure.  Once you know which part, you can negotiate with it. Find out how to meet its needs and if it will agree to let you continue with the task of developing a trading system. For example, you may have (1) to agree to give so much time each day to meeting the needs of that part (2) to set a deadline for the development of your trading system and/or (3) to agree to devote full attention to that part once the deadline occurs.  Perhaps you have a part of your personality that finds the system development �no fun.� We can call that your �fun� part. To negotiate with your fun part you could agree that once you meet an objective or a deadline then the fun part can have it�s chance to do whatever it is that you think of as fun. [Parts work is covered extensively in the Peak Performance Home Study Course.]

Lastly, you must develop an overall plan for developing your trading system. Work out your objectives in detail!  Once your objectives have been written down, you can then develop a plan for meeting those objectives. Divide the plan into various tasks and set a deadline for meeting each of those tasks.

About Van Tharp: Trading coach, and author Dr. Van K Tharp, is widely recognized for his best-selling book Trade Your Way to Financial Fre-edom 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 at www.iitm.com.

Day Trading Workshop

September 16-18, 2006 - Raleigh, NC

Presented by: D.R. Barton and Brad Martin

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Trading Tip 

Trading Tip

A Review of Market Models: ADX

by D. R. Barton, Jr.

Okay, I�ll admit ADX is really not a market model, but rather an indicator developed by Welles Wilder and introduced back in 1978.  BUT, for long term trend followers, ADX is so important, such a key to the kingdom, that I�ve decided to treat it by itself. 

ADX (Average Direction Movement Index) is, at its core, a measurement of the strength of trend.  The calculations are not overly difficult, and if you want to understand the math, it is described on many websites.  I chose one, almost at random, to save you the Google time:  http://help.geckosoftware.com/40manual/indicators/dmi.htm.

ADX:  The Trend Follower�s Best Friend

I�ve had the pleasure of getting to know lots of great traders and technical analysts.  One of the best and most knowledgeable that I�ve ever met is Chuck Le Beau.  And to top it off, Chuck is one of the really great guys in our industry (please see my special note at the bottom of this article about the Systems class that I�ll be teaching with Chuck).

It�s no stretch to call Chuck the world�s leading authority on ADX.  He has built some classic systems around this indicator, that have stood the test of time including systems that have been top-rated in the Futures Truth rating service.

Chuck uses ADX alternately as a set-up and entry criteria in various systems.  The power of ADX lies in its smoothing and its persistency.  The smoothing minimizes false signals from whipsaws and the persistency comes from being able to stick with a trend through modest pullbacks.

If you have any desire to be an intermediate to long-term term trader, you really owe it to yourself to spend some time with Chuck, and study ADX with the master.

Let�s look at our market model questions for ADX:

Is it theoretically credible?  Absolutely.  This indicator has very strong technical support.  And it tests well across many time frames.

Who�s it most useful for?  Clearly this is most useful for long term trend followers.  However, I have read some articles where ADX is used in shorter (even intra-day) time frames.

How Fanatic are the fans?  A very �behind the scenes� bunch.  With the notable exception of Chuck, very few people are out there touting ADX.

Is it being used by real-life traders?  Yes.  Many of folks keep this on their charts and use it in system building.

***Special note:  I have the honor and privilege of teaching the IITM How to Develop a Winning Trading System That Fits You Workshop at the end of this month, with my good friend Chuck LeBeau.  This is the only three day systems course that Chuck or I will teach this year, so don�t miss this chance.  Chuck and I work really well together and we get to spend a lot of one-on-one time with participants reviewing their individual systems.

The $500 early enrollment discount expires next Tuesday, so I encourage you to sign up before then.  I look forward to seeing many of you in Raleigh!

Great Trading!

D. R. Barton, Jr. 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.

D.R. presents the IITM Swing Trading Workshop and Professional Tactics for Day Traders Workshop. Each workshop is only held once each year. 

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Trading Forum

How to Define the Initial Risk (R)? 
Author: oem7110 
Date: 08-01-06

Does anyone have any suggestion on how to define initial Risk (R) based on the performance of a system? If I select the average lost to define initial Risk (R), will it be appropriate?

Reply To This Message 

Re: How to define the initial Risk (R)? 
Author: PMK
Date: 08-01-06 07:22

In the absence of an actual initial stop, average loss is a reasonable estimate of initial risk. This does not, however, take into account the variability of losers for a system. Two systems may have exactly the same average loss, but one could have much more variable returns than the other.

Hope this helps.

Paul King

Reply To This Message 

Re: How to define the initial Risk (R)? 
Author: Pumpernickel 
Date: 08-01-06 10:11

One reason why people want to know the initial risk, is so they can calculate how many (shares, lots, contracts, tickets) to trade on this play. Some mechanical trading systems provide a "stop," which allows easy calculation of initial risk, and other mechanical systems DO NOT provide a "stop".

The standard example of a whole class of systems without a stop is "Pure Indicator Systems". The ones that buy when the indicator(s) perform X and sell when the indicator(s) perform Y. A system with these properties is

1. Reverse to long when the 14 day RSI crosses below 25,
2. Reverse to short when the 14 day RSI crosses above 75

As you can see, there is no stop and no obvious definition of initial risk.

Fortunately, for those wishing to calculate position size, there is an alternative. It is found on pages 296-300 of Van Tharp's book Trade Your Way to Financial Fre-edom.

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