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following article about ETFs was written by our ETF expert and
workshop instructor, Ken Long. We asked Ken to educate our readers
on the basics and benefits of trading the ETF sector. Ken has
expanded his workshop teachings into an ongoing learning environment
via a mastermind internet forum. We hope that you enjoy this
introduction into the world of ETFs.
Strategies Work in Extraordinary Conditions
(like those that transpired last week)
Exchanges Traded Funds
(ETFs) are one of the most important and timely investment vehicles
available to the trader or investor who wants to take control over
his own financial future. Here are just a handful of the important
qualities of ETFs you should be aware of.
have useful variety.
No matter what kind of ETF you need for your trading or
investing interests, you are sure to be able to find an ETF
that’s right for you. You
can find ETFs that track any of the following:
are indexes like the Dow 30 industrial average, the S&P
500 index, and the NASDAQ 100. Their symbols are DIA, SPY, and
QQQQ. There are other major indexes like Japan Nikkei
(EWJ), the European large-cap 350 (IEV) and the Morgan Stanley
European and Asian mature company index (EFA). EFA is a
particular favorite of mine because it represents the mature
industrial world minus the US.
Market Sectors: These include ETFs for the nine sectors of the S&P 500
known as the sector SPDRs or "Sector Spiders". These
ETFs symbols begin with an "x" and include finance,
industrial, consumer staples, utilities, and technology among
others. These are very high volume, very liquid and can be
traded with options as well as in direct trading.
- Regions of the
World: These correspond to different regions of the world markets such
as Asia less Japan (EPP), European and Asian mix (EFA), Latin
America (ILF), and emerging markets (EEM).
Countries: There are over 30 separate countries with their own ETF. These
typically reflect the stock markets of each country comprising
the largest capitalized companies, for example, Canada( EWC),
Mexico (EWW) and one of my very favorites Brazil (EWZ).
The Brazil ETF is very liquid and represents a country that is
quickly turning into the economic powerhouse of Latin America
in the Western Hemisphere.
Sectors: These include specific market segments such as semiconductors
(SMH), utilities (XLU, UTH), regional banks (KRE), US
residential real estate (RWR), biotechnology (BBH), and medical
Commodities & Baskets of Commodities: This has been a very hot sector over the last year and the run
may be done. Commodities tend to be cyclical and very volatile
at the end of long trends. You can either buy baskets like the
Deutsche Bank commodities blend (DBC) or an ETF that reflects
individual commodities such as gold (GLD, IAU) or grains (DBA).
- Currencies &
Currency Pair Trades: The seven major currencies of the Forex market can now be
purchased as ETFs including the US dollar (USD). You could
even get sophisticated pair trade ETFs which play the
difference between currency pairs. This is sophisticated
trading that is not for novices.
Style Boxes: there are ETFs that correspond to different styles according to
them and MorningStar style box framework, such as large-cap
value or small-cap growth.
Fundamental Screens: There
are even ETFs that reflect specific investment strategies and
hypotheses. These all tend to be very sophisticated strategies
and in order not to lead you astray I will refrain from
reporting their symbols. It is enough to know that any
philosophy of investment or trading can be framed with an
appropriate set of ETFs.
- Varieties of
Bonds and Income-Generating Dividend Payers: A couple of easy ones are long-term treasuries (TLT) and
aggregate income that mixes treasuries and corporate bonds
Entire World Market: A simple example is the Vanguard
Total Market Index viper (VTI).
have more transparency.
Mutual fund components are effectively screened from public
view, so you cannot analyze your current exposure. That can be
very important as we saw this week. You’d like to be able to
know what your exposure to companies like AIG, Lehman Brothers
and Bear Stearns might be at some moment. You can get this kind
of information in a timely manner with ETFs (WisdomTree ETFs are
especially noteworthy in this regard).
are less volatile than stocks.
There are times when the day to day fluctuations of price can
upset even the sturdiest of stomachs.
Because they are blends of multiple stocks or
commodities, ETFs have a much smoother price curve than
have enough volatility to be tradeable. Even though the
price action of ETFs are generally much smoother than stocks
that make up their components, there is plenty of price change
for traders to be able to frame trades that offer favorable
reward:risk characteristics. In a way, you can say that ETFs
trade jagged volatility for more smoothly oscillating waves. ETF
price waves are more like the long, powerful ocean swells that
move for miles in deep water.
can be compared for purposes of market research.
Because there are ETFs that cover the entire world market, as
well as business sectors, countries and currencies, it is
possible to rapidly assess the condition of the world market by
doing a regular comparison of price performance between a set of
representative ETFs. Because
price rolls up all the variables and market opinions of market
participants who vote with their money, ETF price action serves
as a barometer for market health and opportunity.
can be analyzed using your favorite technical analysis.
Because ETFs buy and sell on exchanges just like stocks, they are
subject to all of the technical and fundamental analysis that
you use on individual stocks.
So the good news is that you don’t have to jettison the
principles and techniques that have served you well already.
ETFs allow you to leverage your time investment in mastering your
niche in fundamental and technical analysis.
can be used to construct any kind of portfolio you seek.
Sometimes you need a core portfolio to take care of your long
term financial goals. Sometimes you need a short term hedge to
protect gains in long term holdings that you don’t want to
prune or to seize an opportunity caused by a short term
imbalance in price and market conditions. Sometime you just need
to get money working in a sector now while you prepare to
conduct a more detailed analysis of individual companies. No
matter what kind of portfolio solution you are looking for,
chances are there is a set of ETFs ready-made to answer the
ETFs are here
to stay. The prudent investor will approach them with care and
interest to see just how you take advantage of the many favorable
qualities they offer to both the
trader and the long-term investor.
received a very timely question about ETFs, “How
do the ETF strategies you teach handle extraordinary conditions like
those that transpired last week?"
It was a
great question and I want to share my two answers with all of you.
First, in our
intermediate and long term systems, market conditions have
deteriorated so much in the past couple of months that we have been
near 100% cash for the last several weeks, which is not a bad place
to be as the market works through some historically large
our short term strategies we have been able to take advantage of
some short term anomalies that worked out very favorably.
Below are two
live shots from inside our live trading room from last week.
And this is
not about me being a genius, far from it. This is an example of the
mastermind effect of ETF traders working together to share insights
that made the difference. Our common frame of reference allowed us
to pool our observations and insights.
We made the
observation that UYG (the 2x leveraged
Financial sectors ETF) was at extreme "Maxpain"
conditions (a technique we describe in the seminar).
Chart 1 shows the setup, and we took positions at 15 with
a $.50 initial stop
Chart 2 shows the follow through, when we sold into
strength the next day
(9/18), intraday, there was an easy and orderly exit possible at 19
for anyone who didn’t want to hold overnight for an 8R intraday
morning, we sold into strength at 23 for a 16R overnight trade,
banking a nice trade and carrying no overnight risk.
afternoon some of us made the case that financials may continue to
benefit from the government's willingness to secure the downside of
the trade, and we framed a trade for next week that so far hasn’t
paid off, but we are within our normal risk managed parameters. But
that's the nature of trading after all. You look for an edge and
establish a trade that seeks to exploit it in a risk managed way.
opportunities don't come along everyday, but if you are paying
attention, and are leveraging the power of a trader mastermind of trusted friends with multiple points
of view, there are times when you can frame really favorable short
term trade with ETFs.
discussion continues as of this writing on looking for and
interpreting opportunities in the financial and commodity sectors
that seem to be setting up for a rebound after a 30-40% selloff
from previous recent highs.
There will be
an opportunity for ETF seminar attendees to join our mastermind
chatroom at a reduced rate. Chatroom members are also eligible for
annual follow up workshops, and monthly webinars to keep the
About the Author: Ken
Long, a retired Lieutenant Colonel in the U.S. Army with a Master's
Degree in System Development, is currently a professor of tactics
and logistics at the Army's Command and General Staff College. He
has developed the Tortoise Method of mutual
fund switching, a trading system that takes about five minutes each
week with a goal of outperforming the S&P 500 Index. Ken is the instructor of our upcoming
ETF Techniques Workshop, and a co-presenter with Van at our Blueprint for
Trading Success Workshop. Ken is founder of Tortoise Capital
He is a trader and writes a daily and
weekly market assessment for mutual funds and exchange traded funds.
He is a proud husband, dad, and ju jitsu practitioner.
Third Party Clause
|October 11-13, 2008
for Trading Success
"This is the best conference I have ever attended. This is the hardest conference I have ever attended. I had to ask myself some of the most difficult questions I've asked in a long time...Van and Mel are not just great trading coaches, they are great people. You are a breath of fresh air in an industry full of hucksters." —S.W., Rancho Mirage,
|October 15-17, 2008
"Excellent course for understanding ETFs and how to incorporate them, both short-term and long-term into your trading plan.
Ken is an excellent instructor with a terrific commitment to making sure everyone understands the material. He is one of the best, if not THE best trading and system design instructor I know." R. Freeman, CA
What’s a Trader or Investor to Do?
D. R. Barton, Jr.
My 14 year old son (and new golf aficionado), Josh, ripped
a drive right down the middle of the fairway on the first
hole of our local golf course.
While this didn’t assure a good outcome on the
hole, it was fairly routine for him to use this good
starting position, put some good shots together and par
Contrast that outcome to the second hole – where he
pushed his drive to the far right, behind some trees.
From there he had to chip back to the fairway and
struggled to just make a double bogie (two strokes over
Consistency is a huge advantage in golf.
If a player has a high degree of variability in his
or her swing, then shots go all over the place, and it’s
tough to make good scores.
Variability’s counterpart in trading and investing in
the markets zip down 4 percent one day and up 3 percent
the next, it’s really tough to have a strategy (and
psychology) that allows you to stick with trades.
Add that to the big bear run we’re part of and traders
in all time frames are facing big challenges.
Volatility at All-Time
It is a very rare thing to use the term “all-time
on an absolute point basis the volatility in the market as
measured by the S&P 500 index’s Average True Range (ATR),
hit just such a milestone yesterday (Tuesday 9/23).
Average True Range provides us with the daily range
of the item being measured, taking into account gaps.
The default setting is for a 14 period average.
In April of 2000, the previous high was set at 43.54
S&P 500 points. Yesterday,
this indicator hit 43.61.
To give some perspective on how volatile the markets
are, the 14- day ATR has been as low as 7.73 in the past
What’s a Trader or
Investor to Do?
Next week we’ll talk about the market implications for
day traders and swing traders.
The bottom lines is that day traders are loving the
volatility and swing traders are most having to reduce
time frames and position size while widening stops.
Since long term traders and investors are less
day-to-day volatility (except psychologically), their main
concern is about overall market direction.
And it has certainly been a rough ride for those
managing long term portfolios.
Since the October 11, 2008 high, the S&P 500 cash
index has dropped 28.1 percent.
With the severe credit contraction that we’re
suffering through in the financial markets, there are many
folks who have reached their pain threshold and believe
that this is the time to get out of their long positions
There are no sure things in
dealing with the markets,
but for those still holding broad-based stock positions,
the strongest case right now is to weather the current
storm with and establish an exit point if some combination
of government intervention and an extremely oversold
market can produce a near-term rally.
In short, whether
or not you like the government plans to inject
capital and backstop bad loans, my good friend and market
maven Christopher Castroviejo says the government action,
“Effectively takes the most urgent bearish case off the
Add to this the effect that the four year election cycle
has on the markets leading into the November 4th
national elections, a market that is very stretched to the
downside, and the most likely scenario seems to be relief
HOWEVER, even if analysis, hope or prayer leads one to
look for an upward move, we still have to have an exit
strategy if the market continues to deteriorate.
Here’s a chart that shows Fibonacci retracement
levels from the October 2002 lows to the October 2007
highs that might be useful to give us exit strategy clues.
The chart gives us a good long-term picture of the market.
The purple moving average (MA) is the 200 day MA, and you
can see that we’ve broken clearly below that.
The main problem with getting out of long positions now is
that the outside interventions and normal technical
oversold indications provide some strong reasons to
believe that the worst of the near-term decline is behind
Two exit strategies could be used by long term traders
still holding significant positions – a close below last
week’s low would be an aggressive exit point, but that
type of price action would indicate that the government
intervention is being seen as ineffective by the market.
A more conservative exit place would be the one
listed on the chart: a weekly close below the 0.618
retracement level. In
Fibonacci analysis, this would signal that the long
uptrend from 2002 – 2007 has been broken.
Next week we’ll look at some market implications for
swing and day traders.
Until then --
D.R. Barton: 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
You may contact D.R. at
“drbarton” at “iitm.com”.
|Melita's Inspirational Corner
Is Simply Enough
was lucky this week that I had two things happen that
brought me a lot of joy. The first was a dinner at Van
Tharp’s house that we hold occasionally between
workshops to meet, greet and spend some personal time with
our clients. Being a social butterfly, I just love
attending these events and especially meeting the people
that are engaged in and enjoying Van’s work. We have a
really easygoing time and talk about day to day things,
learning about one another and enjoying each other’s
company, as opposed to talking about the stock market and
trading. There is plenty of talk about those subjects
during the workshops themselves!
didn’t overdo it because one of our clients was smart
enough to remind me to conserve my energy so that I could
continue to get well, rather than wearing myself down with
extended chatter until my energy was spent and I was worn
out, I heeded the good warning and headed home after a
couple of hours, but definitely in good spirits.
the same day, my cousin Brad arrived from Australia to
keep me company for a week. He has been offering to come
and visit with me for a quite a while and has always been
willing to jump on a plane immediately if things weren’t
going well or if I needed him for any reason. Thankfully,
things are going well at the moment, but he still made the
long journey over to see me and I must say that having
family here with me is wonderful.
the first 24 hours, I was trying to work out where I
should take him so that he wouldn’t feel bored or
disappointed. I offered him a trip to Washington DC, or a
3 ½ hour drive down to Kitty Hawk to visit the area where
the Wright Brothers flew the first plane. However, he made
it very clear that he wasn’t here to travel this week,
or see anything in particular, unless I was feeling well
enough to make a trip and wanted to traipse around
sightseeing. He was simply here to see me and didn’t
need anything fancy or frivolous to pass the time.
Catching up and seeing me during this time was simply
his comments made me realize that spending time together
really is simply enough. Just as meeting and greeting
clients, even if it is only for a brief time, is simply
am very blessed to have such a wonderful family. I really
couldn’t (and wouldn’t) ask for any better. From
across the oceans (Australia, England, New Zealand and the
US) we probably stay in touch more readily than people who
actually live close to one another. Now you may think that
it is my illness that has brought us closer together, but
I beg to differ. I cannot think of a week that has gone by
in my 40 years that I have not spoken to my mother,
wherever I happened to be in the world. And with sisters,
nieces, nephews and close to 40+ first cousins (and plenty
of aunts, uncles and others to add to the brood), there is
always something going on to hear or talk about.
your family is large or small, I hope that you take the
time to share yourself with them. You may not realize that
the simple and brief contact can actually bring joy to
others, and you might even find something enjoyable for
yourself while catching up.
I just wanted to share once again that two things brought
a lot of joy to me this week. It was taking time to meet
both new people and regular clients who follow and benefit
from Van’s work and spending time hanging out with my
whether you find yourself in the midst of strangers,
friends, or among family members that have known you for
your whole life. Enjoy every moment that you have
together. You really don’t need to expend a lot of
energy to entertain them or make big plans to show that
you care. It is simply enough to just be yourself.
Melita Hunt is the CEO of the Van Tharp Institute and a regular contributor to the weekly newsletter. If you would like to keep up with Melita’s progress regarding her lung cancer (she is a
never-smoker), please feel free to read her blog at
You can contact Melita at [email protected]
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Copyright 2008 the International Institute of Trading Mastery, Inc.
"When we are no longer able to change a situation, we are challenged to change ourselves." ~Victor Frankl
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