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Tharp's Thoughts Weekly Newsletter (View On-Line)

July 22, 2009 - Issue #433

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NEW! 2nd Edition of Van's Famous Peak Performance Home Study Course

Article

Tom Watson, Golf and Me by Van K. Tharp, Ph.D.

Workshops

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Trading Tip

Market Update: Germany by Van K. Tharp, Ph.D.

Ask Van

Relating the Secrets of the Masters Game to Futures Trading

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 The Van Tharp Institute Introduces the 2nd Edition of the Peak Performance Home Study Course!

Feature

Tom Watson, Golf and Me

by

Van K. Tharp, Ph.D.

It was Saturday evening, and I had tears in my eyes as I explained to my wife what was going on in the world of golf. Tom Watson, a man two months shy of 60, was leading the British Open after three rounds. It didn’t matter that Tiger Woods had missed his first cut in a major, losing the opportunity to win major number 15. Tom Watson, at nearly 60 years of age, was about to win major number nine. A miracle was about to happen. My wife and niece didn’t seem to get the enormity of the situation. I couldn’t express it to them, or if I did they were not interested enough to watch the drama of the final round.

In golf the collective belief is that when you reach the age of 40, you are very unlikely to be competitive anymore. Somehow you don’t have the strength or the mental tools to play consistent top golf. When Jack Nicklaus won the Masters at age 47, I thought it was one of the greatest golf feats ever. In addition, Julius Boros won the U.S. open at age 48, although that was probably a little too early for me to be aware of.

As a pro golfer, when you reach 50 years of age, you are so old that you really are no longer competitive in the PGA, so you get to join the Senior (Champions) Tour. The senior tour is dominated by men in their early 50s. (Actually, Tom Watson is older than any of the winners on the Champions Tour this year.  Tom had hip replacement surgery in late 2008, so he hasn’t been able to compete again until recently.) By the time you get to be 60, you are just too old to be able to compete, even among the 50 year olds. These, of course, are the collective beliefs of golfers everywhere and they create our reality.

No one could run a mile in under four minutes until Roger Bannister did it in 1954. Once he did it, then all of the top runners could do it. Once someone shatters a collective belief in a very public way, it changes everything.

We create the world in two ways:

  1. Through our own beliefs we create our own experience. 
  2. Through our collective beliefs we create the experience that everyone seems to buy into. 

But Tom Watson rose above all of that. In an interview at the end of the third round, Tom said that he was in a peaceful, spiritual state that he’d only achieved in his lifetime several times before. When I heard him say that I thought, “We might see a miracle tomorrow.”

It was now Sunday. Tom was on the 18th hole and in sole possession of the lead. He needed par and he’d win the British Open at age 59. The commentators were all amazed because they were all professional golfers who had given up competing long ago, and they were all younger than Tom Watson. We were seeing the impossible about to happen. And if it happened, new barriers would be shattered in our collective consciousness.

Tom hit an 8 iron to the green. It was almost perfect. It hit on the green, but caught the slope and rolled off the green, coming to rest right on the fringe. This was one of the hardest holes in the championship and few people managed par from here. Tom hit the ball about 12 feet from the cup. He was 12 feet away from a miracle. He was eight feet away from winning the British Open and he’d made thousands of putts like this in his lifetime.

At that point I wish I could have been his caddie. I’d have told him, “You’ve made this putt many, many times; now just step into the feeling of having made the putt and winning this championship. Imagine what it will feel like to be the oldest man to win a major championship by nearly 12 years. Just step into that feeling. And when you’ve got that, just trust that you’ll make it.” What I would have told Tom was the secret behind The Secret. And Tom had been doing that for almost 72 holes. 

But I wasn’t Tom’s caddie and Tom’s caddie, as best I could tell, didn’t tell him anything. And then it happened—Tom missed the putt. He hadn’t won the British Open. He was now in a playoff. He’d still made history, but somehow that’s like running a mile in 4.000000000000000001 minutes. It’s not enough to make a difference. It wasn’t enough to erase barriers in human consciousness because Tom Watson had not won his 9th major championship. He was only tied. And our rules say their can only be ONE winner.

Tom was now in a four-hole playoff with Stewart Cinq. Stewart had made a miraculous putt on the 18th hole to make a birdie and get into the playoff. And he was on top of the world. He probably knew in his mind that the Open Championship was his. And Tom Watson played the four remaining holes as one might expect a 60 year old to play. Tom was a defeated man and Cinq won by six shots.

I was devastated and I wasn’t sure why. Cinq had won his first major. Why wasn’t I happy for him? My thought was, “It sucks that Tom didn’t win.” I wanted to cry I was so upset. 

You see I’m 62 years old. I used to be a pretty decent golfer. On my 17th birthday I played six holes of golf in five under par. However, a big thunderstorm came in and it started pouring. I was soaked and couldn’t finish that round because it was too dangerous to be on the course. Plus, how well can you play golf when it’s raining so hard that you can’t even see 20 feet in front of you? I left the golf course very upset and about an hour later I was involved in an accident that totaled my car. I never had a round of golf (even 9 holes) under par again. I wanted to make my high school golf team that year, but I didn’t make it that year, nor did I make it my senior year.

Probably because of those experiences, I seemed to have less and less time to play golf. It was no longer a passion. After high school, I didn’t play enough golf to play well. Nevertheless, when I was in my 40s and early 50s, I’d still play golf 6-7 times a year. 

At one point, once I’d worked on the beliefs having to do with my round of golf being rained out and then totaling my car, I attended a three day golf school. At the end of it I could boom a 2 iron or a 3 iron (a feat that had eluded me most of my golfing life). There was still some potential in me I thought. Perhaps I could practice really hard and actually play in the Champion’s Tour at age 50 and maybe even win a tournament. Could I? 

Later, I was told that my swing speed was 85 mph and that pretty much was fixed. I’d never be like the pros with swing speeds of 115 mph who could hit drives of 350 yards. Was that a collective belief I was buying into? Furthermore, as I got older, I’d lose flexibility and my swing speed would slow even more. I’d probably be hitting a fairway wood when a pro might be hitting an 8 iron. And despite the lessons, I still didn’t play often and when I did I usually found that the sun/heat just seem to exhaust me. So I stopped playing. 

I’ve shared this story with you because it is clear to me how my beliefs (somewhat shaped by an incident when I was 17 years old) have shaped my experience playing golf. If I can play six holes in five under par one time, then I’m capable of doing it a lot. But I gave up on a dream because I felt the Universe didn’t want me to have even one exceptional round of golf. And even though I’d cleared that belief, I hadn’t realized the impact of a few other beliefs on me:

  • Golf isn’t any fun unless you play well.
  • You’ve got to play 2-3 times per week to play well.
  • I feel exhausted when I get too much sun, so I don’t play golf when the temperature gets above 80.

And then I bought into some of the collective beliefs:

  • Once your swing speed is established, it’s fixed for life. (Or perhaps this was just a belief one professional golfer gave me).
  • By the time you reach 50 your ability to play will fall dramatically and by the time you reach 60 you are just a shadow of your former golfing self.

So why am I writing this in a newsletter about trading? Your performance in golf is rooted in your beliefs about yourself and golf. In the same way, your trading performance is shaped by your beliefs about yourself and trading. Think about that for a minute. Can you identify (make conscious) ten beliefs that you have about yourself and trading? The great news is that you can overcome your own limiting beliefs through the procedures discussed in the Peak Performance Course. 

Additionally, whether or not you realize it, you are shaped by the collective beliefs that most people share (i.e., about golf, trading, or anything else). Think about that for a minute. Can you make conscious ten commonly held beliefs about trading? These affect you also—even if you don’t believe them. You can minimize the effects of collective limiting beliefs by focusing inward. Furthermore, if you become clear enough, you can get into a flow state where you no longer are influenced by the collective beliefs of others at all. You can get into that state with your trading, as well as other areas of your life. Tom Watson did it this weekend even though he didn’t shatter the collective belief by actually winning the open.

I promised my wife that if Tom Watson won the British Open, I’d get serious about playing golf again. He didn’t win, so I don’t have to do anything. But Tom proved something to me. I think I’ll start hitting golf balls again and see what kind of barriers I can overcome.

We play the games of life according to collective rules. In the game of golf, that means that few can break par and only one person can win an Open Championship. To the victor go the spoils and the rest are just forgotten. But what if we made one simple rule change? If two people are tied at the end of 18 holes, then both of them are crowned Champions. Tom Watson, I just changed the rules, and you’ve just won your ninth Major at almost 60 years of age. You’ve accomplished a miracle. How does that feel? And why can’t that be the rule?

The games of life (including the money game) are filled with rules to make a few people special and the rest forgotten. And you can only be special a few times. Most of the time, you are forgotten. But as we teach in the Trader Reinvention game in Peak Performance 202, you can make up your own rules to the games you play:

  • Making a mistake means not following your rules; it has nothing to do with making money. 
  • You make money by cutting losses short and letting profit ride; it has nothing to do with being right.
  • When your monthly income from passive sources exceeds your expenses, you don't have to work again. 
  • Tom Watson, you’ve accomplished a miracle as you approach your 60th birthday. You’ve won the British Open because being tied for the lead at the end of 72 holes means winning it. And you have my permission to believe that if you wish.

About Van Tharp: Trading coach, and author, Dr. Van K. Tharp is widely recognized for his best-selling books 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. 

 

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Trading Tip

Market Type for the German Market

by
Van K. Tharp, Ph.D.

When you have a trading system, you should always know how it performs under various market conditions. In fact, one of the biggest mistakes you can make is to attempt to use a system for a market type for which it was not designed. In fact, Ken Long (who will be teaching our ETF workshop in Germany) recently said that instead of wondering why your system isn’t working in the current market, you should be wondering what kind of system is working really well under these conditions.

We’ve now settled on a market type measure that uses the 20 day ATR (as a percentage of the close), in comparison with its historic mean and standard deviation, to measure volatility. We’re now using the following guidelines:

  • Normal: The average ATR% plus or minus 0.5 standard deviations. 
  • Quiet: Anything less than a 0.5 standard deviation below the mean. 
  • Volatile: 0.5 standard deviations to three standard deviations above the mean. 
  • Very Volatile: Anything greater than three standard deviations above the mean.

Last week I covered the Australian Market. This week, I’ll be covering the German Market. For this market I used the DAX Yahoo! data (^GDAXI). Yahoo! has 4,701 days worth of this data going back to November 26, 1990. Thus, even for the 200 day market type, I was able to use 4,501 days worth of data.

The mean ATR% for those 4,501 days was 1.58 and the standard deviation was 1.18. This is quite similar to our U.S. data for nearly 15,000 days of data in which the mean is 1.30 and the standard deviation is 0.72.

The following table shows the distribution of our 4,501 days in these four categories.

Very Volatile Volatile Normal Quiet Total Days
88 980 1,917 1,516 4,501
1.96% 21.77% 42.59% 33.68% 100.00%

The next table shows the average percent change in the DAX index during each of the four volatility-based market types.

Average Percent Change
Very Volatile Volatile Normal Quiet
-0.02% -0.05% 0.04% 0.09%

Notice that the more volatile the market, the more likely the price is to go down, just like the U.S. market. Similarly, the more quiet the market, the more likely the price is to go up (with both normal and quiet days being generally up days).

Let’s look at what happens to the market the next day after a given market classification. Here we are asking the question, “If the markets are highly volatile on March 3rd, what is the average percent gain on the following day (i.e., March 4th), regardless of the market type that day?” This data is shown in the next table.

% Change Next Day
Very Volatile Volatile Normal Quiet
0.78% -0.06% 0.03% 0.06%

And just like the U.S. market, but unlike the Australian market, we can expect the day that follows very volatile markets to be up.

Now let’s combine our five market types (defined in the article two weeks ago) with our four volatility types and see what we can expect. In this case we are using the 100 day SQN™ on the daily percent change to determine market direction. By the way, I’m simply looking at the daily percent changes in the index and doing an SQN based upon that (rather than R-multiples). 

% Very Volatile Volatile Normal Quiet  
Strong Bull 0.00% 2.11% 10.44% 7.35% 19.91%
Bull 0.00% 4.67% 13.44% 16.60% 34.70%
Neutral 0.00% 4.11% 9.38% 5.89% 19.37%
Bear 0.44% 8.24% 7.44% 3.07% 19.20%
Strong Bear 1.51% 2.64% 1.89% 0.78% 6.82%
  1.96% 21.77% 42.59% 33.68% 100.00%

Just like the U.S. Market, we only see bear and strong bear markets when the market is very volatile. 89.3% of strong bull markets occur under neutral and quiet conditions. 

Let’s look at our total market type and the average percentage gain/loss that is likely to occur under each market type condition. This is shown in the next table. There are no real surprises here.

Average Change %
Days Very Volatile Volatile Normal Quiet
Strong Bull 0.00% 0.11% 0.21% 0.17%
Bull 0.00% 0.16% 0.09% 0.11%
Neutral 0.00% -0.01% -0.06% 0.01%
Bear 1.37% 0.08% -0.11% -0.08%
Strong Bear -0.43% -0.99% -0.13% 0.03%

The data are pretty much expected except for the plus percentage for the bear market condition under volatile and very volatile conditions. 

Some History

Now let’s look at the last year’s worth of data on market type. I’m going to use the 100 day SQN to determine market type but show you the 200, 50, and 25 days SQNs as well. Remember that I use the following SQN ranges to determine the market direction, so you can translate the other SQN days to market types.

Strong Bull

>

1.5

Bull

>=

0.3

Neutral

 

the rest

Bear

<

-0.3

Strong Bear

<

-1

The data as of Friday’s close is slightly different from the U.S. markets. First, the U.S. market is still listed as being volatile, while the German market is neutral. The 200 day is bearish for both, the 100 day is bullish for both, and the 50 and 25 day are neutral for both. So the primary difference is in volatility, which is somewhat due to the higher standard deviation for the German market. 

Click here to see a larger image of the chart.

Next week we’ll look at the Hang Seng Index (Hong Kong). When I’ve completed the ten markets, I’ll report on all ten once each month, probably on the 3rd week of the month.

All of this work was done with the XLQ add on to Excel with the help of Leo van Rijswijk, the developer of XLQ

About Van Tharp: Trading coach, and author, Dr. Van K. Tharp is widely recognized for his best-selling books 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. 

Q&A

Relating the Secrets of the Masters Game to Futures Trading

Q: I tried to play the game, but somehow, I could not relate the game to futures trading. I am a day trader on Bund, and found the concept of position sizing great, but how does it relate to futures trading; moreover, futures trading only one market? 

A: The only way the trading game does not relate to the futures market is that no leverage is allowed. That's not true of the futures markets. However, you can get in a situation similar to a futures trade in the game.

So let's decide that you have $100,000 in the game. You are trading a $50 stock and risking $1. And you want to risk 3%. That means you can risk $3,000. If you decide that your stop is $1, then you need to buy 3,000 shares, which would cost you $150,000 (which is more than your equity). In the game you cannot do that because no leverage is involved. However, in markets, which allow leverage (and that's allowed in the stock market with margin accounts), you can buy the 3,000 units.

And theoretically your risk is 3%. However, say the market gapped $3 against you on the open (i.e., you have a 3R loss). You now have a loss of $9,000 or 9%. Without leverage, you could not have taken the trade or you could only have done 2% risk. That's the difference.

Nevertheless X% risk is X% risk no matter what market you are trading.

A word of caution: When you have high leverage or tight stops, you can still have huge losses. For example, if you had a 10 cent stop on a $50 stock and it gapped $2 against you, then what you thought was a 1% risk is now 20% risk. And this kind of loss is much more likely when leverage is involved.

Otherwise, as I said, X% risk is X% risk and it doesn't matter whether you are trading stocks, options, forex, or futures.

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