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

November 11, 2009 - Issue #449

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Trading Education

What Type Trader Are You?

Article

Poker and Trading Mistakes Part II by Van K. Tharp, Ph.D.

Workshops

2010 First Quarter Workshop Schedule

Trading Tip

Gold Analysis and Strategy by Florian Grummes

Mail Bag

Should I Just Give Up?

Trading Education

What Type Trader Are You?

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Feature

Poker and Trading Mistakes Part II

by

Van K. Tharp, Ph.D.

A few nights ago, I had the wonderful experience of getting really upset. I can’t remember the last time I was that upset, so I’m very grateful. It means I’m getting to the core of something deep inside.

I was initially upset by a family issue (me projecting something… it had nothing to do with the other person). Then I continued those feelings over into a poker game. Again, I consider it to have been a rare gift; I cannot remember the last time I have been that angry. I was so angry that I had to wait until the next morning to process the issue. Thinking about it the next morning provided me with many insights into my poker behavior the prior evening (and into my trading behavior if I would have allowed it).

I play on a site that gives players $1,000 in free play money chips every hour. And when you accumulate over a million dollars, you start to respect your play money— it becomes pretty similar to playing with real money. I currently have about $20 million in play money, and I can make several million each night. I can also convert $500,000 in play money to $2 in real money by finishing in the top 18 of a daily tournament. So when I feel like playing poker, I play that tournament and also attempt to make a million in play money.

So here is what happened. First, I was upset, and I was going to sit down and play poker. I missed my normal half million tournament by about ten minutes, which added to my frustration. I then played in a 90 person tournament that cost $1—from my free winnings. I didn’t make any mistakes, but I still lost, which caused me to become even more upset. 

Everything about poker that evening seemed to add to my anger. First, I’d missed my usual tournament start time. Then, I lost in the $1 tournament. At this point, it seemed like this was not my night, so I decided just to make a few million in play chips. (By the way, if you haven’t realized it already, I never should play poker when I am upset.)

Then, I lost big. I lost about $2 million just by bad luck and probably some mistakes that I wasn’t aware of at all. In one hand, I had a 77 and with an AA7 flop. I had a full house. The other person had an AK. A king came up on the turn, and I lost all my chips. I was even angrier now but within my regular limits.

It was my very last hand, however, which really set me off. That last hand cost me $3 million. I can remember enough about it now to show you my mistakes and how they were all due to being angry.

Here were some of my thoughts, before and during this particular hand. (Remember, I wasn’t thinking about being upset before this hand).

  • These idiots shouldn’t call my big bet with weak hands. They are just getting lucky and getting the right cards.

  • Poker players should play wisely.

  • Other poker players should respect me.

  • That guy is a bully. He’s crazy and a lunatic.

Those were my thoughts. Of course, I believed those things about the other players, not about myself. I was a victim of those other players as far as I was concerned, and I probably could convince you of that, but that’s not my purpose. My purpose is to tell you about my projection.

So what happened in the hand? I was the big blind and my blind was $20,000 of play money. I had a 45 of clubs. I usually don’t play that sort of hand, but I was upset. 

About five people were in the hand and the person on the button (the dealer and the last to bet) raised the pot and doubled the big blind. I called as did everyone else. And there was now $200,000 in the pot. Looking back, my call wasn’t so bad. It cost me $20K to call, and I was getting 6:1 to call—10:1 after everyone called.

The flop (i.e., the first three cards) came up 2, 3, 5. Wow, I had a straight draw, and I had the top pair. I bet first, betting $200,000. No one was in better position unless they had a higher pair in their hand. I wanted to get everyone out who might get a higher pair later.

Everyone folded except the button. He had 72 of clubs (but the flop didn’t give him a flush draw). Thus, he had 22 and the remote possibility of a straight draw if the next two cards were a 4 and a 6, or three 2s if one of the remained two 2s came up. Not good odds. It’s what I call an idiot play—calling my pot bet with that hand.

There was now $600,000 in the pot. The turn card was a 7. I was feeling quite aggressive (remember I was angry). I couldn’t imagine anyone calling with a 7 in their hand, so I bet another $600,000. The 72 now had a pair of sevens and twos, and he went all in with his $5 million in chips.

I had put $840,000 in the pot. The pot now contained $6.2 million. I had about $2.2 million left. So let’s see, if I bet $2.2 million more, I had a chance at the 4 million that was in the pot. I didn’t count the extra chips he’d bet that I couldn’t match. I was angry so I called the bet. I didn’t get the straight, and I lost another $3 million having lost $5 million on the night. I was furious. “How could he call me with a 72? IDIOT‼‼‼”

By then, I was too mad to process anything about my thoughts. The next morning, however, I was able to see what I did the previous night and the results amazed me. 

All of my beliefs were projections and none of them were true. Believing those beliefs and being attached to them left me angry and nowhere near a state of objectivity. I was seeing all sorts of other things in the other players. They were just on-line avatars. Who knows, I could have been playing a robot. So let’s look at those beliefs that were making me angry one by one.  

First Belief: Idiots should not call my large bet with weak hand. The reality of it: Wow, I wish they did that all the time. Sometimes, they’d get lucky. Last night, my opponent had 3 chances to catch a 7 and two chances to catch a 2 in the next two cards; the odds were originally 3.5:1 in my favor. However, he could have flopped a straight, which I didn’t consider. In addition, I called his large raise after my bet when the odds were clearly in his favor. I was the idiot. Out of the 44 cards that were left, 8 cards would have given me the straight: I only had an 18% chance of winning. He also could have called me with a 46 on either the flop or the turn, giving him a higher straight, and I would have been drawing dead. With either no chance of winning or an 18% chance of winning, I risked $2.2 million to win $4 million. I was getting less than 2:1 odds. Who was the idiot? I was, and I was just projecting that on him.

Second Belief: Poker players should play wisely. Well, should they? No, they should all play like that guy and overall, I’d win big. I’m the one who should play wisely. I was the idiot, but I was blaming him and mad at him. It was all a projection.

Third Belief: Other poker players should respect me. I was feeling disrespected and, therefore, angry because I was attached to that belief. Again, let’s look at the reality. Is it true that they should respect me? Absolutely not! I want them to play like idiots or think I’m an idiot (but only when I’m not). But what was the reality? I wasn’t respecting the other player, especially when he went all in with two pair and possibly a nut flush (proper use of a poker term). I was getting 2:1 odds for less than a 20% chance of winning or perhaps no chance of a winner. So again, I was projecting onto the other person and feeling strong emotions. In reality, I was the one not showing respect.

Fourth Belief: The other person was a bully. I didn’t like that at all. But look at my behavior. I bet the pot twice, with either the high pair or the second high pair and just a flush draw. Again, I was projecting—actually, I was being the bully. You might be saying that you can see it here, but what if this person had physically beaten me up? Well, if I’d been afraid of him, thinking, “He’s a bully,” then it would still be projecting because in reality he beat me up once. The bully was really my thought that he was a bully. Believing your thoughts is the primary cause of all suffering.

Fifth Belief: He was crazy and a lunatic. Wow, look who was saying that. I was playing poker when I was angry and not at all objective. I had just lost 2 million, which is more than my limit for the evening. And now I was risking everything for a 2 to 1 payoff with at best an 18% chance of winning and at worst no chance of winning. Here was more projection on my part. I was the crazy lunatic.

Is what I was thinking and feeling last night beginning to make sense to you? Wrapped up perfectly here in my poker experience is the very core of my teachings:

  • You are responsible for the results you get.

  • The psychological impact of trading (poker) is enormous.

  • Projection makes perception.

  • You can only trade your beliefs.

  • We make up the world we live in. As long as we do that, we might as well adopt useful beliefs and live in a manner that makes us effective traders.

Finally, if you don’t understand these ideas, you very well could be projecting some interesting beliefs of your own onto me and this article. Just notice it. It’s your right to do so, just like I’m free to project my beliefs onto my fellow poker players.

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. 

 Workshops

2010 First Quarter Workshop Schedule

Download Van's 2010 Syllabus Now

We have many new workshops offerings this coming year! We have a completely new three-day workshop Great Systems for Bear Markets and two reworked courses that will better serve your needs, Systems That Outperform the Global Markets Long Term and Swing and Day Trading Systems for Equities and ETFs (scheduled in second quarter). 

Also, Van will be bringing three workshops to New Zealand in February!

If you'd like a 2010 Syllabus mailed to your home, click here.

 

January 14-16 Blueprint for Trading Success Cary, NC
January 18-20 Peak Performance 101 Cary, NC
February 19-21 How to Develop a Winning Trading System That Fits You New Zealand
February 23-25 Systems That Outperform the Global Markets Long Term New Zealand
February 27- Mar 1 Great Systems for Bear Markets New Zealand
March 21-24 Four-Day Peak Performance 202 Cary, NC
March 26-28 New! Three- Day Peak Performance 203
               
(more info to come)
Cary, NC

 

Trading Tip

Gold Analysis & Strategy: Gold Spot Price Analysis

November 7, 2009

By 

Florian Grummes

Gold in USD (one ounce = US$1,094.50)

 

As expected, the price of gold broke out to new all time highs last week. Before that, gold tested the level of US$1,025 during a quick correction. Gold is now definitely the “leading market”—its movement is quite disconnected from the developments in the US$ and the broader stock markets. The gold chart is looking very good, and the more “new money” that enters this small precious metals sector, the stronger the current rally will become. 

Short term gold already reached the upper Bollinger Band (US$1095.85). From that perspective there won’t be any huge up moves within the next couple of days, but a short-term peak around US$1,120US$1,130 seems to be realistic. During the last up moves, gold almost always stopped at US$30-40 above a “round number” (425US$, 540US$, 640US$, 730US$, 845US$, 917US$, 1,037US$). Besides that, gold  is currently moving in US$25 steps. I expect gold to move towards US$1,120 – US$1,130, and from there another quick correction should start. 

The past teaches us that the breakout level will always be tested again for support (e.g., the last correction down to US$1,025). This means we should see prices around US$1,070 once again before gold explodes towards US$1,250 around the end of this year. At this level, we very likely will see a stronger correction of at least US$100 down to around 1,130US$. From here the rally should strengthen again and will probably move up to US$1,600 where I forecast that gold will top out in March 2010  and a new correction and consolidation period should start. I laid out this road map already in early September and until now gold is behaving quite well according to my strategy. The underlying principal is simple: history does not repeat itself, but it does rhyme. I examined the character of the gold market in the last seven years, and indeed the new rally is very similar to the past two up moves (2005/2006 from US$ 430 up to US$740 and 2007/2008 from US$640 up to US$1,037). That is also why I have been telling you for months about the Fibonacci Extensions of the correction in March 2008 (US$1,250 and US$1,600) as the next price targets. 

Here is my advice to the increasing crowd of inexperienced highly leveraged gold traders: If you believe that you have to trade CFDs or other leveraged derivatives or futures on margin, buy only weakness and use the Bollinger Bands to save your gains. Always calculate your margin in advance and keep it quite low. Implement money management rules to regularly save your gains and transfer these gains into less speculative and safer investments. The most important thing is to control your emotions and stay alert: greed destroys your brain! Volatility will increase dramatically, and I personally believe that only a few will be able to trade these short-term movements successfully. 

If you already invested in bullion coins and bars, relax! The gold rally has just ended the warm up phases and will skyrocket within the next years. Prices normally rise higher than most of the market participants can imagine.

But if your physical holdings are very big, you should start to think about how you can protect and hedge yourself against the coming sell off next spring (the early bird catches the worm).

The 50d MA (US$1,025.60) and the 200d MA (US$954.10) are not important at the moment but underline the bullish picture. We probably will meet the 50d MA again as important support during the first bigger correction after the move up to US$1,250. The 200d MA will be seen again in the spring—also as an initial support during the correction. 

The Dow Jones/gold ratio is at 9.15. Gold is outperforming the stock markets again. The correction in the worldwide stock markets has already gone pretty far and is now ending. Especially during advancing stock markets, gold will perform exceptionally well. I expect higher stock market prices until March next year. But this party will end in spring 2010.

Long term I expect the price of gold to move towards parity to the Dow Jones (=1:1). The next primary cyclical change is still years away. This means we are still in a long term bull market in gold (and also commodities) and in a secular bear market in the broader stock markets.

Gold in EUR (one ounce = 736.37€)

 

Gold measured in EUR moved more or less sideways during most of October with a slight tendency towards lower prices. But for a few days, €gold has been moving strongly higher. 

As mentioned in the last issue, the 50d MA (698€) has now crossed the 200d MA (689€)—this formation is a “golden cross” and a very bullish buy signal. Therefore, the old top at 790€ should be reached quite soon.

The upper Bollinger Band currently runs at 738€ and is a short term resistance. 

For next spring I can imagine prices between 900€ and 1,000€. The opportunity to buy more bullion coins and bars for reasonable prices is closing slowly but surely. In the last couple of months you had many opportunities to buy below 650€. Above 750€ you should only buy if you are not yet invested at all. 

Gold Bugs Index USD (442.17 points)

 

The gold mining stocks are a roller coaster these days. After declining for nearly 3 weeks the HUI Gold Bugs Index exploded last week gaining back all the losses within just five trading sessions. Nearly everyone who thought they were smart to take money off the table is now standing at the sidelines and running behind the prices. Here is more simple advice: let your winnings run. The rally will not be over before next spring. By cashing in too early you are risking running behind the prices and increasing the chances for mistakes and emotional short circuits.

The HUI Chart is looking very positive. During a stock market recovery, the gold mining stock sector should be very strong within the next weeks and months. The 50d MA (418.15) and the 200d MA (350.89) are moving up parallel. The upper Bollinger Band (469.83) is offering enough space for higher prices. The RSI has cooled down and on the daily chart the MACD gives a clear buy signal. 

The MACD/PPO looks weak and exhausted on the weekly chart.

I can imagine that the gold mining stocks might take over the lead again and will move in front of the price of gold. The South African mines are looking very good here.

Besides that, some high speculative explorer mines are available for incredibly cheap and undervalued prices. With a lot of patience, thousands of percentages can be made until the end of this gold bull market. 

Gold COT Situation

For many months I have been writing about the record high commercial short position in the Comex Gold Futures market. At the same time gold is moving up strongly. The COT Data, therefore, remain a warning signal—not more and not less.

Considering the latest COT numbers, it looks like the commercials used the last correction down to US$1,025 to cover more of their shorts. The number of sold contracts is now equal to the number from the end of September with the slight difference that gold is standing around US$40 higher. If the commercials continue to cover their shorts, the rally will get even stronger.

  • 04/18/2009 = -153,419 (PoG Low of the day = US$885 )

  • 05/26/2009 = -208,136 (PoG Low of the day = US$939 )

  • 06/02/2009 = -226,521 (PoG Low of the day = US$970 )

  • 07/14/2009 = -182,287 (PoG Low of the day = US$917 )

  • 08/04/2009 = -228,193 (PoG Low of the day = US$950 )

  • 09/01/2009 = -216,708 (PoG Low of the day = US$940 )

  • 09/22/2009 = -287,610 (PoG Low of the day = US$1,012)

  • 10/06/2009 = -281,864 (PoG Low of the day = US$1,035)

  • 10/13/2009 = -295,926 (PoG Low of the day = US$1,055)

  • 10/20/2009 = -297,493 (PoG Low of the day = US$1,051)

  • 11/03/2009 = -283,852 (PoG Low of the day = US$1,054)

Gold Seasonality

The seasonal pattern from now on is very positive for gold. From November to March all precious metals are generally moving higher. 

Gold Sentiment

Gold is not “underground” anymore, therefore—as a contrarian & individualist—I am a little bit sad since I have to move with the crowd from now on. But this phase brings the biggest gains. Everyone who knows what he is doing and is prepared for extreme volatility can create huge profits. But of course, in the end most investors will lose everything (e.g., 2000 and the “dotcom bubble”).

Anyway, the soft sentiment indicator is not very helpful at the moment because everyone who steps in the way of a crazy herd of bulls will get hurt and has no chance to survive. Let’s wait and see how the picture looks in spring 2010.

Conclusion

The next big rally in the gold market has started and within the next weeks and months we will see much higher prices! Everyone who is telling you a different story is not listening to the market. Short-term pullbacks are always possible and are buying opportunities. Volatility will increase—the movements in the HUI Index are giving a bit of a taste already. Short term gold should rise up to US$1,120 – US$1,140 followed by a pull back down to US$1,070 that will cool down the indicators and the minds of the investors. Until the end of the year, I believe that a spike in price to around US$1,250 is realistic. 

Gold in USD US$1,094.50 new all time highs Bullish for Gold
Gold in EUR 736.37€ Breakout above 700€ Bullish for Gold
Gold in GBP 659.20£ on the way to new all-time highs Bullish for Gold
COT Data -283,852 record high commercial short position Bearish for Gold
Dow Jones/Gold Ratio 9.15 technically very bullish for gold Bullish for Gold
Gold/Silver Ratio 63.00 Silver is weak. This will chance towards the end of this rally Bullish for Gold
Gold/Oil Ratio 14.14 this ratio is moving sideways between 12.70 and 15.40 Sideways
Gold – ETF Holdings New money is pouring in Bullish for Gold
Gold Seasonality From now on this is the strongest phase until spring Bullish for Gold
Gold Sentiment Crazy herd of bulls underway Bullish for Gold
Gold mining stocks HUI 442.17 Gold mine shares are moving up again Bullish for Gold
Spread Spot/Future Spread is not moving a lot  Seitwärts
US Dollar Only little bear market rally, Dollar Crash is quite possible Bullish for Gold
US Dollar COT Commercials net long Bearish for Gold
Bullion market Indian Central Bank is buying gold Bullish for Gold
Jewelry demand Demand is getting stronger but no big effect at the moment Sideways

Recommendations

Mike Maloney - Where are we in the Gold Cycle?

http://www.youtube.com/watch?v=uac2vIzThSA

Final Warning

http://goldswitzerland.com/index.php/final-warning/

Ron Paul: Be Prepared for the Worst

http://www.forbes.com/forbes/2009/1116/opinions-great-depression-economy-on-my-mind.html

Who Woke the Dragon?

http://www.321gold.com/editorials/schoon/schoon102009.html

China's Dragons: Oil, Gold, and the US Dollar

http://www.321gold.com/editorials/hera/hera102309.html

The Most Undervalued Currency in the World

http://www.moneyandmarkets.com/the-most-undervalued-currency-in-the-world-3-36240

Yuan to Swap?

http://dollardaze.org/blog/?post_id=00721

About the Author: Florian Grummes (born in 1975 in Munich) has been studying and trading the Gold market since 2003. Beside a lot of self-development workshops and seminars his experience in the gold market comes from trading and investing his own money to finally become a very successful self-employed precious metals trader and investor. Along with his trading business, he is also a very creative and successful composer, songwriter and music producer.

Disclaimer

Mail Bag

Should I Just Give Up?

Q: I recently purchased the Peak Performance Home Study Course and have taken the Investment Psychology Profile. Well, after taking the profile and the tests in Book 2, it seems that I shouldn't be trading...ever.

As per the WT test my score is 41, A/B 16, and LSI of 82. My profile says that I am an INFJ and have a lot of issues I have to work out. 

What should I do now? 

I want to be a trader but obviously have a lot to work on. Would it be advisable to keep pushing or should I just give up since I might be just wasting my time?

A: Your continued commitment to becoming a great trader is what will get you to that point. In your strong favor, your willingness to work through the Peak Performance course is evidence already of great commitment.  Congratulations! 

What the tests tell you is that you should not trade until you've done the necessary preparation work to trade well. I don't know if this will surprise you but this is the same case for most people.

As for your personality type, I'm also an INFJ and that's only one degree from the ideal profile. I've seen people who do a lot of psychological work improve themselves and get to the top 10% of trader performance within their profiles. You can do that, too. 

Here's my basic recommendation for your preparation work: 

  • 1-2 years of psychological work

  • 1 year developing a strong business plan after attending the Blueprint workshop

  • 1-2 years developing 3-4 good trading systems

Done individually in that order, that's somewhere between 3 and 5 years. If you are able to work on those items concurrently, you can probably finish the work in about two years. 

I wish you the best of luck. 

- Van

(Note: the Investment Psychology Profile is not the same as the Tharp Trader Test. The Tharp Trader Test is an abbreviated version of the profile.)

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