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

January 27, 2010 - Issue #459

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Workshops

Van Tharp Workshops Are Coming to New Zealand

Article

Project Marathon by R.J. Hixson

Trading Education

How to Develop a Winning Trading System That Fits You

Trading Tip

More Thoughts on Cause and Effect by D.R. Barton

Mail Bag

What is a Trader's Contribution to Society?

Free

What Type Trader Are You? Take 3 Minutes to Find Out

Feedback

Ask Van Your Questions

 

 Workshops

Van Tharp Workshops Are Coming to Auckland, New Zealand

In February, Van Tharp will bring three extraordinary workshops to New Zealand.

$700 Discounts Are in Effect Right Now. 
Plus, attend all three and save an additional $150 each.  

With the exchange rate of the dollar, now is a great time for you get even more value from one of our workshops.  

 Learn more

Feature

Project Marathon

 by 

R.J. Hixson

It is with some trepidation that I begin this article. I'm one who has always been relatively private with my personal goals. At the Peak Performance 202 workshop in November, however, I felt compelled to put myself way out of my comfort zone. Why would anyone do that? 

In one particular section of the workshop, Van asks everyone to make a bold promise, one that would really stretch them and for which they may have no basis for being able to achieve. His lesson is about leaving your comfort zone. We tend to stay in a comfort zone that allows us to live, well, comfortably—live a routine, familiar, and safe life. 

Beyond the comfort zone is the edge. Edges are where everything happens. From a scientific standpoint, they are unique and can only be described with fractal geometry. They cause unique energies and forms to arise. What happens at edges is complex because by their very nature, they are dynamic and unstable. People who live on the edge tend to place themselves in "dangerous or unstable" situations that stretch them well past their former limitations. However, being at the edge is uncomfortable; it’s unfamiliar and risky. 

By staying within your comfort zone, you live in a realm of the possible. Heading towards the edge, however, you can go for what’s impossible. By living out at your edge, you can create anything. People living at the edges are the most powerful agents for change for themselves and for the world. 

To help people understand these concepts at Peak 202, Van has everyone do some exercises that put them outside their comfort zone. For some folks, these exercises can be disconcerting, while for others, they can be sheer fun and amusement. After a few of those in November, I was excited for something that would keep me out of my comfort zone for a long time. During the bold promise section of the course, I thought about what might hold me to the edge for 2010 after a big year in 2009.

2009 was a great year for me. I had one major life change: leaving a “comfort zone” employment situation where I had been for many years, then being partially unemployed for awhile, and finally joining a new company. Overall, that entire process was only mildly stressful. I attribute the ability to manage that much uncertainty and change easily to all of the self-work I have done in the past few years. I was largely calm and peaceful through the year as I knew my employment situation would work out well—however the particular circumstances turned out. 

My trading in 2009 also went well after having not traded at all for quite awhile. Several years back, I was somewhere in the middle of the Peak Performance Home Study Course when I wondered what I was doing trading. I had no business plan, no clear trading objectives, no trading systems, and really no idea about position sizing. I felt very lucky that I hadn’t blown up my account. I decided not to trade again at all until I had created the necessary plans and systems to trade in a professional manner. That intention took a few years to fulfill and eventually led me to complete the Super Trader Program. By late 2008, I had done the work, planned the business and felt ready to trade again.

Through 2009, I traded very actively using small position sizes while I developed various processes for my trading business. My primary objective for 2009 was to trade and not lose any money. I wanted to trade several systems and at least break even for the whole year. That was a new experience for me, and I felt great about achieving it.

By the fall of last year, I wondered what kind of goals I might set for 2010. For some reason, the thought occurred at Peak 202 in November that my trading is like a marathon—a very long distance race. I have always enjoyed running for the sake of running, but I wouldn't train hard without a race on my calendar. With any kind of upcoming race, I found the motivation to run longer, harder and more consistently. So my thought was, in preparation for many years of consistently profitable trading—my trading marathon, I would train for a half marathon of sorts this year. A half marathon is 13.1 miles long, so the idea came to me to shoot for a net trading result of 131R in 2010. Earning 131R is completely impossible from the comfort zone I built last year. I have to head out to the edge. 

Also, I want to reach 131R for the year in about 10 hours a week. I am employed full-time. I have a very active and fulfilling family life. I figure I have about a half hour in the evenings and mornings each, and maybe five hours on the weekends that I can devote to trading and business development. That’s it. 

So in the big promise exercise at Peak 202, I said I would make 131R in 10 hours a week and that I would report my progress to the Super Traders on a monthly basis. Van accepted that I go for the trading results but thought that the accountability part (to the STs) was within my comfort zone. He recommended that I write about my experiences for the newsletter readers. Wow! OK? OK. That’s definitely edge territory for me. Does the thought of risking failure so publicly strike abject fear into me? No, but I do have a good bit of trepidation for sure. (Van also suggested that I be willing to feel the feelings, so I’m feeling them writing this article. Yes, uncomfortable.) 

Regardless, as the year goes by, I will share with you my progress, observations, and lessons learned. Together, we’ll see how (or even if) it’s possible to make 131R in a year in about 10 hours a week. This Project Marathon will be a case study of Tharp-Think applied. Hmmm, I’ve got work to do. Until next month, good luck and take care.

About R.J. Hixson: R.J. Hixson is a devoted husband and active father. He started trading again recently after completing Van Tharp’s Super Trader program and made a full recovery from his previous trading habits. He is in charge of research and development at the Van Tharp Institute. In his spare time . . . wait a minute, he has no spare time. LOL

Trading Education

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Trading Tip

More Thoughts on Cause and Effect

by
D.R. Barton, Jr.

The article I wrote last week on cause and effect in trading the markets covered a subject that many wrestle with judging by the large number of e-mail responses.  Many were complimentary (thanks to all of you—I’m blushing).  Several were also very introspective describing the personal struggle that can result from unexpected or unpleasant results in spite of doing the right things.

In last week’s article, I mentioned three responses that tend to occur when expected results fail to follow correct actions.  Whenever we sense a disconnect between cause and the expected effect, it’s common to question the rules or guidelines that were supposed to direct the process.  That questioning often leads to the following sentiments:

  • The rules really aren’t good and don’t serve me.

  • I no longer need to follow the rules exactly, or at all.

  • At least I can tweak the rules to feel like I have some sense of control.

Let’s look at these individually.  As you read, consider if any of them are issues for your trading or investing. 

The rules really aren’t good and don’t serve me. 

This one is pretty easy to identify and is quite common.  This thought process leads people to dump one system and jump to another or do the same with market gurus.  These folks are looking for the system or guru with “THE answer.”  This also leads people to jump from trading stocks to futures to forex to options and then back again, searching for the instrument with the right characteristics.  This same reasoning causes people to abandon good solid strategies in search of the Holy Grail.  EVERY system or strategy will go through rough patches leading to drawdowns. 

What to do about it!   We need to understand our system’s strategies more deeply and then we have to understand statistical randomness just a bit.  Just because a system has traditionally won 61% of the time in the past with winners 15% bigger than losers doesn’t mean those characteristics will apply to every 3 trades.  Or every 10.  Or every 50.  Van’s Definitive Guide to Position Sizing does a great job of emphasizing the importance of understanding variability, especially the amount of scatter that exists in a given system’s trade results.  Systems with more scatter produce a wider variety of results over a given time frame.  If we understand that statistical concept and couple it with an understanding of how our individual systems work in different market conditions, then we can experience the expected variation in results without the desire to drop the system and look for another.

I no longer need to follow the rules exactly, or at all.  

This is an advanced stage capitulation that usually comes after believing the rules don’t work and that tweaking them won’t really help either.  At this point, the trader or investor decides that they might as well do what feels good because following what were supposed to be the “right” rules didn’t work often enough to matter.

What to do about it!  This one is easy: if you find yourself in this “throw your hands in the air” mode, stop for awhile.  Do a bit of introspection.  Have you given your strategies a long enough time to work?  Are you using proper position sizing that will allow you to stay in the game long enough to let your strategy’s edge take effect?  It’s far better to re-evaluate than to flail at the markets!  If a plan didn’t work (and some of them won’t), that doesn’t mean every plan will fail.  Evaluate what was useful and what was not, then correct and continue.

At least I can tweak the rules to feel like I have some sense of control.

I don’t know anyone who has avoided this trap!  Making changes too early, too often and to too many variables are mistakes that almost all traders make at some point in their careers.

What to do about it!  Stop tweaking! Seriously though, when you start using a new system or strategy, write down the number of trades you’ll make before doing any tweaking.  The bare minimum should be 30 to 50 trades; 100 is better, especially if the system has more than a few variables.  It’s okay to review performance more frequently, say monthly or quarterly (or every one to two weeks for day traders).  But if you do these more frequent reviews, only use them to assess performance, not to make changes.  Always be sure to take into account the overall market environment and market type when assessing performance or contemplating changes.

Once again, remember that no one trade is important (as long as you position size properly and honor your stop loss)—it is just useful data as part of the larger whole.  Allow yourself and your strategy the luxury of time.  Cause and effect in trading and investing does exist—patterns repeat themselves, and the psychology of buying and selling will make sure that they do.  But seeing those patterns repeat may take more samples than we expected initially.  Understand this going in, and you’ll be way ahead of the game.

Great Trading,

D. R.

About D.R. Barton, Jr.:  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 Advisor magazine. You may contact D.R. at  “drbarton” at “iitm.com”.  

Trading Education

What Type Trader Are You?

Take 3-5 Minutes to find out. 

www.TharpTraderTest.com

Learn your trader type, your strengths, challenges and solutions. 

Pass it on to your friends! It fun and it's free!

Mailbag

What is a Trader's Contribution to Society?

Q: I have a question I'd like to ask you and it's in regards to establishing a mission statement for me as a trader.

As a trader, what is the REAL service that I provide? What's my contribution to society at large?

I've been reading a book by Steve Pavlina called Personal Development for Smart People: The Conscious Pursuit of Personal Growth (See Page 177 through 197), and I seem to be having a hard time in clearly seeing the values we add as traders. 

I couldn't think of any other qualified expert to ask this question than you. 

A: Traders serve an extremely valuable function for market based societies because they provide liquidity and distribute risk. Traders "lubricate" the market and thereby help the economy and all of its participants— everybody, in effect. Does that inspire you? Can you take on those functions as a driving force behind your trading? Will those functions serve as your mission? 

Rather than asking what service your trading provides, ask yourself, "What is my bliss?". Follow your bliss and you'll find a deeply powerful mission. 

I love what author Joseph Campbell says, "When you follow your bliss . . . doors will open where you would not have thought there would be doors; and where there wouldn't be for anyone else."

My experience is that when you follow your bliss you are in tune with your mission.

—Van

Feedback

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Copyright 2010 the International Institute of Trading Mastery, Inc.

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Quote:
"I've learned that finishing a marathon isn't just an athletic achievement. It's a state of mind; a state of mind that says anything is possible."

John Hanc

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