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

• Special Offer Name Your Own Price Workshop is Back!
• Article Project Marathon Update by RJ Hixson
• Workshops 2011 Workshop Dates
• Trading Tip Precious Metals at a Decision Point by D.R. Barton, Jr.
• Mail Bag Level 1 of the Position Sizing Game

One-Day Tharp Think Workshop
The Fundamentals of Trading Success

Presented Exclusively by Van Tharp

This is your chance to spend a day with Dr. Tharp, in person, at a price you can afford.

How do we know that? Because you’ll be able to name the price that you are willing to pay for the workshop!

Now through noon on Friday, January 21st we'll take bids from you on the workshop price.

The minimum bid amount is $50. To bid, email [email protected] and put your bid amount in the subject line. Also include your full name and the best way to contact you to let you know if your bid has won. You will not get to see other bids, nor will you get feedback on your bid. So bid as much as you are willing to pay the first time. The 30 workshop attendees will simply be picked from the 30 top bidders.

The "buy it now" price that will guarantee you a seat in the workshop is $499.99 while we have available seats.

Click here to learn more...

Feature Article

by R.J. Hixson

One of the benefits of my job is the ability to witness some impressive trading ideas and results from our clients. In the last few weeks, several have really jumped out at me:

• A simple trading plan to generate 1,000% return.
• A +31R intraday trade.
• A Super Trader who made 134R in a single month.
• A $3 million windfall opportunity.
• A trader efficiency of 96%.
• A Sharpe ratio in the double digits.

I look at these achievements with wonderment and a little suffering. I knew generally how my trading year had ended up and I felt quite unable to produce anything close to those kinds of numbers or to my goal of 131R.

Here I was, surrounded by trading prowess, and I couldn’t generate even a reasonable double-digit R-multiple year. This made me feel like a eunuch in a harem. Later I realized that thinking this way is all ego, ego, ego. We’ll come back to that though.

Scorecard

My mistakes were down significantly from the previous year, but I’ve yet to reach the 95% efficiency that Van requires for graduation from the Super Trader program. I’m still pulling those results together.

Well, there it is and now you know.

Stuck

Those results caused me some stress. I had lots of very good reasons, too. Here are a few:

1. 20R is a 15% achievement rate of 131R. That’s horrible! More precisely, that is an abject failure!
2. I completed Van Tharp’s Super Trader program! I don’t want people to think the Super Trader program doesn’t work.
3. I have to tell the world. They are going to think I can’t trade.
4. I know other traders making more than 131R a year. I’m as smart as them.
5. 131R? That’s not actually as aggressive a returns goal as I could imagine pursuing.
6. I was committed to that goal.
7. I worked really, really hard this year.

So that’s where my mind was at the end of the year—stuck in failure and inability. The “eunuch in the harem” story seemed apt given those results coming across my desk. How was I expecting to reach my longer term goals when I can’t even reach my shorter term goals?

Beyond the Ego

To paraphrase Byron Katie from A Thousand Names for Joy, “A stuck mind is torture. It lives in dead ends, trying to find a way out. When one problem is solved, another pops up. Such is the life of an unquestioned mind.” In my stuck mental state, Libby Adams asked me a series of questions in some coaching calls.

Libby’s questions are part of the process from her 28-day course Mastery of Self. She defines Mastery as "increasing time lived as THE SELF and decreasing time in the 'separated' self." Her process has helped me get “unstuck” in a number of cases. In light of my end of year trading results, that separated self generated feelings of smallness, inability, and immobility.

Here are a few of Libby’s questions and my answers that helped me get unstuck by reframing my beliefs and thinking about my trading in 2010:

What was the intent of your 131R goal?
To pull me out of my comfort zone.

Was that a success?
It was! I made a number of changes from the year prior and gained some very good trading experience doing things I would not have done otherwise (e.g., trading one minute bars and some new systems). And I got out of my comfort zone for gains with a +35R month.

Does not making 131R by the end of 2010 mean you won’t make 131R, now, next year, or ever?
Not a bit.

If you didn’t get to 131R this year, could there have been something more important that you were supposed to achieve and did?
Getting my family settled in a home, and gaining a much better understanding of myself and how I want to trade now.

Are those are more valuable than 131R?
Yes.

If you think you are not attached to a goal and then you don’t get it but find yourself upset, were you really not attached to it?
No.

How do you reconcile desire/commitment with non-attachment?
I didn’t have an answer for this one initially. After some reading and thinking, however, here is what I would say. Desire and commitment help motivate me to fulfill my purpose. It’s possible to use them to move away from my purpose but not useful—regardless of the goal. Goals aligned with my purpose merit my energy and commitment. Non-attachment is the ability to let go, and it means I have trust in a Divine plan and a bigger picture. With non-attachment to a goal, winning means I may or may not achieve the goal. Achievement is not my job; my job is to do my very best with the tasks at hand and not worry about meeting the objective. There is a dance here among desire, commitment, and non-attachment that I am still learning.

After my conversations with Libby, I felt completely different about last year's results. It wasn’t a burdensome loss but rather a success in a broader context and grand opportunity.

Now

In Peak 202, Van encourages traders to ask “What’s missing?” when evaluating progress towards an objective. So thinking about that, here are some of the top items on my "What's missing?" list for reaching better trading results:

• Practicing the top tasks of trading. I would say this is the single biggest factor on what’s missing. I could tell the days where I was not prepared and the weeks where I had not done my “homework” on the weekend. Not doing a good daily review meant there were stretches where I didn’t keep track of my trades and results. At one point, I had a large drawdown, but I didn’t feel it because I kept my position sizes small. Keeping on top of my cumulative results with a more thorough daily review would have had a dramatic effect on my results though the simple concept of focus.
  
  
• Executing a few systems consistently and well. If I’m not taking every trade from a particular system, I’m either lacking discipline or not trusting the system. In my case there was some of both of those. In addition, I was inconsistent about which systems I traded during the year with no plan or process to 1) choose to trade a particular system, 2) know if it was working within my parameters (because I had not defined them), or 3) formally stop trading a system.
  
  
• The belief that I can make a “large” return in a year. That’s been in the background in the past but the belief came to the foreground with my 131R objective last year.

The Task of Mastery

In George Leonard’s little book, Mastery: The Keys to Success and Long-Term Fulfillment, he explains at length the path to mastery within the context of a discipline or practice. Rather than a steady incline or jagged line upward, the path to mastery creates a much more “boring” shape. There are typically short bursts of slight improvement followed by long plateaus of seeming non-advancement as you can see in the adapted graph below.

To reach mastery, Leonard says you must learn to love the plateaus because they are the vast majority of the journey. That’s why it helps have a passion for something you’d like to master. Passion provides the motivation to endure the plateaus that comprise continuous practice and mundane tasks. For martial artists in Asia centuries back, that meant doing things like chopping wood and carrying water.

In the trading context, practice constitutes self-work, planning, preparation, execution, and evaluation. Mastering those tasks is my job. I have more work to do this year chopping more wood and carrying more water, but I will keep at it as it’s still quite early. I’m looking at this as a marathon, you know.

About the Author: R.J. Hixson is a devoted husband and active father.  At the Van Tharp Institute, he researches and develops new products and services that will help traders trade better.  Part of what he loved most about serving in the Air Force was being so close to the clouds so often. He can be contacted at “rj” at “iitm.com”. 

P.S. Libby Adams is happy to offer a $500 discount on her 28-day consulting program. Offer expires January 19th. Click here to learn more.

Workshop

Winter 2011 Workshop Schedule

Trading Tip

by D.R. Barton, Jr.

There are many compelling reasons why gold, silver and other precious metals have had such an amazing run up in the last two years. Such severe action has brought us to a juncture point—perhaps even a watershed event.

The most compelling reason for the increase in the price of precious metals is very simple (my 3rd grade economics students learn this every spring before the annual economics competition in the state of Delaware): supply and demand.

In the case of precious metals (and all commodities denominated in dollars), the driver is the supply side. It’s no secret that the US has been printing new dollars at an unprecedented pace. So when the supply of dollars goes up by a huge amount while gold or silver only increases by a little, in the long run, the price of gold, silver and other commodities have to rise. And that’s what we’ve seen: gold has almost doubled since the beginning of 2009 and silver prices have more than tripled!

Let’s look at some gripping graphics that show how far precious metals prices have moved.

Gold to Silver Ratio: Always Informative

The ratio of gold to silver prices is almost always interesting. In short, the pair behaves similarly to large cap stocks versus small cap stocks with gold being the less volatile flight-to-quality instrument and silver playing the part of the bigger risk/bigger reward instrument). So when things are going well in the world of precious metals, silver usually outperforms its more valuable sibling. Let’s look at a chart that shows both metals’ prices and then compares the two in a single ratio.

This chart shows gold futures prices on the top, silver futures in the middle and the ratio of the two on the bottom between 2003 and today. One can think of the bottom in real terms as well as it tells us how many ounces of silver an ounce of gold will buy. Right now, you can get 46.62 ounces of silver with one ounce of gold—a figure that is in the extreme low end of the range. To bring that point home further, let’s put the relationship cycle in to perspective.

On this ratio chart from 1990 to today, you see that in the last decade, gold had been more valued relative to silver at equity market bottoms or fear points (purple ovals on top) while silver was in higher demand at equity market tops (red ovals on bottom). In general, just within the precious metal world, investors buy gold in times of uncertainty or fear and they prefer to buy silver when precious metal prices are moving higher.

Of course buyers prefer one metal over the other up to the point of exhaustion of the move. Having recently gone parabolic, the price of silver is giving us some signs of exhaustion.

Silver recently broke the phenomenally steep trendline that began at the end of August, but just barely so. The push up could easily continue from here, especially since the current sideways correction has relieved the overbought condition in this market. However, this parabolic ascent, along with the extreme compression in the gold to silver ratio points to a more sustained correction in the precious metals over the next few weeks or months. As always, macroeconomic policy changes in the US, Europe or Asia could delay or accelerate such a pullback.

For some really long term historical perspective (i.e., centuries), here’s a chart from the Austin Gold Information web site (Note: I haven’t vetted this precious metal sales company’s research, but saw this chart referenced on several other sites). Look at the volatility that has come into the precious metals market in the box, which is in just the last 150 years. For whatever reasons we might ascribe—and there are several obvious ones—the volatility with which we live now is unprecedented in terms of the truly long term prices of these two metals.

I’d love to hear your thoughts and feedback on this article or about trading and investing in general at drbarton “at” iitm.com. Until next week...

Great Trading,
D. R.

About the Author: 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".

Disclaimer »

Mailbag

Level 1 of the Position Sizing Game

Q: I played Level 1 of the position sizing game and even using a very strict control risk of 1% of the portfolio, I could not pass the level after many attempts. 1.5% risk per trade made me profitable, but it seemed random. I find it unrealistic to set my risk to 1% and then lose 2% or 3%. I wonder if this is the way the game was meant to be or if it's a mistake. I do not understand how it is possible to get -2R and -3R under normal running conditions.

A: Dr. Tharp designed the trading system in Levels 1 and 2 to be mediocre in performance and difficult to trade very much on purpose. Those losses are part of what makes the trading system mediocre in Levels 1 and 2. The trading systems in Levels 3 through 10 in the game have higher SQNs, which makes it easier to use position sizing methods to achieve the 50% objective.

The primary lesson for the game is that position sizing strategies help you reach your objectives and that process is easier if you have trading systems with higher SQNs.

As to your question about how losses bigger than 1R can “normally” happen, a trader or trading system may be presented with several situations:

• Exits from positions in stocks at the open when prices can and do gap frequently.
• Exits from intraday positions with very tight stops when a position pops or drops suddenly.
• Exits from some futures markets with limit days where you may not be able to get out of your position.
• A mistake where the wrong stop price was entered.

Best of luck in 2011.

—RJ Hixson

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