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

• Article 5 Qualities of Top Traders by Van K. Tharp, Ph.D.
• Trading Education Peak Performance Home Study
• Trading Tip When Markets Get Rattled: The Flight to Quality by D.R. Barton, Jr.
• Workshops Germany Workshop Dates Announced
• Mailbag Reducing Stops and Scaling In

by Van K. Tharp

People often ask me questions like, "What qualities do top traders have?" One person even hired me on a consulting basis for a half day to get my answers to this question. However, paying a sizable fee for that information is unnecessary. Here are the five most important characteristics that I have found researching top traders.

1. A belief that you create your results in life.

Most people don't understand this concept. They repeat the same mistakes over and over again because they blame their mistakes on external factors. For example, if you blame your bankruptcy in one of my marble games on the person who pulled the 5R marble against you, you are not taking responsibility for your position sizing error of risking 20% (or more!) of your equity on a single trade. Consequently, you'll repeat this mistake over and over again and there will always be someone to blame for pulling the 5R marble against you.

Conversely, top traders are constantly determining how they produced their results and working to correct their mistakes. They create their reality.

2. The interest and desire to really understand yourself.

You cannot understand how you create your own results if you don't know yourself intimately. I believe that most people live their lives like the automatons in the movie, The Matrix. They just do their thing, not realizing how much they have been programmed by their culture, and their family and friends rather than understanding that they always have a choice in everything.

The great traders I know continually study and challenge themselves, their thinking, their actions, and their reactions.

3. Discipline to continually work to improve yourself.

Top traders often have a passion to work on themselves. A good trader will probably complete the Peak Performance Course once or twice and internalize many aspects of it. A top trader, or a potential top trader, will go through the course many times and develop a discipline that involves spending 1-4 hours each day working on improving himself or herself.

Several years ago we held a private workshop for one of the best traders in the world. I expected to go out to dinner with him after the workshop and get to know him better; that did not happen. Instead, his entire day was so meticulously planned (i.e., so he could fit in all of his daily disciplines) that he had exactly the amount of time to attend the workshop but—literally—not three minutes more.

Discipline of that nature creates excellence.

4. The ability to strategize well.

Good traders tend to excel at high skill games (e.g., poker, backgammon, chess, blackjack) because they can create good strategies and stick with them.

Top traders execute their strategies based on robust business plans that they have created to guide their trading. They have taken the time and effort to form meaningful objectives. They have also developed effective strategies to reach those objectives by understanding the multiple scenarios that are possible and how they will respond.

5. The ability to get in the zone.

Top traders can become one with the market and accurately sense what it is doing. They have the ability to live in the present moment without being influenced by the past or the future. It's a very intuitive state and often gives them a total sense of how successful their moves will be in the market even before they make them.

Now, take a look at yourself and consider honestly if you have what it takes to be a top trader.

About the Author: 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 vanktharp.com.  

Trading Education

Peak Performance Home Study

YOU are the most important factor in your trading success!

You create the results you want. Going through this home study course, you’ll gain a perspective on the "how" and "why" of your past trading results and learn techniques to increase profits and reduce stress.

Your success as a trader depends upon the amount of work you put into applying the principles of the course to your investing and trading. Buy now and take charge of your trading success!

Learn More

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Trading Tip

by D.R. Barton, Jr.

What began as a localized uprising in the small North African country of Tunisia has spread throughout the Middle East. The Economist magazine notes that Egypt has long been a political bellwether for the Arab world. If that’s so, then Mubarak’s exit signals that other Arab regimes may be in jeopardy. Decades old dictatorships have now fallen in two countries now and a third fall seems imminent already as rebels appear to control the eastern part of Libya.

What does this political unrest mean for traders and investors? One thing for sure: it means more volatility. If the negative news from this region continues, it will drive equity prices down and oil prices up. We saw big jumps in volatility (stocks down, oil up) on 1/28 (Egypt’s significant news day), and on 2/22 (when the Libyan air force killed hundreds of protestors). We should probably be prepared for similar conditions, and we can also benefit from another phenomenon that occurs when volatility picks up.

Flight to Quality

Until the unrest stops spreading, we should expect a continued flight to asset quality. We saw that yesterday (2/22) as bonds and gold rallied. In the equities markets, there is also a shift to quality. In times of turmoil we see people leaving riskier sectors (like small caps) and heading into large cap stocks. The chart below shows the ratio of the S&P 500 (large caps) versus the Russell 2000 (small caps).

During the biggest scares of the real estate and credit crisis during the fall of 2008 and spring of 2009, the S&P 500 was at its highest valuation versus the Russell 2000. Recently, however, the markets have been more complacent and moving up so people value the Russell more highly. Investors have felt safe enough to chase bigger returns. You can see that trend in ratio indicator (the blue line) in late 2010. Now, the ratio indicates that S&P valuations just started to pick up a bit.

The US equities markets have been stretched to the upside for some time. With the current political turmoil, the markets may finally find a reason to relieve its overbought condition.

Canons and Trumpets

This is probably a good time to remember Lord Rothschild’s famous epigram to “'Buy to the sound of cannons and sell to the sound of trumpets.” In other words, buy at the start of a conflict (when things look bleakest) and sell when everyone else celebrates the end of it. In our case, remember that negative geopolitical news will drive equity prices down and oil prices up, but they will likely rebound after the impact of the news wears off.

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 »

Workshop

2011 Spring Workshop Schedule

Dates Announced for Germany!

Mailbag

Q:

1. When I reduce my stop as I move into profits, I assume I do not reduce my risk, as my initial risk was set when I entered the trade. For example, if 1R = $1,000, when I reduce my trailing stop to half of the trail, my R remains the same for calculation purposes, right?
2. If I add-in to my position once a stock moves very profitable, do I compute the R for that add-in as a new trade? For example, I start with an R of $1,000, and have a stock with a price at $50. If it moves to $60 and I want to add to my position, do I treat that new transaction as a new position, or do I add it to the existing position for purposes of computing the R multiple?
   

A:

1. Your entry price and initial stop price define 1R for any trade—regardless of where you move the stop in that trade anytime after that.
2. Van has not come up with an elegant or easy way to handle R-multiples on trades where you scale in. Van recommends looking at any second position as a second trade with its own entry price and initial stop price. You can also “join” the scaled trades together later to evaluate them as single unit later if you choose. —R.J. Hixson

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