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

• Article Our Mission at the Van Tharp Institute: Part II of Trading through a Financial Metaphor
• Trading Education Gain Peak Performance in Your Trading
• Trading Tip Market at a Potential Turning Point
• Workshops Early Enrollment for Berlin Workshops Expires TODAY!
• Mailbag Taking Home What I Learned

by Van Tharp, Ph.D.

“Believe in yourself and all that you are. Know that there is something inside you that is greater than any obstacle.” –Christian D. Larson

Last week I introduced the Van Tharp Institute’s mission: transformation through a financial metaphor.  I wrote about the first of three levels of transformation, which is transformation of the trading game from rules that assure big money wins to rules that give the astute trader a huge edge. 

This week we’ll cover the second level of transformation: Understanding the Matrix. You create how you experience life through your beliefs.  Once you understand this, you can recreate yourself through your beliefs to be a successful performer.  This is similar to Neo from the movie, The Matrix choosing to take the red pill.

The Matrix Model of Reality

I love the premise for the movie The Matrix because the matrix is much more real than most people assume. The film at its most basic description questions reality. Is reality that which is perceived by most humans? Or is our reality something that is being thrust upon us by outside forces? Is it something very individual?

There really is a matrix and we form it through our language and our common beliefs.  When you name something and then add adjectives and phrases to that name, you give meaning to the world (e.g., dog, small dog, hyperactive dog, dog that would be a good pet, dog that needs discipline training classes).  We shape our entire world by our words, thoughts and beliefs and the first step is to realize it.  Morpheus calls this "taking the red pill." But before we get into how our beliefs shape our experience, I'd like to share a few quotes from the movie that I found particularly relevant.

Quotes from The Matrix

Morpheus:  Let me tell you why you're here. You're here because you know something. What you know you can't explain, but you feel it. You've felt it your entire life, that there's something wrong with the world. You don't know what it is, but it's there, like a splinter in your mind, driving you mad. It is this feeling that has brought you to me. Do you know what I'm talking about?
Neo: The Matrix.
Morpheus: Do you want to know what it is?
Neo: Yes.
Morpheus: The Matrix is everywhere. It is all around us. Even now, in this very room. You can see it when you look out your window or when you turn on your television. You can feel it when you go to work... when you go to church... when you pay your taxes. It is the world that has been pulled over your eyes to blind you from the truth.
Neo: What truth?
Morpheus: That you are a slave, Neo. Like everyone else you were born into bondage. Into a prison that you cannot taste or see or touch. A prison for your mind.

"What you know you can't explain, but you feel it. You've felt it your entire life, that there's something wrong with the world. You don't know what it is, but it's there, like a splinter in your mind, driving you mad."

"What is real? How do you define real? If you're talking about what you can feel, what you can smell, what you can taste and see, then real is simply electrical signals interpreted by your brain."

"The Matrix is a system, Neo. That system is our enemy. But when you're inside, you look around, what do you see? Businessmen, teachers, lawyers, carpenters. The very minds of the people we are trying to save. But until we do, these people are still a part of that system, and that makes them our enemy. You have to understand, most of these people are not ready to be unplugged. And many of them are so inured, so hopelessly dependent on the system, that they will fight to protect it. Like everyone else you were born into bondage. Into a prison that you cannot taste or see or touch. A prison for your mind."

"I'm trying to free your mind, Neo. But I can only show you the door. You're the one that has to walk through it."

Taking the Red Pill

“You take the blue pill, the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill, you stay in Wonderland, and I show you how deep the rabbit hole goes.”

When you take the metaphorical red pill, you learn that the whole world is shaped by your beliefs.  You then open up to an amazing world of possibility.  You can transform by releasing non-useful beliefs and adopting more useful ones.  And it all starts by examining your beliefs.  What do you believe?  Are those beliefs true?  Can you absolutely know that they are true?  What happens when you believe these things?  What would you be like if you didn’t believe such things?  Suddenly, you see each belief’s limitations and part of the illusion falls away.  Perhaps it’s replaced by something more useful or perhaps it just disappears.

Some beliefs, however, have emotional charge attached to them which makes them difficult to change or release.  For example, perhaps you think at some level, “I’m worthless.”  Now it’s very easy to see that belief as being non-useful.  But until you can release any associated emotional charge, releasing that belief can be very difficult.  Perhaps anger, fear, or depression is associated with the belief and perhaps the charge has a history of many years.  How do you let go of something so powerful?  Well, there is a secret to releasing the charge: stop resisting it and start feeling it fully.  When you finally do, it can just flow out of your system.  We teach a number of feeling release techniques in the Peak Performance Home Study Course and in various workshops. They all release the charge and allow non-useful beliefs to fall away.

How do you know a belief is not useful?  Start by asking questions like the ones I listed previously:  Is it true?  What happens when I believe that thought?  What would I be like without that thought?  Does it have any emotional charge associated with it?  Ask those questions and you’ll know what’s hindering you.

Imagine the impact of changing 20 beliefs each day for five days a week.  That’s 100 beliefs each week—5,200 beliefs in a year.  Do you think there is a good chance that you might be a more effective trader if you spent a year getting rid of 5,200 non-useful beliefs?

This belief examination exercise, however, involves looking inward, which some people find painful.  It also involves dealing with fear. Unfortunately, as soon as most people feel any fear, they get stopped in their tracks.  Yet that fear signifies something they need to move through.  We spend years avoiding such experiences, literally running away, but now we’re asking you to really look at them and that takes courage.

Much of our education for traders involves this sort of work.  Imagine looking at all of your trading beliefs and eliminating those that don’t help you win. On top of that, imagine eliminating all the beliefs that limit you.  Now imagine eliminating all the beliefs about the universe that seem to indicate that you can’t win because the universe (or God) is against you.  This gives you some hints at how powerful personal transformation can be.  When you are committed to doing the work, the Peak Performance Home Study Course and the Peak Performance workshops series will help you eliminate all of your limiting beliefs so you transform your Self—the second level of transformation.

Next week we’ll go over the third level of transformation: Dramatically changing your level of consciousness. 

My next book will be about trader transformations.  The book will cover the three levels of transformation and include stories from five or six different people who have accomplished a major transformation on each level.  We are accepting submissions now, and we’ll be paying $250 for any chapter that we publish in the book.  If you think you’ve made a major Level II transformation, as described in this article and would like to write a chapter-length article (3000-6000 words), we would love to see it. Submit articles in MS Word to [email protected].

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.  

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Trading Tip

by D.R. Barton Jr.

There are many different ways to influence public opinion. And since the markets basically are a reflection of the “public” voting with their money, understanding the ebbs and flows of market sentiment is often very useful in setting expectations for market movement.

In the past few months, we’ve seen two very different types of negative sentiment. In mid-March, a sudden negative event sent the market and market opinion to intermediate lows when the devastating earthquake/tsunami struck Japan. The market made an intermediate low on March 16th when a European nuclear commission official gave an opinion about the extent of damage to the nuclear power plant and for a brief time, the world believed that it was new factual information on the situation. Market prices plummeted until the statement was clarified.

We are currently experiencing a different type of market move—a slow grind, the longest string in over two years. However, the pullback has been relatively shallow at 7%. Despite the moderate nature of the price drop, the persistence of the down move has spooked investors and sentiment measures are reaching bearish extremes.

Market Due for a Move Up But How Much Strength Can It Muster?

Many sentiment measures have reached extreme oversold readings. In sentiment analysis, this leads us to a short-term expectation for a market move up. Here are a few of the items that are reaching extremes (all of these measures have gone lower than they were at the Japan disaster low of March 15th):

• AAII Bullish-Bearish Sentiment Survey: The American Association of Individual Investors (AAII) does a weekly survey of its members to learn whether they are bullish, bearish or neutral on the market. The weekly number shows twice as many bears as bulls now: 48% to 24%.
  
• 52-Week Highs and 52-Week Lows: This is a purely quantitative measure for market sentiment. U.S. stocks hitting 52-week lows have exceeded those making 52-week highs by 256 in the last few days. The lowest reading of the March move down was 186 more lows than highs.
  
• Number of Stocks Trading Above Their 50-Day Moving Average: Another technical indicator based sentiment measure. At the end of Monday’s trading (June 13th), only 15.6% of stocks in the S&P 500 were trading above their 50-day simple moving average. The lowest reading in March was 23%.
  

In the chart below, you can see the divergence in the 52-week high/52-week low reading now versus the March swing low.

Here are the conclusions to draw from this quick look at data:

1. Absolute Values: We are in an oversold condition from a sentiment perspective and can reasonably expect a rebound to the upside.
   
2. Relative Perspective: All of these sentiment readings are lower than the levels reached at the March swing low when prices made lower lows than we’ve seen so far in this trip down. This tells us that there seems to be more “damage” done in the markets on this trip down and that the expected rebound is likely to be weaker than we saw after the March drop.

For perspective, here’s one more chart of the S&P 500 cash that shows all of the support levels that we are close to at current prices.

This chart shows price levels that are likely to be defended and could serve as short-term turning points to the upside. And there are some important numbers clustered together. On the flip side, with each price level that is broken, the bear move will gain in strength and increase the probability that a bigger correction is coming.

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".

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Workshop

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Mailbag

Just a note to thank you for your help and consultation during the recent Blueprint workshop.

Since my return home, I have read Loving What Is, which has really opened my eyes and, if it's not too corny to say, it has also opened my heart. There's been a kind of "aha" moment that has continued for days. I find the belief that everything is perfect as it is to be particularly liberating; I wonder if I can maintain such equanimity during trading. I look forward to reading it again, as soon as my wife finishes it.

I am working on my business plan by going through the workbook page by page and elaborating on notes taken during the workshop. My goal is to have a presentable business plan by September when I will see you at Peak 101.

Please extend my appreciation to Van and the staff for an excellent workshop.

—Ian

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