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

• Article Ride Your Elephant to Change by RJ Hixson
• Trading Education 2011 Fall Workshop Schedule
• Trading Tip Debunking the Death Cross: Part 2 by D.R. Barton, Jr.
• Mailbag Know Yourself, Know Your Time Frame

Peak Performance 101 Is Dr. Tharp’s Signature Workshop

This workshop provides the foundation for every trader who wants to earn bigger and better profits, consistently, all with less stress.  It’s not a technical workshop with lots of numbers and analysis but rather an exploration of the underlying role that personal psychology plays in trading success.  This is the last time this year that Peak Performance 101 will be held. Peak Performance 202 has already sold out. Be sure to register for 101 soon to ensure you get a seat.

To learn more about Peak 101, as well as the rest of our fall schedule,
visit our workshop page.

by RJ Hixson

Last year, one of our clients recommended a book called Switch, How to Change When Change Is Hard by Chip and Dan Heath. (Thanks Rick!) The authors are two brothers, one is a consultant and the other is a Stanford University professor. In Switch, they explain why change can be so difficult, and they present a simple process for helping individuals and organizations make changes. They delve into academic research in the area, lay out a simple process and recount some very inspiring case studies where the situations seemed intractable, yet people found ways to make great changes. As I read it, I kept relating the lessons back to what we teach here at the Van Tharp Institute.

An Apt Model

The authors cite a split-mind analogy from Jonathan Haidt, a University of Virginia psychologist and author of The Happiness Hypothesis. Haidt explained that every person has two primary parts: a rider and an elephant.

The rider is our logical, rational part. The rider can assess the situation, evaluate the options and come up with a plan. If you have ever planned a project or solved a complex problem, you know the rider. While the rider can be visionary, it also has a stronger tendency to plan and analyze problems rather than to act.

The elephant represents the doer. It’s your motivational part, full of energy and determination. It’s also a creature of habit, and it seeks gratification. Information is not so interesting to the elephant—it follows its emotions and appetites. If you have ever slept in or blown your diet, you’ve felt the elephant having its way.

The rational rider sits atop the elephant with reins in hand, but who’s truly in control of where the two will go? The rider directs the elephant; however, the rider fatigues easily trying to control the elephant's course and because the elephant is so powerful, it eventually goes where it wants to. There are practical limits to “will power.”

A Simple Process

To make a change, you have to find ways to get both the rider and elephant moving down the desired path. That is, you have to satisfy each part. To do so, the authors present a three-step process:

1. Direct the rider (clarify the destination).
   
2. Motivate the elephant (engage the emotions).
   
3. Shape the path (make it easier to follow the desired path).

Direct the Rider

Often, the driver appears resistant to a change but more likely, that's merely a lack of clarity on where exactly to go. The authors suggest clarifying the objectives with rich detail. Ambiguous goals lead to ineffective or little action. The Heaths also recommend looking for what’s already working today in the direction of the change because the rider’s attention is so easily drawn elsewhere—primarily to problem areas that need analysis and planning. Another key element to help the rider is to also get past the big picture and focus on the next specific action step.

Motivate the Elephant

Knowing a fact is simply not enough to generate action. The authors point out that lots of facts (e.g., exercise can improve your health) are true but useless in helping anyone make a particular change. To make a change, you will have to find the feelings and emotions that will come as a result of the change. Also, because big changes spook the elephant, they need to be broken down into small steps.

Shape the Path

Because change can be hard, it’s important to make the way easier. The authors suggest changing the situation or environment, which can then help produce a change in behavior. They strongly recommend habit building as a way to shape the path because once a behavior is habitual, it no longer taxes the rider; the rider is “free.” The authors are also big proponents of using checklists for recurring activities.

Context for Trading

The Heath brothers’ process is undoubtedly applicable to trading. In-line with their penchant for checklists, here’s a short one to help you make a change:

Do your objectives evoke emotions to help motivate your elephant?

Enrich your objectives with the feelings and emotions with which you expect to be rewarded. “Enjoying barefoot walks at sunrise with my wife at our beach house” is probably a lot more motivating than simply making $X.

Have you clarified your objectives to the extent that your rider can act rather than analyze or plan? Are you able to paint the achievement with rich detail and quantify it some way?

Van stresses that 50% or more of your total planning time and effort should go to defining your objectives.

Have you looked for what’s already working so you can focus more of the rider’s energy there?

What’s already working doesn’t have to be perfect, just the best of what's available. Look for ways to reproduce and expand on that performance.

Have you laid out the short-term steps to make the path easier?

Focus the rider and calm the elephant on the huge journey ahead by only focusing on taking very next step.

Deeper Changes

I believe Switch is a practical guide that can help people and especially businesses make changes. I also believe that going beyond that process for “bigger” or “deeper” changes requires introspection—understanding not only your rider and your elephant, but all of your various parts.  I base that statement on my personal experience and on abundant feedback from our clients.

One of Van’s core premises is that you don’t trade the markets, you trade your beliefs about the markets.  Beliefs filter not only your trading experience, but your entire life.  To help people understand the structure of all those beliefs, Van often draws a pyramid.  The top portion represents beliefs about various aspects of life in mostly superficial terms.  It’s possible to make changes in these beliefs relatively easily.  The second level from the bottom of the pyramid represents identity beliefs about who you are and how you see yourself.  Spiritual beliefs comprise the base of the pyramid.  At this level, you have some sense of the greater universe and your place in it. 

Making changes at the identity and spiritual levels is much more challenging than at the superficial belief levels. These beliefs tend to be more ingrained, are largely unconscious and they may often have an emotional charge associated with them.  You can use Van’s belief paradigm exercise to examine and even change these beliefs unless they have emotional charge. 

If these beliefs have charge, however, you have to release the charge before you can examine or change the belief.  In simple terms, the charge causes your elephant to freeze or quickly retreat to familiar territory, no matter how much your rider coaxes it. Once you are able to release the charge from a belief, the resulting changes can be wholly transformational as you can shift your entire belief structure at the higher levels, which may affect many areas of your life.

It is a privilege working here where we get to see those kinds of transformations firsthand at the Peak Performance workshops or hear about them from people who have finished the Peak Performance Home Study Course.

I wish you luck in your transformation efforts.

About the Author: RJ 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. His rider uses Excel a lot and his elephant loves to go off the path and surf the Internet. He can be contacted at “rj” at “vanktharp.com”.

Trading Education

2011 Fall Workshop Schedule

Click here to see our full workshop schedule with details

Click here to see locations, logistics, etc.

Trading Tip

by D.R. Barton, Jr.

Last week, we looked at one of the better known technical analysis events called the Death Cross or Black Cross.  The signal triggers when the 50-day simple moving average (SMA) of the S&P 500 cash index crosses below the 200-day simple moving as it did recently on Friday, August 12.

The Death Cross also triggered in July of 2010 with a lot of buzz and broad media interest.  Just days ago, however, that same signal received little to no media coverage at all.

Why?  As we discussed last week, the reason for the differing receptions is simple: the July 2010 signal followed the December 2007 signal—the most successful Death Cross signal of all time, which presaged the market meltdown accompanying the bursting of the real estate and credit bubbles.

In sharp contrast, the much-heralded July 2010 signal failed to predict a decline—in fact, the market actually moved strongly up almost immediately after the Death Cross and kept going up for months. 

Last event bias clearly explains this month’s silence about on the signal and last year’s media hype. Regardless of the hype factor, a much more important question looms for traders:  Is the Death Cross any good in the first place?

Cocktail Party Novelty or Serious Trading Tool?

Does selling the S&P short when the 50-day SMA crosses the 200-day SMA and then covering when the 50 crosses back above the 200 make you money?  To answer this question, let’s look at two studies.

First, let’s apply that rule to the S&P 500 cash index back to 1960.  For 51 years of S&P 500 data (and 50 years of signals), here are the statistics:

• Total trades:          26
• Winning Trades:    8
• Losing Trades:      18
• Winning %:           31%

Most people who follow Van’s or my work know that a system’s winning percentage alone is insufficient to tell you whether you have a quality trading system.  This is especially true for long-term trend following systems. 

This system would be very hard to trade, similar to a long-term trend following system.  In the last 50 years, there have been no consecutive winners!  This means that every winning trade has been followed by a loss and a lot of losing trades were followed by other losing trades.  The biggest string of losing trades was eight in a row from 1984 through 1999.  Trading this would obviously be very difficult from a psychological standpoint.

So what’s the bottom line? This Death Cross system is very close to break-even on the S&P—just slightly positive.  If you exclude the one monster winning trade from December 2007 through April 2009, however, the system had a negative expectancy for the last 50 years.

In a study similar to mine, Jason Goepfert looked at Dow Jones Industrial Average data back to 1928 and found that all the Death Cross trades from 1928 to 2000 were cumulatively negative.  Once again, only if you add in the big win during the real estate and credit meltdown from 2008-2009 does the system enter positive territory.  Just one trade making a system slightly net profitable over 50 to 84 years of data clearly shows the Death Cross as just a conceptual novelty rather than anything to guide your trading.

If you have read an interesting article on the Death Cross or have seen any interesting research, please pass it along to me at drbarton “at” vanktharp.com.  And as always, we love to hear your general thoughts and comments about the articles.

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 "vanktharp.com".

Disclaimer »

Mailbag

Know Yourself, Know Your Time Frame

A mentor told me about Van Tharp. He knew I was struggling, and he thought Van's teachings could help.

I read his book, and ordered the Peak Performance Home Study Course. I would do well for days and days only to shoot myself in my violating my methodology.  Finally, I sat down and looked at why I was failing.  The methodology of day trading did not work for me. I had hit my danger zone in capital at this point.  I needed to be honest with myself.  So after much thought, I changed to swing trading.

Since July 1st, my account is up 50%. I am significantly less stressed. I started to trade with the right positioning and that allowed my correct view to play out with greater R returns. I would be back at a bulge bracket by now if it was not for my mentor and Van's approach.   Thank you sincerely for your contributions in my success.  

— M. Waln

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