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Trader Self-Evaluation

Part One

What are Seven Key Areas that You Need to Work on to Become More Self-Aware?

By Van K. Tharp, Ph.D.

In my work with traders and investors I believe the most significant work that anyone can do to increase market returns is self work. Really understanding yourself and how you think can give you an edge that others in the market don't have. 

As part of my Super Trader Program, I give a long questionnaire to each trader to do an evaluation of themselves.  Some of the feedback that I get is that taking the test is like doing a Ph.D. program!  It's that involved.  

I consider the ten questions that I give my Super Traders to be the essence of this self-evaluation process� a minimum starting point for this type of work.

This week we'll start this process with just one of the points. My advice to my Super Traders is to spend at least an hour on each question�a day is even better. These questions are meant for you to really dig deep and come up with responses from your core belief structure. 

 Question of the week:

What are seven key psychological areas that you need to work on or are currently working on? 

 Don�t say �none� because that answer really suggests that you are totally unaware of what is going on with you. 

We basically live in a society in which we are programmed to feel separate and alone from everyone else, programmed to follow the rules of the games that others invent for us to play.  The net result is most people do the exact opposite of what is necessary for success.  As you become aware of this, you�ll also become aware of all your patterns, beliefs, and emotions that you need to work on or clear out to become more successful as a trader.

 Here are some examples that might fit some of you:

• I really have a fear problem that enters into my trading.  I want to make trades but I�m afraid to pull the trigger.  And that fear seems to come up in other areas too; I guess I�m really afraid of failure.
• I have some internal conflict when it comes to working on myself.  On one hand I want to, but on the other hand, I�d rather do other things.  Working on myself feels like having a tooth pulled.  For some reason, I just don�t want to do it.
• I don�t have any discipline.  Sometimes I just decide to trade.  I make almost random trades or take recommendations that I�ve been given, but just certain select ones appeal to me.  And the net result is that those trades never seem to work out.  (Note: this is also an incomplete answer.  What is the selection process?  What happens to those trades?  Do you cut losses and let profits run?  Are you compelled by some emotion to trade?)
• My mother continually criticizes me.  My mother gave me everything when I was growing up, and I�m very grateful to her.  But she�s always telling me what I do wrong.  In fact, it upsets me to be around her.  Yet at the same time, I feel that I must support her.  I need to find out why her criticism bothers me so much and what I can do about it.
• I really don�t like to be alone.  When I do all of things that are important to trading success, like psychological work, I have to go inside and search and that really disturbs me.  Also when I try to meditate, things come up that cause me to be afraid.  (And, of course, if you had this response, I�d want you to at least find out what�s trying to come up that is causing this).

Next week we will continue with another important self-evaluation topic.

About Van Tharp: World�renowned trading coach, author and psychologist Dr. Van K Tharp, is widely recognized for his best-selling book Trade Your Way to Financial Fre-edom and his outstanding Peak Performance Home Study program - a highly regarded classic that is suitable for all levels of traders and investors.

Psychology of Trading Series

Presented by Van K. Tharp

Learn the tools and techniques that you need to transform your trading and investing results. 

Make bigger, more consistent profits with less stress.

This audio series covers the following topics:

• The Psychology of Discipline

• Belief Change and Mental State Control 

• How to Fix Mistakes and Two Tasks of Trading--Rehearsal and Daily Debrief 

• Games People Play 

• Self-Sabotage 

• Creating Your Future by Goal Setting and Manifesting 

• Personality Type and Trading

Learn More...

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Trading Tip: 

Trading Tip

Housing Bubble Update, Part Two

The Attack of the Killer �G�s�

by D. R. Barton, Jr.

In my last tip, I reviewed some important data from a report that Alan Greenspan co-authored.  (This is only the second paper he has affixed his name to in his tenure as Federal Reserve Chairman, adding to the gravity of his comments.)  To review that article, click here.

The most significant finding of the Greenspan study was that in 2004 alone, U.S. homeowners took out home equity loans equal to whopping 7% of the total disposable income of the U.S.  The figure was $600 billion. 

A philosophical debate has ensued over how much of that figure was actually spent vs. saved.  Bill Gross of Pimco weighed in and I�ll share some of his thoughts on this subject and their usefulness in bubble timing next week.  But how can there even be any debate?

How many people do you know that took out a home equity loan in the last year or so?  Probably more than one or two.  As an anecdotal test, ask them how they used the money.  If even one said they used it to open a savings account, I�d be stunned.  My bet is that folks take out home equity loans to:

�        Repair, upgrade or add-on to their home

�        Get a down payment for a vacation home

�        Buy a new car

�        Take a vacation

�        Pay for college tuition

�        Consolidate other consumer debt (credit cards, etc.)

�        Other �big ticket� wants or needs

So when I hear pundits trying to minimize the significance of the home equity loan growth rate, I chuckle.  If this �7% of disposable income� rate drops by half (and it will), shockwaves will resonate through most (if not all) sectors of the economy.

But fortunately for you readers out there, someone much smarter than me has looked at this issue and its broad implications to the financial world.  Enter our second Killer �G,� Pimco�s own Bill Gross, a.k.a. the Bond King.

Not only has Mr. Gross evaluated the data in Mr. Greenspan�s research, but he has melded it with his inside knowledge of the markets and given us a blueprint for how the housing bubble will burst. As I stated in the last article, not only did he provide a process, but Mr. Gross also says that this housing price cooling/ slowing / reduction is a 99% certainty � a �slam dunk� in his words.

Let�s look at how the Bond King sees things unwinding in the housing sector:

�        Housing prices drop because these things happen: 

1.    Interest rates (on the long end of the time spectrum) finally get to the point where outrageous housing prices are truly reflected by outrageous mortgage payments. 

2.    Increased mortgage payments per dollar of house value are also pushed to the fore by regulatory pressure to shrink the amount of �funny money� lending (Gross� term referring to interest only mortgages, balloon payment mortgages, etc.).

3.    Speculators of all stripes begin to sniff out the fear in the market.

4.    Housing prices fall (maybe moderately, maybe a bunch).

�        This reduction in housing valuation leads to a drop in home equity loans (because homes have less �paper� equity to borrow from).

�       With Americans unable to suck paper profits out of their homes, consumption weakens and so does the consumption-driven U.S. economy.

�        The Fed then cuts interest rates to start the cycle over again.

D. R. Barton, Jr. is the Chief Operating Officer and Risk Manager for the Directional Research and Trading hedge fund group. D. R. has been actively involved in trading, researching, and teaching in the markets since 1986.  D. R. has taught extensively in many investment areas including intra-day trading, swing trading, and cutting edge risk management techniques. 

His writing credits include co-authoring Safe Strategies for Fin-ancial Fre-edom and co-creator and contributing author on Fin-ancial Fre-edom Through  Electronic Day Trading.

Listening In... 

Portfolio Sizing Dilemma 
Author: J.L.
Date: 10-12-05 03:54

I have this dilemma. Let's say I sized my portfolio using the Percent Risk Model with 10 stocks and a stop-loss system. I entered 10 positions using a stock screen. What shall I do when a stop-loss has been triggered? I think I have two choices:

(1) Buy a new stock that might appear on the screen. If there are no stocks appearing on the screen, keep the proceeds in cash until the screens shows up a stock; OR

(2) Purchase additional shares on the best performer of the portfolio.

If I do (1) then portfolio diversification would somehow be maintained but additional profit opportunities by additions on the best performer would be missed. 

If I do (2) then the number of stocks on the portfolio would diminish as the proceeds from those that get stopped are plowed to the best performers eventually reducing the diversification. 

Is there a way to arrive at a more logical choice so that the emotion factor would be kept at minimum?


Reply To This Message 


Re: Portfolio Sizing Dilemma 
Author: PMK
Date: 10-12-05 08:17

J.L

Why does this have to be an either/or choice?

Why not allocate half the capital to add to winning position(s) and the other half to open new positions (or some other proportions you are happy with)?

Alternatively, you could do a historical simulation of both scenarios to see which one matches your objectives the best. Note that the 'correct' answer for you depends on your objectives, tolerance for risk, available capital, etc etc, and not some over-arching 'logical choice' defined by an 'expert'.

One thing to be wary of is ending up with too much of your capital in one position, so I would define a ceiling after which you will no longer add to a winning position even if capital is available.

Paul


Reply To This Message 


Re: Portfolio Sizing Dilemma 
Author: Level7 
Date: 10-12-05 11:12

I would suggest that (2) is not an option for you. Eventually you would end up with all your money in one stock following strictly what you said and the system would end there when that one quit going up. 

(1) is the logical choice for what you describe, especially since you are (IMO) likely not as diversified as you think with any stock screen. 

I think the really good traders tend to select their plays carefully and that is more in line with what you describe. There are so many stock opportunities, that waiting in cash for the good ones is easy.

Diversification is done to give you a lower return with less risk. In certain conditions I do anti-diversification to achieve the other condition. Exactly as Paul says, I have an upper limit (portfolio %) on my position size that even if I am 120% positive and my mom is sure that it just has to win big, I don't exceed it. It is around 15 to 20% and the rule is that if it doesn't produce returns within a week, the position size is cut back again. I have been experimenting with options to accomplish the same idea with less risk.

Interestingly enough I have reached this huge position size about 3 times this year and none of them accomplished the great returns that mom promised me :-). I reduced all of them after the week time limit. When you have this huge position size, emotion is very very tough to deal with.

Bottom line: Generally speaking your logic will be better with smaller position sizes and some money in cash. 

Participate on Van's Trading Forum, a place for traders and investors to share ideas and learn from each other

Special Report

Self  Sabotage - Two Reports of Self Sabotage

Click here to read page one of each report, or to order. 

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Quote of the Week

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