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March 22, 2006 � Issue #263 | |
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Back-to-Back Systems Development and Mutual Funds/Exchange Traded Funds Workshop
Feature Article Interview with Systems Expert, Ken Long, Part Three, By Van K. Tharp, Ph.D.
Trading Education People Don't Trade the Markets, They Trade Their Beliefs About the Markets.
Trading Tip Short Selling: Useful Tips and Tools , by D. R. Barton, Jr.
Listening In Coping with Success Special Reports Reports by Van Tharp: Self Sabotage, Changing Markets
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Two Workshops� Only One Trip!
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Van: I also seem to remember that there was a step that involves assessing your opponents. How is that important to trading or to trading system development? And why did you include that in your game development strategy? What difference does it make what your opponents are going to do? Ken: Remember that in the game, our big payoff depended upon us being the top group. As a result, it was important for us to know our opponents� performance and to anticipate our opponents� strategies. We knew that the other groups might adjust their strategies based on relative performance after each ten turns. Anticipating their probable reactions to our performance we believed would give us an advantage when choosing our performance strategy. For example if they saw we were far ahead of them, they would be likely to increase their risk profile in order to catch us. In that case we would be able to reduce our risk and still maintain a comparative advantage. We conducted that kind of analysis for three different conditions: (1) if we were far ahead of other groups, (2) if we were about the same, and (3) if we were far behind. Since we had developed a number of strategies we were able to match strategy to conditions before the events occurred. Our rehearsals of these decisions turned out to be great stress reducers in the actual play of the game. This concept of rehearsal and contingency review is a big part of a trading system model and has a tremendous practical benefit. That�s exactly what professional basketball players do prior to shooting foul shots. By visualizing and rehearsing their actions, they program themselves for success. That�s exactly what we were doing in the trading game. Again, you are talking about one of the ten tasks of trading�mental rehearsal. That�s all about the importance of not making decisions in the heat or stress of the moment and about how your system takes that into account. Any comment? If your trading system requires you to analyze a great deal of data and make difficult decisions in the heat of the moment, then you�re setting yourself up for failure. You will take short cuts, make decisions in ways you haven�t planned for, or freeze up and not act because of system overload. Our group conducted all required analysis while we were calm and had plenty of time. We anticipated all the decisions we would likely need to make. We also identified the information needed to make the decisions and rehearsed a variety of contingencies. So, when it came time to actually make a decision, we faced little to no stress because we had rehearsed what we needed to do ahead of time. Then it was simply a matter of executing the well-rehearsed plan, like an audible in football. People feel trapped and have a sense of losing control when they don�t see options in a given situation. Take your time during system development to give yourself the options that you�ll need to navigate troubled waters. This will keep you from making critical decisions under stress when your resources are most at risk. Of course, part of the mental rehearsal task is thinking of what might go wrong. And most people don�t like to do that. They call it negative thinking. There is an art form to playing the role of the Devil�s Advocate, to see how many circumstances, disasters, events you can dream up that challenge your system. By working through the responses to these events you can reduce most of the stress you might otherwise face during the trading day. Too many times however, we work backwards by inventing a system we really like, and then focus only on the conditions required to make it successful, and then try to make it work everywhere and at all times. I also need to stress continually the importance of comparing your results with your goals and objectives throughout the process. And, of course, you must have objectives to do this. Precisely, no system works as originally conceived and implemented from day one. I firmly believe you have to have a plan for regular and systematic feedback beginning in the design phase. You have to make certain that the environmental conditions (market conditions for traders) for which you�ve designed your system still exist and that the system is operating as designed. This is an important issue that is beginning to come to the front in the business community. I�m scheduled to participate in a number of business seminars later this year. We call this the �After Action Review,� where we methodically and in detail compare the plan and the standard to what actually happened, and try to determine the lessons learned from the results. This technique of comprehensive self-review may the single most important reason for the success we achieved as a fighting force in Desert Storm. Can you recommend any good books on the process of system development? I�ve already mentioned Walton�s book on Dr. Deming as a must read. The two best books that I�ve seen on the subject are Breakthrough Thinking by Dr. Gerald Nadler and Systematic Systems Approach by Thomas Athey. Both are textbooks but do a great job of making theory work in practice. Diligently applied, their methodologies make sure that you address total system development from the inside as well as the outside. They also help you overcome the bias of your own expertise. I can�t tell you how many times I�ve seen the systems development process dominated by a senior leader or expert who came from a technical background, and whose personal point of view influenced the system design in a negative way by emphasizing his particular expertise to the exclusion of other points of view. A systematic approach, as outlined in these two books forces you to consider alternate points of views and competing priorities on a more objective basis. I also have to plug two other books which contribute greatly to cultivating an open fresh mind when designing systems: The Complete Murphy�s Law edited by Arthur Bloch, and The Wit and Wisdom of Mark Twain edited by Alex Ayres are essential for helping us remember that the best plans of mice and men must be operated by our peculiar and eccentric species. They help remind us why it�s best to keep the systems simple and robust with plenty of margin for error and safety. As Twain might say: you can make things foolproof, but not �damn-fool� proof. Remember, the secret of the McDonald�s hamburger sales system is that it delivers a high-quality, consistent, inexpensive �good-enough� hamburger that any 16 year old public school student named Murphy can operate well enough to keep the franchise owner out of court and at an acceptable profit level. Next week in our fourth and final installment, we will get into some of the issues of multiple trading systems.
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Trading Education
Van Tharp's Peak Performance Home Study Course People do not trade the market. They trade their beliefs about the market.
These are just a few of the benefits of the Peak Performance Home Study Program. |
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Short Selling: Useful Tips and Tools Short Selling (Part IV) by D. R. Barton, Jr. In this last installment on short selling, we�ll look at some useful items that will help make short selling easier. (Click these links if you missed any, Part I Part II, Part III.) First of all, the short selling tick rule (requiring an up tick before you can short stocks) is not applicable to commodities/futures trading, currency trading on Foreign Exchange (forex) or to Exchange Traded Funds (ETFs � the most well known are symbols QQQQ, SPY, and DIA � a complete listing of these can be found at www.amex.com ). Some key changes have been made over the last year or two to make short selling an easier task for traders. The first change is that Archipelgo (formerly just an Electronic Communication Network (ECN), through its relationship with the Pacific Stock Exchange, now operates on its own exchange rules. As part of this new-found freedom, Archipelego does not require an up tick to sell a NASDAQ stock short. (More correctly, the NASD�s �bid test� rule does not apply to NASDAQ stocks executed on the Archipelego exchange.) This means that you can short any NASDAQ stock at any time there is a bidder to take the shares that you�re offering, just by using the ARCA ECN route. (The shares, of course, must also be borrowable from your broker.) The second change is that the Securities and Exchange Commission (SEC) has finally realized that short selling is a necessary part of the balance of buying and selling securities in a secondary market. Therefore, the SEC is conducting a pilot program where one third of the largest 3000 stocks traded in the U.S. are allowed to trade without short selling restrictions. The stocks have been selected and the pilot program is being run under SEC temporary Rule 202T. It has been running since last spring and will end on April 28, 2006. This should provide evidence that unimpeded short selling provides extra liquidity and, in fact, reduces extreme volatility. (There is evidence that blow-off tops occur more frequently when short selling is restricted.) For a list of stocks that are taking part in the pilot program you can check out the following links:
Great Trading!
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Re: coping with success |
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| Participate on Van's Trading Forum, a place for traders and investors to share ideas and learn from each other. For the above posts, look for the title, Coping with Success. | ||||||||||
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Special Reports By Van Tharp Click below to read page one of each report, or to order. |
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Copyright 2006 the International Institute of Trading Mastery, Inc. |
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Free Trading Simulation Game A computerized version of Vans famous "marble game." It is designed to teach you the important principles of proper position sizing. Download the 1st three levels of the game for free. Register now. |
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Did You Know...
Van Tharp is featured among Jack Schwager's original Market Wizards. The Market Wizards books are cited by top traders as essential reading. |
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2006
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