Dr. Tharp will be in London this Summer!
2007 Dates Confirmed
| July 2-4 |
Blueprint for Trading Success | |
| July 6-8 |
How to Develop a Winning Trading System that Fits You | |
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There are a limited number of seats available in this location so be sure to book early to secure your place. |
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Feature
Tharp�s Thoughts
Way of the Turtle, Way to Go
By
Van K. Tharp
I recently wrote a foreword for a book that I think is one of the top five trading books ever written. It�s Curtis Faith�s new book, Way of the Turtle. Curtis was one of the more successful traders in Richard Dennis� experiment to see if he could train good traders. And since I was part of the selection process, but never knew what happened once they started training, I was fascinated to get these insights.
So why do I believe that it is one of the five best trading books ever written? First, it paints a very clear picture of what is necessary for trading success. Curtis says in very concise terms that it�s not about the trading system. Instead, it�s about the trader�s ability to execute the trading system. During the initial training period, Curtis earned almost three times as much as the others combined, yet they�d all been taught to do the same thing.
Think about it: Ten or so people who had all been taught a certain set of rules, including fixed position sizing rules, all produced different results. The answer as to why is, of course, that trading psychology produced the differences in the results. And Curtis really brings this point home in his book.
The second really fascinating aspect of Way of the Turtle is that it probably has the most lucid description of how some of the principles of behavior finance apply to and influence trading that I�ve ever read. Curtis even goes into a lengthy discussion of support and resistance and why these exist because of inefficiencies in our decision making. It is must read material.
The third aspect of the Way of the Turtle that I really like is Faith�s emphasis on game theory and using it to explain how a trader should think. For example, he suggests that you concentrate on the present trading, forgetting the past and the future. Why should you do this? You should know from your historical testing that you will probably be wrong most of the time in your trading. But you should also know that some of your gains will be huge, which will result in a positive expectancy. Curtis tells the reader why they must understand and have confidence in the expectation of their system. And it�s this confidence that will make them long term winners.
Other excellent topics along the same lines include:
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How the Turtles were trained and what they actually learned.
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The real �secrets� of the Turtles (and I�ve already given you lots of clues).
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An excellent discussion of the problems involved with system development and why people make mistakes in their system development because they don�t understand basis statistical principles involved in sampling theory.
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A superb discussion of why most systems fail to perform adequately. And even though most good systems are dropped for psychological reasons, there are also many bad systems out there that look good at first glance. So if you want to know why and how to spot them, then you must read this book.
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And lastly, there is an interesting discussion of robust measures of systems. And if you understand this material, you will go a long way toward being able to design a long-term profitable system for yourself that will work.
Below
is an excerpt from that book that is very informative. If you'd like
to purchase a copy, Way of the Turtle
About Van Tharp: Trading coach, and author 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. You can learn more about Van Tharp at www.iitm.com.
By Curtis Faith
Excerpted from the Newly Released Way of the Turtle
and the greatest challenge. Master it and you will succeed. Ignore it at your peril.Human emotion is both the source of opportunity in trading
To trade well you need to understand the human mind. Markets are comprised of individuals, all with hopes, fears and foibles. As a trader you are seeking out opportunities that arise from these human emotions. Fortunately, some very smart people�behavioral finance pioneers�have identified the ways that human emotion affects one�s decision-making process. The field of behavioral finance�brought to popular attention in Robert Shiller�s fascinating book, now in its Second Edition, titled Irrational Exuberance and greater details of which were published by Hersh Shefrin in his classic Beyond Greed and Fear�helps traders and investors understand the reasons why markets operate the way they do. Just what does make prices go up and down? (Price movements can turn an otherwise stoic individual into a blubbering pile of misery.)
Behavioral finance is able to explain market phenomena and price action by focusing on the cognitive and psychological factors that affect buying and selling decisions. The approach has shown that people are prone to making systematic errors in circumstances of uncertainty. Under duress, people make poor assessments of risk and event probabilities. What could be more stressful than winning or losing money? Behavioral finance has proved that when it comes to such scenarios, people rarely make completely rational decisions. Successful traders understand this tendency and benefit from it. They know that someone else�s errors in judgment are opportunities, and good traders understand how those errors manifest themselves in market price action: The Turtles knew this.
Emotional Rescue
For many years economic and financial theory was based on the rational actor theory, which stated that individuals act rationally and consider all available information in the decision-making process. Traders have always known that this notion is pure bunk. Winning traders make money by exploiting the consistently irrational behavior patterns of other traders. Academic researchers have uncovered a surprisingly large amount of evidence demonstrating that most individuals do not act rationally. Dozens of categories of irrational behavior and repeated errors in judgment have been documented in academic studies. Traders find it very puzzling that anyone ever thought otherwise. The Turtle Way works and continues to work because it is based on the market movements that result from the systematic and repeated irrationality that is embedded in every person. How many times have you felt these emotions while trading?
� Hope: I sure hope this goes up right after I buy it.
� Fear: I can�t take another loss; I�ll sit this one out.
� Greed: I�m making so much money, I�m going to double my position.
� Despair: This trading system doesn�t work; I keep losing money.
With the Turtle Way, market actions are identified that indicate opportunities arising from these consistent human traits. This chapter examines specific examples of how human emotion and irrational thinking create repetitive market patterns that signal moneymaking opportunities.
People have developed certain ways of looking at the world that served them well in more primitive circumstances; however, when it comes to trading, those perceptions get in the way. Scientists call distortions in the way people perceive reality cognitive biases. Here are some of the cognitive biases that affect trading:
� Loss aversion: The tendency for people to have a strong preference for avoiding losses over acquiring gains
� Sunk costs effect: The tendency to treat money that already has been committed or spent as more valuable than money that may be spent in the future
� Disposition effect: The tendency for people to lock in gains and ride losses
� Outcome bias: The tendency to judge a decision by its outcome rather than by the quality of the decision at the time it was made
� Recency bias: The tendency to weigh recent data or experience more than earlier data or experience
� Anchoring: The tendency to rely too heavily, or anchor, on readily available information
� Bandwagon effect: The tendency to believe things because many other people believe them
� Belief in the law of small numbers: The tendency to draw unjustified conclusions from too little information.
Although this list is not comprehensive, it includes some of the most powerful misperceptions that affect trading and prices.
In another edition of this newsletter, we'll look at each cognitive bias in greater detail.
Way of the Turtle
Van Tharp's Peak Performance Home Study Course
The
Ultimate Home Study Course for Traders. 
Contains the five books listed above, and four CDs. �Your course is the
most powerful material I have ever come across on trading.
It is challenging and therapeutic for those who want to be
better traders and less neurotic in their
personalities.� �J.M. |
Top Notch Internet Resources
Part
III
By D.R. Barton, Jr.
Today we�ll dig into Internet news. Great sites and analysis keep coming on what you find useful. Keep those e-mails coming! More info on submitting your favorite sites and why you like them is contained in the last paragraph of this article.
First�the bad news. One of the last holdouts of no-cost internet content is true streaming real-time news. If any of you have found sources and would like to share them with me and other readers�let me know! But my cursory search showed nothing of particular note in real time news.
The good news is that streaming news exists, and for a relatively modest price. Also, there are plenty of sites where you can get relatively good �recent news� � news from the last 15 minutes or so � but they don�t stream.
For modest cost streaming news, you can try briefing.com at their platinum service level. This costs $30 a month or $300 per year. For that tariff, you get their �Live In Play� service that streams headlines to a browser window. To be honest, for most folks, this is way too much information, since 20 � 50 items come through per hour. But it can be worth it for day traders and others who need up to minute info. The search function is also very useful to see if any news has popped up recently for a stock you�re interested in.
In the �recent news� category there are plenty of web portals out there that scour other financial news services and choose the ones that their editorial staff think are the most important (or most likely to get read). Folks break into fistfights over which site is best, but here�s my take:
� Yahoo: If you need to see if a recent news story has come out on a stock, this is still the best free place to go. In a quick poll I did today, Yahoo still seems to tap the largest number of sources and list more stories per stock than other sites. Their front page (http://finance.yahoo.com/ ) is a bit cluttered but contains links to vast amounts of info.
� Google: For sheer readability it�s impossible to beat Google finance. The page is so clean, it squeaks. I particularly like their sector summary and market summary sections. And their news headlines are the easiest to find and follow.
� Wall Street Journal: Great front page. Fairly high level of no-cost content. Fastidiously updated �latest news� stories, though they can veer off the �pure trading and investing� path. The most frustrating thing here is that if you want more depth than the headline and opening paragraph, you have to subscribe. Fortunately, the first paragraph is usually enough. I�m a paid-up subscriber to the WSJ and I use the site often. Site is www.wsj.com.
� Others that I glance at occasionally: I�ll sneak a peak at marketwatch.com, investors.com, and barrons.com for news occasionally. But I rarely find a reason to go to any of those before the top three listed here.
As a reminder, I�d like your help!! If you have found a site that is particularly useful, please send me an e-mail at drbarton@iitm.com and let me know what sites you find useful and why (also let me know if you�d like credit for your find or would care to remain anonymous). This way lots of folks can benefit from the little nuggets that you�ve found!
Next week I�ll share some individual gems that I use and some sent in by readers. Until then�
Great Trading!
D. R.
About D. R. Barton: 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 where he is one of the most widely read and followed traders and analysts in the world.
He is a regularly featured guest analyst on both Report on Business TV, and WTOP News Radio in Washington, D. C., and has been a guest analyst on Bloomberg Radio. His articles have appeared on SmartMoney.com and Financial Advisor magazine.
Rock, Paper, Scissors
by Melita Hunt
First, I�d like to say thanks to the many people who take the time to drop me a line and write to me each week. I enjoy getting your emails and appreciate the feedback. And, I want to share a story with you from back in November when I first decided to start this column, because surprisingly it gave me the courage to keep going with the sharing of my thoughts, ideas and sometimes crazy ramblings.
In the first couple of weeks the following was sent to our customer service email:
Are you not even the slightest embarrassed [sic] by the idiocy Melita Hunt wrote? Any contributor to your publication with a shred of integrity should be loath to associate oneself with that drivel. What next? Will she write the definitive study on "Rock, Paper, Scissors" strategy?
Obviously, the staff didn�t want to forward it to me, but I happened to see it myself and told them that I really did want them to send me the good, the bad and the ugly.
It was one email of many, and of course the other 90% were positive. I just chose to focus on the one that happened to give negative feedback.
And honestly, my first thought was: �Ouch�
So I called Van and told him that I was tagged by this criticism and needed his wisdom. So what was his answer? �Well that�s because you�re an approval suck� � Huh? Double Ouch!!! Did Van Tharp really just say that to me? That in itself was quite a shock.
But yep, that�s what he said and then he explained himself and I had a lesson to learn: It wasn�t such a bad thing, it just showed that I like people to like me and this was a good opportunity to notice that. He went on to say that the more I �put myself out there�, the more criticism I am going to face and it�s a wonderful lesson in dealing with that. Not everyone is going to like what we have to say and even Van feels the tinge when his work or character is criticized. But it�s all in the way that we deal with it.
It helps to build strength of character and to give me awareness of how others can affect my moods and thoughts; if I let them.
So the lesson for me is to stay neutral on the good, the bad and the ugly and just to realize that in each case it�s someone�s opinion. I get to be thankful for both the approval and for the naysayers and just notice my responses. Is my core remaining solid in both instances? Well the jury is still out on that one...
Maybe I�ll have to put myself out there more�
In the meantime, let me
get back to that definitive guide on rock, paper, scissors�
You can contact Melita at mel@iitm.com
Join in the discussions on our blog and forum
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