Workshops

Germany Workshops

Seating Is Limited and Hotel Rooms Are Filling Up 

Click here to read an interview with Van Tharp and Ken Long on how trading ETFs benefits international traders in non-US markets.

Feature

Market Type: Hong Kong

by

Van K. Tharp, Ph.D.

When you have a trading system, you should always know how it performs under various market conditions. In fact, one of the biggest mistakes you can make is to attempt to use a system for a market type for which it was not designed. Ken Long (who will be teaching our ETF workshop in Germany) recently said that instead of wondering why your system isn’t working in the current market, you should be wondering what kind of system is working really well under these conditions.

We’ve now settled on a market type measure that uses the 20 day ATR (as a percentage of the close), in comparison with its historic mean and standard deviation, to measure volatility. We’re now using the following guidelines:

• Normal: The average ATR% plus or minus 0.5 standard deviations. 
• Quiet: Anything less than a 0.5 standard deviation below the mean. 
• Volatile: 0.5 standard deviations to three standard deviations above the mean 
• Very Volatile: Anything greater than three standard deviations above the mean.

Incidentally, this results in an inverse Gaussian distribution. Thus, in the future I may take steps to normalize it based upon the high and low of the distribution.

So far, I’ve covered the Australian and German markets. This week I’ll be covering the Hong Kong market (in lieu of the Chinese market as I have a lot of data for the Hang Seng Index). Yahoo! has 4,827 days for the Hang Seng Index (^HSI). Thus, for the 200 day market type I have data going back to October 18th, 1990.

The mean ATR% for those 4,827 days was 1.93 and the standard deviation was 1.02. This is quite similar to our U.S. data for nearly 15,000 days of data in which the mean is 1.30 and the standard deviation is 0.72.

The following table shows the distribution of our 4,627 days in these four categories.

The next table shows the average percent change in the Hang Seng index during each of the four volatility-based market types. 

Again, we see that the more volatile the market, the more likely the price is to go down, just like the U.S. market. Similarly, the more quiet the market, the more likely the price is to go up (with both normal and quiet days being generally up days).

Let’s look at what happens to the market the next day after a given market classification. Here we are asking the question, “If the markets are highly volatile on March 3rd, what is the average percent gain on the following day (i.e., March 4th), regardless of the market type that day?” This data is shown in the next table.

And just like the U.S. market, but unlike the Australian market, we can expect the day that follows very volatile markets to be up. 

Now let’s combine our five market types (defined in a previous article) with our four volatility types and see what we can expect. In this case we are using the 100 day SQN™ on the daily percent change to determine market direction. By the way, I’m simply looking at the daily percent changes in the index and doing an SQN based upon that (rather than R-multiples). 

Just like the U.S. Market, we only see bear and strong bear markets when the market is very volatile. 91.7% of the bull and strong bull markets occur under neutral and quiet conditions. But when the market is very volatile, then it is either a bear or strong bear market 92.4% of the time.

Let’s look at our total market type and the average percentage gain/loss that is likely to occur under each market type condition. This is shown in the next table. There are no real surprises here.

The data are pretty much expected except for the plus percentage for the bear market condition under volatile and very volatile conditions. 

Some History

Now let’s look at the last year’s worth of data on market type. I’m going to use the 100 day SQN to determine market type but show you the 200, 50, and 25 days SQNs as well. Remember that I use the following SQN ranges to determine the market direction, so you can translate the other SQN days to market types.

The data as of Friday’s close is quite a bit different from the U.S. markets. First, the Hong Kong Market has been volatile for most of the year, but not very volatile. Second, the Hong Kong market moved out of bear territory (at least for the 100 day SQN) on March 16th. And finally all four measures are bullish, with the 100 day average being strongly bullish. The Hong Kong market is much easier to interpret than the U.S. markets. Notice that the high of the last year was on Friday and the low was March 9th. Sound familiar?

Click here to see a larger image of the chart.

The Hang Seng index is up 38.89% this year compared with 24.66% for the NASDAQ and 8.42% for the S&P 500. Does this really represent China? Well, Hong Kong is controlled by China, but it is almost a separate country. For example, I have to get a visa to go to China in September, but if I were going to Hong Kong, no visa is required. And the Shanghai composite index is up 85.23% so far in 2009. 

I’ll be looking at up to ten markets. Next week will be our regular update. Then in two weeks, we’ll be looking at the London FSTE, plus I’ll revisit the three markets we’ve already covered.

My plan is to look at Brazil and then Gold, Oil, Commodities (in general), the U.S. dollar, and the Euro. That will give us the ten markets that I’ll continue to update once each month.

All of this work was done with the XLQ add on to Excel with the help of Leo van Rijswijk, the developer of XLQ.

About Van Tharp: 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 www.iitm.com. 

Trading Tip

Portfolio Diversification and Other Myths

by
D.R. Barton, Jr.

I recently caught about five minutes of a TV program on the Loch Ness monster. So many people are still convinced that it exists!  The vastness of this great body of water allows hope to spring eternal that some prehistoric or otherwise unique critter could be hiding out in the loch.

The same hope for existence is true of other mythical creatures: the yeti, Bigfoot, and successful portfolio diversification.

It’s amazing to me, really.  The lengths that institutions will go to protect the status quo is astonishing.

And the vastness of the markets, much like expansive Loch Ness, serves to give people hope that myths like diversification work.

An article published by the venerable behemoth Fidelity Investments made me chuckle recently.  In an effort to keep folks clinging to their “buy and hold” mutual fund strategies, they made this laughable claim: “Diversification didn't fail in the recent market downturn. It worked—just to a lesser degree.”

The downturn cited in the article was from January 2008 to February 2009 (an odd starting date for the study, but we’ll go with it).  During this time period, the S&P 500 was down 48% and a “diversified” portfolio of 70% stocks, 20% bonds and 5% short term investments was “only” down 34%.

Then they looked at the brief two month period of March and April of ’09.  During this time, the all-stock portfolio (an S&P 500 mutual fund) was up 19.2%, while the diversified portfolio described above was up only 11.7%.

And they claim victory from this?

In the down markets, the diversified portfolio suffered 70% of the losses, and in it only made 60% as much when the markets turned up.

This is the promise of diversification—slightly smaller losses in bad times and substantially reduced gains in good times.

The bottom line is that mutual fund companies and almost all financial advisors are stuck defending a model that is broken.  Buy and Hold strategies just do not work in markets that we have seen in the past 10 years.  Buy and Hold is an outdated way of managing people’s portfolios.  And the mainstream retail financial community will not admit it because they have a vested interest in propagating the myths that surround Buy and Hold.  They will continue to publish ludicrous articles that claim victory where none exists as long as the regulatory structure and plain old inertia keeps them clinging to a broken and outdated model.

In future articles, we’ll explore some simple and some more sophisticated alternatives to Buy and Hold. Until then...

Great Trading!

D. R.

About D.R. Barton, Jr.:  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".

Q&A

Welcoming a New Member to the Van Tharp Staff

Welcome to RJ Hixson

RJ Hixson has been hired as VP of Research for the Van Tharp Institute.  RJ has completed the Super Trader Program, which means he understands what we are trying to help people accomplish.  In addition, he has an MBA and a marketing and high tech background—all of which are great additions to the team.  With RJ’s presence we’ll be able to expand our Super Trader program and workshop curriculum, plus move into the latest technological breakthroughs with more ease.  We are excited to have him as part of the team at the Van Tharp Institute!

A note from RJ:

Hi,

Somewhere I read that when starting a business, it’s best to pick the customers before you choose a service to offer or product to make.  That advice has stuck with me and gratefully, I found an employer whose clients are more fascinating, worldly, and conscious than any other group of people I have ever met.  It’s a great honor that I’m here, and I look forward to serving you.  (Like his customers, Van has an outstanding staff with whom it’s a true pleasure to work).  I’ll be helping them develop new products and workshops that you’ll start to see next year.  I’ll also help organize the Super Trader Summit in December and provide some support to the Super Trader program as well.

For what it’s worth, here’s a short, short bio:  I am blessed with one fantastic wife and two wonderful children.  My parents raised me in Virginia.  After college, I spent 6 years in the Air Force traveling the world.  After returning to school, I worked for a series of companies including an e-commerce company that filed to go public in March 2000—guess what happened to that one?  For the last eight years, it’s felt like I’ve been traveling the world again but this time for IBM.  That was an excellent experience and a great company (from which I gratefully accepted an early separation package a few months back).  My primary professional roles have been in product marketing, sales, and business development, so I get to apply that experience here. 

As for trading, my first trade was a bond purchase sometime in middle school.  Then in high school, I placed my first stock trade.  Since then, I have traded different markets on and off until about five years ago when I decided to “get serious” about my hobby. 

That’s about the time I read about a trading coach named Van Tharp in the book Market Wizards.  After reading a few of Van’s books and working through a home study course, I attended some his workshops.  At Peak Performance 202, Van assigned me a 500 word dream life statement.  It’s funny that working for him now fulfills part of that dream life.  I wrote that my ideal day would include trading for about half the day and for the other half, I wanted to help small business owners through consulting and teaching. So now, most of my early mornings and late evenings (ah, the peace of sleeping children) are spent working in or on my trading business and then during the day, I'm helping traders with their business.

I truly look forward to working with you.  If you have any feedback, I seek and welcome your comments. Email me at RJ "at" iitm.com (just use the @ symbol between RJ and IITM).

Van Has a Question For Kiwis

I'm considering scheduling workshops in 2010 in New Zealand. Do any of our New Zealand clients know if New Zealand has the same restrictions on technical seminars that Australia does?

Feedback

Ask Van...

Everything that we do here at the Van Tharp Institute is to help you improve as a trader and investor. Therefore, we love to get your feedback, both positive and negative!

Feel free to click below to leave us any comments so that we can serve you better. Or, send Van a question that you would like for him to answer. 

Email us  suggestions@iitm.com

The Van Tharp Institute does not support spamming in any way, shape or form. This is a subscription based newsletter.

To change your e-mail Address, click here

Or, paste this address in your browser: http://www.iitm.com/privacy_policy.htm

 The Van Tharp Institute
102-A Commonwealth Court, Cary, NC 27511 USA
800-385-4486 * 919-466-0043 *  Fax 919-466-0408

Copyright 2009 the International Institute of Trading Mastery, Inc.

Quote:
The great enemy of the truth is very often not the lie, deliberate, contrived and dishonest, but the myth, persistent, persuasive and unrealistic. 
~John F. Kennedy

Buy Now

Free Downloads

Handbook for Traders and Investors

Free Trading Simulation Game

A computerized version of Van's 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.

Share this newsletter with a friend!