Apparently, the Federal Reserve commissioned a study on the condition of the United States Government. That study was finished and released a few weeks ago and concluded that the United States is bankrupt and that the remedies for saving it are so drastic that it just won't happen....triple taxes cut spending so dramatically that most programs would have to shut down.

The problem is debt. I've been tracking the debt issue in my monthly update Tharp's thoughts. I concluded that the total debt was between 35-40 trillion dollars and couldn't see how we were going to get out of that. However, the economic professors who did the study concluded that our debt was much worse... More like $67 trillion. They basically said that only a country that had the reserve currency of the world could get itself in that deep of a hole and that suddenly (but who knows when) we'll find that other nations will stop accepting the dollar as the world's reserve currency and then we'll really start to feel the consequences of the problem.

I don't know how this one will play out and I haven't seen the studies yet... So stay tuned. Incidentally, this information came out right about the time that Israel rolled into Lebanon, so the media was distracted from something that probably would have been major news. Hmmm!!!

By the way, last week was the best week for the stock market all year. Perhaps my friend was right about the market being poised to turn around. However, if that's the case, then it's a purely short term phenomenon, but that's just my opinion based upon the long term perspective of the market.

Posted by Van K Tharp at 06:47 PM | Permalink | Comments (1) | TrackBacks (0)

Comment: Your July 4 entry is instructive, but does not hold together. You mention risking $1000 on each trade, yet you have two examples of losses of $2,000 and $1,500. Per the "rules" of your example this could not happen, you would have been stopped out at $1000 loss.

My reply: Just because you have stops that should get you out at a particular levels doesn't mean that you will get out at that level. First, the market will definitely gap against you from time to time. A stop order is generally
designed to get you out at the market once the stop price is given. However, anyone who uses stops on a regular basis will soon learn that you will quite often have losses that are much bigger than your stop.

I usually estimate that such happenings should not be bigger than 2R -- although they could be. If you were in silver when the government changed the rules because the Hunt Brothers had cornered the markets, the markets basically were in a free fall to the downside with no way to get out. This can easily happen in the futures market with limit down days in which no orders get filled because there is such a demand to sell with no buying demand.

Lastly, psychological errors and mistakes will always creep into people's trading. I usually consider losses of 5R or greater to be psychological losses. Yes, the examples are accurate because you can easily have losses bigger than your stop.

Posted by Van K Tharp at 02:52 PM | Permalink | Comments (1) | TrackBacks (0)

One of my good friends, who is well-known for the newsletter he writes, put out a recommendation this month to buy the NASDAQ. He called the trade a sure thing and made the analogy to Jimmy Rogers saying that he only invests when the money was lying in the corner waiting to be picked up.. And my friend wasn't the only one to say "buy now." I'm seeing it all over the place from different investment newsletters.

My personal bias is that things look about as bad as they can be. There might be a short term rally, but certainly nothing significant and that the major direction of the market for a while is down.

So what does it mean that so many people are saying we're due for a rally? If you are writing a newsletter and your recommendations are starting to lose money, you don't want people to get upset. Consequently, you tell them that the market is going up and now is the time to buy. Worse case scenario is that the market continues to do what it is doing, going down, and your clients lose more money. But at least you've bought some more time.

But let's say, you get excited about such a recommendation and want to do it. The worst thing you can do is put all of your money at risk in such an investment because someone said it is a sure thing. My friend said to buy a double leveraged fund based upon the NASDAQ. If it goes up, he'd take profits when it's up 60% (i.e., when the NASDAQ is up 30%) and he'd sell if it's down 15% (i.e., when the NASDAQ is down 7.5%). Even though I don't like the recommendation, it is still a low risk deal. First, the potential gain is four times the potential loss. If the NASDAQ goes down 7.5%, my friend will say, "OK I was wrong lets get out" And if he's right, he makes 4 times his risk.

If you plan to do such an investment, however, you need to be very cautious about one thing in particular -- position sizing. Don't risk more than 1% of your portfolio in such a trade. Let's say you have a $50,000 portfolio and you only want to risk 1% or $500. If you invest, $3333 in this investment, and only take a 15% loss, then you've only risked 1% of your portfolio. Risking one percent on an idea with a potential 4% gain. Is usually a pretty good idea. And even if you are wrong 60% of the time with such ideas, overall you'd still make money. However, that is the only way to play such an idea. IT IS NOT SURE MONEY WAITING FOR YOU TO PICK IT UP.

But that's just my two cents worth.

Our model portfolio, started two weeks ago, had 7 short entries and three long entries. As of 3PM today, all three long entries were making money and six of the seven short entries were making money. Plus it looks like we'll be stopped out of one of the shorts for a 1% loss. But despite the loss, the overall portfolio is up over 2% in the two week period.

Posted by Van K Tharp at 08:00 PM | Permalink | Comments (4) | TrackBacks (0)

The key to profits is to take LOW-RISK ideas and I've already defined what that means.

Academia has put out that if you want to make a lot of money then you must take a lot of risk. I think that its BS and that the academic community has had a hard time justifying it's stance.

Lisa - your comment simply reflects the academic viewpoint.

Posted by Van K Tharp at 09:38 PM | Permalink | Comments (0) | TrackBacks (0)

The key to profits is to take LOW-RISK ideas and I've already defined what that means.

Academia has put out that if you want to make a lot of money then you must take a lot of risk. I think that its BS and that the academic community has had a hard time justifying it's stance.

Lisa's comment simply reflects the academic viewpoint.

Posted by Van K Tharp at 09:35 PM | Permalink | Comments (0) | TrackBacks (0)

I was watching one of the poker professionals on the television and he said, "I would never risk my family (i.e., his entire stake in the tournament)unless he was sure he had the absolute best hand possible." And I think this is one of the big differences between professionals and amateurs. Amateurs will see a high pair and risk everything on it, not realizing that they have about a 20-30% chance of surviving if everyone at the table were to call. Some of my biggest disasters happen when I get QQ and when the first three cards are shown, perhaps I see J, 6, and 3 -- all of different suits. At that point, I might be willing to go all in with my hand. However, what could still beat me at that time (AA, KK, and a pocket JJ, 66, or 33). So that's five better hands than mine -- its not the best hand and that's why about 20-30% of the time I get really hurt by it.

You really need to think about what's out there (in poker or the market) that could really hurt you.

Posted by Van K Tharp at 06:23 PM | Permalink | Comments (1) | TrackBacks (0)

Re the comment: a trader going from $10k to $250k+ What causes the trader to lose it all and then be able to get it back? If he can trade so successfully and be profitable, what is the psychology that allows he/she to go through these stages?

I think you are really asking the wrong question. The person who goes from $10,000 to $250,000 or from $100k to $1 million is taking huge risk and doesn't understand position sizing...eventually they will go bankrupt if they keep it up. And yes, they may do it again, but that doesn't mean its wise or prudent. It probably means they love the excitement of the market, which also isn't a good trait because good trading is boring. It comes from having a business plan and treating trading like a business. It comes from have several good, uncorrelated strategies that fit the big picture. And most importantly, it comes from continually working on yourself to avoid mistakes and to keep from repeating them.

That being said, look at the earlier blogs on Tharp fundamentals. It's not that hard to develop a system that will make you 100% per year. But that means that it might take you four years to turn 100K into a million. However, most people cannot do that because they don't have enough self-responsibility or understanding to eliminate their mistakes. So far, our data indicates that each mistake you make averages out to a 4R loss for your system. Most people cannot overcome making such mistakes, no matter how good their system might be.

Posted by Van K Tharp at 03:55 PM | Permalink | Comments (2) | TrackBacks (0)

Good poker is actually very boring. If you are in a tournament with about 1000 other people, it will probably take you 4-5 hours to get to the end of the tournament at Internet sites (and perhaps a day or two in live
tournaments with a dealer). During that time, if you are good, you probably do not play more than 30% of the hands you see. Professionals actually say that people who play more than 30% are very aggressive and could be setting themselves up for disaster by playing less than mediocre hands. You could go hours without playing a hand. Perhaps you'll start to play a few hands, but then you'll have to fold because someone raises a hand you have that is not particularly strong.

But when the action does come it can be very dramatic and exciting. It's a real down when your AA loses to QQ because the last card turned up is a Q. It it's really great when you get that Q. People thrive on the ups and
downs of playing.

Good trading is equally boring. In fact, if you do it right and just follow your system, there is none of the excitement of the few extreme moments in poker. Well, perhaps you might get excited when a stock goes up
(or down) 5-10 points in a day.

I've been researching personality types and trading and there are many types of traders who cannot tolerate the boredom of good trading. They must have some excitement. And if they don't find it in the markets, then they'll
make it for themselves. The results are usually disastrous. And if you put all of your chips at stake whenever someone raises, no matter what kind of hand you'll have, you'll also get a quite bit of excitement (probably extreme
disappointment) but it will probably end early with you being eliminated from the tournament.

The same goes for trading - how often do you throw position sizing fundamentals out the window and risk more than you should?

Posted by Van K Tharp at 06:54 PM | Permalink | Comments (1) | TrackBacks (0)

Excerpt from an on line trading newsletter: On Friday only 6% of the components in the Nasdaq 100 (NDX) closed above their respective 10-day average, and only 10% closed above their 50-day. That's a special kind of washout, and it's been rare to see over the past decade. In the nine times this decade we’ve seen such washouts, the NDX was higher three months later, and by an average of over 30%.

My opinion: It's almost a psychological phenomenon... over and over again, I'm seeing these email letters saying the QQQQ has hit a new low and will bounce back. This one is really funny because all of the examples come from the secular bull market. How about saying every day during 2001 to early 2003 when the NASDAQ was hitting new lows, we certainly didn't see the market 30% higher within a few months. This is really dangerous thinking. But if people read enough of it, they'll think its true – simply because the experts said so.

Posted by Van K Tharp at 06:15 PM | Permalink | Comments (0) | TrackBacks (0)

What's the most important entry blog I've made so far? Well, it again depends upon your persepctive.

Most people think that success is all about predicting the market and picking the right investment or trade. If that's your perspective, then the most important entry so far is the blog on my outlook for the market (assuming you think it is correct). However, our research shows that picking the right investments is the least important aspect of success. And predicting the market is equally unimportant... you merely have to notice what the market is doing and that's pretty obvious, "It's going down.

Instead, our research shows that success has everything to do with psychology, treating trading like a business, and developing systems that fit who you are. And if that's the case, then my most important entries are the first ones... which give some of the essence of my core thinking and the entry on "how to make a living as a trader." That entry may seem "promotional" to some, but if you take the essence of what I said, without reference to IITM products, its probably the most important entry I've made to date. It's the essence of what I ask my SuperTraders to do.

Posted by Van K Tharp at 11:47 AM | Permalink | Comments (1) | TrackBacks (0)

One of the comments to my poker entry mentioned how good an Ace is heads up. Well, we now have the data. on heads up from 10 million simulations. When there are ten players, A2 ranks 101 out of 169 possible hands. However, when there are just two players it ranks as the 46th best hand.

It just shows how important the context is.

Posted by Van K Tharp at 11:40 AM | Permalink | Comments (1) | TrackBacks (0)

In Tharp’s Thoughts this week – I talked about my new efficiency trading system. Since then, some people have emailed me asking exactly how I screen for efficient stocks.

The purpose of the efficiency screen is to determine what stocks are going up in a straight line. I don't plan to share my specific formula, because then people will be asking, "Why didn't you do this or why did you do this?"
The purpose is to find stocks that are going up. You can find that with any trend following filter. And any such filter will still require that you screen the charts of all the stocks that the filter brings up.

If you'd like such a filter, then it's described quite well in Safe Strategies for Financial Freedom. Efficiency filters are also described in Trade Your Way to Financial Freedom.

Lastly, my business is to teach you how to fish, not to hand you the fish.

And the purpose of the efficiency filter is to give you an example of how to lay out a system in terms of beliefs and how to test in real time. Thus, for people who ask for an entire list of stocks, that's handing you the fish and that's not what we do at the Van Tharp Institute.
Van

Posted by Van K Tharp at 12:10 PM | Permalink | Comments (1) | TrackBacks (0)

Lately I've been getting lots of "newsletter" emails saying that the market is about to take off because sentiment about the market is getting low." People are very pessimistic and that is a great time for the market to turn.

This might be a little like the same emails that said, "be careful of the gold market because we are due for a correction." Those emails came at a time when gold was about $550 per ounce, on its way up to $725." In fact, when the correction did occur, about two months later, it corrected to about the levels at which the pundits were predicting the correction would start."

So let's look at what's really going on.

1) We're in a secular bear market in which price valuations will generally go down -- possibly for another 10-15 years.
2) That secular bear market will not end until we get single digit PE ratios.
3) We've had 16 (that's SIXTEEN) interest rate increases with no real negative effect on the market.
4) Let's assume that this secular bear market has an Elliot Wave feel to it.
If that's the case we've had one primary down wave (2000-2002) and a correction upward (2003) and 2.5 flat years when PE ratios continued to decline (2004 to date). What we have not really experienced yet is the next down wave.
5) The down wave may have started in the Spring. I certainly don’t see any sign of a turnaround. If fact, the down wave has not even started to hurt most traders yet, and down waves usually have a very painful feeling about them.
6) Crisis always means opportunity and there will be plenty of opportunity in the commodity markets, in my opinion. And you can buy commodities these days through stocks and ETFs.

Van

Posted by Van K Tharp at 10:00 PM | Permalink | Comments (0) | TrackBacks (0)

"I am always asked what makes a successful trader? It's not just one thing, I actually separate it into three parts. In one sense, it's 100% psychology because its all about your beliefs and your performance. We've actually developed a workshop called the "17 Steps Workshop" that basically provides a blueprint to all the steps you need to take in order to be successful as a trader.

Today's blog will give you information about this blueprint as well as some information about various products that I have for traders that can help you if you wanted to dig deeper into these steps.

Part one is about developing a business plan to guide you. You must know who you are, you must set objectives, you must really understand your thinking and your beliefs, you must lay out the big picture, you must develop all the systems you need (and not just trading systems), and you must develop a worse case contingency plan. For help on business planning, I have a CD series which even has some sample plans at the end. In addition, I consider completing the Peak Performance Course, so that you really know yourself, to be essential for this step.

Part two is about developing strategies that fit the big picture and strategies that will work if the big picture changes. I recommend at least three strategies here. Two that are non-correlated and fit the current big picture and one that you would expect to work well should things change. And since you can only trade your beliefs about the market, this step is very psychological. Recommendations for doing this step. First, complete the Peak Performance Course and then the Systems Home Study course. And if you prefer to attend workshops to get all of the information in an intense and concentrated format then you might also want to look at our systems workshop and our two peak performance workshops.

Part three is about working on yourself in an ongoing manner to continually evolve and improve your performance. Let's look at it this way. I think anyone can develop a system that makes 100% per year, but trading it to get that performance is something else. Why? As I've discussed below, people continually make mistakes and you must be able to correct those mistakes. And if you repeat the same mistakes over and over again, it's called self-sabotage and it means that you really need self-work. Again, here I recommend all the Peak material, and other supplemental material that we provide, such as A Course In Miracles.

If you want to know more about the 17 steps and the blueprint for trading success, then it would be very beneficial to actually attend the 17 Steps workshop. For example: in that workshop you get an outline of a worse case contingency plan that took one of my supertraders six months to complete. And the group usually doubles the size of it before the workshop is through.

However, I also plan to write a brief outline of each of the 17 steps in future editions of my own personal newsletter which is called, Tharp's Thoughts. Thus, if you are not on our particular mailing list to get that free newsletter, then I'd recommend you start today. You will need to go directly to www.iitm.com to do this.

For a basic background on all of my concepts, I'd recommend that you read each of my three books which is a great way to get started

Van

Posted by Van K Tharp at 06:06 PM | Permalink | Comments (0) | TrackBacks (0)

In response to my comment that part of the reason we trade is the challenge of losing, one person commented, "Who wouldn't want to win 100% of the time?" But if this was your response, then I think you missed the point of my discussion. Yes, everyone would like to step into a situation in which you could never lose. But how long would you continue to regard it a challenge? How long would it hold your interest? Perhaps you are driven by money so you'd trade until you had a billion dollars...or even 100 billion. But at some point, you'd decide, "What's the point?"

It's the challenge of being the best that drives people. And if there is no challange, you 'd move on to some other endeavor that creates a challenge. I certainly wouldn't play poker if I won every hand. I'd find it boring. And if I made money on every trade, I'd probably trade enough to have a comfortable income and that's it...I'd find some other challenge.

In fact, I aleady play poker with a group of people at an entirely different skill level. So to keep it somewhat challenging, I basically tell them that I'll never bluff. And even then I still win most of the time and as a result, it doesn't have the same charge as when there is the possibility of losing everything on a given hand.

Think about it because what I'm talking about says a lot about the human condition.

Posted by Van K Tharp at 05:56 PM | Permalink | Comments (0) | TrackBacks (0)

I started looking at the top poker hands that I play in terms of how often I play them and how well I do with them. And what I found out startled me. First, I know that hands consisting of an Ace (A) plus another card of a different suit (below a ten) are not nearly as valuable as most people think. But what I found out is that even though I know that, I'm still more likely to play them.

Let's look a two examples. The first one is A9 unsuited. It ranks as the 63rd ranked hand (out of 169 possible holdem hands), but I played it more than any other hand ranked above it. Hmm.

Or how about A7 unsuited? That hand is the 82nd ranked hand.... so near the middle of pack. But I've played it 8 times. In contrast, let's look at another hands that's much stronger, but doesn't stand out -- K7 of the same suit. It's the 42nd ranked hand, but I've never played it. Now it's possible that I've never seen one, but it also much more likely that it didn't stand out and a hand I wanted to play and just threw it away.

So one is much more likely to play hands that stand out and much less likely to play stronger hands that don't stand out. And if that applies to poker, it certainly applies to trading. What happens when a stock is recommended on CNBC. It might be a dog of a stock, but it suddenly stands out, and people are likely to buy it.

Van

Posted by Van K Tharp at 10:55 PM | Permalink | Comments (2) | TrackBacks (0)

I love playing poker and one of the reasons is that I think it's very much like trading. First, you have to assess your initial hand and bet it only if it is above average. Interestingly enough, most beginners play every hand and many people who think they are not beginners still play every hand.

Lets look at an example. I had a computer simulation run of 10 million hands of poker with 10 people playing to determine how likely any starting hand was of winning.

Incidentally, if you are a poker player and would like access to that data. I'm willing to share the cost of the simulation with about 10 people (i.e., about $75 each). If you are serious about poker, its a no brainer because very few people have access to this sort of data. If found a listing that claimed to be such a simulation in a book, but there was NOTHING accurate about their data. I think it was actaully plucked from air. Oh, contact me at our web site (info@iitm.com) if you have interest in the data.

There are basically 169 different starting hands and I now have them ranked in order and I bet that's information that a whole lot of people don't have. Those hands include 13 pairs. The suited combinations such as AJ suited. And the unsuited combinations. The best hand, of course, is AA. But how many times do you think AA will win against 9 other players if nobody folds and all the cards are dealt. The book I read said 86% of the time, but it was way off -- way off.

Most novices like to play Ace plus anything. But if you are talking about unsuited combinations, then only the combinations AKu, AQu, AJu, and A10u fall within the first 50 hands. And only A8u and A9u fall within the next 25 hands. And if you are talking about something like A2 unsuited -- it doesn't even rank in the top 100 hands (out of 169). Yet people play it all the time. It sort of like what happens when some analyst makes a recommendation on televion, most people want to buy that stock even though its probably a dog. Well A2 unsuited is definitely a dog of a poker hand.

Van

Posted by Van K Tharp at 05:59 AM | Permalink | Comments (1) | TrackBacks (0)

Self-sabotage is making the same mistake over and over again. The problem is that many people who do this don't even know they are repeating the same mistake. Why? Because (1) they can blame someone else for their results -- It was my broker's fault. Or (2) they can justify the results -- My system is no good or its hard to make money in this market. Or (3) they can even blame themselves without recognizing the error by saying something like, "I'm a stupid idiot."

If the problem is something like constantly overtrading or not keeping your stops or entering on a whim, etc.,then deciding you're a stupid idiot does nothing to fix it. Stopping the mistake is what fixes it. Or dealing with the underlying problem is what fixes it. And that's what we do at www.iitm.com. We help you recongize mistakes, fix them, or deal with the self sabotage.

Posted by Van K Tharp at 05:06 PM | Permalink | Comments (1) | TrackBacks (0)

If you can easily develop a system that makes 121R in a YEAR, then why don't most people make 100% each year?
The answer to that question is simple. PEOPLE MAKE LOTS OF MISTAKES. I define a mistake as not following your rules and if you don't have a business plan or written trading rules then everything is a mistake.

So here is how it works. Let say each mistake is worth 2R. Suppose you make 1 mistake each week. In a years time, you make 104R worth of mistakes. If your system only makes 121R - then because of mistakes you only make 17R. And most people, during a large drawdown, usually abandon the system totally and think they cannot trade it.

With that in mind, my whole Peak Performance Program is designed to teach people how to avoid repeating mistakes. And if you keep making the SAME mistakes, then that's what I call self sabotage. But that's another story.

Van

Posted by Van K Tharp at 12:50 AM | Permalink | Comments (2) | TrackBacks (0)

Now you know what expectancy is...it's the average R value produced by a system. So now you can get a general idea of what to expect from your system. If it produces an expectancy of 1.21R per trade, and you make 100 trades each year. Then on the average you should make 121R each year. If you only risked 0.75% per trade with that system, you should be able to make 100% each year.

Generally, I think it is very easy to develop a system that has the potential to return 100% each year, even though most people struggle with system development.

What's HARD is trading the system to get the full return. Most people make so many mistakes that they ruin the system. But that's another topic for tomorrow. And that's where the psychology of trading comes into play.

Posted by Van K Tharp at 11:02 PM | Permalink | Comments (0) | TrackBacks (0)

In the last entry I suggested that you express all your trading results as R-multiples. So let's say you risk $1000 on each of ten trades and you have the following resuls:

-400=-0.4R
-2000 =-2.0R
-600 = -0.6R
-800 = -0.8R
+10000 = 10R
-400 = -0.4R
-700 - -0.7R
-1500 = -1.5R
-500 = -0.5R
+9000 = 9R

So are these good results? You have eight losers and only two winners? Would you want to trade the two system?

Well, one of the keys to evaluating the system is its expectancy which is the mean R-multiple of the results. So if we add them up you'll find that the eight losers sum to -6.9R while the two winners produce 19R. Thus, our total results are plus 12.1R. And if you divide that by ten trades, you get an expectancy of 1.21R. That means that this system, on average, looks like it will produce 1.21R per trades over many trades. And 1.21R is the expectancy of the system.
More on what you can do with that later.

Van

Posted by Van K Tharp at 07:39 PM | Permalink | Comments (3) | TrackBacks (0)