Tharp Continued: Maxing My Strengths

This is the first follow up to my post Tharp Trader Test.

recap

After completing the Tharp questionnaire I was sent a personal report. I came up as "Facilitative Trader", which according to Tharp means that of the 3 core trading qualities above I have 1&3 but will need to work on 2. Making decisions based on logic and analysis.

The report starts by recommending 3 articles to ensure that I am making the most of my strengths, these are what this post will cover.

strengths

1. Energy and Creativity: not afraid to try new ideas, good at coming up with new ideas. Creativity best applied to systems ideas, need to understand all that’s required in a trading system...Read the Article “What Is a Trading System?”
2. Ability to Pull the Trigger: don't require extensive back/live testing to execute your trading ideas.  I need to understand that my ideas really are beliefs, read the article. Read the Article “Your Beliefs About Trading”
3. Quickly Develop Trading Ideas: Your ideas will continue to come easily and naturally if you remain in the flow of the markets. To see what that means, read the following article. Read the Article “The Flow of the Markets”

strength 1: working on my trading system

This was quite a long article, I will try and keep things as brief as possible but initially Tharp talks about Robert Kiyosaki's Cash Flow Quadrant. This I found very interesting and would like to spend a little time on.

defining self

1. Employees: run systems created by businesses but often don't understand that they're even doing so. They are akin to the investor who wants to be told how to do everything.
2. Self Employed (ME): are motivated by control and doing it right. Cannot see the system because they are so much a part of it, the more they work the more tired they get. Stuck in all the details, have a strong tendency to want to "complexify" things, always looking for perfection believing that the perfect system must be complex. They will likely have a discretionary system that is constantly being changed.
3. Business Owner: Creates simple systems to run the business then delegates. Usually does very well in the trading arena, would hire someone to run the system at a much lower wage.
4. The Investor: Looks for returns of 25%+ and no work. Kiyosaki says rich people typically derive 70% of there income from investments and 30% or less from wages.

This alone has been an eye opener for me. I have already been...

• Adding more trade plan rules(systems), like a "business owner", to get me further out of the in-trade decision making process and hopefully a little more like a "system following employee".
• Despite having to run the system, as I have no staff, ha! I'm trying to take a step back to remove the need to be in control by putting surplus energy into other areas, ie blogging.
• To try and avoid the desire to "tweak" I have a set a time of day that I can look for trades.

trading strategy essentials

Tharp then goes on to describe exactly what a Trading Strategy should contain, that being...

1. A market filter, 2. Setup conditions,3. Entry signal, 4. Worst case Stop Loss. 5 Re-entry when appropriate. 6. Profit taking exits. 7. A position size algorithm 8. Multiple systems for different market conditions

The fact that I have nothing to do here is entirely thanks my coach Paul.

business plan essentials

The next thing Tharp talks about is what you need in your business plan...

1. Executive Summary, 2. Business Description: mission, history, services(growth of cap and risk control), operations, equipment needed, location, organization and management of employees.(I have but needs adding to). 3. Industry Overview and Competition: needs work on! 4. Self Knowledge 5. Trade Plan 6. Your Trading Edges: self explanatory (I have but needs adding to). 7. Financial Information 8. Worst case Contingency Plan.

developing a system

Tharp then offers some tips on developing a systems...

1. Defining who you are. 2. Objectives: define what you want the system to achieve 3. Calibration: what are your performance bench marks? what are your criteria for knowing it is working? how will you make decisions when your criteria are met? 4. Tips: Work out how you will make decisions ahead of time there should be a mechanism and a range of contingencies (got). we want robust simple plans that can cover a wide range of conditions.

strength 2: understanding my beliefs about trading

Tharp says "you do not trade the markets- no one does... what your really trade are your beliefs about the market... (and) your ability to so is tempered by your beliefs about yourself". So you trade your beliefs but your beliefs can screw you, great!

belief exercise

1. Write down your beliefs about yourself, its okay if this is difficult, just start. 
2. continue this exercise each time you open, manage or close a trade.
3. keep this up until you 100+ statements about yourself.

strength 3: the flow of the markets

Paraphrasing from Tharp: "The market is like a river. The river just is, no matter how much you struggle, it moves downstream and nothing you do can change that. Your struggle "is the need to be right", to chose the right trend, chose the right turning point, chose the right SL, chose the right profit target. But these psychological needs obscure the obvious solution: Letting go. The market is not going against you personally, the market is simply moving. The market isn't the problem, the" trader's struggle" with the market is. When you realise the problem stems from you, then the solution becomes obvious, just relax and flow with the river". 

This a lovely metaphor that more than hints that we should be happy to concede. I don't disagree with this however I would say sometimes it is hard to know whether you are conceding out of fear, or out of "respect for flow". 

It therefore stands to reason you need clear rules/guides to identify "fighting flow" from a trade that's still valid. I'm happy but will revisit my rules that tell me what the trend is and when a trade has failed but I need to work on my rule that tells me when a trade has topped. These would provide a good indicator to when I am fighting the market.

Hold or Fold

copyright FT Weekend Magazine

intro

Just read an article by Tim Harford in the FT magazine titled "The odds are you won't know when to quit". You can read it here.

He talks a lot about "loss aversion" which I had always thought lead to a lack of participation in order to avoid losing, think I got that from a Curtis Faith book. Where as Harford says "it can lead us to cling on pig headedly to bad decisions because we hate to stop playing when we're behind". Meaning we actually hang on to loss, he states the TV show Deal or No Deal as a good example.

my trading worries

The article struck a chord with me, not due to the outcome of individual trades but more to do with trading as a profession.  I often think "when if ever is trading as a career going to happen for me? And how am I going to know if I should throw the towel in?"

options

Harford saw 3 options.

1. "look resolutely away from sunk costs and towards future prospects". I feel this is verging on gambler's hope.

2. "persevere flexibly rather than stubborn", which he likens to having to choose between 2 evils.

and his favourite...

3. "view decisions as experiments... viewing a decision as an experiment gives a useful perspective because experiments are always designed to teach us something. We can keep asking: what have I learnt? And am I still learning? If a new project or activity keeps teaching us new things, it is probably worth continuing - even if the lessons are sometimes painful". I see his point and will be working "what have I learnt" into my Strategic Business Plan as a guide to whether I should be persisting in these endeavours. 

Maintaining My Edge

copyright roblox

intro

Recently I posted a GBPUSD short I exited prior to NFP, I had the option to tighten and lighten but with the pending volatility and the trade just nudging break even it just didn't seem worth the risk/gamble.

going deeper

Now what is interesting is that all the more experienced traders I spoke to were fine with me killing the trade but first recommended keeping it. Kevin of Forexiation was particularly insightful. He treats "major news as a "50/50"... (If) I have a trade open just before a news event and can win a reward of +1R or over at the current price, then I'll usually stay in it, mathematically, if you have a 50% chance of winning anything over 1R reward, it's a good bet... If I only stand to win a reward of less than 1R, then I might close the trade or move my SL to breakeven. (while if I am already a good way to my target, 75%ish) I would probably... close the trade before the news as I have a 50% chance of winning (25%), or 50% chance of losing (75%)."

Now getting back to topic, in the lead up to making this decision I had experienced a bit of what I shall call "gambler's hope" which caused me some concern. What I mean by this was "ooooh, that data might really hurt my trade!... but maybe the data will push the trade my way?"

I'm not beating myself up, hope is not in itself awful, but it is an emotion and I find when I'm emotional it is far harder to be objective. Objectively speaking the trade may still have been valid as my trading friends suggested, however because I was emotional I was unable to see the truth, that it was a 50/50 event and act accordingly. This got me thinking...

what other ways can I be losing my edge?

This lead me to thinking about what my coach, Paul Wallace teaches. The 4Ms, Method, Money, Markets and Myself. He explains that the sweet spot is found when you get all these plates spinning. It occurred to me that if these are the areas to find an edge they will also be the places in which they are lost and should be accounted for in my tactical trading plan.

money

...and shall we say risk management: If we are exceeding either one of our money or risk management principles we are very easily going to lose our edge!
TTP Action: This is already accounted for in the TTP, however if for some reason this is incorrect, I need to close trade immediately. Trying to correct an oversized position and maintain exits that are technically legitimate is very difficult.

method

Assuming that your method provides an edge on the market, it stands to reason if you are not following it, or pushing its principles you not working your edge.
TTP Action: Again already accounted for in the TTP, however if for some reason this is incorrect, I need to close trade immediately. I'm not trading my edge so I can't learn anything from the results as I have nothing to compare them to.

markets

Perhaps a little harder to define. However if we assume you are respecting high and low season (leave in May and stay away) and that you have a some kind of filter to identify the best markets to invest your capital... If you find yourself trading in disregard to either of these your edge will certainly suffer.
TTP Actions: Again already accounted for in the TTP, however if for some reason this is incorrect I have 2 options. 1. If in low season I find myself trailing my stop, swap to target. 2. If however I find that I am trading a market/pair that does not meet my filter parameters, close immediately.

myself

Speaking to some experienced traders they suggested I watch out for "Greed, fear, distraction. tiredness, boredom over trading ,focussing purely on the trade set up, not the big picture, overconfidence and revenge trading " to me these are all examples of a loss of objectivity, losing objectivity will dull our edge.
TTP Action: This has not yet been accounted for in my TTP and I wish to add... Once you start to feel emotions, try to recover objectivity by thinking of the trade in odds/probabilities, if this can not be achieved shortly after your acknowledgement then you should close the trade immediately.

GBPAUD Short R-1 DHT

Before I start I just want to clarify DHT stands for "Dick Head Trade".  I'm sure you can now tell the direction in which this post is heading...

On doing my weekly prep I found GBPAUD to be in MOTR S (strong selling), experiencing a deep pullback to W1 supply and had printed a smallish pin (my least favourite) which I choose to sell,  all technically sound.

However I hadn't checked the data for the week and so ended up buying AUD about 2 hours before an RBA interest announcement,  hence "Dick Head".

P/L: R-1.0     Exe: 1     Per:1

R+0.1 GBPUSD Short

So earlier in the week I found that the GU was in MOTR S (a nice down trend) and had experienced a deep pullback to a W1 supply level, I waited for a entry signal, which turned out to be a Bear EP and took a short with a 70% stop as the pattern was quite large.

Perhaps if the trade had gone more in my favour by Friday morning I would have held through NFPs. But I mentioned to Paul and Reg that I was feeling a bit of "hope" and they noted that usually means you've lost your edge, which certainly matched the inner voice I was trying to silence.

Both suggested tightening the SL and PT and lightening up. But as I was already going for quite a small target of 261.8 it didn't really seem worth the risk.  Perhaps if 423.6 legitimately had a chance of being reached I would have felt differently but there were a lot of steps in the way. So I closed the position for break even Friday morning.

P/L:R+0.1    Exe:4     Per:3

Tharp Trader Test

Copyright © 2016 Van Tharp Institute for Trading Education. All rights reserved. 

So my coach suggested that my fellow students and I do the Tharp Trader Test. If you're interested you can take it yourself for free here.

I thoroughly recommend it, I have only just received my personalised report but am already gleaning useful information from it. Not only that but I am being pointed to follow up material to help correct the areas I need work in.

According to Tharp there are 3 Core Trader Qualities to have...

Copyright © 2016 Van Tharp Institute for Trading Education. All rights reserved. 

I came up as a Facilitative Trader and accordingly have qualities 1 and 3,  so will need work on 2, "Making decisions based on logic and analysis".

In honesty this blog works much like my personal trade journal/diary, so what follows is more for my records. However you're welcome to read on if you desire. My immediate task will be reading the suggested articles for each "strength" and "challenge" Tharp has listed.  I will likely write an additional post in the future with what I garner from the lessons.

NB: Much of what follows are Tharp's own words, these are indicated in italics and are only reproduced as an aid for my learning from the personal report I received from The Van Tharp Institute.

My strengths according to Tharp are...

• Strength #1 – Energy and Creativity : I'm " not afraid to try new ideas and are good at coming up with new ideas." but this creativity is "best applied to systems ideas that you will be interested in testing and trying." so I "need to understand all that’s required in a trading system. Read the Article “What Is a Trading System?”
• Strength #2 – Ability to Pull the Trigger I "do not require extensive backtesting or live testing to execute your trading ideas  and my  "courage to start working them right away is useful to a trader" but i need to understand that my "ideas really are beliefs and how that distinction is critically important, read the following article. Read the Article “Your Beliefs About Trading”
• Strength #3 – Quickly Develop Trading Ideas I" have the ability to come up with tradable ideas very quickly" and "this will seem quite easy for you"  but I need to "remain in the flow of the markets. To see what that means, read the following article. Read the Article “The Flow of the Markets”

While my weaknesses are...

• Challenge #1 – Need for External Confirmation I "may feel a need to get external confirmation of your ideas, your systems and beliefs, which can be detrimental to becoming a successful trader." I need to "Learn how to develop the inner confidence and the other requirements needed to trade consistently successfully or what I call “Peak Performance Trading”. Read the Article “What Is Involved in Peak Performance Trading?” 
• Challenge #2 – New Ideas I am  "always coming up with new ideas that you want to apply to trading systems that are already working and can subsequently screw things up". and I "could find it hard to trade it because of mistakes." I need to  "Understanding the purpose of trading systems and their role in pulling money out of the markets is the basis for the following article. Read the Article “Paradigm Shifts for Trading Success” 
• Challenge #3 – Needing Excitement  I need to understand that "Good trading tends to be boring but you have a need for external excitement." and  "It is imperative that you have an outlet for this excitement; otherwise, you will bring it into your trading. Rather than profitable, excitement in trading is most often very expensive. Complete the “Compulsive Trader Test” 

R+2.9 GBPCHF Short

Hi all, sorry for my "Trade Journal" radio silence. As mentioned in my last post I had a bit of a rough time in March, taking 14 losses in a row. The lowest Timeframe I'm trading at the mo is D1 to try and avoid "over-thinking / over-analysis". I will get smaller again but for now want to keep my mind clear and I find that easier by not looking at the charts all day.

This is my first trade back. Not perfect, used a 100% stop instead of a 60% so I could limit risk should it go against me, so some fear in there from the start. Also got very twitchy as price approached my target and ended up taking a 1:2.5 instead of the planned 1:3 target. I did add on the Ross Hook which helped bring the overall return to R+2.9 on this GBPCHF trade.

Hopefully I can work on my execution next time.