van tharp’s favorite · 2020. 11. 6. · van tharp’s favorite systems s1912e ©2019...

Van Tharp’s Favorite Systems S1912E

©2019 International Institute of Trading Mastery, Inc. All Rights Reserved

The reproduction or transfer of this material is prohibited by the Van Tharp Institute student agreement

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Van Tharp’s Favorite

Systems

Presented at the Super Trader Post Summit

December 16, 2019

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Workshop Objectives

I have a number of systems in the past that I really like. Some of them are in the bear market workshop which will

become an Elearning Course soon. Some of them were given

in prior workshops and except for being in the playbook

never come to your attention. My first objective is to

introduce you to (or reintroduce you to) those systems.

Second, I’ve designed a format for looking at your beliefs in your systems that I think works better than the Belief

Examination Paradigm. Basically, you accept that idea that

the belief is not true but only useful in a certain context. And

then you start looking for the context in which it is true and

for those which it would not work at all.

Third, I want to show you how powerful this is by analyzing a system that no longer works and show you why (and why it

might work if you could take it back to its original format).

To introduce you to some systems that I understand and would easily approve for your business handbook if you do a

little research on them. I could potentially give this workshop

every year but just add new systems each year.

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Section 1:

Format for Systems Presentation

Objectives

Show you how the belief that you cannot trade the market

(it’s a process not a thing), you can only trade your beliefs can

combine with Systems Thinking to help develop better

Systems.

To give you a format for developing and documenting any system you want to trade.

Action Steps:

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New Format for any System You only trade your beliefs, not the market. What if you combine

systems thinking with the belief that “you only trade your beliefs

about something that we’ve invented called the market?’

One result is a new format for trading systems which we call the

Belief—Beyond the Matrix Thinking (BTMT) Format. Your

systems should answer the question given below. So, if you use any

system we recommend please use this as the format to present your

system.

Before you state any belief, you need to be aware of the level of

consciousness under which it seems to be true and what happens

when your level of consciousness changes (goes up or down). Also,

your response to any of the questions will be a belief and you need to

be aware of the conditions/context in which it is true.

Basic assumptions of Systems Thinking and Beyond the Matrix

Thinking

The whole (your system) is more than the sum of its parts.

There are multiple causes for everything. And at a level of consciousness above 500 – everything causes everything else.

No belief is true. It’s only useful.

Useful means it gives lots of value to you and others under as wide a context as possible.

The subjective is as important as the objective (Systems thinking) and the subjective could be all there is (Beyond the Matrix

Thinking).

Measurement is also invented. Does what you measure have the meaning you gave it when you measured it?

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Systems of mathematics are invented and seem complete but have

no particular use… and then someone

finds a context under which it works

(i.e., Einstein needed Riemannian

Geometry to mathematically work out

general relativity). Bernard Riemann

developed a geometry for curved space

which has little use until Einstein was

able to use it for General Relativity.

Note that making it mathematically

sound gives it some sort of validity. Question: Is that true for

systems?

Paul Dirac worked out equations to bridge the gap between quantum physics and relativity. His equations suggest that an

interesting possibility and the result was a theory that something

called antimatter exists.

Scientist feel that when you work out something mathematically and then find evidence to confirm, that it’s reality. Is it?

I developed the SQN as a way to measure an efficient trend. It was then used to measure market type. But does it?

Ken likes regression line crossovers (RLCO) and has developed trading patterns from his application of RLCO. Are they real?

Systems thinking is best approached though computer simulations and looking at things through multiple perspectives such as NLP

Unified Field Theory.

Multiple perspectives can include 1) perspective (i.e., system, God, observer, 1st person perspective, other person perspective and inner

parts).

Multiple perspectives can include logical levels (i.e., spiritual, identity, value, capability, behavioral, and environmental).

Multiple perspectives can include time (past, present, and future).

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The New Format:

Belief-BTMT Format

What is the Belief? ______________________________________________________________________________________________

What is your viewpoint on this belief?

1. What’s the edge?

2. Under what context? And when is it no longer an edge?

a. What market qualities (types) does it fit?

b. What market conditions would it not fit?

c. Is there something other than the market type that would cause it to not work?

d. What's the sentiment? Market psychology around the instrument?

3. What instrument? Is there hype around some particular asset class? Under what conditions is the hype valid and when is it not?

4. Opening a position. What are your beliefs about that?

5. Exits and controlling a reward to risk? R-multiples and maximum R possible and what kind of losses?

6. If it fits my objectives (can I use exits and reentry to maximize expectunity)?

7. What are your beliefs about exiting the market and no longer trading the system?

8. Objectives and how to achieve them through position sizing?

9. What time frame fits your objectives and you?

a. Time available to trade

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b. Expectunity you wish to make.

10. What could change it all so it doesn’t work?

11. Are my measurements really reflecting my beliefs?

12. How do my emotions come into play (mistakes)?

13. Do I have any conflicting parts over this?

14. What is the viewpoint of someone taking the other side of the trade? Is there something here I haven't thought about?

15. What is the viewpoint of the system itself, if it had a viewpoint?

16. What does your Inner Guidance (Divine) think of this system? Does it fit my mission/divine purpose? How?

17. How does my level of consciousness change this system? (If my consciousness were 600 versus 350 versus 100).

18. Do you have any conflicting parts?

19. Does this fit my values?

20. Am I capable of doing/following this system?

21. Do I have test results to prove the system? If so, then list them. If not, are you confident enough without them to trade the system?

What conditions (context) with respect to your belief are 100% sure to

change. The answer is all of them, because none of it is real. So, the real

question is, what contexts have a reasonable probability of changing

within the next six months? This question is important in terms of what

to become aware of with respect to changes in what’s going on.

As more beliefs come out of the system more applications of this format

become necessary. That is, your answers to these questions are simply

more beliefs.

Tang –context is just a metabelief (VT- meta implies it is a step up. So

for Tang’s belief to be true context it would have to be a step up over the

belief itself and I’m not sure that it is.)

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Items which might be context for your belief.

1. Market Type

2. You … if you can’t trade a system it won’t work

3. System assumptions are faulty and not useful in the first place.

4. The base currency in which you trade.

5. Technological change. How 5G, because of its speed, makes automatic

cars a possibility.

6. Technological base must stay in place (i.e., electric grid, internet, etc.)

7. Changing values by big firms. How Apple, Google, and Microsoft have

moved us 1) away from CDs, DVDs and large storage devices to renting

space from the cloud and streaming music.

8. Societal values

9. Long term changes in the environment.

10. Market availability (certain markets could become no longer feasible).

SEC says ALTCOINS are securities and should come under their

regulation and ICO don’t fit the bill here. So, most altcoins do not sell to

US Citizens for fear of the SEC and most exchanges are not open to USs

Citizens.

11. Legal environment

12. Long term environmental change

13. Cultural change

14. It works because people believe it and they stop believing it.

15. Some measurement is given a meaning and then becomes a basis of

knowledge.

16. Money game changes (i.e., negative interest rates; credit cards; electronic

money; crypto assets).

17. Power games played by companies.

a. Scottrade bought out by TD Ameritrade.

b. Suddenly Schwab was advertising no commissions on stocks and

ETFs.

c. Suddenly TD Ameritrade was doing that as well.

d. And then TD Ameritrade announces agreement to be taken over by

Schwab.

18. Perceived edge changes

a. Buy what’s going up and sell what’s going down.

b. Knowledge is an edge (i.e., insider trading).

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c. Time is an edge. If you can connect 100 milliseconds faster than you

can outrun everyone else’s orders.

d. Market making

e. Arbitration (temporary window which always gets closed).

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Applying the BTMT Format to a basic

edge in trading, so you can see the

importance of context and thinking

this way.

System:

1) Buy what’s going up.

2) Sell what’s going down.

3) Make sure you have 3;1 Reward to Risk ratio in your favor at the

beginning of the trade and that your reward to risk ratio during the

trade is at least 1 to 1.

4) Know your expectancy for each market type.

5) Based upon item four, position size to meet your objectives.

So, let’s look at context in which the first two beliefs work.

1) You have a bull or a bear market that makes #3 possible. Won’t

work if the market is not going up.

2) Won’t work if you don’t work trading the system (i.e., I’m not

worthy of making a lot of money)

3) Requires that a liquid market exists.

4) Requires minimal market manipulation.

5) Taxes must be favorable to trading.

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Section 2:

Ken’s Mutual Fund Switching System

Objectives

To show you a system that used to be great (i.e., 20-30% per

year returns with no losing years), and show you what happens

when one of the beliefs no longer worked in a wide context.

An example of the Belief-BTM Thinking Format in Action

Ask Yourself if it might still work in the original format for

which it was designed.

Action Steps:

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The Tortoise: Ken’s Long’s Original

Mutual Fund Switching System

Beliefs:

1. Big Money will show you where you need to put your money.

2. Big money is slow to react so we can move in and out ahead of

them.

3. You can classify sectors of money movement in various mutual

funds.

4. Look at the relative strength over the last three months, with a

double rating on the last month. This shows you where big money

is moving.

5. Invest in the top three with a 10% trailing stop on the 1st of the

month. Ideal is when last month’s picks are still good.

6. Results produced gains of 20-30% per year with no losing year.

7. Many more beliefs are given in Tortoise System in the Appendix.

What happened?

1. Ken traded this system through Scottrade and they basically told

him that he couldn’t trade mutual fund – getting in and out all the

time. Mutual funds were for long term investing. (Did Scottrade

say this or did the mutual funds say this?)

2. Result: Ken developed a new model based upon using ETFs with

all the same beliefs and it worked for a while.

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3. Eventual Result: Belief #2 was no longer valid (i.e., Big money

was slow to move). Big money would go into and out of ETFs very

rapidly and the system stopped working well.

4. Our backtesting showed that the best we could do would be a 20%

drawdown that after that it might take as long as four years to

reach a new equity high. And this was not acceptable to anyone

with a requirement of no losing years and minimal drawdown time.

How to apply:

1) What would happen if you went back to mutual funds?

2) What if you added other asset classes like cryptocurrencies and

GBTC?

Answer is unknown.

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Section 3:

Systems Van Likes

Objectives

To give you the beliefs that all (almost?) systems are based

upon.

To help you get an idea how everyone trades.

To give you the criteria (subjective for Van) whereby he tends to like a system and want to trade it.

To give you a starting list of such systems.

Action Steps:

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Key Beliefs Behind All Systems

Momentum o Buy what’s going up and sell it when it stops going up.

o Sell what’s going down and buy it back when it stops going

down.

Buy and hold and try to pick the right

stocks/investments.

o Motley Fool. Sells you access to “great” portfolios for

$3000/$5000 each. Tells you to buy and hold and your

money gives you regular reports on your companies.

o Listen to the talking heads on TV who give you stock picks

Value (some try to turn fundamentals into this). o Usually buy and hold but Warren Buffet does sell.

o Benjamin Graham Systems (NCAV)

Mean Regression Systems (it’s overbought or oversold)

o RSI

o 5 Down Days

Fear and Greed Advertising. o Buy this penny marijuana stock and make 100 times your

money as soon as X happens and it should happen within the

next six weeks.

o Mr X. as a venture capitalist, made big money on 8 out of 10

investments (when most make money on 20%). He’s picking

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these 5G stocks which you should buy and forget about.

You’ll make 100 times your money or more.

o On Jan 15th a bill will pass which could wipe out your

retirement account. Here is how to protect yourself and make

an addition $100,000 or more with this insider secret.

o Basic tenant. This asset class is going to go up big time and

here’s why?

Strong Belief in a Coming Bear or Bull Market, no

matter what the market is actually doing.

I must trade my systems and a mistake is not following

the rules.

Belief overrides the system.

It’s important to be right. No understanding of R-

multiples, reward to risk, expectancy and Expectunity.

No real understanding of position sizing.

Non-useful beliefs about self. (I’m not worthwhile and I

don’t deserve it).

Buy some service to save myself the work involved.

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Criteria for What Van Likes in a

System

1. That I totally understand how it works and what the

beliefs are. I don’t even need to see trading results if

these four criteria are met.

2. It is relatively simple (and doesn’t rely on patterns

from complex indicators which the inventor of the

indicator has convinced you that they mean

something).

3. That it doesn’t require much of my time. No more

than 60 minutes per day, but 60 minutes per weekend

is even better.

4. I can see the potential for great returns.

I like, for example, Ken Long/Larry Connors 5 Down Days system.

It’s simple.

It’s great for illustrating reward to risk in a trade.

But it’s a regression to the mean system and I don’t think the

return potential by itself is great and it’s not as good as RSI 2 in

improving the strongest stocks type systems.

During 1999 – Stocks would gap from where the expected opening price

would be to the reward point in about a minute and you could not trade.

During Bear Market, there will be lots of candidates but not good

returns.

Ken Long traded GM in 2007 all the way to bankruptcy, going long after

a 5 DD signal. (However, this was a DOW stock that the mutual funds

loved and needed to own).

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List of Systems I like

1) NCAV (originally from Safe Strategies for Financial

Freedom). It’s a Benjamin Graham system but web sites

appeared to do the screening for Van Tharp’s system.

a. I especially like the flat to slightly up pattern (for at

least two months at the end) as a requirement for the

initial entry.

b. I believe the pattern can be applied to lots of things.

For example, it worked well with GBTC and BTC in

March 2018.

c. I like fundamentals to support the trend and NCAV is

a method of value that makes sense to me.

2) RSI 2

a. This is a day trading system (and day trading doesn’t

fit Van) but I believe it can be easily adapted as a

better entry/exit for various “strong stock” models of

trading.

b. Robert Tharp presented one version he used as a day

trader.

c. Mark McDowell adapted it so that it had a better SQN

score by using RANGESTAT.

d. Van would trade it as a day trading system if day

trading fit him and he could get margin.

3) DRL’s System of Strongest Stocks in Strongest

Industries

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a. Outstanding performance and can be applied (with

caution to down markets)

b. DRL original format as I wrote it down.

c. A lot of inner guidance was involved in his

performance

d. Adaptations with RSI 2.

4) Hot Industry Stocks. Based upon Greed in some

particular future area. Most of this is “greed” marketing

by newsletters. But if they are right about the hot area,

then getting a list and applying RSI 2 will work.

Potential Hot Areas include

i. Cannabis

ii. Artificial Intelligence

iii. Robotics (could be a hot area but not used in

greed marketing yet or combined with AI).

iv. 5G technology

v. Crypto-assets

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Section 4:

System 1: NCAV

Objectives

To help you understand the NCAV system (presented in Safe

Strategies for Financial Freedom and in the Bear Market

System Workshop).

To show you how NCAV base pattern can be used with other systems.

Action Steps:

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Key Beliefs of NCAV Net Current Asset Value (NCAV)

1. This is a Benjamin Graham system that has withstood many

years of trading.

2. I saw it in action twice (during 2002 and during 2008). Rules

had to be changed in 2008 because I had published the system

in a book and there were now websites screening for stocks

that met this system criteria. Result was that there were no

stocks selling over $5 that met these criteria and we had to

move to penny stocks.

3. Key Entry rules

a. Find the net current assets of a company (in books and

defined as value if everything liquidated within a year).

b. Subtract short and long term debt.

c. If it’s a positive number (and it’s not for most stocks) then

divided by the number of shares to get NCAV per share.

d. Key metric is to look for stocks in which the actual stock

price is about 2/3 of the NCAV per share.

e. One more criterion to buy is that the stock needs to be flat (or

going up) over the last two months.

f. There has to be some up movement at the end (if its flat) to

buy.

g. Stop loss is below that base.

4. Exit rules.

a. Look at the reward to risk ratio among all the candidates (at

the bottom of a bear you might have a lot).

b. Risk is the buy price to the stock just below the base.

c. Reward is the potential gain if the stock simply returns to the

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d. Buy those stocks with the highest reward to risk ratios (with

minimum potential of 20R).

e. Use initial stop and 25% or 3 times 20 day ATR as a trailing

stop. Whichever is the tighter of these three… use that.

f. Make sure the that ongoing reward to risk ratio is at least 1 to

1 in the stock (otherwise tighten the stop so that it is)

5. You can try to squeeze more profit out of the stock once it his

NCAV by using rule 4f, but remember that many of these stocks

eventually go bankrupt so this is not a new buy and hold.

6. Alternative exit. At NCAV with at least 20R profit, sell half and

then use 25% trailing stop on the balance, keeping in mind rule 4f.

Format for Examining System Beliefs

What’s the edge? I think the key edge here is that value is defined in a

clearly measurable way that people can relate to. What can the company

be sold for if you had a year to liquidate it. Easy to comprehend.

Another example, is if you have something on the books at a really low

price that is unrealistic (such as Hawaiian Land at $200 per acre), and

you know it sells for $250,000 per acre, then you again have something

that is clearly undervalued.

Analysts often try to project things into price (such as growth rate, and

new innovations and their potential impact), but these estimates are what

Ed Seykota used to call “funny mentals.”

1. Under what context? And when is it no longer an edge? The measurement of estimate value is only an edge if it is much higher

than the current price and produces a way to trade with a high

reward to risk ratio. Also, we need to know that there is a market,

that the laws favor trading profits, and we usually need a bear

market to produce prices well below NCAV and a bull market to

start to produce real profits. Publishing the original strategy in

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Safe Strategies for Financial Freedom took away the edge in

stocks selling above $5 (one of the original entry criteria).

a. What market qualities (types) does it fit? End of bear market transitioning to bull market.

b. What market conditions would it not fit? Mature bull market, sideways market and a down market (except to produce good

values).

c. Is there something other than the market type that would cause it to not work? Bottom line is there is only a small window

within market types that such a system fits.

However, there might be other kinds of things, such as crypto

or hot stock areas, where you can see a 100-fold increase in

price where some aspects of this system would work. Still

requires you to be coming out of a bear market.

d. What's the sentiment? Market psychology around the instrument? It must be VERY NEGATIVE at the time you

buy.


No real hype, but you have to have a good reason for wanting to

go long (undervalue in a huge way).

3. Opening a position. What are your beliefs about that? See key entry rules above.

4. Exits and controlling a reward to risk? R-multiples and maximum R possible and what kind of losses? Initial pattern can produce a

really low initial risk and huge R-multiple possibilities. 20R is the

minimum to look for. But you need very low prices to get this sort

of situation.

5. If it fits my objectives (can I use exits and reentry to maximize expectunity)? Absolutely, doesn’t take much time to apply. And Co

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it’s obvious (prolonged bear market) when I have to start looking

for potential candidates.

6. What are your beliefs about exiting the market and no longer trading the system? See exit rules above. I also believe that most

of these stocks will eventually go bankrupt (from 2002-3

examples and 2008-9 examples). So once potential reward is hit,

don’t get greedy. Use target.

7. Objectives and how to achieve them through position sizing? I would probably allocate as much as 50% of my account to such

positions and allow a portfolio heat of potentially a 20%

drawdown if I’m totally wrong.

8. What time frame fits your objectives and you? Long term.

a. Time available to trade. 1-2 hrs on the weekend when I could do the screening.

b. Expectunity you wish to make. No Expectunity goals. Want to make 400% compared with 20% risk to portfolio, but must

always have at least 1:1 Reward to risk left in the trade.

9. What could change it all so it doesn’t work? Currency crisis. Trading crisis and exchanges close. New concept of value come

up which are more acceptable.

10. Are my measurements really reflecting my beliefs? I believe that value should be something that really is value and I can know it’s

highly undervalued. NCAV works for me.

11. How do my emotions come into play (mistakes)? Fear and greed. When I’m too excited about my profits it’s probably time to get

out. We could be in a prolonged bear market and I simply forget

to start screening for NCAV stocks. Needs to be done at least

weekly during a strong bear market.

12. Do I have any conflicting parts over this? No, not for this one.

13. What is the viewpoint of someone taking the other side of the trade? Is there something here I haven't thought about? They are

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worn out and beaten down over the bear market and they just want

to unload.

14. What is the viewpoint of the system itself, if it had a viewpoint? I don’t remember how I decided that this was a good system. Did I

come up with it for Safe Strategy for FF or before that? And why?

I don’t remember. System has price undervalue is the key edge.

15. What does your Inner Guidance (Divine) think of this system? Does it fit my mission/divine purpose? How? I don’t remember

how this came about but Durga has encouraged me to put this one

in here, so I’m doing so.

16. How does my level of consciousness change this system? (If my consciousness were 600 versus 350 versus 100). At fear, I

couldn’t enter such a market. At high levels (above 600), I

wouldn’t care about the results. I could manifest anything, and I

wouldn’t need it anyway.

17. Do you have any conflicting parts? No, but one is wondering will this work in the next bear market. I didn’t publish the last

iteration.

18. Does this fit my values? Little time, logic is simple, potential to make a lot of money. And I really understand this.

19. Am I capable of doing/following this system? I haven’t traded it before because the rules kept changing. I didn’t publish the last

version (Penny stocks with potential gain of 36R) so it probably

will work. There are two examples of me writing down rules that

fit, finding stocks that fit, and seeing huge profits (all paper) in

those stocks.


1st iteration published in Safe Strategies and the system did much

better than what was shown in the book. Second system Robert

tracked in 2009 and it was also great. No real trading with this

system and no bear market since 2009. Most of these stocks

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eventually go bankrupt so hard to verify it 5-10 years after the end

of the bear.

What conditions (context) with respect to your beliefs are 100% sure to change.

The answer is all of them, because none of it is real. So the real question is, what

context have a reasonable probability of changing within the next six months. This

question is important in terms of what to become aware of with respect to changes

in what’s going on.

Market type will change. My consciousness level will change. Government rules

will change. Tax rules will change. Public values will change. The environment

(global warming) could make all of this meaningless.

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Section 5:

System 2: RSI 2

Objectives

To show you the RSI 2 system in its various versions

1. Robert Tharp’s original version 2. Mark McDowell’s improvement to get a better SQN

To show you how RSI 2 could be used as a tool for stock trading in some of the other systems (including crypto systems

with GBTC). Action Steps:

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Key Beliefs with this System.

(Intraday rules are given at the end and in the

appendix that we’ve put in basecamp)

1. Most stocks don’t move up efficiently, otherwise we wouldn’t

need this sort of system.

2. There will be extreme movements that we can see with RSI 2.

3. As an indicator RS makes seeing the extremes easier

(otherwise you just get excited about up moves and bummed

out about the down moves).

4. Recent market history (last year of trades) will tell you about

what RSI extreme might be and they’ll probably 1) be

somewhat different for each stock and 2) change over time.

5. So, use last 200 days of prices on the stock you are trading to

tell you what will probably work in the future. (Intuitive

part).

6. You should only trade 5-10 stocks that you know very well.

Depends upon what your capacity is for watching stocks

closely – how many can you follow.

7. How a measurement that was designed for one thing (relative

strength) can be used to mean something else

(overbought/oversold).

8. Note how those are all nominalizations that we’ve learned to

measure and give some meaning to… but they only have

meaning because we give them the meaning.

9. The RSI plus a price confirmation (RSI 2 above 80 plus a

price drop or RSI 2 below 25 plus a price rise).

10. Opening/Buying a position.

a. SQN 100 says bull market Copy

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b. Get RSI 2 extreme (i.e., below 25) and price shows an

obvious spike down.

c. Price moves above yesterday’s high the next day.

d. Buy when it meets criteria a, b, and c.

e. If you don’t have a two-month period that is flat to slightly

up to get you in, you could use this to buy your initial

position.

11. Selling a position (during a bull market).

a. You would have several sell signals.

b. SQN 100 turns bearish (goes below zero).

c. 40-day channel breakout as a new low.

d. And if you have at least a 3R profit, then you could use

what’s given below.

1. RSI 2 extreme on the upside (i.e., above 75)

2. Price moves below yesterday’s low

3. Sell when it meets criteria b and c.

4. You might do this with 50% of your position

Caution on Measurement: RSI means Relative Strength Index, but most

people use this to find overbought or oversold positions.

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Example with AAPL

This is six months of recent data for AAPL Apple, in this example, is

a very efficient stock with no significant downturns. So you don’t

really have to use RSI 2, but you do have extremes in the indicator.

RSI 2 probably hits as high as 90 on the upside (so we’ll use 85)

It clearly goes below 30 and occasionally goes below 25 (so we’ll use

25)

Clear examples are an obvious spike up in late July.

Next red bar takes out prior day’s low so you would sell 50% when

it does that

A few days later we get an obvious down spike with a very low

RSI.

Two days later it takes out the high. We would buy when it does

that with a stop below the low of the red bar down.

There is a red spike up for which the day’s low is taken out the

next day and the RSI 2 is probably about 95. Get out of 50% of the

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position if you have a 3R profit and can exit with at least a 2R-

profit.

Risk, it’s basically flat for the next month and then you get a low.

But the RSI 2 might not be low enough to buy (i.e., below 30 but

perhaps not 25). If not you’d miss the next up move.

No real obvious spike up with the very high RSI toward the end,

but it is probably above 85 for more than two weeks. You could

probably sell on the red bar down at almost the end of the graph.

Let’s run this through the System Format. The answers to

the questions are in red.

1. What’s the edge? You have a very strong efficient stock moving up. RSI 2 could help take more money out of this position and

smooth out your equity curve. It might also mean that you don’t

have to give back too much profit.

2. Under what context? And when is it no longer an edge? We’ve taken one nominalization (relative strength) and given it another

meaning (overbought or oversold). But those concepts have

meaning because we have given them meaning. It’s all made up.

a. What market qualities (types) does it fit? Here we are talking a bull quiet market (with AAPL) or a bull volatile market would

also be appropriate (with GBTC).

b. What market conditions would it not fit? Sideway markets or extreme bear volatile might be difficult.

c. Is there something other than the market type that would cause it to not work? Conditions that might cause the market type to

change such as news; change in economic policy or law or

something that impacts the stock you are trading in

specifically. Also your estimate of what RSI values worked in

the past might no longer be valid.

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d. What's the sentiment? Market psychology around the instrument? Depends upon the stock. AAPL is an AI stock,

and a high-tech stock, and one of the fastest growing stocks,

plus it is a trillion dollar market cap stock (at a price above

200).

3. What instrument? Is there hype around some particular asset class? Under what conditions is the hype valid and when is it not? Later

we are going to apply RSI 2 to hot stocks (stocks with hype or hot

in terms of IBD criteria) and an area of stocks that is being hyped

by newsletters. AAPL is an AI stock.

4. Opening a position. What are your beliefs about that? It should be simple at first. Channel breakout (60 days) or at least 60 days flat

with slight up bias would be enough for an initial entry. But RSI 2

allows you to buy more or buy if the market is quite volatile – but

using it to mean overbought or oversold.

5. Exits and controlling a reward to risk? R-multiples and maximum R possible and what kind of losses? RSI 2 sets you up with a

potential low risk position (the RSI price extreme is broken)

compared with an exit that says get out when the market turns

bearish which might be 20-50% drawdown from the highs.

6. If it fits my objectives (can I use exits and reentry to maximize expectunity)? This makes me a little more active than I really want

to be, but I’ll use it if I have the time. For example, I was long

AAPL when I put this chart in this section as an example. I will

probably consider an exit if the price breaks the low soon. TIME

IS BIGGEST ISSUE FOR VAN.

7. What are your beliefs about exiting the market and no longer trading the system? I have no problems not trading this in a

sideways quiet (or volatile) market. I’d be more careful in a bear

volatile market, because opposite reactions can be extreme.

8. Objectives and how to achieve them through position sizing? I like the idea of using RSI 2 to get out of 50% of the position, because

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I’d be excited about my performance and this gives me a structure

to get out and get back again.

9. What time frame fits your objectives and you?

a. Time available to trade: Long-term (ideally looking at prices on a weekend). Spending an hour each day might be more

work that I want to make.

b. Expectunity you wish to make. I’m more concerned about the overall potential of the investment. Let’s say I put 10% into

the stock and risked 25% of that with the idea that in might go

up 10-fold. So, if a $10 stock with $2.50 goes up 10-fold to

$100. Then I’ve made 36R. I’d rather do that than spend a lot

more time to make 50R with perhaps weekly trades.

10. What could change it all so it doesn’t work? Base currency crisis, stock trading suspended, tax changes that don’t make it profitable.

Too many people using RSI.

11. Are my measurements really reflecting my beliefs? I believe that when I get too excited about a position, it’s probably time to get

out. And if I think it’s the end of the world, then it’s probably time

to buy. RSI 2 logically makes sense to me as an

overbought/oversold indicator that could do make me less

dependent upon my emotions.

12. How do my emotions come into play (mistakes)? Not feeling I have the time and then missing trades. But mostly this harnesses

my emotions.

Any systems which places a strong emphasis on a particular

instrument going up in value has a strong risk that you will use that

belief to override your system (i.e., not sell when you should; buy

as it goes down rather than when the system tells you to; and

probably even position size to big). You must remember that the

belief about the instrument is just a belief (i.e., marijuana stocks

will take off so buy as much as you can and just hold).

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For example, in cryptos I have a strong belief that BTC will at least

double or triple over the next year. However, the market type (Nov

15th) is strong bear and it just took out the low (Nov 22) because of

China again saying no BTC in China. So, does that mean 1) stay

away, the system says wait for a bull market based upon the SQN

100 and we are in a bear market; or does it mean 2) given that I

believe it could go up 300% in the next 6-12 month, this is a

fantastic buying opportunity for buying BTC.

13. Do I have any conflicting parts over this? Yes, my time part doesn’t want to spend a lot of time on trading. And belief in the

strength and proximity of a big move conflicting with system rules

for entry.

14. What is the viewpoint of someone taking the other side of the trade? Is there something here I haven't thought about? If I

enter/exit on RSI trading, then the person on the other side is

probably feeling my emotions and doesn’t have an indicator that

says those emotions are probably not useful and will cause you to

do the opposite of what will make me money. We are basically

using RSI to indicate the opposite of what it was intended to

indicate. So, perhaps someone taking the other side is using the

original meaning of RSI.

15. What is the viewpoint of the system itself, if it had a viewpoint? This is somewhat of an indicator system and I’m assigning

meaning to an indicator (it does the opposite of my emotions).

That’s all made up and, in my head. The system understands that

it’s not real. In fact, it understands that its original meaning was the

opposite of what we are using it for.

If your understanding on RSI is sell at overbought zone and buy at

oversold zone then you are in trouble. RSI the name itself says it’s

used to identify the strength of the trend. You should always look

for divergence using RSI and take judgement whether trend is still

continuing or the trend is about to reverse.

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16. What does your Inner Guidance (Divine) think of this system? Does it fit my mission/divine purpose? How? Durga guided me to

this system. She also guided me to this new format for using

Beyond the Matrix Thinking.

17. How does my level of consciousness change this system? (If my consciousness were 600 versus 350 versus 100). If consciousness

low enough, my emotions would dominate the trading. If

consciousness were a lot higher, I could immediately create the

results wanted, but I probably would not care about the results.

18. Do you have any conflicting parts? Just the time issue and the belief in the move versus the entry rules.

19. Does this fit my values? Yes, especially in that it gives me something to strengthen my presentation of systems thinking and

to illustrate it. It allows me to teach and transform peoples thinking

and I might make a lot of money with it.

20. Am I capable of doing/following this system? Biggest risk is with the time issue. If I’m going to trade it, I need to commit to an hour

each night.


My criteria don’t include test results. But if I get a sample of 100

trades that don’t produce at least a 20-30% profit, then I’d be

concerned about using it. And a huge loss immediately upon

trading it would probably cause me to no longer consider the

system (but this is somewhat a second chance concept for the DRL

strongest stocks in strongest industries system. This is simply an

optional add on.

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Section 6:

System 3: DRL’s System: Strongest

Stocks in Strongest Industries

Objectives

To show you what I know about DRL’s System in its original

format.

To show you how you might use RSI 2 with the DRL System

Action Steps:

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Beliefs of the DRL Strongest Stocks in

the Strongest Industries System

(as modified by Van after he learned the rules without really

knowing the IG advice portion of the system – i.e.,

sometimes he said he just knew what to do)

1. My client took a $1M account and turned it into about $51 million in his

IRA or 401K. This took 11 years and of course was largely take free gains

less the MRD that was taken out each year.

2. I would like something else to support me beside the chart moving in

my direction (i.e, strongest industries… or later hot areas). Strongest

industries criteria is like fundamental support… something is going on in

this industry.

3. I wanted efficient stocks in the presentation in the appendix, but

DRL’s criteria are all we are going to use here. Efficient stocks are too

rare.

4. Works best in bull quiet and bear quiet markets, but probably also

bull volatile and bear volatile. DRL certainly went through those in 1999

and 2002.

5. His preparation included the following:

a. Look at the top and bottom 10 groups

b. Make a list of 30-40 stocks to watch

c. Look for groupings that are 1-2 for 5 weeks or more.

d. Know the market direction for the day

6. Screening criteria from Market Smith (was Daily Graphs at the time).

However, as best I can tell, they no longer provide that service. You can

get the information for free from …

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(http://bigcharts.marketwatch.com/industry/bigcharts-

com/default.asp?timeframe=ThreeMonth (I set it at 3 months but you can

set it at any value from one week to five years) Daily graphs had 46 areas

they monitored.

7. You then need to look at the stocks in each of the industries. On that

same chart if you click on the industry you can see the stocks listed for that

sector. The 4th best performing sector (up 50.77%) was precious metals so I

clicked on that one. I have troubling believing the 1st three area which are

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47

up 2000-4600%. And that might be another problem if Market Smith

doesn’t have the information.

8. Here is where it becomes tricky. You are looking for accumulation

distribution below, but that is unique to IBD.

a. Accumulation/Distribution that is A- or better for longs and (D or

worse for shorting plus a price above $10)

b. Average Daily volume greater than 500,000 shares

c. Examples of the former Daily Graphs industry screens are in the

appendix.

9. You then need a charting package. DRL used Charles Schwab. You need

to look at:

a. Daily bars for one year.

b. Hourly bars for 30 days.

c. 10 and 21 period moving averages for both the daily and hourly bars.

In each case you want 1) both to be going up and 2) for price to be

above both. (going down and price below both for shorting).

d. The stock should be making higher highs to buy or lower lows to sell.

e. Stochastic %K above 80.

f. ADX up

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g. You want +DI to be greater than -DI but five points or more. (for

shorting you want the opposite.

h. You want positive momentum.

Below are hourly and daily graphs of BYD which passed both screens (probably

about 10 years ago when I looked at this).

Daily

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Hourly

10. Entry signals once screening criteria are met.

a. Wait for a correction that is a B#3 (3rd higher low after B1 and B2). In

other words you get a correction that goes to bottom 1 (B1), then it

makes a higher low (B2), and then it makes a third higher low (B3).

You buy after B3 or at B3.

b. Assume the opposite for shorts. You want a correction and then you’d

short and the third Lower High (H3?)

11. Exit signals.

a. ADX tops out.

b. Bail out when it makes a lower low (for longs) or a higher high (for

shorts).

c. Also pay attention to moving averages.

d. Van (I didn’t see examples of this and he said he just knew when to

get out) so you will have to work this out yourself. But a lower low on

an ADX means you are getting out pretty quickly after any sort of

down move. You will have to play with this one a lot of you want to

trade this particular system.

12. The addition of RSI 2, could be useful in this system if I don’t like the

idea of 1) any down move (i.e., ADX goes down) causes me to sell.

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Instead it could be that any RSI 2 above 85 followed by a down move

causes me to sell.

Belief Format Applied 1. What’s the edge?

This might be the ultimate trend following system because 1) it is

buying really hot stuff (with a reason behind it, hottest industries)

and 2) it sets up low risk ideas (Buy B3 after a correction; and 3) it

doesn’t seem to tolerate much drawdown from the top. I have no

idea how often DRL traded or how long a trade lasted, but I wished

I’d asked him

2. Under what context? And when is it no longer an edge? Need strong directional markets. Need an atmosphere for trading well

(markets exist; reasonable fees; favorable tax environment;

government favorable to traders). Needs a world condition that

supports trading (electrical grid okay; internet okay; global

warming isn’t so extreme that it changes everything). Without

those conditions it wouldn’t work anymore.

a. What market qualities (types) does it fit? Will work in bull or bear markets, but volatility will subtract from the performance.

b. What market conditions would it not fit? Will not work in sideways markets.

c. Is there something other than the market type that would cause it to not work? Environmental or legal conditionals change;

current worthless; taxes and markets become unfavorable; no

data available or desired indicators not available (industry

rankings with accumulation/ distribution). High cost of trading

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d. What's the sentiment? Market psychology around the instrument? This system is pretty sentiment free as it buys

strong markets and gets out as soon as they are weak.


Strongest stocks can be defined by measurement. Hot stocks

(which it might work with) is all psychological in that they

represent a scenario people have dreamed up and are putting out to

the world – which may not be true.

4. Opening a position. What are your beliefs about that? See #9 and #10 above. However, I buy after a correction on the third higher

bottom (B3) for longs? I don’t really know if all the other stuff still

has to be in place (see #10) or if it’s okay if the correction voids

some of that. I’d have to find out, but my assumption is that they

are in sequence.

a. Very strong stock

b. Correction

c. When third higher bottom (B3) confirmed, enter.

5. Exits and controlling a reward to risk? R-multiples and maximum R possible and what kind of losses? I’ve never seen the R-

multiples for this system (just the 50-fold increase in value over

10-12 years). Looks like very quick exists so losses are probably

small and you don’t give back too much profit. His main exit is as

soon as the ADX turns down by a certain amount.

a. How often do you get such downturns?

b. Any downturn you would sell? I need to know the answer to these questions.

6. If it fits my objectives (can I use exits and reentry to maximize expectunity)? It requires some daily work, which is more than I’d

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could do that. You are out pretty fast when the markets turn so my

guess is there are a lot of trades.

7. What are your beliefs about exiting the market and no longer trading the system? Right now I (VT) don’t trade this system. I had

a bad experience with it on the downside, but realized I needed to

short after a correction and then it reaches T3 (third lower top).

That helps a lot. To trade this system would take me reorganizing

my priorities (but there is a good chance of that happening). A

10% drawdown or taking 3 months to reach a new equity high

would cause me to stop following this system.

8. Objectives and how to achieve them through position sizing? If I traded this system, it would be with the blessing of my IG. I would

be willing to risk 20% of my retirement account and I’d want to

beat DRL in his performance just to see that it is possible.

9. What time frame fits your objectives and you? 2 hrs per weekend and perhaps 30 minutes each day with the goal of cutting that in

half.

a. Time available to trade. Enough if I committed to this system.

b. Expectunity you wish to make. I have no idea about the R-multiples of this system.

10. What could change it all so it doesn’t work? Within the context of what’s needed for the system, the biggest risk is inability to get

data needed or cost of trading being too high or sideways markets

for a long time.

11. Are my measurements really reflecting my beliefs? The charts have a lot of indicators (+/- DI, ADX, momentum, and %K). I

never have particularly liked stochastics and never used them (so

I’d probably want to simplify the number of indicators and perhaps

eliminate %K)

12. How do my emotions come into play (mistakes)? Less likely to make mistakes having to do with prediction here. Fear and greed

could enter. Get excited about trade (when I should get out), but

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this has me exiting pretty fast. And I don’t get in until it really

starts to move.

13. Do I have any conflicting parts over this? I learned about this system in 2008 and I traded it short – probably at the heat of the

bear market when there was the most volatility. I didn’t think about

shorting after a correction with a T3 low. And the price gapped a

huge amount through my initial stops. It was a huge loss and that

was enough for me to think elsewhere. I wasn’t thinking about the

system when the bull market started in 2009, but I wish I had. But

there is a part of me that remembers what happened.

14. What is the viewpoint of someone taking the other side of the trade? Is there something here I haven't thought about? People who

would take the other side are market makers (to make the market);

very short-term traders (profit big enough already); or people who

get scared by price going up and want to take profits quickly (i.e.,

they don’t want to lose their profit).

15. What is the viewpoint of the system itself, if it had a viewpoint? This appears to be an inner guidance-based system. I think the

issues would be “I will work for you if you trust me.” It’s pretty

similar to IG – so I have enough faith to trust my inner guidance.

System would say, do you have enough faith to trust me?

16. What does your Inner Guidance (Divine) think of this system? Does it fit my mission/divine purpose? How? My IG says I don’t

teach you systems but I brought you to this one. You need to really

commit for this one to work.

17. How does my level of consciousness change this system? (If my consciousness were 600 versus 350 versus 100). I think at 600 this

system would pretty much trade itself. At 350 I’d have to be

committed to it and at 100 I’d find a way to cut profits short and let

losses run.

18. Do you have any conflicting parts? The part of me that remembers the big loss when I first traded it. But I didn’t understand T1 to T3

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and its application at the time. It’s interesting because I should be

really excited about this system but I’m not. I think understanding

T1 to T3 would make this work for shorts as well.

19. Does this fit my values? Yes, I don’t see any conflict with my values.

20. Am I capable of doing/following this system? I don’t know, I’d have to get really comfortable instead of being nervous. I’d have to

decide to explore the nervousness. Part of me says it’s not my

system. I’ve never seen any data that it works. I’m simply relying

on what someone else told me about its performance. And I’m

nervous because of the initial mistakes. I’d have to see a month of

trading on this system to get comfortable. It doesn’t have to be

mine, but I’d have to be convinced it was accurate data.

21. Do I have test results to prove the system? If so, then list them. If not, are you confident enough without them to trade the system? I

don’t have the results, and I’d need to see them in this case because

I feel a little nervous.

When I don’t have that much on my plate, which I do until the beliefs

book is out, then I will commit to researching this system to see if I can

trade it.

1) Can I find all the data I need and develop my own screening

routine?

2) What about industry accumulation/distribution scores? What is that

and do I know what it means.

3) I’d need my questions about exits and entries answered so that I

understand the system.

What conditions (context) with respect to your belief are 100% sure to

change. The answer is all of them, because none of it is real. So the real

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question is, what context have a reasonable probability of changing

within the next six months. This question is important in terms of what

to become aware of with respect to changes in what’s going on.

Sideways market is inevitable

Debt bubble and dollar crisis is inevitable (but not necessarily in six

months).

Global warming catastrophe is inevitable but not within six month.

As more beliefs come out of the system more

applications of this format become necessary. That is,

your answers to these questions are simply more

beliefs.

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Section 7:

System 4: DRL System Applied to Hot

Industries

Objectives

To show you how you might apply the DRL Systems to some

area that the investment guru’s believe will make lots of

money, such as AI, 5G, Cannabis.

To show you how newsletters get you to act based upon fear and greed.

Action Steps:

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Beliefs Around Applying DRL System to Hot

Stock Areas.

1. Basically, hot stocks replace the screening criteria of the

strongest industries.

2. This is basically a bull market system because I wouldn’t

expect that shorting these makes a lot of sense. It’s a hot area

for a reason (unless it was not and now it’s hated).

3. Can explore shorting but not for now.

4. Preparation

Read extensively (including Newsletter Greed campaigns)

to determine what the future hot industries are. Right now

I believe these to be

a. Artificial Intelligence

b. Robotics (these two are often combined)

c. Cannabis/Marijuana

d. 5 G technology

Get extensive list of stocks for each area and develop a

screening spreadsheet.

One screener could be 1-2 ETFs that represent each area

and start looking at them when that ETF has SQN greater

than 1.0. This would substitute for IBDs

accumulation/distribution ratings.

Stock daily volume needs to be over $500,000

Screener could also screen all of the hot industry stocks

for what meets the criteria.

Such a screener would make it so I could do some back

testing to get an idea how the market works.

5. You then need a charting package. DRL used Charles Schwab.

You need to look at:

a. Daily bars for one year.

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b. Hourly bars for 30 days.

c. 10 and 21 period moving averages for both the daily and

hourly bars. In each case you want 1) both to be going up and

2) for price to be above both. (going down and price below

both for shorting).

d. The stock should be making higher highs to buy or lower

lows to sell.

e. Stochastic %K above 80.

f. ADX up

g. You want +DI to be greater than -DI but five points or more.

(for shorting you want the opposite.

h. You want positive momentum.

This could be put into a spreadsheet and screened that

way.

6. Entry signals once screening criteria are met.

a. Wait for a correction that is a B#3 (3rd higher low after B1

and B2). In other words, you get a correction that goes to

bottom 1 (B1), then it makes a higher low (B2), and then it

makes a third higher low (B3). You buy after B3 or at B3.

b. Assume the opposite for shorts. You want a correction and

then you’d short and the third Lower High (H3?)

c. Or could trade on an RSI 20 followed by an up move.

7. Exit signals.

a. ADX tops out.

b. Bail out when it makes a lower low (for longs) or a higher

high (for shorts).

c. Also pay attention to moving averages.

d. Van (I didn’t see examples of this and he said he just knew

when to get out) so you will have to work this out yourself.

But a lower low on an ADX means you are getting out pretty

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quickly after any sort of down move. You will have to play

with this one a lot if you want to trade this particular system.

e. Could exit on an RSI 2 above 85 followed by a down move.

Other possibilities

1) Look for down market across all of the stock in the hot area. Wait

until you get two months that are flat or slightly up and then buy.

Borrow for common NCAV patter.

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Fear Marketing (came out 11/25/19)

Fear Example 11/27

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While a sudden bear market is what many investors fear the most, there's a camouflaged threat to your portfolio that can do far greater long-term damage (10.17.19)

The News Out of Las Vegas That's Terrifying Investors By Brian Hunt (10.8.19)

A Hot Industry Would be Treated Like the Strongest

Stocks in the Strongest Sectors.

Here HOT means that some guru has convinced me that a lot of money is going to be made in this particular area. The most recent are cannabis; artificial intelligence, and 5G (with 5G being a game changer in terms of its impact on society). So here are some of the hot sectors and some example of greed marketing that has accompanied them.

GREED MARKETING

van tharp’s favorite · 2020. 11. 6. · van tharp’s favorite systems s1912e ©2019...

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