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Ep. 509: Van Tharp Interview with Michael Covel on Trend Following Radio

Van Tharp
Van Tharp

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Van Tharp is on today’s podcast. It is his third appearance on the show. Van runs the Van Tharp Institute and is the author of four acclaimed books published by McGraw Hill: Super Trader, Trade Your Way to Financial Freedom, Safe Strategies for Financial Freedom, and Financial Freedom Through Electronic Day Trading. His new book is called Trading Beyond the Matrix. He was also featured in Jack Schwager’s Market Wizard’s: Interviews with Great Traders. Van Tharp received his Ph.D. in psychology, is a certified Master Practitioner of Neuro Linguistic Programming (NLP), a Certified Master Time Line Therapist, a certified Modeler of NLP, and an Assistant Trainer of NLP.

Michael starts the podcast asking Van how he felt the year Eugene Fama and Robert Shiller won the Nobel Prize. Van has a long standing theory that those who win the Nobel Prize are just supporting the ideas of the status quo. It is meant to propel the majority into believing they are in the right. Trend following does nothing to support the status quo, therefore Van says that Michael and himself will not be winning the Nobel Prize anytime soon.

People looking for help constantly approach Van. Michael asks, “What is it like to observe the learning of people who come into your world?” Van goes into the steps he takes new students through when teaching them how to trade. He shares some typical biases that new traders have when starting their training. He first teaches people to understand that they need to take total responsibility for what happens to them while trading. If was easy to make money in the markets then big money would make it hard to participate in the game, but since it is not easy to make money in the markets, they make it easy to join.

Michael switches gears and asks, “When were you first exposed to the ‘how much’ question?” Van says that it was at a workshop with Ed Seykota. Seykota asked, “What is the most important factor in your trading?” Van responded, “Well, It’s you.” And Seykota said, “No, it’s how much.” It all starts with how much you are willing to lose and how much you can afford to lose. Michael moves on to ask “Are there anymore interesting things that you learned from working with Ed Seykota?” Van shares a story about Seykota and the psychology behind what makes him such a legendary trader. He moves on to share some stories about another legendary trend following trader, Tom Basso. Van shares personal stories about how he conducted his business and trading.

Discretionary trading is the next topic. Van says, “If you are a pure discretionary trader, it seems to me that it would be very difficult to implement some of the position sizing methodologies that are in your work.” A trader needs to know when something is not working anymore. You need to be aware of market changes, and subtle changes in that market that no longer works.

Michael ends the podcast asking, “Who changed your thinking in your life? Who helped to send you down this path?” Van started his business around 1982, which coincidentally was probably the low point in his life. He went to a life science church that helped him work on himself. He can’t pinpoint a specific event or person that has molded him into who he is right now, it was a collaboration of events and people.

In this episode of Trend Following Radio:

  • Systems theory
  • Money management vs. Position sizing
  • Ed Seykota’s trading and psychology strategies
  • Tom Basso’s trading and psychology strategies
  • Yoga
  • Training your brain how to think

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Ep. 400: Special Tom Basso Compilation with Michael Covel on Trend Following Radio

Tom Basso
Tom Basso

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Today marks 400 episodes on Trend Following radio. To celebrate Michael has put together a compilation of Tom Basso interviews. Tom has been on Trend Following Radio four times and his interviews have been among the most popular episodes airing on the show. Michael plays the interviews back to back and throws in a bonus interview at the beginning. The bonus excerpt is a Tom Basso presentation from the early to mid 1990s.

Tom Basso is most famously known as “Mr. Serenity” in Jack Schwager’s “The New Market Wizards”. Now retired from managing client money, Tom was president and founder of Trendstat Capital Management. He became a registered investment advisor in 1980, a registered commodities advisor in 1984, and was elected to the board of the National Futures Association in 1998.

Throughout this 4 1/2 hour podcast Michael and Tom cover a broad range of topics including: Tom’s background and how he got into trading, speculation, emotional rushes, emotional devastation, catastrophic events, separating trading from politics, behavioral economics, advice to newcomers entering the CTA industry, location independence, time management, stoicism, black swans, and the importance of routine.

Michael and Tom also go through listener questions spanning topics including: trading regrets, money management vs. trading, tinkering with current systems, drawdowns, one-system vs. multiple systems, thoughts on Alan Watts, emotions during both losing and winning periods, exit strategies, practice trading vs. live trading, money management, risk control, how to handle skeptics, serenity, John W. Henry, coin flip entry method, percent betting, comfort with uncertainty, initial capital at risk vs. unrealized gains, and fighting against your gut reaction. This podcast includes a wealth of knowledge worth listening to over and over again.

In this episode of Trend Following Radio:

  • Speculation
  • Fighting against emotions
  • Catastrophic events
  • Separating trading from politics
  • Advice to newcomers entering the CTA industry
  • Time Management
  • The importance of routine
  • Money management vs. Trading

“I realized that every time I had a loss, I needed to learn something from the experience and view the loss as tuition at the College of Trading. As long as you learn something from a loss, it’s not really a loss.” – Tom Basso

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Portfolio Selection Queries

Feedback in:

Mr. Covel. First, thank you for a great job preaching not only trend following but the importance of a systematic approach to trading. Your web site is something I have come across recently, and I feel I have found a gem, because it is very difficult to find good relevant technical trading information. On slow trading days I have some great interview to look forward to. I use a volatility based trading strategy on the commodities I trade, with a Secure F (trailing) stop and proper position sizing. The last being the most important risk- and money management tool. Being from the outskirts of Europe, I am probably one of very few Norwegian followers, but I stick my head out with a suggestion and a question. Linda Raschke had a presentation at the Society of Technical Analysts (STA) in London UK, recently. Being one of very few women in the industry, she has an impressive track record and very interesting to listen to. She would be a good subject for an interview. My recent focus, has been scanning techniques for individual stocks or commodities – basically getting rid of non performing outliers and keep the “asymmetric positive skewed trades/stocks”. Is this a topic that has been explored in one or more of your interviews or is there other sources that you would recommend? Thanks again for an excellent site and service you do to the trading community. Best regards, [name], MSTA

Thanks for the nice words.

I do not have any leads on where you can go for more on portfolio selection. Most information I have, that has been across my desk, I share with clients via www.trendfollowing.com. It is a subject that is much work, but with big potential results.

Money Management Clarity Called For

Feedback in:

I listened to your recent podcast with Jason Russell. The part concerning the importance of money management was interesting. My question: what is meant by money management? It seems to be a term that everyone uses but never really defines and it’s always good, right, just and American. Any trade you do that reduces your risk and volatility is good? And, the big question: when do money management trades become discretionary trades that are used in place of following the system? Back in the early ’90s when I sat in front of my CQG and got spooked by volatility I would override my system exits and reduce my positions only to have to buy them back a few days later. I correctly called that discretion and a lack of discipline – a trader must follow the system and enter and exit only when the system rules dictate it. Now, all of these ideas can be programmed and can be called “money management” when, in my opinion, they are little more than systematized discretion. Is it no less discretion and panic driven when the computer is telling you to do it? So many of the trades are not part of the system – entry, exit, stop loss – that produced the 2000 trade sample size that makes one feel that should rely on a trend following system. What’s the difference between a necessary sample size and “it’s worked in the past?” A lot. CTAs need to face this issue.

Thanks for the feedback [Name].

Money Management Advice

Trading mentor Van Tharp once stated:

Perhaps the greatest secret to top trading and investing success is appropriate money management. I call it a ‘secret’ because few people seem to understand it, including many people who•ve written books on the topic. Some people call it risk control, others call it I diversification, and still others call it how to ‘wisely’ invest your money. However, the money management that is the key to top trading and investing simply refers to the algorithm that tells you ‘how much’ with respect to any particular position in the market.

He added:

John was a little shell-shocked over what had happened in the market over the last three days — he’d lost 70% of his account value. He was shaken, but still convinced that he could make the money back! After all, he had been up almost 200% before the market withered him down, He still had $4,500 left in his account. What advice would you give John? Your advice should be, “get out of the market immediately. You don’t have enough money to trade speculatively.” However, the average person is usually trying to make a big killing in the market, thinking that he or she can turn a $5,000 to $10,000 account into a million dollars in less than a year. While this sort of feat is possible, the chances of ruin for anyone who attempts it is almost certain.

I have been helping clients with these very issues in my trading courses for over a decade.

Trend Following Money Management Insights

A good reminder about money management (PDF):

Money management in the context of trading refers to what a gambler might call ‘bet sizing’. It is how many contracts to trade on a certain strategy, given a certain bankroll. In my experience with retail investors, the number of contracts to trade is normally an arbitrary consideration. One contract, five contracts, ten contracts – whatever you can afford. I have known traders who spent countless hours studying Gann, or testing indicators, or drawing little lines all over their little charts. But when it came to placing the bet, there appeared to be no consideration to the position size. Someone even said to me recently, “It doesn’t matter how much you bet as long as it’s a good trade.” We will use a really simple example to explain why such thinking is incorrect.

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