Personality Parts
by Van K. Tharp, Ph.D.

Most forms of psychotherapy assume we have a multitude of internal parts operating on a subconscious level. For example, Freud’s theory of personality assumed that we each have an Id, Ego, and Super ego—parts that certainly could be in conflict. Transactional Analysis assumes we have a parent, child and adult. I could go on listing theories all the way to Psychosynthesis, which assumes that we are all composed of thousands of parts and the primary job of therapy is to get the parts to work together as a unit. 

Who knows whether or not people are made up of parts? I certainly don’t! But at the same time it appears to be a useful fiction to assume that we are. For example you might have a trader part, a parent part, a fun-loving part, etc.

It is useful to assume we have some parts and that core behavioral problems often come from conflicting parts or from parts acting on their own without understanding the whole picture. Each part has a positive intention for you or you would not have created it in the first place, even parts that now cause negative side-effects (such as trading for excitement and not following your system). As a result, you can use some standard negotiation techniques to get the parts to work together. Those techniques are detailed in the third volume of the Peak Performance Home Study Course, and are much too involved to cover in the scope of this newsletter. However, I would like to provide you with this introductory information about what your parts may be,  their positive intentions, and how you can get to know them better. In particular, I want to explore the intentions of parts that might seem to function to lower your self-esteem by producing fear, anger, depression, or feelings of worthlessness.

In our Peak Performance 101 workshop, we expand on this work by incorporating exercises on an experiential level. And again this work can only be practiced in an interactive environment, such as a workshop, where student and teacher work on individual situations. But you can do the first step in the process, which is the first step our workshop students take. We ask people to do an exercise to determine what parts are in their heads. The exercise is called a “Parts Party.” I recommend you do it about half an hour before you go to sleep, while you are in bed. 

Parts Party

First, since everyone reading this is a trader or wants to be a trader, assume you have a trading part. Bring up that trading part and ask him/her/it the following questions:

1. What are you trying to do for me? What’s your positive intention for me?

2. Who are you in conflict with? What other parts give you the most trouble in your trading?

3. How does this part represent itself? If it is an image, what does it look like and how would someone else recognize it if it walked into the room? If it is a voice, whose voice is it? If it is a feeling, then describe the feeling. How heavy is it? How big is it? And so on.
Ask all your parts to come and let them know you are just giving them a chance to show up and play. But whenever you become aware of a new part, ask it the same questions.

The next morning, after everyone has done the exercise, we ask each participant about their parts. Often the discussion helps others discover additional parts that might not have shown up at the party. Here are some typical responses:

• “I had five parts show up. The trader, whose primary purpose is to make me the best possible trader I can be, and the banker, who is very conservative and in charge of risk management. The little boy, whose intention is to have fun and enjoy life. My family part, whose intention is to love and care for my family and give them lots of time; and my mother. I don’t know what my mother’s intention is, but she is always telling me what can go wrong and making me worry. I know it’s her because it is her voice I hear. The trader, at times, can be in conflict with all of the other parts.”

• “Well, I seem to have four trading-related parts. At least, that is all that showed up last night. One part, the trader whose job is to trade. The second part is the broker part of me whose job is to execute customer orders. However, he’s always giving the trader advice based on what I hear from my customers and that’s usually not productive. I also have a gambler part who really likes the action of playing the market. He is counterproductive. Then I have a part of me that is angry all the time—especially at the gambler part of losing so much money. He tends to disrupt my personal life as well.”

• “I have a skydiver part and a banker part. Neither of them gets along at all. The banker part is very business-like. It makes money by taking low-risk ideas. It manages money well. On the other hand, the skydiver part just loves fun. It loves the excitement. But what it does is very dangerous. It could kill me—both physically and financially.”

• “What I discovered is that I have thousands of parts. I have five advanced degrees and there are parts responsible for each. I’m involved in three different jobs and there are parts involved in each of those. A different part represents each family member—for example, there is not just a father part, but I have a part of me to look after each child. I could go on. And there are new parts being formed each time I want to learn something new. The problem I have is that none of these parts have enough time.”

Spend some time thinking about your parts.  It’s ok if you don’t completely grasp this concept. As I mentioned this is core material from both the Peak Performance Home Study Course and a very interactive exercise in the workshop. If you just start thinking about this concept and what your many parts may be, I believe it will be a very a positive and useful exercise in self understanding and moving closer to peak performance whether in trading or other aspects of your daily life. In Part Two we'll look at how to deal with conflicting parts. 

"System Trading:" What Is It? Should you Buy and Use a Trading System?
by Jim Wyckoff, Senior Analyst

There is an endeavor of futures trading that is popular among many traders, but also about which many other traders are unfamiliar. It's called "system trading." In this educational feature I will define system trading and detail the advantages and disadvantages of the methodology.

What is System Trading?

System trading (also known as mechanical trading systems) is the deployment of a well-defined and very strict set of criteria for trading a futures market or individual stock--including entry and exit points. The trading criteria for a particular trading system can include all kinds of technical indicators, chart patterns, volume, open interest, and even fundamental factors.  There are all kinds of trading systems available for sale, and even more trading systems that have been developed by individual traders, for their own use. 

The key tenet of a trading system is that strict signals are given for entry and exit points, based on the parameters of the system. Most trading systems are computer-program based, due to the complex nature of most of the trading parameters. Indeed, trading systems can be highly complex and have dozens of parameters plugged into the system. Or, a trading system can be as simple as a moving- average "crossover" method that provides buy and sell signals with each moving average crossover.

Advantages of System Trading

A major advantage of system trading is that it takes the human emotion factor out of a trade. By strictly adhering to criteria built into a trading system, a trader cannot be swayed by such emotions as fear or greed "in the heat of battle" during the trade. Many veteran trading professionals argue that the major downfall of futures traders is their own emotions and lack of trading discipline. A trading system attempts to control both emotions and trading discipline.

Trading systems can be "back-tested" by running the trading system program through many years of previous price data for one or many markets. A trader may discover that his particular trading system works best in T-bonds or best in grains. When doing back-testing, a trader can refine the trading system's parameters to get what he or she feels is the very best trading system, based on past price history, and for various markets. This is what trading system advertisers and marketers call "hypothetical" trading results. 

For some traders who are also computer programming "wonks" anyway, much of the enjoyment of a trading system is derived from designing it, actually building it and testing it--before it is ever actually put through the paces of real-time trading. 

Disadvantages of System Trading

There are at least a few significant disadvantages of the "system trading" methodology. A major drawback is the potential for severe drawdowns in one's trading account. Since many trading systems have a trader in the market--either long or short--all the time, then unexpected big price moves can be devastating to a system trader who does not have a bigger trading account.

Another disadvantage is the propensity for marketers to "hype" a trading system as generating immense profits, based on "hypothetical" results. For example, a trading system may be advertised as generating 300% profits over the past five years, based on hypothetical back-testing. What the marketers and advertising don't tell you is that the drawdowns on a trading account may have been so severe that the vast majority of traders would have been wiped out before the market ever turned around.

While mechanical trading systems attempt to eliminate the potentially negative human emotion factor, they also eliminate the very important "trader intuition" and experience tools that can be extremely valuable. While computer trading programs are very powerful and take into account many, many variables (as many as the developer wants to add), there is no substitute for the power of the human brain and its flexibility.

For comparison, my "toolbox" approach to trading means that I may use any and all trading tools available to me in any given trading situation. I'll use different trading tools for different trading circumstances. To program a trading system to have such flexibility would be extremely difficult, if not impossible.

Finally, I do get many inquiries regarding the use of trading systems by individual traders. There is no single right answer regarding the viability of trading systems for individual traders. "Different strokes for different folks," as the saying goes. However, my universal response to those seeking out a trading system and who ask for my opinion on the matter is this: Don't spend hundreds or thousands of dollars purchasing a trading system and think you are on your way to Easy Street. Instead, at least first spend less than $200.00 on some classic books on futures or stock trading tools and strategies. Learn and fully understand some of the basic trading tools and trading methods before diving into any trading system.

Have a great week!

 

Currency/Commodity Markets
by Kevin Klombies

Sept. 1 (Bloomberg) — The yen rose to the highest level in five months against the euro and rallied versus the dollar as a decline in stocks prompted traders to pare holdings of higher- yielding assets funded in the Japanese currency.

Sept. 1 (Bloomberg) — Brazil’s real fell the most in more than a week as commodity prices dropped, slowing dollar inflows.

Sept. 1 (Bloomberg) — Asian currencies fell, with South Korea’s won reaching the lowest level in almost four years, on speculation overseas investors are withdrawing funds from local bond and stock markets.

The old trend featured a weak U.S. dollar and Japanese yen so our argument is and has been that a new trend will likely emerge out of dollar and yen strength.

The chart below shows the cross rate between the Japanese yen and Australian dollar (JPY/AUD) and the cross rate between the euro and the yen (euro/yen). The argument is that the trend has been in the process of changing since mid-2007 as the yen bottomed against both the AUD and the euro.

Below we show the ratio between the stock price of Wal Mart (WMT) and the cross rate between the Japanese yen and the AUD. For the JPY/AUD we have reduced the chart to two moving averages (100-day e.m.a. in green and 200-day e.m.a. in red).

We would like to make two points here. First... in both 1990 and again in 1997 the ratio of WMT to the SPX turned higher and this preceded the lows for the yen relative to the AUD. In other words once the WMT/SPX ratio begins to trend higher it is only a matter of time before the commodity trend weakens to the point where the AUD starts to decline relative to the yen.

Second... on the two prior occasions when the WMT/SPX ratio turned higher it continued to rise for a good three years. If history were to repeat WMT would outperform the SPX into late 2010. As well once the yen finally turns higher against the AUD the trend remains positive for years.

Short-term Views

We have something of a fascination for ‘crash tops’. We probably shouldn’t given how frequently we focus on them and how infrequently they actually work but... there you go.

Below we show the S&P 500 Index (SPX) from 1987 and a chart of Citigroup (C) from 2008. The idea is that the C chart is virtually a mirror image of the 1987 SPX. In other words it has the potential to be a... reverse crash.

Since markets rarely ‘crash’ higher we have to view this somewhat carefully. The idea is that the July bottom for C is similar to the August peak for the SPX and that if the pressures on the financials manage to ‘clear’- and the weakness in crude oil prices yesterday was a nice start- then the trend could shift quickly back in favor the financials.

Quickly... below we show a chart of crude oil futures. The trend turned rather sharply negative at the end of this year’s second quarter. If crude oil futures were to break below 110 then the channel would support a short-term decline down to and potentially through 100.

Below we have included a chart of aluminum producer Alcan. Alcan was purchased by Rio Tinto last year so we are using this chart to make a broader point. The argument is that this is where the adage ‘sell in May and go away’ comes from. Typically cyclical strength makes a bottom in October and a top around May or June. Every so often the lows for cyclical strength are marked by bottoms for the mining sector. The chart shows, for example, that Alcan made bottoms in or around October in 2000, 2001, and 2002. We continue to look for weakness in the commodity cyclicals through into at least this year’s fourth quarter.

 

 

U.S. Stock Market Update
by Robert W. Colby

Best Wishes,
  

Weekly Currency Wrap-up for Week Ending August 29, 2008
by Darrell Jobman, Editor-in-Chief

With little in the way of major US economic data releases over the week, there was a tendency for markets to consolidate. There was still an acute focus on the state of the global economy and relative prospects between the major economic blocs.

The US industrial data offered some support with durable goods orders rising by 1.3% in July while core orders rose 0.7%. There was also a tentative recovery from near record lows for consumer confidence with an increase to 56.9 in August from 51.9 previously .

Both existing and new home sales stabilised close to the previous month’s levels. The inventory overhang remained substantial while prices remained weak, although there was some evidence that conditions were starting to stabilise.

The Case-Shiller house-price index recorded a 15.9% decline in prices in the year to June. These was evidence that the rate of decline was slowing and much if the weakness was again focussed in California and Florida with other areas more robust.

Second-quarter GDP was revised up to an annual rate of 3.3% from the provisional 1.9% estimate, primarily due to the impact of higher exports. Initial jobless claims remained above the 400,000 level while continuing claims continued to rise.

Minutes from the July Federal Reserve meeting confirmed the unease over growth trends with expectations of weakening conditions over the second half. The Fed stated that the next move in interest rates would be an increase, but the rhetoric lacked conviction and this pattern continued in comments from Fed officials over the week.

There was further weak German data over the week which maintained negative sentient towards the Euro-zone. The IFO index for August weakened to 94.9 from 97.5 the previous month and consumer confidence weakened to a fresh five-year low.  In contrast, the employment data was stronger than expected with unemployment falling by 40,000 for July. As far as inflation is concerned, the flash Euro-zone estimate dipped to 3.8% from 4.0%

There was further tough rhetoric from the ECB during the week with council members Weber and Liebscher both warning that it was too early to talk about interest rate cuts while there was the need for strong vigilance at this time.

The dollar retained a generally firm tone over the week, but it was subjected to a correction after recent rapid gains and was encountering tough resistance at levels beyond 1.46 against the Euro while stalling on a trade-weighted basis.
                    
The Japanese government also announced a JPY11.7trn fiscal boost and the Japanese economic data over the week was actually stronger than expected with a 0.9% increase in industrial production for July compared with expectations of a further monthly decline while unemployment fell to 4.0% from 4.1%. Core consumer inflation rose to 2.4% in August from 1.9%.

There was still evidence of yen selling on significant rallies as margin accounts continued to sell the Japanese currency. Nevertheless, the yen strengthened slightly and challenged the 160.0 level against the Euro.

Sentiment towards the UK economy continue to deteriorate. The latest BBA mortgage approvals data showed some stabilisation over the month, but approvals were still down by over 60% over the year while Nationwide reported a further 1.9% decline in house prices for August to give a 10.5% annual decline.

There was further evidence of a serious downturn in the retail sector with the latest CBI report recording a net sales balance of -46 from -36 and this was the weakest figure for over 25 years.

Bank of England MPC member Blanchflower continued to warn over the UK economic trends and re-iterated more forcibly that there should be sharp interest rate cuts, especially as there was likely to be a rapid medium-term drop in inflation.

The UK currency has remained under heavy pressure as confidence in the economy continued to crumble amid a stream of poor data. Sterling weakened to a fresh 2-year low below 1.83 against the dollar and fell to a 12-year low on a trade-weighted basis.

The Swiss economic data continued to suggest a slowdown. The UBS consumption index fell sharply to 1.85 in July from a revised 2.22 the previous month and the KOF leading indicator also weakened again to 0.68 in August from 0.85.

The dollar again hit tough resistance above the 1.10 level against the franc during the week. The Swiss currency firmed against the Euro, but hit resistance close to the 1.61 region as confidence in the European economy as a whole weakened.

 

Darrell Jobman is Editor-in-Chief of www.tradingeducation.com, which provides free daily and weekly commentaries for traders as well as complimentary trading tutorials, and eBooks. He is an acknowledged authority on the financial markets and has been writing about them for more than 35 years.