appendix original workshop notes objectives...van tharp’s favorite systems s1912e ... who want to...

Van Tharp’s Favorite Systems S1912E

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Appendix

Original Workshop Notes

Objectives

If a system was presented by someone else at a VTI workshop, we

have tried to include notes and some of the original beliefs in this

appendix.

Systems Include:

1. Ken Long’s Tortoise System

2. NCAV as presented in Bear Market Workshop

3. RSI 2

Robert Tharp version

Mark McDowell revision for better SQN

4. DRL: Strongest Stocks in Strongest Industries

Action Steps:

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Ken Long Tortoise System

I. Bottom Line Up Front:

II. Who we are

III. Tortoise Beliefs about Financial Planning:

IV. Overview of the Tortoise Invester:

V. Overview of the Tortoise System:

VI. Evolution of a Trader and a Trading System:

VII. Tortoise beliefs about Money

VIII. Tortoise beliefs about the World:

IX. World dynamics in Y2K favoring the individual invester:

X. Tortoise beliefs about equity investment choices

XI. Tortoise beliefs about mutual funds

XII. Tortoise System competitive edge

XIII. Specific Tortoise System Objectives

XIV. Tortoise method beliefs

XV. Tortoise method implementation

XVI. Performance Observations

XVII. Areas to explore to ratchet improvement

XVIII. An advertisement for the Tortoise Website

XIX. The Tortoise Trading Simulation:

XX. Tortoise Seminars:

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I. Bottom Line Up Front:

At tortoisecapital.com, we teach you how to get annual rates of return better than the S&P 500

Index year in and year out. Our method takes only minutes a week to operate, doesn’t require that you

conduct extensive research or possess special technical knowledge and most importantly keeps you in

charge of your investments. You provide the time, self-discipline and willingness to learn. We provide a

simple, robust, proven method and timely information that enables you to act quickly and with

confidence in the market. Together, we overcome the fear, greed and lack of knowledge that prevent

most people from fully participating in the most dynamic time of opportunity and growth in human

history.

II. Who we are:

Tortoise Capital Management, Inc., is a Kansas C Corporation, organized in 1999 for the purpose

of providing simple, robust financial education products to the growing numbers of individual investors

who want to take personal responsibility for achieving their long-term financial freedom

III. Tortoise Beliefs about Financial Planning:

Long-term growth investing in our dynamic world market is only 1 component of a total

personal financial plan. It cannot be a substitute for the other components of a complete package. We

strongly urge you to take care of first things first, in order to build a solid foundation for stable

consistent future prosperity. Take care of first things first:

1) reduce & eliminate consumer debt

2) have sufficient insurance to provide for your family’s security and long-term goals

3) maintain an emergency fund of 3 month’s salary (at a minimum)

4) pay yourself first

5) know where your money goes

6) know the difference between need-to-have and want-to-have

7) minimize taxes legally through use of competent advisors and business structures

8) achieve your specific long-term financial goals by disciplined, automatic monthly

contributions to an appropriate investment vehicle

9) hire competent advisors for tax and estate planning just like you do for medical and dental care

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10) achieve true diversity by participating in the 3 areas of opportunity for growing your wealth: real

estate, business, and equity investing

11) Take personal responsibility for your results and your future. No one has more at stake in your

future than you.

12) Routinely check performance against a benchmark to see if your system is meeting the

checkpoints along the way to your goal.

IV. Overview of the Tortoise Investor:

1) An individual investor who takes responsibility for his or her own results

2) Has the discipline to stick to a system

3) Studies the system and adapts it carefully as the world changes

4) Compares performance against a benchmark (the S&P 500 index) on a regular basis to ensure the

system is performing as intended

5) Has taken care of first things first

6) Spends a few minutes a week to ensure that his long-term financial goals will be reached

7) Shares good ideas with others, but takes everything with a grain of salt

8) Knows where the emergency stop loss limits are

9) Employs the Tortoise within a retirement account to get the maximum benefit of tax free growth.

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V. Overview of the Tortoise System:

We believe that the secret to above average mutual fund rates of return is not finding the perfect

fund for all time, but finding a great mutual fund family that lets us leverage the advantages of being an

individual investor. Our method is to study and adjust portfolio allocations weekly, within a great family

of mutual funds with the following characteristics:

1) minimum $10 billion under management (so that they have a first class research department

and have trustworthy auditors)

2) Multiple funds within the categories of large cap, medium cap, small cap,

global/international and bond/money market (so that their product line covers the entire world

market and so that at least one of their funds will be able to pull away from the pack whenever a

mega-move takes place in any sector).

3) Includes an S&P 500 index fund as a large cap choice. (so that when it is the best performing

fund within the family, all our money will move to it and give us at least the S&P 500 rate of

return)

4) No loads front or rear (why should we pay for the privilege of starting and stopping an account

with them? Plenty of families don’t charge, and we want all our money working for us).

5) No fees for exchanging between funds (Why pay for this action when there are plenty of

families of funds who don’t charge? As the customer, you have the power, make them come to

you with better service)

6) No limit on exchanges (Why pay for this action when there are plenty of families of funds who

don’t charge? As the customer, you have the power, make them come to you with better service)

7) Same day execution of fund exchanges: (Insist on this service since plenty of fund families

offer this service)

8) 24/7 service (Insist on this service since plenty of fund families offer this service. The only way

fund families can really distinguish their products is by providing superb customer service: insist

on it)

9) Web enabled, 800 number, touch tone telephone options (So you can leverage the flexibility

of the Info Age)

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VI. Evolution of a Trader and a Trading System:

You must answer 3 questions before you begin:

1) Who am I? (know thyself) What are your strengths and weaknesses? What level of

understanding of financial matters do you have. How much are you willing to commit to your

continuing development & education? Who are you investing for? What do you value?

2) Start point (know where you are) Monthly budget, Income Statement and balance sheet for

personal money flows.

3) Goals and Objectives (know where we want to go): In minutes a week, beat the S&P 500 Index

rate of return for the year and finish near the top of all funds within the fund family for annual

rates of return.

VII. Tortoise beliefs about Money

1) Money as an idea: Money is not an object or a "good vs. evil" thing. It merely is energy that

represents capacity for action at some point. You can trade it for activity or results, or use it to

generate more money. Money is what you spend it on and how you treat it. You don’t own

money, although you can let it own you if you are not careful. You can merely direct it in

certain directions. If you do not develop sound habits for handling money it will go away and

not return until you change your ways.

2) Money dynamics: Money cannot remain static. It must remain in motion to grow. It will seek

out good ideas to see if the idea will help it grow. The better an idea is, the more and faster

money will flow to it and the longer it will stay. Money clustered around a good idea will attract

other money. Money will leave an idea that turns bad or is without substance.

3) Crisis = Danger & Opportunity: There is inherent risk with money management and investing

in the same way that there is risk in handling electricity. The opportunities provided by

knowledge, discipline and a system can overcome the crisis of fear, ignorance and greed.

4) Price is the market’s language: The market reinvents itself with every trade. It is the sum total

of all transactions, thoughts, emotions, opinions and beliefs at any given time. It is beyond the

capacity of any 1 person or computer to fathom. It is not knowable, but it does communicate to

us through price. The last price IS the market, everything else is opinion and predictions. Prices

are your only facts.

5) Parent/child relationship of the Investor/Market: Just as a parent chooses how to interact with

his children, so too can you decide how you will interact with the market. If you shout and

scream and try to control you may have some short-term success but you will not be happy or

prosperous in the long run. If you are quiet and grow and learn and study together, you have the

opportunity to develop a long and fruitful relationship with the market. There will be good times

and bad. Take joy in the good times and learn how to recognize and protect each other from the

bad. Learn as you go. Help others. Copyri

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VIII. Tortoise beliefs about the World:

In order to prosper in the world market you must understand the world and how money and

institutions look at the world.

1) Sector Analysis of the world market: Analysts, fund managers and investors classify the world

into sectors for ease of understanding and to be able to focus on growth opportunities. They

focus by putting their money on certain sectors consistent with their beliefs on why certain

sectors will have advantages over other sectors. They charter their funds to abide by these

philosophies, and the managers must stay within these boundaries. Their flexibility comes from

adjusting within these parameters. The amounts of money they move are huge, and it takes time

to make their adjustments, far more time than it takes individuals to observe, react and adjust.

The action of adjusting institutional size money affects the market while the adjustment is being

made, because they affect the dynamics of supply and demand. These changing dynamics are

detectable through price changes within and between sectors. The market is an organic whole

and so none of these static classifications is true or false. They are merely useful, more or less.

Typical ways of looking at the market and at companies within the market are:

a) Functional: based on type of business activity or business sector. You can keep dividing

into as many useful classifications as are helpful. The S&P 500 companies can be

classified into 9 sectors, 1 of which is “high-tech”. High tech can be divided into many

sub sectors, with each “space” having its own dynamics. High-tech sub sectors could

include areas like: semi-conductor manufacturers; long haul broadband service providers;

network management software developers etc.. The list is infinite.

b) Geographic: based on region, there are sectors corresponding roughly to continents, thus

you could think of the world market consisting of sectors like: Asia Pacific, Europe, US,

North America, Latin America, or conversely: 1st World, 2d World 3d world emerging

markets.

c) Capitalization Size: You can think of publicly traded companies in sectors as a function

of their market capitalization. For example as rules of thumb you can classify by large

cap (10B+) Medium cap (2-10B), small cap (200M-2B), micro cap (<200M).

2) Companies as ideas: Each of the publicly traded companies that are available to mutual funds to

invest in can be thought of as a physical expression or manifestation of the idea that is their

competitive advantage. Dell Computer’s “idea” was to conduct low-cost assembly of computer

systems in a tax advantaged area with common world-class components, marketed, shipped and

supported directly to the corporate customer, leveraging the power of the Internet. Other

companies with similar ideas that don’t execute as well are rewarded proportionally to the

goodness of their own idea and their ability to execute. But the “company as idea” is a useful

concept because you can then think of that idea expressing itself throughout a world market.

You could map its footprint onto the different sector schemes of analysts, and therefore think of

Dell as a large cap, 80% US - 20% international, hi tech, computer manufacturing company.

Each company in the public arena, in fact, tries to define its own unique space where it is Copyri

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uniquely positioned to provide cost effective value to its customers, and is engaged in defending

and expanding its own space. You can think of companies as ideas competing within sectors

which are themselves ideas. These ideas can be compared and assessed for usefulness in terms

of their ability to make money grow faster than other sectors. What an individual needs, then, is

a useful way of comparing the relative advantages of being in 1 sector at a given time over

another, for a given period of time. The idea can then be assessed in terms of its potential for

above average gains for a time period when compared to a standard benchmark. Again, we like

the S&P 500 as a benchmark because it is the best representation of the world market as a whole

in terms of trends and rates of return, and year in and year out beats 85% of actively managed

mutual funds. In fact, the S&P 500 Index is a manifestation of the advice to "Cut your losers,

and let your winners run" because the selection committee is constantly culling the list and

incorporating those great companies who have earned their way to leadership by virtue of their

market capitalization.

3) Mutual funds as ideas: Now think of mutual funds as ideas. The manager defines an idea that

will have to compete against the ideas of all other mutual funds managers. The mutual fund

manager’s idea is expressed as an approach to looking for growth in certain sectors (functional,

geographic, capitalization etc.). His idea will have a certain amount of flexibility built in, which

defines how much discretion he is entitled to use. Some are very restrictive. Others, like private

hedge funds give unilateral discretion to the manager to do anything he pleases at any time,

consistent with his assessment of risk/reward.

There are risks associated at each end of this discretion spectrum. The idea of a tightly

constrained manager can be just as risky (and more so) in a rapidly changing market as

unconstrained hedge fund manager. In any event, all publicly registered mutual funds are bound

by SEC restrictions which limit the size of any one given position in their portfolio. These

restrictions and the sheer size of the portfolios they manage, and the time required to adjust

institutional size money give advantages of timeliness and agility to individual investors not

bound by the same restrictions.

4) Water balloon analogy: Think of the dynamic world market as a water balloon made up of

interconnected and overlapping sectors. As selling pressure causes a sector to contract, the

money flows to the sectors with a relative advantage, and this buying pressure in the favored

sector causes the stocks in that sector and the funds that own them, to rise. New money pours

into the water balloon at some rate from corporate profits, pension plans, and individual

investors. Money comes out of the balloon when capital invested long term is removed and

spent on consumption. But that consumed money is not really lost, as it goes right back into the

balloon in the form of working capital for companies. The size of the balloon only truly shrinks

when we face worldwide depressions that reduce the size of total market cap as a function of

lowered production and reduced consumption on a global basis.

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IX. World dynamics in the 21st Century favoring the individual investor:

1) Pax Americana: The winning of the Cold war freed up a great deal of capital that used to be

spent in the most nonproductive sector of all: defense spending. That money is now at work in

the capital markets contributing to the increasing levels of production driving worldwide

prosperity.

2) Information Age: shrinks the world, and causes the growth of databases that make more things

knowable. Information management tools and intelligent software, decision support systems,

management information systems, graphical user interfaces, intelligent agents, neural networks

etc. all add up to giving individuals the ability to process, synthesize and act on

3) Free markets & Globalization: new places and faces to receive capital to develop business

opportunities. Countries around the world are figuring out that the way to prosperity is through

the Western capitalist model (or least through the use of Western capital), and so the

opportunities for money to grow in new places are exploding upward. Will China see their way

to wisdom by breaking their paradigm? or will they adapt capitalism in some manner to their

Middle Kingdom? or will Confucius triumph over Adam Smith? That looks, to me, like the great

international paradigm test for the 21st Century, whereas the direct confrontation between Adam

Smith/Thomas Jefferson and Karl Marx/VI Lenin was answered in the 20th century.

4) Digitization of information and capital: information can be reduced, transformed, analyzed

and communicated faster than ever. Capital travels across borders in nanoseconds and is orders

of magnitude quicker in sniffing out new and better ways to grow.

5) Competition: drives down prices and raises performance levels and expectations

6) Broadening of the investor class: more demand for services and increases the size of the pile of

discretionary capital in search of long term growth opportunities

7) Sheer size of world market and institutional money: Gives empowered, informed individuals

the advantage over institutions because of their better liquidity and ability to focus, when

combined with the same information products available to institutions.

X. Tortoise beliefs about equity investment choices

1) Risk/Reward/Volatility: when you seek more rewards than mutual funds offer, you also

increase: downside risk, time commitment to operate and manage, volatility hazards, the

requirement for specialized knowledge, and the administration costs of individual buying and

selling.

2) Inflation risk: When you seek less risk than mutual funds as a class, you get less rewards which

makes the net effect of inflation greater, and actually represents greater risk to your long term

financial freedom. Clearly, the risk premium of equities is more flexible and adaptable than the

relationship between the interest rates your capital can command and the rate of inflation.

3) Knowledge requirements: mutual funds, by filtering through the markets for you based on first Copyri

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class research departments, eliminate the needs to spend hours researching individual

competitors in a given sector. Drives your knowledge needs to zero, by letting you focus on

results and not on the details of stock picking.

4) Time Requirements The relatively smooth equity curves protect you from the volatility of

individual stocks and reduce if not eliminate the need for daily system management.

XI. Tortoise beliefs about mutual funds

1) Advertising: while never telling lies, mutual funds tailor their advertising to lull you into

believing that their performance is at least above average if not exceptional, whereas, year in and

year out the passive S&P 500 Index outperforms 85% of actively managed funds. With a single

good year of performance, a fund can squeeze out 3 years of deceptive advertising. It’s only

deceptive to those without the knowledge and discipline to benchmark performance periodically

against the S&P 500 Index. In down years, you will be advised that mature investors have long-

term time horizons. Try to remember that the current year was once at the far end of a 5-year

time horizon. The ultimate resort of advertising are the studies that show buy and hold strategies

in equities always win in time periods greater than 25 years. Are you prepared to wait 25 years

to determine if your retirement plan is still within historical parameters?

2) Payment: Fund managers get paid by charging you 1-2% administration fee for your funds

under management, not by how well they are doing with your money. 1.5% is a reasonable fee to

pay to a good mutual fund company that meets all the criteria we have outlined here. That 1.5%

is the price you pay for their accounting, research, stock picking, trading and their salary. It’s the

price you pay for reducing your time commitment to minutes a week. But the truth of the matter,

from the fund family and fund manager perspective is this: they only have to do good enough to

get your money in the fund and good enough to keep your money there. So, their motivation is

not primarily to do great, but to not be the worst.

Now they are also willing to charge you any fee over and above this reasonable

management fee that you are willing to pay. Thus, the many funds that charge sales and creation

fees, redemption fees, 12-b fees etc. If you are willing to pay (why?) they are willing to charge

you. It’s your money, you decide how much you want to have working for you. I choose strictly

no-load, no exchange fee fund families, period.

3) Equity curves: mutual funds, by virtue of their diversity, achieve market rates of return but with

much smoother equity curves than those experienced by individual stocks. This means that the

daily/weekly/monthly volatility is less than that experienced by individual growth stocks and

therefore allows you more time between checkups.

4) Generic funds types : There are plenty of different kinds of funds that allow you to put your

money into definable categories of risk/reward that suit who you are and what you want to

accomplish as an investor. You could label them roughly in the following categories:

a) Sector specific funds: narrowly focused on a fraction of the market

b) Aggressive growth: nowadays this usually means high tech heavy Copyri

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c) Growth: will have a high tech component but is open to growth in whatever sector or

industry that growth can be found.

d) Growth and Income: a mix of growth with dividend producing companies that provide

a flow of cash as well as capital appreciation

e) Total return: can swing between pure equities , cash instruments, and dividend

producers to achieve the highest rates of sustainable return in the near term

f) Capitalization specific (large, medium, small): these focus on particular sizes of

companies, believing that trends occur that are profitable.

g) Geographic: focus on finding quality companies and investment opportunities in

specific geographic regions

h) Value: seeks to find quality companies in out of favor sectors that are oversold based on

an analysis of their underlying fundamentals

i) Balanced:. try to strike a middle of the road approach by being a little bit in everything

and making smaller bets on particular sectors/trends. They aim to produce consistent

sustainable returns over the long run. A recipe for mediocrity in our opinion

j) Bond: usually a large assortment of types here that can include a mix of corporate

bonds, government bonds, international bonds, tax free etc. Can usually count on slightly

better than money market rates of return, and these make sense for folks who have a short

term and continuous need for a reliable stream of income

k) Money market: similar to bonds, these funds are extremely liquid, allow for check

writing usually) and will give you better rates of return than typical checking and savings

accounts. The best place for your pay cash account money since you get a competitive

rate of return on money that you will soon be spending. Also, a good place to park

money within your portfolio when you are protecting capital and waiting for

opportunities to arise in the short term.

5) Market type and fund dynamics: markets are either trending (a clear dominant move up or

down that is discernible) or non-trending (up and down, back and forth, with much confusion

about where to be; no clear winners or losers). The fund types noted above have different

performance characteristics in the different types of markets. Generally the more specialized the

type of fund the clearer it is whether it’s the right place to be in a trending market. When the

market is non-trending, typically the balanced or value type funds muddle along quite nicely.

6) Performance parameters: the most important factor to analyze when comparing mutual funds

is total performance over a given time period expressed as a total percent rate of return. You

must account for all the fees and sales charges (cost of ownership), taxes generated by buying

and selling, dividends and capital gains distributions in order to be able to compare funds against

other funds on a fair and impartial basis. Don’t get confused by comparing share prices. What

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7) Handicaps of the mutual fund manager: By law, the public fund manager may not have more

than 5% of his fund invested in any single position. So, he must have 20 good ideas at any given

time, whereas the individual investor only has to find a couple to be successful. The fund

manager is at the mercy of investors who are putting money in and taking money out of his fund

perhaps at times when these transactions are inconvenient. As an example, a fund manager might

be forced to sell positions to meet redemption requirements when he would prefer to be a buyer

or a holder.

Another handicap relates to the sheer size of the portfolios being managed: this can

produce a couple different problems that individuals don’t face. When Fidelity Magellan has to

figure out where to invest 50-60 billion dollars it is inefficient for them to spend time on small

companies which don’t give them enough volume to invest and so their research can be restricted

to larger companies. Also, when trying to move billions of dollars from sector A to sector B it

can take weeks and months to make the move in such a way that the act of moving doesn’t

negatively affect the fund’s buying and selling.

XII. Tortoise System competitive edge

1) Lump sum Vs Dollar cost averaging (DCA): The Tortoise method works equally well with either

of these methods of introducing new money into the market. We strongly believe in the goodness

of regular automatic investing. In fact, we strongly discourage the idea of moving large amounts

of money suddenly from 1 asset category to another (like moving home equity suddenly into the

market in 1 move). Large single jumps increase dramatically your risk levels. We believe in the

goodness of moving into the market consistently, regularly, and automatically. We also believe in

moving out when conditions indicate that’s the right move too!

2) DCA in a single fund: this is a staple belief of the financial planning community who often advise

to buy and forget, and trust in the power of a generally and historically rising market over

considerable lengths of time. The problem with this method is that if you pick a substandard fund,

and market conditions change during the lifetime of your holding you arrive at the destination with

a lot less in your kit bag than you were planning on. Depending on where you enter the market,

your break-even point, historically, can be 13 years in the future after a 50% drawdown. The

Tortoise method allows you to take advantage of the power of dollar cost averaging while giving

you the benefit of staying alert to a changing market in time to act in a productive and profitable

manner.

3) DCA in multiple funds: can be better than DCA in a single fund, provided you pay attention to

your mix of assets. When combined with frequent, periodic performance reviews this captures the

essence of the Tortoise method when performed inside a family of mutual funds that cater to the

individual active investor.

4) DCA in passive funds: Pioneered by Vanguard funds, this philosophy says that by taking

advantage of the natural tendency of markets to rise over long periods of time, coupled with low

administrative costs you can get by merely buying companies in proportion to their market

capitalization (and avoiding all the costs of active portfolio management and research) individual

investors can do quite well and expect to outperform actively managed funds. The Tortoise agrees Copyri

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in principle and in fact encourages the use of the Vanguard family of funds, particularly the S&P

500 Index fund for those without the time or temperament to apply the Tortoise method. Facts are

facts, and S&P 500 Index funds are extremely competitive

5) Active adjustment within a retirement account: the best place to apply the Tortoise method

because you have a long term time horizon coupled with the tax advantages of IRAs and 401(K)s

to protect you from the effects of relatively active trading.

6) Active adjustment in a non-retirement account: The Tortoise method works quite well in non-

retirement accounts but you must allow for the lessened performance generated by taxes on your

trading activity. Circumstances vary, but in many cases monthly portfolio adjustments can achieve

acceptable rates of return with lesser tax and less administrative record keeping not found in

retirement account trading. Trading activity outside an IRA, regardless of your trading vehicle

(funds vs. stocks for example), carries with it tax and administration burdens.

XIII. Specific Tortoise System Objectives

1) Benchmarking vs. S&P 500: This is the benchmark against which we measure ourselves over

any time period. Because of the confidence we have in the continued utility of the S&P 500 as a

measure of the broad markets performance over time, we use this standard to check our own oil.

One of the reasons we want to have an S&P 500 index fund in the fund family we choose is so

that when the S&P 500 Index is the best performing fund in a given time period, we can move all

our money to it and be assured that we are not losing to our own benchmark.

2) System feedback: Since we study fund performance on a weekly basis we measure ourselves on

a weekly basis, while also looking at the longer time periods as well.

XIV. Tortoise method beliefs

1) Horse race analogy: A handy way to understand the Tortoise method is to liken portfolio

adjustment to a horse race, except you are able to change your bets as you watch the horses

going around the track For example, if you saw Secretariat 40 lengths ahead in the first turn,

wouldn’t you like to be able to change your bet at no cost, and earn money off his success for as

long as he was in front.? Of course you would. By picking a mutual fund family that allows

frequent no fee exchanges between a wide variety of no-load products, you can recreate this

story within your own investment portfolio.

2) Choosing the right fund family: this is much more important than trying to find the one size

fits all, for all time, single best mutual fund. Because the market is continually reinventing itself,

there is no such thing as the single best fund for your long term investment needs. But, if you

pick the right fund family you can maximize the payoffs available to you by moving your money

to the winners more quickly than the institutions can. You can take advantage of the trends they

create when they move their money around. By picking the right family of funds you can

maximize the amount of your money that remains working for you.

3) Key to wealth: participate in every mega move, avoid mega down moves. Simply put, if you Copyri

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manage to get a good part of the significant major moves up (“mega moves”) and miss most of

the major negative moves, you will consistently achieve rates of return that are far better than the

average market return, with less volatility.

4) Mega Move examples in last 5 years: To name just a few mega moves, at various times in the

last 5 years you could have doubled your money in less than 4 months in Asia Pacific sector

(twice) and in the NASDAQ (3 times). Unfortunately you could have given all that money back

in a couple months by staying in those sectors for too long. By remaining fully invested at all

times you would have ridden a roller coaster and ended up with average to below average

returns. Paying some simple attention to weekly and monthly trends, which is the fundamental

basis of the Tortoise approach would have enabled you to capture most of those large mega-

moves up and protected you from the downside risk when money flew out of those sectors.

5) Information requirements: We pay close attention to the 7 day and 30 day percent rates of

return for all funds within the family we choose when it comes time to allocate our money

among all the potential funds. We also watch closely the daily and weekly performances of the 3

major indices : the S&P 500, the Dow 30 industrials, and the NASDAQ, believing that they

define the overall market conditions that our money in our chosen funds must participate in.

6) Why the Tortoise beats the S&P: let’s say that in a given year the S&P 500 Index was the best

performing fund in the entire family for 6 months, and that for 6 months at least one other fund

did better. In our method , all our money goes to the S&P 500 fund when it is the front runner,

for as long as it is the front runner, but then goes to a better performing fund whenever that

occurs. In that year then, you would earn the S&P 500 index rate of return for half a year and

earn more than the S&P for half a year. Some things really are that simple.

7) Why the Tortoise finishes in the money (Win, place or show): Because the Tortoise’s money

is always moving to the front runners, and coming out of the market when conditions turn sour,

the Tortoise typically participates in the best moves of the best funds but misses much of their

“givebacks”. Over the course of a year this keeps the Tortoise at least among the year to date

winners if not allowing it to outperform the single best performing funds.

8) Price is the message, performance is the standard

XV. Tortoise method implementation

1) Weekly review: The Tortoise simple weekly ritual occurs on Friday nights after the market has

closed. We use Friday night’s closing prices for all our calculations. We determine the weekly

performance of all 3 major indices (S&P 500, DJIA, and the NASDAQ). We then calculate the 7

day and 30 day percent rates of return for all funds within the fund families we report on. We

decide on our strategy for the upcoming week which takes effect on Monday with Monday’s

closing prices. If something catastrophic happens Monday we may elect to not act or change our

mind if we saw something like a repeat of Black Monday (all indices down over 5% for

example). You must allow for some common sense after all.

2) Index performance to determine % exposure to the market. If we see agreement between

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increase or decrease our market exposure in increments of 25%. Because of the difference in

volatility between the indices, we think a significant move is 2% for the S&P and DOW, and 3%

for the NASDAQ for a week. If we see disagreement (example: the DOW and S&P are up, and

the NASDAQ is down) we won’t change our percent participation/exposure in the market, but

are likely to adjust the money within the portfolio as determined by the 7 and 30 day % rate of

return. If we see a double good or double bad % agreement we would increase or decrease

market exposure by as much as 50% in a given week, although 25% is our norm. Whatever

portion of our money is not in the market is in a money market fund within the family of funds

earning a reasonable rate of return, liquid, waiting to act when conditions change the following

week.

3) 7 Day & 30 day rate of return performance: these calculations are the bedrock of our analysis,

because these 2 trends, taken together, perform 2 critical functions: they screen out market noise,

yet provide early notice of significant trends developing. We will move money from one fund to

another when we see the new fund beating our current holding on both the 7 AND 30 day rate of

return. We allocate money between the funds we own as a function of the 30 day rate of return.

We find that this method gets our money to a new winner quickly enough to reward its

exceptional performance, yet gives former front runners enough opportunity to recover their

form.

4) Deciding which funds to own:

a) The problem of over diversification: At some point, probably after 6-7 funds, you risk

duplicating your holdings in the underlying stocks, and you get a false diversification.

Conversely if they are not correlated, you end up watering down the performance of your

front runners. There’s probably a lot of art as well as science in finding the right mix of

funds, but as a general rule of thumb we end up owning between 2 and 6 funds in a given

week with 3 being about the norm. Although there have been weeks at a time when we

owned only 1, the clear front runner (but with a finger on the safety button to preserve

capital). Typically this kind of focusing occurs only after a dominant positive trend that

incrementally pulls our money to it.

b) How much of a difference makes a difference. As a rule of thumb a 2% difference in a

week is a significant difference and 5% in a month is a significant difference. If you

project those numbers out over a quarter and a year you will probably agree.

5) Portfolio allocation among the winners: based proportionally on the 30 day rates of return.

6) Weekly ritual: At the Tortoise, we do all our rational thinking Friday nights after we have

calculated the performance data from Friday night’s closing prices. By staying in touch with the

significant market moves and news during the week, we then map out the portfolio % exposure

strategy for the next week. We then think about it for 2 days in the back of our minds and in the

pit of our stomachs. We listen to both sides of our brain. We have until Monday, really, to make

the changes based on our strategy, with the ability to see how the market is unfolding on Monday

to make our final decision.

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7) Insurance information

(a) Index strength; HOLDRs and SPDRs: by watching the performance of sub sectors

within the NASDAQ and S&P we believe we are able to keep a close watch on the

market pulse to alert us to significant changes in trends.

(b) Top 10 underlying strength: we study the Top 10 holdings of each fund we own to

make sure that the momentum up is sustainable, and that the percent of the total fund

portfolio represented by the top 10 does not expose us to unacceptable risk.

XVI. Performance Observations

1) Trading up from funds that are making money: when market conditions are good, we often

find ourselves trading up from funds that are making money into funds that are making more

money.

2) Doomsday scenarios: The market index rules that define how much exposure we have in the

market at any time serve us well to protect us from bear markets and catastrophes.

3) 2 year bear market: the Tortoise method would have us in funds that were making money,

although money market or bond fund rates of return (estimated at 5% per year), are probably all

you can expect to get. But +5% is a pretty good return in a year when the S&P 500 might lose

25%!. When the bear market is over, the Tortoise gets us back into the market in stages

consistent with sustained performance.

XVII. Areas to explore to ratchet improvement (Monkeying around)

At the Tortoise we are constantly on the lookout for simple, common sense to improve our

system. We are very satisfied with our performance results, but we are researching the effects on

performance of using some or all of the following indicators. We won’t add anything to the system

without a thorough systems check and informing you of any proposed change.

1) Different time periods: are there better time periods than 7 and 30 days?

2) Moving Averages & Exponential moving averages: is it better to use moving averages and/or

exponential moving averages than straight percent gains?

3) New funds: is there an advantage to getting into new funds right away? Or should we let them

develop a track record before committing money?

4) New managers: if a fund gets a new manager should we take it off our list for 6 months while

we assess the effect of the new manager?

5) Market news (FOMC, election year): Should we try to discount the effect of news (other than

price action) on our decision making process or should we stay strictly with price indicators?

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XVIII. An advertisement for the Tortoise Website at http://www.tortoisecapital.com

1) Community: our goal is to establish a community of like minded investors with similar outlooks

and goals whose discipline and willingness to share their observations and decisions can help to

enrich the “Tortoise Tribe”. We will establish a place where we can talk and discuss, ask and

answer questions, and make decisions based on high quality and timely information for our long

term investment system.

2) Chat: the website supports live members-only Java chat, where we can meet online to discuss

the Tortoise system, philosophy, strategies etc.

3) E-mail distribution lists: by signing up for e-mail distribution of our reports you can receive

just those reports you want to the e-mail address of your choice.

4) Browsable reports: This is the heart and soul of the Tortoise website. In the members area you

can browse any and all reports, from the Market Watch to the High Tech Health Check to any of

the fund families that we study and report on (currently Strong, Fidelity, Janus, Vanguard and

Rydex).

5) E-store: you will be able to buy memberships, books at a discount, and special reports as they

become available.

6) The Daily Thought: gives you a daily snapshot of the market and significant events if you just

can’t keep your eyes away from daily events.

7) Performance charts: we track the weekly performance of a 10,000 investment in the Tortoise

from the 1 January, and show how the Tortoise compares against a buy and hold strategy in the

big 3 indexes.

8) News and articles: through our partnership with I-Syndicate we provide daily updated dynamic

links to interesting articles about the Information Age and financial matters. I-Syndicate has

agreed to partner with us and have included the weekly Tortoise tracks in their catalog of

financial newsletters which they market worldwide. Several of their staff have even become

members of our site and are applying the Tortoise method to their own finances.

9) Lycos quote and portfolio tracker: you can setup and track your own portfolio through this

self-explanatory feature.

10) Members Forum: a moderated e-mail based discussion board where you can ask and answer

your questions. It’s a good way to stay in touch with others who are in the same fund family as

you and whose opinions you’d like to hear. An e-mail forwarding feature allows the answers to

your questions come to you!

11) Most importantly, the Tortoise website is driven by what you want!. We can expand our

offerings in any direction our customers want and we look forward to hearing how we can better

support your long term investing needs.

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XIX. The Tortoise Trading Simulation:

We’ve developed and play tested a very useful Tortoise trading simulation that lets you get the

feel for reviewing, analyzing and then acting on Tortoise reports using real life performance data. It lets

you test the Tortoise as you would use it in real life. It has helped us tremendously in developing the

capital preservation rules that minimize our losses in down markets while letting us phase into good

markets in a timely manner. We plan to sell the product to the public, and will make it available free for

Tortoise subscribers as part of our way of saying, “thanks for joining us”. This trading simulation has

proven to be one of our most popular training seminars, because it proves that the Tortoise can meet its

system objectives in all types of markets by paying disciplined attention to price performance.

XX. Tortoise Seminars:

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Bear Market Notes

Strategy: NCAV

This is the Mark McDowell Version which adds the RangeSt concept to improve the

SQN® score.

?

Bull

Bull “corrected”

Bull

Note: Sideways can be short / non-existent

3 - Side

When does the bear start for your system?

Outline of a bear market

2 - BEAR

Bull

Side

1 -

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• System Name: NCAV (Graham Number)

• Concept: Buy deeply undervalued stocks during or at end of bear market and sell when they recover to fair value.

• This is a long term trend following system that enters positions in stocks that are trading far below the value of their short term assets during bear markets.

• It does not pick market bottoms, but it tends to get entry signals near market bottoms.

• Graham’s value-based approach

• This system was originally written about by Benjamin Graham in The Intelligent Investor.

• Warren Buffett credits Benjamin Graham’s strategy

for his success in investing.

• Dr. Van Tharp writes about the system in Safe

Strategies for Financial Freedom.

3

3

• Definition of NCAV

• Net Current Asset Value (NCAV)

• To calculate NCAV:

• NCAV = (TCA – TL)/OS

• where TCA = Total Current Assets

• TCA is: cash, cash equivalents, accounts receivable, inventories

• TL = Total Liabilities

• OS = Outstanding Shares

4

4

• According to Graham this would be the fair value for a stock • Graham recommends buying stocks that are trading for 2/3 of their NCAV • In other words, buy great value when everyone else is selling, and sell it

when it’s over valued (when everyone else is buying)

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• Example: NCAV = (TCA – TL)/OS

• XYZ Company:

• TCA: $100.00

• TL: $10.00

• OS: 1

• NCAV = ($100.00 – $10.00) / 1

• NCAV = $90.00

• Buy Price = 2/3 x $90.00 = $60.00

• If XYZ stock is trading at $100.00, then:

• ($100.00/$90.00)*100 = 111.11% of NCAV

Example: Google (in millions) as of 12/31/2013

Total Current Assets

Total Liabilities

Outstanding Shares

NCAV Buy Price (2/3 of NCAV)

72,886 23,611 335 $147.09/share

$98.06/share

5

5

• Beliefs • Many healthy company stocks are very undervalued at end of bear markets. • Healthy company stocks that are undervalued can be identified through their Net Current

Asset Value (NCAV). • NCAV is determined by subtracting total liabilities from current assets and dividing by the

total number of shares outstanding. It is an excellent test for near-term financial strength. • Healthy companies whose stock is priced at 2/3 of their NCAV provide the lowest risk

opportunities for substantial gains during recovery rallies. • Very low NCAV setup opportunities tend to appear only when the market has endured a

pronounced bear market decline • Fundamental analysis helps in trading • The last leg of a bear market can cause participants to act irrationally and push share

prices below what the company is actually worth • Bull and bear markets can be detected through price analysis

• A good time to buy any product is when you can get it below its fair value • Benjamin Graham’s way of measuring a company’s fair value is still accurate • Most companies are not trying to deceive the public with bad accounting • The market has over reacted and the company should rebound

6

The data for NCAV calculations can be found in the balance sheet section for companies at: finance.yahoo.com or finance.google.com

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• Setups

• These conditions provide low-risk opportunities:

• The overall market needs to have declined for a while before the NCAV system can begin to work.

• The bear market needs to have been painful and the market has to have found a definite bottom. A short or shallow bear market will not trigger signals.

• The market (e.g., SPY) has been flat or up for at least two months

• The stock’s low on daily chart < ( 2/3 x NCAV )

7

7

• Setups

8

8

• NCAV system is looking for stocks of “good” companies that have been punished with the rest of the market during a severe or prolonged downturn.

• It can be easy to find stocks with prices lower than their NCAV, but this is often due to very bad news or adverse conditions for the company.

• When you find a company that meets the screening criteria, you still

need to research what's going on that might be driving the price down. There may be some valid reasons – more than just the overall psychology of the market. Avoid stocks with problems (operational,

financial, leadership changes, etc.)

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• Verify: Current Assets (CA) > Total Liabilities (TL)

• Calculate NCAV = TL – CA

• Is current price < 2/3 * NCAV? Then that stock has passed the screen

• Currently, www.grahaminvestor.com has a free NCAV screener.

9

9

Market & stock are flat or up for 2 month

10

10

Consider the reward to risk ratio based on using a target price at NCAV with a stop at the recent low.

In 2008, there were a number of 20:1 reward to risk opportunities

Bear market

• Less than 0.1

Debt / Equity

• Greater than 10,000

Daily Volume

• Less than 0.8

Price/Book

• Greater than 3

Price

• Greater than 0.1

Price / Cash Flow per Share

• Less than 0.3

Price / Sales

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Market & stock are flat or up for 2 month

Stop at 11

Consider the reward to risk ratio based on using a target price at NCAV with a stop at the recent low.

In 2008, there were a number of 20:1 reward to risk opportunities

• Stock price should be greater than $3, to avoid penny stocks

• Price to Book - compares the cost of a stock to the value of the company if it were broken up and sold today

• Book Value = TA – IAL

• Where

• TA = Total Assets

• IAL = Intangible Assets and Liabilities

• A Price to Book Value less than 0.8 means that you are looking for a company that is trading 20% below it’s book value.

• We want to find good value at the bottom of a bear market

• Requiring a daily volume of 10,000 shares helps find stocks that have liquidity (for buying and selling), i.e., the bid/ask spreads should be reasonable

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14

• Price to Sales Ratio is a relative way to value a stock against itself or other stocks.

• P/S = (SP * OS)/TS

• Where:

• SP = Share Price

• OS = Outstanding Shares

• TS = Total Sales over the last 12 months

• Note: (SP * OS) = Market Capitalization

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13

A P/S of 0.3 means you are paying 30 cents for every dollar the company makes in sales

The lower the ratio the more attractive it is

P/S Ratio tells you how valuable each dollar of the company’s sales is.

Used for spotting recovery situations

Company is increasing sales as the economy recovers but the share price isn’t changing…yet

As the economy recovers sales will increase and the value of the company should return to a more reasonable P/S ratio

Two kinds of cash flow

• Outflow

• Expenses

• Investments

• Inflow

• Financing

• Operations (sales, etc.)

• Investing

• Cash flow = Inflow – Outflow

• Positive = good

• Large Positive = better

• Negative = bad

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• A Price to Cash Flow Per Share greater than 0.1 means we are looking for companies that have

positive cash flow

• More cash inflow than outflow

• If this ratio is going down it means that cash flow is increasing while the share price isn’t

changing, or isn’t changing as fast as cash flow is increasing.

16

• Price to Cash Flow per Share is similar to a stock’s price to earnings ratio

• It is more difficult to manipulate (e.g., through accounting tricks) than reported earnings. Some believe it is a better indicator than the price to earnings ratio.

• SP/CFPS = Share Price

Cash Flow / Outstanding shares

OR

Share Price * Outstanding shares

Cash Flow

OR

Market Capitalization

Cash Flow

15

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• Equity = Assets – Liabilities (debts)

• Debt / Equity = Liabilities / Equity

• A debt to equity ratio less than 0.1 means

• Companies that have debt that represents less

than 10% of their equity

• The smaller the amount of debt as compared to the equity the better it is for the company’s future

• This number will decrease as debt decreases and/or equity increases

17

• For candidate stocks that meet the screening criteria, monitor their chart pattern.

• Wait until a rolling up price pattern has formed on a daily chart looking back for about a year.

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Avoid any stock that has still not yet found its bottom.

• These stocks are still in the process of forming their lows.

• Instead of catching a falling knife, wait until the price bounces or

rolls up and make sure it isn’t about to retest that low.

• Monitor stocks that are falling and look for the bottoming pattern and when they begin moving up.

19

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http://www.grahaminvestor.com/screens/

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NCAV Entry

• Stock meets screening criteria

• Stock has shown rolling up pattern off 52 week low on chart

• Focus on stocks with best reward- to-risk ratio

Stops

• Initial stop is below 52 week low

• Do not buy stock if it’s testing 52 week low

• Trailing stop of 20% or 25%

Exits

• Initial or trailing stop is hit

• Profit-taking target: at 100% NCAV, start using trailing stop or set exit based on continuous evaluation of reward-to-risk

Re-Entry

• If stopped out on one stock, re- enter after it’s found support and is rolling up

• If overall market is going down, exit everything and wait for the market to show the rolling up pattern.

Note: you may have to re-enter 2 or 3 times before the bull market

takes hold

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• Psychology: the NCAV system frames a long trade in a bear market

• NCAV may find many small companies with “ugly” charts

• The system is a rules-based system with discretion based on chart patterns

• Does it fit you?

• Filtering For the Economic Environment

• What industry was the “cause” of the bear market?

• 1999 – Technology

• 2007 – Finance, Real Estate

• 2011 – Finance

• Avoid buying stocks in the industry that “caused” the bear market for this system

• Stocks in the industry at the “center” of the bear market may take a long

time to recover or may not reach NCAV level valuations

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• Only take trades that have increasing NCAV

• Only take trades that have decreasing Price / Sales ratio

• Sales are increasing while the stock price isn’t changing or not changing as fast as sales

• Only take trades that have a falling price to book value

• Assets are increasing, liabilities are decreasing and stock price isn’t changing or not changing as fast as assets are increasing the liabilities decreasing.

• Alternative to buying stock:

• Buy call options

• Sell put options

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• The key concept of the NCAV system is to buy good, healthy companies at a discount.

• The NCAV system is one method for finding discounted stocks.

• You can use other methods. For example: • American Association of Individual Investors (aaii.com) tracks dozens of model portfolios

using different criteria, including investing in “value” stocks

• NAIC (betterinvesting.org) educates individuals and clubs on how to find and invest in growth stocks at a discount to their intrinsic value

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Bear Market Notes

Strategy: RSI2 Intraday

Concept: Sell short stocks that are overbought on a short-term basis

Primary objective: profit from intraday moves by shorting stocks

Key Beliefs

• RSI(2) is an effective indicator for identifying equities that have pulled back from

the trend; RSI(2) indicates overbought /oversold conditions

• Stocks that are in a downtrend and pullback will revert to their mean (trend)

• We can profit from intraday reversions to the mean

Terms and definitions

• Relative Strength Indicator RSI(2)

• Moving averages

• RangeStat

Setups

• Market type is bear

• Stock is below 50 day moving average

• RSI(2) > or = 95 or 97

Entries

• Go short when price moves down at least 25% of RangeStat from High of Day

(HOD)

• Reward:Risk > or = 2:1

Exits

• At target: HOD – RangeStat

• Stop is hit

• 3:30pm ET if stop or target not hit

Stops

Initial stop at 0.01 above HOD

Lower stop to entry (breakeven) when price moves +1R

Lower stop to +1R when price moves to +2R

Rules for making long trades in bull markets are opposite to short trading rules

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4

RSI2 Intraday System: Overview and Objectives

• Rationale for the trade: • Sell short a pullback in a downtrend (or buy a pullback in an

uptrend)

• We expect the trend to resume, but our objective is to make

a profit on the first sign of a move in the direction of the trend

m

RSI2 Intraday System Objectives for System An intraday system with

frequent trade opportunities

Minimal

effort

required to

identify, stalk,

manage and

monitor trades

during the

day

Win rate

of at least 40%

No

overnigh

t risk

SQN® large

enough to enable

position sizing to

achieve my

financial

objectives

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5

6

RSI2 Intraday System Key Beliefs

S&P500) is “the market” when

assessing market type

SPY (ETF for the

RSI(2) Intraday

• RSI(2) is an effective

indicator for identifying

equities that have pulled

back from the trend;

RSI(2)

indicates overbought

/oversold conditions

• RangeStat: the average + 1 standard deviation

of the intraday ranges for the last 30 days

defines a “normal” intraday move

• A move greater than 25% of RangeStat

indicates a stock is likely to continue trending

in that direction

• Stocks/ETFs that are in a trend will experience pullbacks from the trend

• The pullbacks will revert to the mean (i.e., return to the trend)

• We can profit from the intraday reversion towards the mean

• On an intraday basis, stocks that show a move in the morning in the direction of

the trend are likely to continue to trend in that direction

• It is useful to go with the overall daily trend, i.e., long when the market trend is

up and short when the market trend is down

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RSI(2) Intraday

RSI(2) by Connors • Larry Connors adapted the RSI indicator by using 2

periods (instead of the typical 14

periods).

• Sample performance

criteria:

• Average 1 - we ek return of stocks with a 2 - period

RSI: •

Below 2

(oversold)

=

+

0.79%

•

Above 98 (overbought) = - 0.19%

“Is the 2 - period RSI the Holy Grail of Oscillators? In

my opinion, it’s pretty close. It does a solid job of identifying markets that are extremely over bought

and oversold on a short - term basis. From there it can be used many ways… We all know that no trading

indicator is perfect

but the

2 - period RSI

does a better job of ident ifying market swings than any other

indicator

we have

tested or

use for

ourselve s.

I strongly recommend you consider using it and applying it to any equity, ETF, and indices trading

that you do.”

Source: Short Term Trading Strategies That Work, Larry Connors, pgs. 58, 72

RSI2 Intraday System RSI(2) Indicator

• RSI(2) oscillates between 0 and 100

• We are looking for extreme readings in stocks:

• Less than 5 for Oversold

• Greater than 95 for Overbought

• Note: for ETFs, we can use 5-10 for Oversold and 90-95 for Overbought

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RSI2 Intraday System: RangeStat • RangeStat is the average (mean) of the intraday range

for last 30 days + 1 standard deviation of the ranges

Range = High - Low

• RangeStat represents a potential “normal” intraday move, given the stock’s performance during the last 30 days.

• A “normal” move is defined as the RangeStat distance from a stock’s low of the day (for long trades)

• Gaps are not a factor when using RangeStat

– we care about intraday ranges

RSI2 Intraday System Standard Deviation of Intraday Ranges

• We want price to move in our direction before we enter the trade; how far does it have to move?

o When price moves past the intraday “noise”

then we have a directional move

o 25% of the RangeStat is a move past the intraday “noise”. This provides a 3:1 reward to risk ratio when used with our intraday target (more info below).

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12

RSI2 Intraday System: RangeStat For last 30 days:

• Range = High – Low

• Average = Average of Ranges

• St Dev (SD) = Standard Deviation of Ranges

• RangeStat = Average + 1 SD

RSI2 Intraday System: Assess Direction of Trend • Take short trades when stock is in downtrend: below 50 day

moving average (reverse for longs)

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RSI2 Intraday System: Trading Universe Our preferred trading universe consists of liquid stocks and ETFs with tight

bid/ask spreads, since we will enter with market orders

Bear Necessities S1703B

2017 Van Tharp Institute, Inc. All Rights Reserved. 13 The reproduction or transfer of this material is prohibited by the Van Tharp Institute student agreement.

RSI2 Intraday System Rules for Short Trades

Setup

Entry

Initial

Stop

Target

• High of day - RangeStat

• $0.01 above high of day

• High of day – (25% of RangeStat)

• Price is below 50 day moving averages

• RSI(2) is greater than or equal to 95

Exit

Rules

Lower

Stops

• Exit at initial stop • Exit at target • Exit at 3:30pm if neither stop nor target has been

hit • Move stop to breakeven when price is at +1R • Move stop to +1R when price is at +2R • Move stop to $0.05 above intraday swing high if +1R and +2R

stops are not in effect

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15

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RSI2 Intraday System Short Trade – Entry / Stop / Target

Bear Necessities S1703B

2017 Van Tharp Institute, Inc. All Rights Reserved. 15 The reproduction or transfer of this material is prohibited by the Van Tharp Institute student agreement.

Risk = $0.17

Reward =

$14.64 - $14.06 =

$0.58

R:R = 0.58/$0.17 =

3.4

• w

RSI2 Intraday Exits - “mechanical” rules

when price hits our initial stop (iStop) to protect capital

when price hits our Target; our target is a

nnnormal move (low of day + RangeStat)

0pm if neither a stop, nor target, has been hit

• Moving stops to protect profits:

• When price has moved +1R from our entry, move stop to breakeven (entry)

• When price has moved +2R from our entry, move

stop to +1R (e.g., entry + 1 SD)

• Mid-day and mid-afternoon, move stops to $0.05 above(below) intraday swing low, if +1R and +2R stops are not in effect

Exits will protect our capital and protect

our profits

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e = Bull

RSI2 Intraday System Trading Results – Bull Markets • Actual Trades: January 1 – September 5, 2012

• RSI2 <= 3 and price > 50 day moving average and Market Type = Bull

• Expectancy = 0.43

• 62% win rate

• SQN ®(100) = 3.5

• 40 trades

• 17R

• RSI2 <= 5 and price > 50 day moving average and Market Typ


• 62% win rate

• SQN ®(100) = 2.6

• 60 trades

• 19R

• RSI2 <=5 and Market Type = Bull


• 52% win rate

• SQN ®(100) = 1.1

• 159 trades

• 21R Bear Necessities S1703B

RSI2 Intraday System Customizations

Actively manage the

intraday trade:

- Scale-in as it’s

working

- Exit before stop is hit if it’s not

working or market is against you

Initiate trade as an intraday trade; if

it’s profitable, then convert some/all of

the position to a swing trade

Customizin

g

RSI2

Use different criteria for market

type

Example: Van’s market type with 30 day look back

Use RSI(2) values from 3 to

10 for longs (90

to 97 for shorts)

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RSI2 Intraday System Customizations

Convert intraday trade

(or part of

Exit 2/3 at target and carry 1/3 into the next

day; exit at end of 2nd day

original position) into

a swing trade If position is profitable at 3:30pm, adjust

size to account for overnight risk, and carry

position into next day; exit at end of 2nd

day

Exit when price crosses 5 day or 10 day moving

average (reversion to mean)

Exit with trailing stop (e.g., low of last 2

days, 1 average true range, below the 20 day

moving average, etc.)

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The Following presents the Robert Tharp

version of RSI 2.

7. RSI Period (2)

Beliefs about the System (Credit goes to Mark Briant for Beliefs about system and Limitations as he contributed to

this section)

1) Stocks that are heavily sold off or heavily bought become

stretched like a rubber band as they deviate from the mean

to the extreme. This system looks for when the selling or

buying subsides for a retracement to happen and profit off

the retracement.

2) This system is a contrarian system in that it goes against

the overall longer term trend. This system does a great job

of identifying stocks that are overbought/oversold.

3) This system is catching falling knives and stopping run

away upwards running trains. If you are wrong and

ignore a stop the potential to get hurt is massive

4) Market Psychology: Overbought and oversold conditions

are natural reaction- people tend to continue buying

beyond the point where buying can be justified and selling

beyond the point where a stock deserves to be punished.

This leads to a quick price reversal: some short lived some

sustained. With this strategy, we don’t care if it is a quick

correction or one of the longer duration as long as it lasts

into the next day.

5) Fundamentals: In general this strategy doesn’t lend itself

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duration. By the time the fundamentals are

overbought/oversold we’ve already taken profits and move

on.

6) This system believes in RSI and 200 dma

7) Strengths of system simple concept, set up and entry

8) Scans daily are very simple

9) Tight stops are used and provide opportunities for high R

multiples.

10) Scaling in is possible especially for day hold exit strategy

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Cop

yrigh

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019 V

an Th

arp In

stitut

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The following power point was an efficient stock strategy that I

developed partially based on the RL System

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DIN RT DPZ

EAT CAKE PZZA

YUM CPKI SBUX

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Screen 3d EAT –

TOTAL REJECT

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BGP DKS POOL ASCA MPEL

MGM BYD PNK WYNN LVS

IGT PENN SGMS FOSL TIF

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Screen 3m BYD

(Yes, Yes, Yes)

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appendix original workshop notes objectives...van tharp’s favorite systems s1912e ... who want to...

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