Tharp's Thoughts Weekly Newsletter (View On-Line)

• Article Forex Trading with Gabriel Grammatidis, Part 2, Interview by R.J. Hixson
• Trading Education Van Tharp Signature Peak Performance Training
• TradingTip Risk-On & Risk-Off Trading—The New Normal, Part 1 by D.R. Barton, Jr.

New! Three-Day Forex Workshop
Presented by Super Trader Gabriel Grammatidis

June 14-16

Learn about Gabriel's path to trading success in the second part of our two-part interview below.

Click Here to Learn More About The Workshop.

Forex Trading with Gabriel Grammatidis

Part 2

Gabriel Grammatidis is a successful full-time trader and graduate of the Super Trader program. He has extensive experience trading Forex, and will impart the knowledge he's gained at a three-day Forex workshop at the Van Tharp Institute in Cary, North Carolina from June 14-16.

Last week, Gabriel talked about what drew him to trading and to Forex in particular. This week, he talks about his own Forex trading techniques and gives advice for those who are interested in trading the Forex market. Click here to read part one.

Q. Do you trade one primary pair, the majors, or any pair that fits your setup requirements?

I trade 8-10 different setups on more than 25 Forex pairs. Here, my main selection criterion is whether it makes sense to trade the specific pair from a transaction-cost perspective. The bid/ask-spread of a pair is wider when it is a less liquid pair. As a general rule, I do not trade pairs when the spread makes up more than 20% of the trade risk involved. As a result, I trade the most liquid combinations of USD, EUR, JPY, GBP, CHF, CAD, AUD and NZD pairs.

Q. Do you see any particular patterns to Forex trading by certain pairs or by season?

I do not differentiate much between the characteristics of individual Forex pairs. I’ve developed a style of trading that specializes in trending pairs that develop specific setups. I haven’t specialized in individual pairs; I screen more than 25 pairs. I differentiate the market cycle they’re in, which doesn’t depend on the individual pair or any seasonal pattern. The only exception is the month of August, where liquidity usually comes down and swings do not develop easily. That’s why I usually take my longest vacation during this time of the year.

Q. The amount of leverage that traders can tap in Forex accounts attracts some people and scares others off. Do you use a lot of leverage in your Forex trading?

I use the leverage standard provided by my broker, which is 50:1. In Forex, some leverage is required because currencies move much less on a percentage basis compared to equities or commodities. In the end, my risk is not a function of my leverage, but the amount of capital per total trading capital I am prepared to lose per trade. The leverage only tells me how much margin is absorbed from my trading account.

Q. What advice do you give traders about Forex leverage?

The most important thing in trading is risk management, not leverage. If the risk is under control, the profits will come sooner or later. Van has written a lot about position sizing™ strategies and risk management and I generally follow his advice. When focusing on a position sizing strategy, the risk of leverage is already covered. Leverage of 25:1 up to 100:1 should be sufficient for a Forex trader.

Q. How much money does someone need to trade Forex?

In Forex, very small accounts can be traded profitably because the transaction costs are calculated as a percentage and usually do not include a fixed commission. Depending on the broker, Forex accounts can be opened with as little as $500 U.S. with no disadvantage to large accounts.

Q. Does technical analysis work for Forex trading?

TA works very well in Forex due to the huge size of the market. As I said before, market participants usually aren’t big enough to manipulate the prices, which means that the prices react very well to support and resistance areas, pivots, moving averages and other technical aspects. Because Forex is a trendy market, trend-following strategies work particularly well.

Q. Is trading Forex really that different from trading stocks or futures?

Forex’s participants, and thus its market characteristics, are quite different from those of other markets. There are also Forex-specific issues such as pip value, spread, margin calculation etc. Aside from these specifics, though, a Forex chart follows the same dynamics of supply & demand. I plan on discussing this topic extensively during my workshop in June.

Q. Do you read lots of economic news to keep up with the fundamentals of individual country economics and currency rates?

Although I like reading fundamental information and news, I found that I trade best when I focus on chart-reading alone. I’ve noticed several times in the past when the opinions of others, particularly those in economic news, have influenced my evaluation and analysis on a subconscious level. When trading, I try to expose myself to as little outside information as possible.

However, it is important to be aware of major economic news during the day that might influence prices. During times when significant news might affect the market, I reduce my risk or close out positions.

Q. Do you trade the spot Forex market or Forex futures? Why?

I trade spot Forex only because it allows me to trade more currency pairs with sufficient liquidity around the clock than if I were trading Forex futures contracts. If someone already trades futures, however, I would recommend continuing trading futures and simply adding Forex futures. You can trade the major pairs very well through futures contracts. Should you decide to trade Forex futures, I recommend analyzing the spot market Forex charts because the highly liquid sport market plays a leading role.

Q. What has been your experience attending trading workshops?

All the workshops I’ve attended have given me something valuable to take home with me—be it a trading system, an indicator or a market perspective. One thing I would have enjoyed seeing more of is the practical application of a system, not only on the basis of screenshot examples, but on that of well-simulated life trading, as well. Many things can only be understood when actually applied in practice. The practice section of my workshop will provide a lot of room for interaction.

Q. What was your experience teaching the one-day Forex workshop here last summer?

My experience was very positive in the sense that people have been really passionate when it comes to learning more about Forex. The interaction and feedback I received has been very gratifying for me. I love to teach and transfer know-how to other people and to see them grow as a result.

Q. What will you teach in your three day workshop June 14-16?

The workshop agenda is structured around three main areas:

• Forex background & basics: all you need to know to start trading Forex.
• My Forex systems: I will teach three trend-following systems that can be traded on any timeframe.
• Trading simulation: All three systems will be traded with live history-replay software. Participants will get a live feel for the setup and go home with experience and a good number of trades performed in a relatively short frame of time. I believe this is very important to be able to start trading at home.

Q. So you are going to use a simulator again this summer for your three-day workshop?

Yes, we’ll use it again. The simulator allows you to play historic data as though it were a live event, which in turn allows you to jump into the Forex pair at a certain day and time when things start to get interesting. You can enter a trade with a certain position size and a stop, as though you’re trading in real time. This is one of the advantages over real live-trading because there will be a number of trading opportunities to learn from.

Q. Is your workshop more for people who have never traded Forex or more for experienced Forex traders?

The workshop is built for traders/investors who do not know much about Forex. People will go home with a good understanding of both the Forex market and a number of proven systems that provide an edge. Also, and most importantly, they’ll trade all three of these systems as if they were live trading in the Forex markets. In addition, I’ll show my tools and process for trading preparation.

Having said that, I will say that in last year’s workshop, two professional Forex traders attended, and both said they learned a lot and were glad they came. So I feel pretty confident that experienced Forex traders would also benefit from attending the workshop.

Q. What advice would you give to people who want to trade Forex but may not be ready for a workshop just yet?

Open a small Forex account and trade with much less than a 1% position size on a small time frame. Your view on trading and your knowledge about yourself will be much different after having completed 50 trades, let alone 200-300 trades.

Q. What advice would you give to people who are working full time right now but want to make the switch to full-time trading?

I think it’s important to prepare well before you try to make a living out of trading. Despite what many people believe, trading is actually one of the most difficult things you could ever try to do. It requires a lot of self-work, experience and knowledge to execute flawlessly and remain consistently profitable.

My suggestion would be to stick with Van Tharp’s trader development material while starting experimental trading early on. I’ve drawn a lot of benefit from trading a small account on a very short timeframe. You can build market knowledge very fast and see what psychological strengths and weaknesses surface, and that feedback can point you to the self-work you have to do, just as it has for me.

Also, trading early in your development process will help direct you into the type of trading, timeframes and setups that most fit you. For me, this was a very important trial-and-error process that helped me find my trading niche.

Most traders I’ve met say they want to work first on themselves and then trade. Knowing that there is a lot of initial resistance to trade, I strongly recommend that self-work and trading be done in parallel.

Thank you very much for your time. We look forward to seeing you on June 14.

Trading Education

Workshops

Next month we will offer a three-day workshop to show you what it takes to trade Forex and send you home with some proven trading systems—and even some hands-on trading experience!

To see our full workshop schedule, including dates, prices and location, click here.

Trading Tip

Risk-On & Risk-Off Trading—The New Normal

Part 1

by D.R. Barton, Jr.

In the 1984 film The Karate Kid, beloved actor Pat Morita portrayed one of the most endearing movie characters of the 1980s—handyman-turned-karate-mentor Mr. Miyagi. Mr. Miyagi stole almost every scene in which he appeared and uttered many memorable lines, almost always in broken English.

Perhaps none of the quotes from The Karate Kid are as memorable as one from a scene in which Mr. Miyagi’s young student, Daniel, shows up for his first karate lesson and is surprised to discover that there will be no kicking or punching, just a lot of car washing, with Miyagi telling him, “Wax on, right hand. Wax off, left hand. Wax on, wax off. Breathe in through the nose, out the mouth. Wax on, Wax off.”

Even many people who have never seen the movie before have heard this iconic quote, which has entered popular culture and become synonymous with learning the fundamentals first.

It’s somewhat interesting that the “new basics” of the market follow this same principal and sound so similar. You can almost hear Mr. Miyagi’s voice saying, “Risk on, risk off. Risk on, risk off.” Why is this style of trading so important now? Let’s dig in and see.

If Your Friend Jumped Off the Empire State Building, Would You?

You can’t turn on any business news network these days without hearing someone chat about risk-on/risk-off trades. In this case, there’s good reason. Institutions of all shapes and sizes are following the common wisdom of putting their capital into risk-on assets during up or greed-based markets and into risk-off assets during down or fear-based markets.

While there are no industry-standard definitions for the terms, most would agree that risk-on assets are those that outperform market benchmarks in good times, while risk-off assets are those that could be considered “flight to quality” candidates. Investors typically go to risk-off asset classes in times of trouble. While not exhaustive, the risk-off list might include:

• U.S. treasury bonds
• German government bonds
• Swiss franc currency
• Japanese yen currency
• U.S. dollar currency
• Healthcare stock sector
• Consumer staples stock sector
• Utilities stock sector
• Blue chip stocks
• Cash (of course!)

In short, risk-off plays are any that would qualify as defensive in nature.

On the other hand, traders rush to risk-on assets when market times are good:

• Junk bonds
• Emerging market bonds
• Emerging market currencies (e.g. Brazilian real)
• Emerging market stock indexes (EEM, EBB)
• Small cap stocks and indexes
• Copper (higher demand in expanding economies)
• Energy stocks and commodities (for same reason as copper)
• Consumer discretionary stock sector
• Tech stocks and indexes

There are always nuances and caveats to different market cycles. The energy sector, for example, usually follows the market; healthy economies require more oil and gas for fuel and raw materials. But that relationship can go counter-cyclic, especially when there are high levels of geo-political tension in oil-producing regions.

Another caveat lies in the precious metal sector, where gold and silver, et al., have less market correlation and, lately, have tended to switch teams early and then late in cycles.

We can check out a microcosm of this risk-on/risk-off behavior by using stockcharts.com’s nifty performance charts and the list of S&P Sector ETFs. The chart below shows the performance for nine different sectors relative to the S&P 500 for the period from May 1 through May 22, of this year.

View Larger Image

For this largely fear-based period in the market, we see financials, materials and energy underperforming. On the flip side, utilities, consumer staples and health care all outperformed, while the rest were basically flat compared to the S&P 500. This is just one snapshot in time, but it’s a somewhat expected outcome of institutions moving money out of risk-on sectors and into risk-off sectors.

New week, we’ll dig into the ramifications of the risk-on/risk-off paradigm. Until then…

Great Trading, D. R.

About the Author: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena. He is a regularly featured guest on both Report on Business TV, and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio. His articles have appeared on SmartMoney.com and Financial Advisor magazine. You may contact D.R. at "drbarton" at "vantharp.com".

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