Tharp's Thoughts Weekly Newsletter (View On-Line)
An Interview with Gabriel Grammatidis by R.J. Hixson and Gabriel Grammatidis
Quantitative Easing—Panacea or Sleight of Hand? Pt. 2 by D.R. Barton, Jr.
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An Interview with Gabriel Grammatidis
Gabriel Grammatidis is a successful full-time trader and graduate of the Super Trader program. He has extensive experience trading Forex and will share his knowledge at a three-day Forex workshop from November 9-11 at the Van Tharp Institute in Cary, North Carolina. In the following interview, Gabriel talks about his approach to trading, the techniques and habits that lead to success in the markets, and his own development as a trader.
Q. Do you monitor macroeconomic fundamentals? For example, the ECB and the Fed are in the process of increasing their respective money supplies. Do you pay attention to any of that, or are you a purely technical trader who just looks at the charts?
I monitor macroeconomic developments very closely, especially during these turbulent times. They form the basis for my big-picture view of capital markets, which determines how I structure my investments and trading—i.e., what and how I should trade (investing, swing trading, daytrading), which asset classes to own, etc. If you want to protect your wealth, I believe it’s important to think about where potential risks might develop. When it comes to short- and medium-term trading, I focus on charts.
Q. It seems that you rely more on the price action you see in the charts than on indicators. Why is that?
Actually, I use a combination of price action and indicators. Most of the indicators people use are based on past price action, which provides a signal after a price move has occurred (lagging indicator). Consequently, many traders enter when the move has already played out quite a bit. To get in early, I typically use leading indicators that anticipate a price before the move happens. Combining leading indicators with price action helps me get the best view of the markets.
Q. Do you monitor the markets on days you don’t trade, or do you just catch up when you get back to trading?
I don’t monitor the markets when I’m not trading. The Forex market operates in sufficient liquidity 24 hours a day, so there are opportunities around the clock. This gives me the flexibility to schedule my trading times around whatever else is going on in my day. In Forex, I think it’s much more important to trade at times when you feel your best rather than to allow specific exchange hours to dictate your day. When I take a day off to go hiking in the mountains, I usually catch up the next morning.
Q. Van stresses the importance of understanding market types for trading system development. Do you measure market type in the currency markets?
There is no Holy Grail system that works well in all market types, so it’s important to analyze how well a system performs in each market type and how many trade opportunities might occur. You can then select or concentrate on those systems that perform best in the specific market type you have. The three systems I teach in the upcoming workshop are trend-following systems that require good uptrends or downtrends. Quiet market types allow me to benefit from other kinds of low-risk trade ideas (e.g., a consolidation pattern breakout failure).
Q. What do you believe causes support and resistance levels? Is the same force at work in Forex markets as in equities or commodities?
Support and resistance levels are caused by market participant psychology. When you look back in time, you see that support and resistance levels have worked even when charting was not performed. Technical analysis applies particularly well to Forex.
Q. Have you read any good books on Forex trading, or do you find technical analysis books more useful?
I screen the market for Forex books once in a while. They all make for interesting reading, but now that I understand the inner workings of the Forex market, I find technical analysis books more useful. In the end, the best trading book is your own trading journal.
Q. You used a trading simulator at your workshop to help people learn your systems’ setups, entries and exits. Have you used a simulator yourself to practice trades on your own?
Yes. I believe that a simulator is a good tool to use after a trade is finished. During my daily debriefs and weekly reviews, the simulator allows me to go back in time and replay situations as though they were “live.” It’s like a drill training session that gives me the ability to think through difficult situations and work on my weaknesses (just as in sports).
Q. You talk a lot about risk management. Why is it important, and how do you apply it to your own trading?
Apart from psychology, trading is mainly about risk management and less about generating profits. Once the risk is under control, the profits tend to unfold themselves (if the system has an edge). I manage my risk through a dynamic position sizing strategy and by monitoring key trade statistics that give me an early warning indication if something isn’t working right.
Q. You also stress the importance of preparing for the trading day. How do you prepare?
It is my habit to follow certain routines in life. I start my trading day by riding my stationary bike, stretching and meditating. A self-analysis and mental rehearsal is also part of my trading preparation. Van stresses the importance of following the top tasks of trading, and these preparations are an important part of the tasks. When I don’t follow my morning preparation, my mental state for trading is impaired. So I better do it...
Q. Some of the attendees at your June workshop were a little surprised that meditation improves your trading. How does meditating and understanding your personal psychology help you trade better?
Meditation improves every aspect of life and trading. The more I trade, the more I understand that trading is mainly about psychology and mental states. Meditation is an important tool for achieving a peak trading mental state. Accepting or even being grateful for whatever happens (win or lose) is a precondition for trading well. Trading from a state of fear or greed is not advisable.
Q. In what areas do you think you excel as a trader?
I am a creative person, and I constantly research and test new systems. One of my strengths is being able to take a trading idea and test and refine the rules for it until the system is production ready.
Q. If you could improve one aspect of your trading, what would it be?
Being less prone to overtrading.
Q. What's the hardest part of trading for you?
The hardest part for me is flawless execution of my system rules no matter what. Not following your rules is a mistake, and most mistakes generate losses. If you want to flawlessly execute your rules, you need to work on clearing non-useful beliefs or emotional blocks. Too often, the mind self-sabotages in order to satisfy unconscious beliefs that are detrimental to trading success. During the Super Trader program, I had to unlearn many of the beliefs I had acquired in my life and learn new ones.
Q. What do you do to continue your education and development as trader?
I attend workshops, talk to trader friends and read books. Having a social network of trader friends is important.
Q. Where do you see your trading going in the next year or two?
Right now I’m developing some new trading systems that should be operative within a year’s time. I’m also working on opportunity detection tools that give me visual alerts if a setup is about to trigger.
Q. What kinds of life experiences have been the most helpful to your trading? Athletics? Your corporate experience?
That’s an interesting question. I used to think that trading was similar to athletics, but it’s not. Whereas athletics is an emotionally intense activity, trading is done best when emotional intensity is very low. My corporate career taught me how to be creative within a logical mind frame, so I guess that my professional career has helped me the most.
Q. Why is trading so difficult to learn?
Trading is a simple thing once you get past all the obstacles—but doing that can take years. When most people start trading, they are “unconscious incompetent.” As they acquire more trading knowledge, they become “conscious incompetent,” then “conscious competent.” This can be compared to somebody who learns to drive a car and just had some driving lessons. The most critical step toward consistently winning in trading is developing the ability to execute systems flawlessly (unconscious competence). Most people, including myself, are unaware of this progression, or else they grossly underestimate the time and effort it will take to advance through the process.
Q. Why do you teach other people your trading systems when you could stay home and make money just trading them?
This question implies that life’s purpose is all about money. I take great joy from teaching others and seeing them progress. I know how difficult it is to get started, and I know that I can save people a lot of time by pointing them in the right direction. I’m grateful to all the people who helped me, so I’m happy to transfer my know-how to others.
Thank you for your time, Gabriel. We look forward to seeing you on November 9.
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Quantitative Easing—Panacea or Sleight of Hand?
In our last trading tip article (click here), we discussed the true role that cash infusions from global central banks play in the markets. There is zero doubt that cash—and therefore extra liquidity—is being forced upon us, even though economic fundamentals have been mixed (as opposed to dire). Many have criticized the recent Federal Open Market Committee (FOMC) decision to purchase $40 billion of mortgage-backed bonds a month as a purely political move in the face of the upcoming election. As we mentioned before, the open-ended nature of this new cash-printing strategy has led pundits to dub this round of quantitative easing “QE Infinity” or “QE Eternity.”
The Fed says that QE3 is intended to help reduce unemployment, but will this new influx of money necessarily lead to higher stock prices? In our last QE article, we said that correlation does not equal causation and that improved corporate earnings are probably a better explanation for the current stock market bull run that is now well into its fourth year. Is QE the prescription for driving this bull market into its fifth year?
Earnings vs. QE
We won’t revisit the charts from the last article that show stock prices vs. QE and stock prices vs. earnings. Let’s just say that the lines on those charts representing stock prices, growth in Federal Reserve assets and growth in earnings went from the lower left corner to the upper right corner for the period between late 2008 and the present. I concluded that earnings growth played a larger role than the QE injections in the stock market’s run-up.
Since the end of the real estate/credit collapse, much has been written about the nature of those earnings improvements. Whereas earnings per share for the S&P 500 have grown 2.5 times since early 2008, sales per share have only gone up by a little more than 20%. The bottom line is that earnings improvements have mainly been from cost reduction, not revenue growth. And while cost-cutting can make a big difference in the short run, you can’t cost-cut your way to prosperity over the long term.
Earnings Season is Upon Us
As we enter earnings season (Alcoa, the company that traditionally leads off the quarter, announced earnings last night), can we count on earnings improvements to keep driving stock prices higher? Those with a bullish bias may not find much solace in the following chart from the New York Times:
The chart shows that earnings forecasts for this quarter anticipate the first year-over-year decline since the recession ended.
Now for a couple of important “if/thens”:
- IF earnings really drive share prices, and
- IF, as analysts predict, earnings are down this quarter,
- THEN we should see a pullback in stock prices as we head toward the end of the year.
- IF we don’t see a pullback in stock prices this quarter,
- THEN we can assume that QE3 is playing a more direct role in equity pricing than many now believe.
Quantitative easing must certainly be having an impact somewhere. Next week, we’ll look at areas these massive infusions of capital might be affecting.
As always, I welcome your comments at drbarton “at” vantharp.com.
Great Trading, D. R.
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