Tharp's Thoughts Weekly Newsletter
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Article: Systems Need to Fit! by Gabriel Grammatidis
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Workshops: Forex and Forex Live this February!
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Tip: When Markets Get Smoked — Remember These Things, by D.R. Barton, Jr.
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THIS FEBRUARY!
Forex Trading and Forex Live!
Learn to Trade Three Forex Trading Systems with an Edge
Join us for this three-day workshop, and leave prepared to use three different trading systems in the currency markets. Professional Forex Trader and Super Trader graduate Gabriel Grammatidis, teaches these systems that have proven to be profitable in live market trading over the last few years.
Have you ever attended a trading workshop that taught a lot of methodology, and then you found that you had trouble trading the system at home because you had so little experience with it? Gabriel has had that experience, and wants the traders at his workshop to be able to trade the systems when they get back home so he takes a slightly different approach.
Students in his course come away with a solid understanding of the trading process because they practice the setups, entries, and exits in groups with other students in the class. Gabriel makes extensive use of a trading simulator (live history replay) with which actual trades are traded in class as if “live.” So, you leave the workshop already having a good idea on how to trade the systems.
After a thorough review of each system, he slowly walks you through a number of trades on each system that has multiple time frame charts—basically the same screen setup that Gabriel uses to identify setups, entries and exits. All of these trades use recorded historical data run on a software system that reproduces the price charts from the date and time in the live market. You will be able to watch the setups happen as he explains how to get ready for and make the entry, and then how to get ready for and make the exit. After walking the class through several simulations, Gabriel involves the students in the decision process for pattern detection, entry and exits as the acquire competence.
When you get home, you’ll already have a good sense of trading each system—which means you’ll have a running start. And just to be sure, Gabriel provides everyone with pages of additional example trades to take home and study.
Plus, you also have the option to continue with your training in two days of live Forex trading so you can trade the systems live!
Learn more...
Feature Article
Systems Need to Fit!
by Gabriel Grammatidis
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Many traders and investors are involved in the search for the Holy Grail with the goal to find the perfect trading system. Does it really exist? Yes, it does! You will not find it, however, looking “outside of you“ for the right indicator or for a long-hidden set of trading rules. Van has consistently maintained, time and time again, that the real key to trading success is “inside of you.” The systems you are trading (as well as the markets you trade) should really fit you, fit your lifestyle, and fit your beliefs.
After trading various markets, I have been trading Forex now for a number of years, because it fits me so well. Forex offers a lot of flexibility for my position holding time-frames and time of day for trading. Forex also provides consistent, longer term volatility (trendiness). For these reasons and others, I really believe that Forex offers more flexibility and opportunity than any other market — not just for me, but for any trader really (more on this in a previous article — Top 10 Reasons to Trade Forex).
But where do you start? What is your way of learning? How will you find out more about markets and systems that would fit you? Reading books and online materials can certainly help and there is a lot of content around on the topic. Workshops from reputable companies can help, too — by greatly accelerating your learning process. My experience has been, however, that traders find the best value at workshops that teach trading systems that work for them — that fit them.
Obviously, poorly performing systems or systems that don’t fit with your beliefs and understandings about markets or trading are a bad investment. Therefore, one of the primary challenges for workshop attendees before registering is to determine if the systems taught at a workshop would be a good investment of their time, effort, and money.
If someone does find a good workshop and systems that fit them, what might that be worth? I have seen workshop attendees who are at total ease with the systems, and can trade them with much success. As you fully learn a system and then let go, you can flawlessly execute the trades in a state of unconscious competence (others like to call this the flow state). Being able to trade like that, what would that be worth? Great systems that fit make that possible.
It doesn’t matter if you are considering attending a workshop in the future. In this article I would like to to give you some things to think about yourself and about the systems you are trading, developing, or just considering.
What Makes Great Systems?
This is not the entire list but here are just a few of the most important factors that I believe great systems have in common:
- Great systems are built on a strong foundation of stated beliefs and the respective market edges that are derived from those beliefs. Knowing these factors reinforces your confidence in the system — which is needed little on the “easy” days but more so on the “harder” ones.
- Great systems do not work equally well in all market types. Systems that tend to work in sideways markets may not work well in strong directional markets.
- A great system will fit a particular market or instrument well.
- A great system will have a full set of trading rules and a good record of past live trades in the appropriate market or market conditions.
Examples of Fundamental Beliefs
Below are the beliefs I have about trading around which I design my trading systems. Do you have a set of your fundamental beliefs written out? Do these beliefs resonate with you?
- Trading/investing based on technical chart analysis & evaluation alone generates (if
correctly applied) superior above average returns. All market information is already included
in price and, therefore, no other sources of information are required.
- Trading/investing with the trend represents a major edge. Trends tend to run further than
one might ever expect. Strategies based on trends are to be favored.
- Trading/investing in line with higher timeframes (HT) represents a major edge. Confirmation
from HTs allows for an increasing flow of new market entrants in trade direction (tailwind).
- Trading/investing based on leading indicators offers an edge. They reveal ahead of time
where support & resistance areas are located and, thus, price action is likely to develop.
- Price consolidations within a trend are times of pause that are required for the trend to
regain strength (“refreshers”) before it can continue. Multi-bar consolidations bring price
volatility down and allow for low-risk ideas.
- Market actors leave behind “psychological footprints” in the chart that can be identified as
specific price/bar patterns. Understanding the dynamic behind these patterns offers an edge
on which systems can be built upon.
- Markets are a reflection of rational human behavior — whether 5min or monthly chart. This
fractal nature of markets is due to humans’ psychological make-up. Until we evolve into a
new species, price action will always be the same.
Examples of Systems That Fit a Market
One major aspect of Forex I really value is that trends are easy to find. Trading a trending chart has a big edge for two main reasons. First, trends generate good follow-through. In many instances they go much further than anyone might have expected. Second, entering a trend lowers the probability of getting stopped out on your initial stop.
In general, I like to divide trends up into three simple phases: early trend (with reversals very common), full trend mode and aging trend. I have worked on systems that take advantage of each phase of a trend. One of my systems works well in an aging trend as well as in early trend reversals. My two other main systems get most of their trading opportunities when the trend is in full directional mode. These systems work well together because they complement each other in the different trend phases and as a result, they offer many good trading opportunities every day.
All three systems have a common characteristic that occurs after entry into the trade — this is an initial spike that is followed by a potential swing move in trend direction. The initial spike gets the trade into break-even mode very early on. Then if the follow-through continues to carry the price, the trade is offered the opportunity to generate further follow-through by holding the position as it becomes a longer term trade.
Because I believe that markets are fractal in nature, all the systems that I have designed can be applied in any time-frame — from 1 minute charts to monthly charts. Whether you like to trade short-term, invest medium-term or prefer to build long-term positions, the same basic system rules apply (with only slight modifications). Due to the fractal nature of markets, any Forex pair as well as other highly liquid instruments (such as Indices, Commodities, Bonds and some ETFs) can be traded in a similar way. Having available a broad selection of instruments and time-frames allows you to trade for example, indices very short-term (1min chart), Forex market on the 15min chart, while stalking a T-Bond entry on the 4 hour time-frame. Be sure — this approach always finds opportunities to trade!
More to Come
In the coming weeks, I will follow up with a trilogy of articles that describe each of my three main systems in a little more detail. This will allow you to read a little about the functioning of working systems and may give you some ideas to think about for improving your trading systems — do your systems reflect your beliefs? Where/when do your systems work best? How well do your systems fit you?
Understanding that the better fit you have between you, the market and the trading system, the easier you will be able to trade in profitable ways. This is the real key in finding your personal Holy Grail system.
Good trading,
Gabriel Grammatidis
About the Author: Gabriel Grammatidis is a successful full-time trader and graduate of the Super Trader program. He has extensive experience trading Forex and shares his knowledge at his Forex and Live Forex Trading workshops, held regularly at VTI.
Learn more about the flexibility that Forex offers you by watching a video segment from the workshop (What is the reality of Forex trading?).
You can see some practical example videos of the system trades on Gabriel’s website, IntuFX.com.
For more information on how to develop a system based on a set of beliefs see my last article in the Traders´ magazine (How to develop your trading system).
Gabriel can be reached at gabriel "at" vantharp.com.
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Mailbag G'day Dr. Van Tharp,
I was listening to an audio book of Trading Beyond the Matrix on audible yesterday, and the chapter on beliefs and the chapters on identifying a feeling of inadequacy as well as the "parts of self"could not have come at a more needed time in my life and trading career. I feel I have reached a real turning point and that these chapters have been the catalyst for a much needed change.
I have commenced a written journal to work on these areas and the others covered in your book. I have no doubt that your book will greatly enhance my life in general and my trading
career.
I honestly believe that my journey into trading has been vindicated and made worth it solely on the basis of those few chapters in your book. Were it not for my interest in trading I would not have picked your book. And were it not for your book I would have been stuck in a terrible psychological rut and possibly have given up on my dream and goal of making trading my career.
What a difference a book, some introspection, and less than 24 hours can make. Thank you from the bottom of my heart. I look forward to more exciting discoveries and insights from your works.
All the best from Australia,
Josh
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Trading Tip
When Markets Get Smoked — Remember These Things
by D.R. Barton, Jr.
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The huge sell off on Wednesday morning has both the patient bulls and the end-of-the-world gang pushing their agendas hard and fast. In times like these, however, a measured and unemotional approach to analysis is more useful.
Since there is so much negativity going around right now, I changed the article topic for today at the last minute so I could write a very quick piece and try to give some balance to what’s going on in the markets. I’d like to share two useful charts with some brief commentary so that traders and investors can add some tools to their decision making.
For the Long-Term Investor
Michael Batnick posted some interesting charts this morning on his Irrelevant Investor blog and I think they’re valuable for longer-term investors to consider. The two charts show the return for each calendar year and the biggest drawdown for that year dating all the way back to 1928.
Click here for larger image
Let me make a few quick observations on these charts for investors and then I’ll add some thoughts for the trading folk.
The current drawdown is (so far) quite normal for most years. The average intra-year drawdown is 16.4%. This one may not be over yet, but the feel of this drop is pretty ugly for a couple of reasons:
- First, drawdowns since 2011 have been pretty tame by historic standards so recency bias makes this one stand out for us.
- This drop is happening at the beginning of the year. That’s very unusual and much has been said already about this being the worst start to any year since the U.S. exchanges opened.
- The global macro-economic picture is pretty ugly making it easy to pile onto the gloom and doom scenarios. For the record, the problems of crashing oil prices, China’s economic slowdown, and the emerging market debt problems should be monitored closely.
For Intermediate and Short-Term Traders
Some thoughts for the traders out there:
- In volatility expansions, swing traders need to monitor stop levels and profit target objectives very closely, perhaps even intra-day. The stop distances used in a slowly creeping up market just won’t work in a high volatility market like this one.
- Since 1992, the 20 biggest down days (excluding today) all happened during three specific periods: the internet bubble bursting in 2000- 2002, the real estate/debt bubble bursting in 2007-2009 and the U.S. debt downgrade of 2011.
- Here’s something you might not know — volatile down markets also include violent swings up, even if for short periods of time! How big are we talking? 19 of the biggest up days in the market happened in those same bear runs just mentioned!
If you’re not comfortable in these markets where the S&P can swing 5 -8 points in half a minute and we get multiple 20 — 30 point swings intraday, then keeping your powder dry until the volatility subsides is a perfectly acceptable strategy.
The bottom line for traders:
— Know what you can handle.
— Adjust position sizes accordingly.
— Err on the side of safety.
Your thoughts and comments are always welcome — please send them to drbarton “at” vantharp.com
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 analyst on Fox Business’ Varney & Co. TV show (catch him most Thursdays between 12:30 and 12:45), on Bloomberg Radio Taking Stock and MarketWatch’s Money Life Show. He is also a frequent guest analyst on CNBC’s Closing Bell, WTOP News Radio in Washington, D.C., and has been a guest on China Central Television — America and Canada’s Business News Network. His articles have appeared on SmartMoney.com MarketWatch.com and Financial Advisor magazine. You may contact D.R. at "drbarton" at "vantharp.com".
Swing Trading Systems E-Learning Course
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This new e-learning course includes Ken Long's Swing Trading Workshop, 5 swing trading systems and a bonus workshop featuring Van Tharp on Tharp Think principles. The course also includes extensive downloadable files to support your learning.
You can complete this course at your own pace, from the comfort of your own home or office, and access the materials as many times as you wish during your 1 year subscription period.
Take a look at this video from Ken to learn more about this course.
We have extensive information about the Swing Trading System e-learning course, including how to purchase...click the link below!
Learn More About The Swing E-Learning Course...
In the six minute video below, Ken analyzes several trades from the relatively quiet session on Monday, October 12. He opens with a swing trade that started last week on XIV talking about the entry, initial stop, target, and progress of the trade so far. That swing trade offers the opportunity trade XIV intraday with some confidence in the long bias. Ken provides two tradeable intraday scenarios for the XIV move during the Monday session and the position sizing ramifications for each. Ken then discusses a second trade where one of the traders in the chat room went short USO and earned a couple of R for the effort. 
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