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

• ArticleTop Ten Reasons to Trade Forex by Gabriel Grammatidis
• Trading Education Learn Three Forex Trading Systems in October
• Trading Tip Are You Ready if the Internet Breaks? By D. R. Barton, Jr.
• Ken's Class Regression Line Fractal Format Trade
• Matrix Contest Winner announced and New Contest Begins

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• Thinking in terms of objectives,
• The key levels of transformation,
• Reward to risk,
• Mistakes,
• Position Sizing to meet objectives, and more.

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Article

Top Ten Reasons to Trade Forex

by Gabriel Grammatidis

View On-line

As recently as the late 1990s, a “veil of mystery” shrouded Forex trading. Many traders had beliefs that sounded something like:

• Forex is the “supreme discipline” of banks & hedge funds… I am just an individual trader. 
• A 24h-market? ... How will I work and sleep if I have to watch the market 24 hours? 
• Trading currencies means trading entire economies... that’s too much to follow or understand.   
• I have too little capital to be able to compete on a level playing field with the big boys. 

Fast forward to 2014 — I still hear those kinds of statements today even though everything about the currency market has changed. What is the reality of Forex trading then today?  Since the US federal government deregulated Forex trading (Foreign Exchange or FX) for retail traders in 2000 (the CFMA act), the market has more than quadrupled in size and transformed completely making it easily accessible  to retail traders.

If you aren’t trading Forex in any way right now, here are the top ten reasons why you should consider it:

Top 10 Reasons To Trade Forex:

1. FX is a very liquid 24h market that trades around the clock.

Have you ever been stuck in a position overnight?  Has an opening gap ever majorly affected one of your positions — and maybe kicked you out of it with a loss larger than -1R? 

Being a global 24h-market with around $5.3 trillion volume (USD daily), you obviously have easy and quick ways to enter or exit positions. Due to the huge depth in this market, there is virtually no risk of getting stuck in a position, experiencing price slippage or partials fills. Astonishingly, the Forex market is about 200 times larger than the NYSE.

Also, without opening or closing bells, there are no pronounced disruptions (or gaps) so price action is smooth & flowing. This fact alone opens up the market to a broad spectrum of trading styles where traders can choose to use long term systems, swing systems, day-trade or even quick scalp - at any time of the day/night.

2. You can always find a good trend.

If one economy is changing in relation to the economy of its currency pair partner, this effect shows up as a trend. With so many liquid currencies in the world you will always find a combination with a strong trend. As in any other market, Forex prices are subject to the forces of short term supply and demand, however, Forex has some unique peculiarities. The price of a currency pair reflects the conditions and activities of entire economies or even regions which very often leads to steady and smooth long term price development. It is quite common to experience nice, steady price momentum over several hours, days, weeks or even months — quite unlike equities or commodities.

(Click here to see a larger version of these charts.)

3. Choose a trading style, a timeframe and a time of the day that fits you best.

You can trade Forex successfully using many different trading styles: from long-term macro, trend following, band trading to news trading or other styles. It is also possible to trade any currency pair during any period of the full 24h open market hours. Therefore, you can choose from a wide array of timeframes: really long-term (daily or weekly chart), to a swing basis (eg 1h, 4h, 8h chart) and intraday (eg 1, 5 or 15min chart). Usually, I am trading intraday or swing positions during European market hours, but if I want to do something else during the day, I can still trade — I just trade at a different time. Or if I am staying in a different time zone, I can trade Forex at times that are convenient for me there locally rather than sleeping in the day and trading at night. 

4. Low cost and efficient order management.

Despite FX being unregulated, the market is very well coordinated through the Global FX interbank structure. The 15 biggest banks form a “transaction ring” that runs on a common platform. Similar to regulated exchanges, orders are processed efficiently by matching the best ask and bid prices. For incoming orders, this guarantees that the tightest bid/ask spread is chosen at that time — minimizing your transaction costs. No exchange commissions, broker fees or other fees apply so usually, the bid/ask spread is the only transaction cost you have to pay for a round-trip.

Another unique cost advantage of Forex trading happens due to the structure of the currency trading market.   Price data vendors and brokers provide price data for free. 

Note: Does this sound a little too good to be true?  Forex being unregulated, your broker choice is especially important. Choose one that offers a good and stable trading platform, is known for its good customer service and does not “play tricks” with its clients – like taking the other side of your trades.

5. Ideal market for charting and pattern trading.

Because Forex offers stable price development without pronounced gaps, spikes or long wicks, it is excellent for trend trading based on patterns. In addition, due to the sheer size of the market, price manipulations are nearly impossible. As a result, FX charts respect important charting lines and price levels very well. Entries and exits are less prone to breakout failures, stop runs or other big-boy-games. Only important FX news has the potential to move currencies markets strongly in the short term. Luckily, you can manage the news announcements issue because these are well-publicized, pre-scheduled events during which you can choose to sit out or manage your risk accordingly.

FX charts are also unique and repetitive in one notable way: low-volatile range consolidations are quite common and they tend to develop into explosive volatility expansions.  After these volatility breakouts, smooth and persistent trends often develop. My Forex systems maintain a strong trading edge in identifying these low-risk consolidation patterns that occur regularly and very often develop into good trends.

6. You can focus on a currency pair position independently.

FX prices reflect the relative strength of two currencies respective economies. Obviously these dynamics are very different from country to country in the different pairs. I see each FX pair as independent and having little correlation to other pairs (with the exception of the Yen-pairs for reasons that are beyond the scope of this article).  In effect, each pair has its own “life”. So I only need to pay attention to what happens to my position on one pair rather than needing to follow multiple currency pair prices. This makes trading a bit easier than equities. Remember for a stock, you have to pay attention to dynamics about the company itself, to the company’s sector, and then to the overall market movement as well. For me, simpler in trading works better. 

7. Portfolio diversification and hedging risk.

Not considering Forex as a separate asset class that can be traded might have put you into disadvantage in comparison to others that have done in recent years. During the global financial crisis in 2008/2009, we saw very turbulent equity markets which were too volatile to trade for many styles and systems. FX just offers another opportunity to make money and as an example, there were lots of great opportunities to trade the Swiss Franc long from 2008 until mid-2011 — when it was pegged to the Euro. As Van likes to say: Crisis always implies opportunity.

If you are an American, have you ever realized that you are actually long the US Dollar when you hold US equities or even if you are “flat” and sitting in cash?  That may or may not be a profitable position once you start considering what the USD is doing in relation to other strong currencies. Finally, if you invest in markets outside of the US, using the FX market to hedge currency risks is something you might want to consider.

8. FX is the ideal asset class to start or learn trading – even with a small account.

First, you can open an FX account with a very small amount of equity, in many cases much smaller than many other account types.  Second, you can day trade FX with a very small account size — unlike much larger minimum account sizes for other instrument types.  Third and most important, small FX traders are not disadvantaged in their methods or their trading as they are when attempting to trade many other asset classes.  With FX, you can trade small positions in the same way you would trade larger positions.  This allows you to learn small with minimal risk and then scale up trading the exact same way. 

Starting out by trading small with real money is a better learning experience than paper trading or trading in a demo account. FX brokers allow you to choose between very small, mid-sized and large Forex lot sizes. Even a very small account of less than $5000 USD is not dis-advantaged. Because only the spread needs to be paid, the transaction costs remain at the same proportional level. This allows you to scale-in and out of positions as often as you want without additional costs other than the spread. 

Additionally, traders can choose to go long or short at any time without restrictions or even the typical psychological bias against shorting. The option of using high leverage available to FX traders allows you the opportunity to benefit from small moves in small timeframes which can increase your learning and growing from your trades.

9. Tharp Think principles apply better to Forex than with any other asset class.

Choosing the appropriate lot sizes (see #8 above) allows you to fully customize your position sizing™ strategies for your accounts without any cost disadvantage to small ones over large ones.  The same is true for your entry or exit algorithms if you choose to scale-in or scale-out of positions — something which I do.  Being able to apply all Tharp Think principles is a big edge alone!

10. The most flexible asset class to fit you.

Having traded several asset classes, I can say with confidence that there is no easier and no more cost effective way to learn to trade than with a Forex account — wherever you live, at whatever timeframe or time of the day you might want to choose.

Forex offers a level playing field for a wide variety of market participants — be it newbies or veterans, small or large accounts, full-time or part-time traders. Forex allows you to choose what fits you best: your time of the day, your preferred holding period, your trading style, your account size and your leverage.

Given this short but powerful list, why aren’t you trading Forex or at least planning to?   

I hope to see or hear from you soon. All the best,

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 will share his knowledge at a three-day Forex Workshop being held October 11-13, followed by two days of Live Trading, October 14-15. Gabriel can be reached at gabriel "at" vantharp.com.

Disclaimer

Workshops

Combo Discounts available for all back-to-back workshops!

See our workshop page for details.

Trading Tip

Are You Ready if the Internet Breaks? Again.

By D. R. Barton, Jr.

“If builders built buildings the way programmers wrote programs, then the first woodpecker that came along would destroy civilization."
— Gerald M. Weinberg, software engineering guru

About 11 years ago, my wife and I dropped our kids off at the grandparents’ house and we took off on the two hour journey to lovely Smith Mountain Lake in Virginia for a long weekend getaway.

Our car had one of the earliest versions of built-in GPS navigation and I was hooked on it.  Armed with no other maps, we set off for our destination with the lovely, if somewhat mechanical, female British accent guiding us along the way.

Things went fine as we flew up I-81, left the interstate and went by quaint little Rocky Mount, VA, the seat of Franklin County.  I noted to my wife, (who grew up in culturally-distant Northern Virginia) that Franklin County was known as the “Moonshine Capital of the World”.  Among other things, that meant that you really wanted to stay on the beaten path and stay off of others’ private property.  Which, thanks to the flawed early GPS navigation technology, is what we proceeded to do.

Our GPS was taking us on the most direct route from Rocky Mount to our rented lake house.  Those early GPS maps, however, didn’t realize that State Route 827 — or whatever it was — was literally a dirt road (really no more than a tractor path through a cow pasture).  From there we were directed onto a gravel road through a heavy forest.  Now, I had grown up nearby and heard plenty of horror stories about what moonshiners did to outsiders who happened upon their stills so I can honestly say, I was afraid for our well-being driving those back roads through Franklin County.

Luckily, the story has a happy ending. We eventually made it to the lake house — though the trip took an hour longer than if we had stayed on the “improved” roads.  Our technology had the destination right the whole trip; it just had its own ideas about what the “best” route was to get us there.

That trip is strangely similar to the problem that occurred to North American Internet traffic on August 12, the now infamous “512k Day”. 

August 12, Internet Capacity, Cisco, and You

Let me start my explanation of “problems with Internet capacity” with a disclaimer — while I do have a very technical education, it is in chemical engineering, not network engineering.  I thought the faithful readers of these articles, however, might still be intrigued (as I was) to understand a little more about the big problem that’s been in the news.

Last Tuesday, August 12th, there were significant Internet slowdowns and even service disruptions, especially in the North American region.  The problem was traced to the so-called 512k problem.  Let’s take a quick look at what this is, in layperson’s terms.

The Internet has two backbone systems that allow such a wide variety of devices to communicate throughout the world.  The first is the Domain Name System (DNS), whose main function (in simplified terms) is to keep track of Internet locations, like towns on a map.  It allows us to use verbal domain names (like Amazon.com or VanTharp.com) and translates them into a numeric-based Internet Protocol (IP) address.  As you may know, all the connected “things” have their own IP address or map location, including your computer, smartphone, tablet, etc.

The second backbone is less well known — it is the Border Gateway Protocol (BGP).  This system tells information packets which of the many routes is available for them to take to reach their destination.  The BGP keeps a global routing table of all the possible routes created for information to flow from one IP address to another.

So, in simplest terms, one system keeps track of all the locations, the other keeps tracks all of the routes information can travel between those locations.

The problem on August 12th was with the BGP or the routes part of the Internet.  You see, a lot of routers (much larger institutional versions of the smaller one in your house) used in the Internet infrastructure are old. Cisco is the 800 pound gorilla of Internet plumbing (they have about 70% market share, according to Synergy research), and their old routers were the source of the problem.  As we shall see, Verizon had a helping hand in the problem too.

The default setting for the maximum number of entries on the global routing table that Cisco’s older Catalyst 6500 and 7600 Series Routers is 512,000 (hence the 512k moniker). For years, the Internet intelligentsia has known about this approaching limit as the network has continued to expand.  On August 12, 2014, the global routing table had about 500,000 entries, still under the set limit.  That was until 7:48 am when an internal Verizon error dumped approximately 15,000 new routes into the system and pushed the number past the settings threshold by several thousand.  The error was corrected in a relatively short time and the number of routes dropped back to the 500,000 level.  By then, however, the older routers had been causing serious connectivity problems for end users ranging from slowdowns to downright outages.  Even many large Internet users such as Amazon, Ebay and LinkedIn were adversely affected.

Interestingly, there’s a part of the 512k Day story which many media articles have gotten wrong.  The problems on August 12 were not and are not a hardware limitation; the 512k routes figure is merely a default setting, not a true capacity limit.  This default setting allocates a specific type of memory (Forwarding Information Base Ternary Content Addressable Memory — FIB TCAM for those geeks out there that have to know).  Cisco had actually sent an adjustment procedure document to router owners in May (and for those of you who absolutely must read the document, here’s the link).

Even if nothing changes for the moment, the 512k problem is not a worry until the global routing table grows organically to 512,000 entries (or until someone else accidentally dumps thousands of new routes into the system).  Is there good news beyond that?  Yes! Owners of the older routers can reallocate memory today to extend their useful lives beyond 512k routes.  The bad news?   This is not the only pinch point in Internet land…

What Does This Mean for Traders and Investors?

Another day will come sooner or later when the Internet service that we take for granted doesn’t work at your house or your place of business.

I’m not an Internet gloom and doomer.  I believe that the profit motive and free market forces will keep the technology mavens ahead of the game (they have their contingency plans, too).  But I do expect and I am planning for temporary outages in the future.

Do you have a plan for such a contingency?  What will you do during the next Internet disruption?

Here are some things to consider:

• Day Traders and other short-term traders: do you have your brokerage firm’s trading desk number(s) in both your cell phone and a land line phone?
• Longer term traders and investors: are you using stops and do you keep orders ”physically” in the market?  Mental stops won’t work if you can’t see price data!
• For everyone — do you have some more basic back-up systems in place?  Uninterruptible Power Supplies (UPS) are cheap and effective if sized correctly.

An ounce of prevention is worth a pound of cure…

As always, 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 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".

Disclaimer

Ken's Class

Regression Line Fractal Format Trade

(Click here to see a larger version of this chart)

Ken Long wanted to share this regression line fractal format trade in US Steel on Monday.  Attendees at any of his workshops can participate in his weekend webinars and the group discussed the setup for this trade last Sunday.  The trade went off like clockwork on Monday morning and earned +3R.

Matrix Contest

Our Matrix Insight Contest has ended and the votes have been counted!

And The Winner Is....

Congratulations to Cristina Sau

When we first received this submission we published it anonymously. However, once her essay was picked Cristina happily agreed to allow us to announce her name.

Cristina was born and raised in Brazil until her family immigrated to Portugal when she was a teenager. She completed her studies and started working in Portugal in retail finance. She then continued her career in Moscow and London restructuring retail banks. In 2010 she moved to the Caribbean to live with the love of her life. Since then she has been free-lancing as a management consultant and learning to trade in pursuit of financial freedom. In 2013 she discovered the Van Tharp Institute and her trading education has taken off. She has been using the Matrix book as a guide to create her own personal version of the Super Trader Program and has been delighted with the results so far. She aims to achieve financial independence by December 2016 and plans on living a blissful life afterwards as a beach-bum.

Cristina wins a foundation workshop of her choice (learn which workshops are considered foundation workshops) or a VTI product of her choice ($795 or under).

Read Cristinia's Winning Entry Here

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