Tharp's Thoughts Weekly Newsletter
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Feature Article: A Small-Risk Trading System When the Light Is Green, by Gabriel Grammatidis
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Workshops: Oneness Awakening in October is last Oneness workshop till 2017
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Trading Tip: The Biggest Volatility Contraction in Two Decades — What Next?, by D. R. Barton, Jr.
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Forex and Live Forex in September
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 is passionate about teaching these systems that have proven to be profitable in live market trading over for several 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 they 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.
To hear what the last attendees thought of the most recent Forex workshop click here.
Plus, you also have the option to continue with your training in three days of live Forex trading so you can trade the systems live!
Learn more...
Feature Article
A Small-Risk Trading System When the Light Is Green
by Gabriel Grammatidis
Click here to resolve formatting problems
Editors note:
This week we’d like to reshare Gabriel Grammatidis’ information on one of the three forex systems that he finds valuable to his trading success. This system does well in strong trending markets, which Gabriel recently remarked he is expecting to continue to see over the next few months.
In the first two articles of this series (Busted Breakout Profit by Hunting for Other Peoples’ Stops! and A Trading System For the Crowd that Needs to be Right Sometimes), I described how I have used my beliefs about the markets and about market participant behavior to design my System 1 and System 2 trading systems. Whereas those two systems are based on multi-candle pattern recognition setups, my 3rd System, 3-Timeframes-Moving-Averages (called 3TMA for short) is quite different. System 3 has a more technical approach rather than the more visual approach of S1 and S2. As you can scan a wide universe of potential trades, this system gives you the most opportunity and flexibility in trading different time-frames concurrently.
System 1 and System 2 are fascinating through their unique set of beliefs, market edges and the “psychological footprints” that can be seen on the chart. Still, S3 is the one that the majority of my workshop attendees are actually attracted to the most. For many, this is the first system they start trading after the workshop. I guess the main reason is that once you have found a very strong and smooth trend fulfilling the setup criteria, this system is the easiest one to trade. You have a lot of trading opportunities and it can make good money in a very short time. It requires, however, the most discretion of the three systems to pinpoint the exact entry into the trade. Underestimating this requirement of the system can lead to some initial frustration before achieving consistent profitability.
General Description
The main idea behind System 3 is that a very strong and smooth trend reduces your probability of making a mistake trading in the trend direction. This is where the most consistent money is made. Why is this so? Well, once you jump into a flowing river, where you jump in does not really matter much — the current will bring you along in its direction anyway. In this system, you should also be prepared to enter several times by scaling-in — in a cautious and controlled manner. Here the main goal is to take every entry signal presented to you with a focus on minimizing your risks. At the workshop, we talk about several different ways to enter into these type of trends.
The basis of the rule-set is a multi-timeframe filtering technique that detects strong and smooth trends (that are not yet overdone). The trends are selected by comparing several criteria in three time frames simultaneously. Whereas the trade is taken in the mid-frame, the high-frame and the low-frame are important as well. Once the filtering technique gives you a “green light modus”, you are allowed to stalk entries. If you prefer programming over visual inspection, you can put together an opportunity detection system (based on the ruleset given) that spots potential trades for you. My detection system scans a wide universe of asset classes and charts, from 1min to 240min, and I usually get multiple trade opportunities every day.
The system works equally well for any FX pair, other liquid instruments and asset classes. It can be traded in any time-frame going both long or short. Actually, you can trade this system easily on a very short time-frame once volatility is going well. The system offers a set of clear rules with a precise entry level and initial stop to control your risk.
Main Beliefs
The main belief is that you should trade a strong and smooth trend in trend direction until the trend is over. To be able to trade this system, it should be well ingrained in your belief-set that trends continue much longer than you might ever expect.
You might wonder — this seems really easy — isn’t the trading crowd attracted to these same trends as well? Yes they are, however, trading with the trend can be a scary thing as often (seemingly always scary to some) the trend looks overdone. As a result, the market keeps drawing in countertrend traders who try to short what they see as tops. Remember this trend really looks like it has gone much too far to many people. If you enter when they have to exit with a loss, the crowd will actually help drive the market in your direction.
It is the unfortunate logic of the market that in a strong trend you actually do not have clear entry signals. This makes traders question their entry signals a lot, not take them. Then they experience losing opportunities as the trend continues. This can be a very painful experience which compels novices, at some point, to chase the market and enter. In many situations, this is the point where you should have already exited (based on the rules) with a likely profit.
Low-risk idea behind the system
Once a sufficiently-established strong and smooth trend has been identified, the biggest edge remains in detecting as many low-risk ideas as possible. You can easily get sucked into overtrading, however, and that could possibly lead you to take high-risk trades. An immediate stop-out will trigger fear of entering again and you might then be trapped in the pain of experiencing a losing trade. You should definitely not trade in such a state. Better wait for low-risk ideas that are fun to watch how they develop. In the workshop, a number of different low-risk entry ideas will be taught that allow you to enter with a tight stop. When things go well, you should actually scale in by adding additional size to build a position, allowing you to benefit from the trend as much as possible. The system rules will tell you once the trend is overdone and it is better left alone.
I use this system regularly during times of good trends or increased volatility (such as during major news events). One of those days happened on October 15th, 2014 when there was “panic in the streets” due to a major news announcement. This also happened to be one of the days of a Live Trading workshop (that followed right after the Forex Trading Systems workshop). That day had ideal market conditions for this system. Actually, the two days of that Live Trading workshop generated a total of 19 trades, +22R, and a win rate of just less than 90% (see many of the details in my previous article Rich Man’s Panic). Although this type of market condition does not happen every day, it is also not that unusual.
Do the kinds of trades generated by system 1, 2 and 3 sound fun to you? The reasoning, beliefs and trade ideas of the three systems are quite different from each other, and still, they are all fun in their individual way. If you know the beliefs, market edges and low-risk ideas that form the basis for every good system, you will approach the markets in a much more relaxed and easy-going way. As you fully understand “your trading game” and know how the markets are functioning, you greatly increase your probability of success. Most of all, you will have “fun” trading — independent of winning or losing. If you do not enjoy yourself trading, then you are probably not trading the right systems — ones that fit you.
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.
Read about the system — System 1: Busted Breakout.
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 the Busted Breakout psychological dynamics see my article in the Traders´ magazine.
Gabriel can be reached at gabriel "at" vantharp.com.
Workshops
Combo Discounts available for all back-to-back workshops!
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Matrix Contest Essay
Profound Changes and New Insights
by Shashank
Click here to resolve formatting problems
To demonstrate the profound changes in my life by reading Trading Beyond the Matrix, I first have a need to explain my background. I am a 26-year-old chemical engineer. My day-to-day job involves analyzing data and making recommendations for day-to-day operations based on my analysis. Most of my clients are non-engineers and thoroughly respect and trust the recommendations I make. This reinforces my belief that if I thoroughly analyze data and provide clear and concise recommendations, nothing will ever go wrong. After all, I am following fundamental engineering principles and having been an engineer for 3 years, and following this system, nothing has gone wrong yet. In other words, I developed a need to be right through my analysis.
Entering the markets, I took the same approach. I took a few courses on trading through my broker, subscribed to a newsletter, and an alert service to understand the fundamentals. I formed a belief that learning how to trade from my broker, reading the newsletter, and trading the alert service recommended stocks would lead to never losing money. If I followed the advice, my need to be right would be fulfilled by trading the alerted stocks.
When I started trading, my first trade led to a 3R win. Not knowing about the concept of R-multiples at the time, I formed beliefs that every trade I would make following the system above would lead to a 3R win and I would become extremely wealthy very soon. The dreams of nice cars, homes, and traveling the world freely flooded my imagination. I formed the need to be better than everyone else at escaping the rat-race of daily work through trading.
Continuing to trade this way, I eventually lost ~20% of my trading account. With every loss, I began working harder to learn the course content, blaming the brokers for not executing my orders properly; subscribing to different newsletters, worrying that the broker and alert service fees were too high. I placed larger and larger trades, thinking that a small percent win for a large account may wipe out all my previous losses. All of this led to an immense amount of stress, which was compounded by changing job roles at work, which led to more stress. Needless to say, the size of my account steadily shrank. Small wins led me to believe that I would never lose again; large losses led me to believe that I needed to study harder.
After receiving my 3rd margin call, I decided to stop trading and learn about the markets more comprehensively. I purchased the audio version of the Market Wizards book to learn about the way other people make money in the markets. Listening to the various people describe systems they use for trading, I learned that there is no one system that fits everyone. One has to find a winning system that fits one’s own beliefs, which I later found out, happened to be the title of one of Dr. Tharp’s workshop!
In Market Wizards, two of the interviews that had a profound impact on clearing up my beliefs about the markets were Ed Seykota and Dr. Van Tharp. Primarily focusing on Dr. Tharp’s interview for the purposes of this essay, Dr. Tharp described how two top shooters, only differentiated by their beliefs about the sport, may lead to one being the top shooter in a contest and the other being the second place finisher. In the remainder of the interview, he then briefly outlined the psychological components involved in trading.
Intrigued by Dr. Tharp’s interview, I decided to take the Tharp Trader Test. The evaluation showed that based on my answers, I am better suited to be an administrative trader. This was a surprise since I always considered myself intuitive in the realm of trading. The assessment mentioned Tom Basso, who was also a chemical engineer and is an extremely successful trader. So I could instantly relate. However, the description of an administrative trader conflicted with my trader-self. I enjoyed the excitement of trading, the fast paced nature of putting my money on stocks, and getting out of the markets with a large win. Later on, I realized that my inability to come to terms with the outcome of the creation of my trader-self led to huge internal conflict. Due to this conflict, I would repeatedly cut my profits short and let my losses run, also referred to as the cardinal sins of trading!
I then decided to read Trading Beyond the Matrix. Even though I may have read the book cover-to-cover, I realize that the profound nature of the topics covered in the book is only a first step in achieving my goals of becoming a successful trader and leading a good life. Just by reading the book, I believe that I have been able to preserve my trading capital for when I do have the various elements of trading in proper order. After my initial reading, I have since re-read sections of the book at different times to properly understand the contents. Each time, I come away with a new insight about things I missed upon my first reading.
The book is truly a masterpiece and should be required reading for anyone embarking upon the endeavor of trading!
Editors note: This essay is part of the on-going Matrix contest in which Dr. Tharp asks for reader insights after reading Trading Beyond The Matrix: The Red Pill for Traders. To learn more about the contest, click here.
Trading Tip
The Biggest Volatility Contraction in Two Decades – What Next?
by D. R. Barton, Jr.
Click here to resolve formatting problems
The current U.S. stock indexes are stuck in neutral — they have been for multiple weeks. But I keep reminding people that while the market is stuck — there’s a pretty good view from up here at the top of the page.
But saying that we’re “stuck in neutral” really doesn’t do justice to how much of “nothing” has been going on.
In fact, for the market of the week ending Friday 8/12, we just had the tightest four-week trading range in the S&P since 1993. That’s the least volatile month of trading in almost 23 years. Here’s a chart that lends some detail:
So what can we expect from here?
Let’s take a quick look at when we’ve had markets this tight over the last 50+ years (spoiler alert — only 5 other times) and talk about the tendencies for markets coming out of volatility contractions.
Volatility Contractions This Tight are Rare
Yes, dear readers, D.R. has been crunching numbers again. These spreadsheets have been smoking as I dug into the historical data.
I looked at rolling four-week ranges (% change of four-week high — four-week low) for the S&P 500 dating back to the 1950s. By rolling, I mean that I looked at weeks 1-2-3-4, then weeks 2-3-4-5, 3-4-5-6, etc. And here are the weeks that were at or below the recent four-week low volatility period:
| Four Week Period Ending |
Range S&P 500 High-Low |
| 8/12/2016 |
1.87% |
| 12/24/1993 |
1.82% |
| 8/13/1993 |
1.75% |
| 8/6/1993 |
1.64% |
| 9/7/1985 |
1.65% |
| 11/13/1964 |
1.79% |
That’s not many!
So What?
I can hear you saying, “Yeah, that’s some interesting data. So what do I do with it?”
Fair enough. Let’s look at some context and then talk about possible actions. In fact, there’s enough context, that I’ll just list those issues here:
- First, I have to say we’re looking at a very small data set here. We can notice some trends, but there’s no statistical significance to discuss. (Alas, such is the fate with very rare occurrences…)
- Low volatility happens in up markets, period. There is just no such thing as a low volatility down trending stock market.
- Each of the volatility contractions instances above happened after prolonged up trends.
What happened after previous ultra-low volatility periods? In general, more up movement. The notable exceptions were at the end of 1993. The market ground up another 3-4% for the next six weeks. This was after the volatility contraction then had a 10% correction. 1994 was a very tight, choppy, sideways year followed by a strong resumption of the bull market in 1995.
In all the other instances, the extreme volatility contractions were followed by a continuation to the upside.
Does this inform our current trading? I believe it has some useful implications. Slow grinding bull markets tend to continue longer than fundamentals suggest is possible (or permabears believe should happen).
And… volatility contracts are coiled springs. So while in stock indexes they tend to resolve on the upside, a pullback that acts like a jumper bending their knees before leaping up is a distinct, though lower, percentage possibility.
For now, strength begets strength and until these complacent markets get acted on by an outside force, we could see some more “ho-hum” do nothing weeks to close out the summer.
Please send your thoughts and comments to drbarton “at” vantharp.com — I always appreciate hearing from you!
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".
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Ken Long's systematic approach to swing trading with 5 distinct trading systems. This course has over 10 hours of instruction with significant follow-along documents included for students to download.
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