The Van Tharp Institute

November 29, 2006 � Issue #299

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In this Issue:

Trading Education

Three in One Workshop Package OFFER EXPIRES TOMORROW

Feature Article

How to Swim the Forex Ocean�and Not Get Eaten by Sharks, By Kevin J. Davey


Revised Edition of Trade Your Way on Sale NOW

Trading Tip

A Review of Market Models: Steidlmayer�s Market Profile Part II, By D.R. Barton, Jr.

Melita's Inspirational Corner

There Are No Accidents, by Melita Hunt

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Trading Education

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How to Swim the Forex Ocean�and Not Get Eaten by Sharks

By Kevin J. Davey

I must be an idiot. The kind of person who drives the wrong way on a one way street. Someone who pushes a door to open it, instead of pulling the handle. A plain old idiot.

Why do I put myself in this class? Simple � the FOREX market.

I never realized the FOREX market was as easy as following some color coded signals, clicking the mouse, and counting the profits. All these years I could have been making enormous amounts of money - so easily a child could have done it. I should stop being an idiot and just attend the free FOREX seminar (conveniently located at a local hotel), and learn what I�ve been missing.

Sure, I finished second in a worldwide futures trading contest in 2005 with a 148% return, but it took nearly 15 years to get to that point, and even today futures trading is a constant emotional and mental struggle. I should have been trading FOREX all along, since everyone on television and in direct mail tells me it is so easy.

Except, it's not that easy.

In reality, FOREX is an ocean of professional traders (the sharks), just waiting to devour the little minnows and sardines. And if you haven�t figured out who the minnows and sardines are, well you may  just need to look in a mirror!

So, how can you evolve from minnow status into full fledged shark? My years of speculating experience, primarily in the futures market and more recently the FOREX market, points to three major areas: knowing the market, knowing the competition and knowing your plan of attack. Do all three, and your chances of avoiding the sharks rises like the ocean tide. Neglect these areas, and you become bait.

Know the Market

The first step to swimming the FOREX ocean is knowing what the waters are like. Do you know what a �pip� is? If you do, can you calculate the pip value in US dollars for the EUR/USD pair? What about the EUR/JPY pair? If not, you need to get the basics down first.

Take time to learn. We�ll talk about competition later, but rest assured, your competition knows all about the FOREX market. Where do you learn about FOREX? Websites and books abound on the FOREX market � it is a good idea to read a few of these books, and use the Internet to find good educational (not just sales hype) sites. 

One key item to learn is regarding transaction costs. Even though most FOREX dealers do not charge commissions if you make your own trading decisions, there is still a trading cost called the bid/ask spread. This spread can range from $20 to $80 per trade and is something you obviously have to overcome in order to be successful. All things being equal, trading pairs with small spreads is the best way to go.

Once you do enough research, you probably will come to the conclusion that you should focus your efforts on the major currency pairs, ones that include the US Dollar, Japanese Yen, British Pound and Euro. FOREX pairs with these currencies typically have the lowest spreads, the highest liquidity, and the most fundamental information available. But don�t take my word for it � research the market until you feel comfortable with whatever pairs you want to trade.

Know Your Competition

Why should you bother to know your competition in the FOREX market? Simply put, FOREX is a zero sum game � for every dollar someone wins, someone else loses that dollar. Wealth is only created for some by taking from others. It is not like the stock market, where almost everyone (except a small amount of short sellers) benefits from rising stock prices. FOREX is definitely not �win/win,� but rather �win/lose.� Knowing this rule, and recognizing your competition�s tendencies, can help give you an edge.

Who are the major players in FOREX? Banks, hedge funds and multinational corporations are all big players, and they make a lot of money from FOREX. One car company recently attributed a large portion of its profit to FOREX activities. These groups should strike fear into little minnows, because these groups are the professional sharks. They trade day and night, know the ins and outs of the market, and eat the weak. Big moves are usually due to professionals, so following their lead and following trends they start may be a good strategy.

In the same waters the professional sharks swim, there are also a lot of minnows. They are also your competition, so knowing their tendencies can help you exploit them. For example, unsophisticated minnow traders are likely to put stop losses in obvious support or resistance levels. Knowing this, you can exploit this tendency and feed on them. Also, think about the first �sure thing� chart formation you ever learned about. Chances are new traders are just learning about that formation now, so you could fade their trades and likely do alright. 

Think of it this way � defeating a foe who is sitting in his home office trading FOREX in his bunny slippers is probably easier than defeating an MBA with a $5000 suit who trades via complex neural network arbitrage programs. So, try to mimic and follow the sharks, and eat the minnows. This is where having a plan (to make you a more agile minnow, or even turn you into a shark), is critical. 

Know Your Plan of Attack (Take Steps To Not Be a Minnow)

Once you really know the FOREX market and really know the competition, chances are you will be very scared. If you aren�t scared, you probably need to go back to steps one and two, and spend more time learning. The FOREX market is very difficult, and you are a minnow swimming in some deep waters. Don�t kid yourself into thinking FOREX trading is easy.

Once you realize that FOREX is tough work, you are ready to determine your plan of attack. There are really two ways to do this � either on your own, or with an advisor.

If you decide to do it on your own, plan on spending at least 500-1000 hours of your time, and $2-5K for software, books, seminars, etc. Like it or not, that is what it takes to develop a good trading system. If you try to shortchange this effort, you trading results will likely reflect that fact. You get out only what you put in.

An alternative is to use an advisor, or an advisory service. This will take less time than doing it on your own, but you must be willing to perform due diligence on any advisor you find. Blindly following signals from an unknown Internet service, or turning your money over to an unknown advisor, is a sure way to lose your money.


So there you have it � a brief overview of how to swim the FOREX waters. The key, I have found, is to treat FOREX trading as a business, not as a hobby. Take the time to really understand the markets and what moves them. Realize that you are up against professionals who will take advantage of any weakness in your trading system or your trading psychology. Finally, have a plan, and be willing to invest the time and money to develop your plan. If you perform all three of these tasks, you might just find yourself surviving the waters of the FOREX ocean.

Happy swimming!

About the Author: Kevin Davey finished in 2nd place in a worldwide futures trading contest in 2005, with a 148% return. Through mid October of 2006, he is in 1st place in the same contest with over 100% return. Kevin can be reached at [email protected].

Note from Van:

A major issue in Forex as in any other area of trading is position sizing, position sizing, position sizing. 

If you don't understand position sizing, the sharks will most assuredly eat you.

And although Kevin has been trading and learning for 15 years, most people that win in trading contests are doing some very dangerous things with position sizing. So notice your reactions. Are you impressed with the people that win competitions? Or is your gut reaction to learn more about how to trade effectively in any market � and just stay in the game!


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Trading Tip 

A Review of Market Models:
 Steidlmayer�s Market Profile II


D.R. Barton, Jr.

This is the second article in our series on J. Peter Steidlmayer�s Market Profile tool. 

The next couple of paragraphs are a repeat from last week to give everyone the basics.

For those not familiar with Market Profile, it is characterized as �a dynamic technical tool that organizes price, time, and volume into powerful trading structures based on the bell curve� in the CBOT�s literature.

A typical market profile would look like this:

Each letter represents a time frame (30 minutes is the default) and a letter is printed at each price traded during that 30 minute period.  Most days, prices align themselves in a bell curve, giving us useful information about buying and selling pressures.

Two of the most basic and useful concepts from market profile are the �point of control� (POC)  and value area.  The point of control is simply the area where the greatest volume of trading occurs and is indicative of the price level with the greatest activity.  This is the area where the buyers and sellers are evenly matched.  In the chart above, it is the price level indicated by the yellow highlight.

POC can be used as a �line in the sand.�  Any time during the day that prices are trading above the POC would be bullish, with price action below the POC being bearish.  In addition, the further that price moves away from the POC, the more likely it is to �regress toward the mean.�

The value area in a Market Profile chart shows the range of prices in which 70% of the market volume took place (this is very close to +/- one standard deviation).  In the chart above, the vertical blue line shows the price range that represents the value area for the day. The highest price of the value area is called the Value Area High (VAH) and the lowest price is the Value Area Low (VAL).

The VAL and VAH are key areas that prove to be important support and resistance levels for the next day�s trading activities.  I know several traders who would not dream of trading without knowing the VAL and VAH of the instruments they trade. 

Next week we�ll look at what the shape of the overall Market Profile curve tells us about the market.  Until then,

Great Trading!

D. R. Barton, Jr. is the Chief Operating Officer and Risk Manager for the Directional Research and Trading hedge fund group. D. R. has been actively involved in trading, researching, and teaching in the markets since 1986.  D. R. has taught extensively in many investment areas including intra-day trading, swing trading, and cutting edge risk management techniques. 

His writing credits include co-authoring Safe Strategies for Fin-ancial Fre-edom and co-creator and contributing author on Fin-ancial Fre-edom Through  Electronic Day Trading.

D.R. presents the IITM Proven Strategies Swing Trading Workshop and Professional Tactics for Day Traders Workshop. Each workshop is only held once each year. 


Melita�s Inspirational Corner

There Are No Accidents

By Melita Hunt

First, before you read any further, just pick a number from air between 1 and 10 (inclusive) and then pick another number between 11 and 20 (inclusive). Write �em down and read on�

Last night I attended a very enjoyable Art of Success workshop here in Raleigh where the discussion focused around what people really wanted. The conversation started out with the usual health, wealth, travel, loving relationships etc� until we got to what the �experiences� were that these things gave us.

If you believe that there are no accidents and that our subconscious mind can tell us things before our conscious mind even �gets it� then take a look at the first number that you wrote down and match it with the word below to see what experience your subconscious is telling you to have more of in your life right now:

  1. Peace

  2. Freedom

  3. Fun

  4. Success

  5. Love

  1. Joy

  2. Fulfillment

  3. Clarity

  4. Wholeness

  5. Security

Now look at your second number and find out what you need to do to have that experience happen:

  1. Be Grateful

  2. Open Up

  3. Be willing to Receive

  4. Give

  5. Laugh


  1. Ask for what you want

  2. Show appreciation

  3. Forgive yourself or others

  4. Have patience

  5. Trust

There are no accidents � and it really IS that simple!


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