Strategies of a Full-Time Currency Trader

01/02/2014 6:00 am EST

Focus: TRADING

Phil DiMartino

Founder & Senior Trainer, Lionheart Trading

Phil DiMartino is a native Coloradoan with over 12 years' experience in the field of finance. After running his own businesses most of his life, Phil realized early on that forex/currency trading held opportunities that regular stock or day trading did not. Phil considers currency trading to encompass many of the best parts of being an entrepreneur. In this interview, we talked about the three things Phil monitors to find good trades: trend, momentum, and turning points. We discuss the time frames he watches on his charts and how he narrows down his opportunities to the best 5-10 trades a week.

 
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Tim Bourquin: Hello everybody and thanks for joining for another interview today. My guest today is Phil DiMartino. He's from LionHeartTrading.com. We're going to talk to him about his approach to the markets, how he finds good opportunities, and his evolution and journey as a trader. So, Phil, thanks very much for joining me on the Skype today.

Phil DiMartino:: Absolutely, Tim, excited to be here.

Tim Bourquin: So give us the type of trader you are. Are you a day trader, a swing trader, and what markets do you trade?

Phil DiMartino: Well kind of a little bit in between. Mostly, I trade the forex market totally and believe it to be the best opportunity in trading because there's so much liquidity and the sucker moves like nothing else I've ever seen. But it's a longer-term swing trading approach, but yet with an intraday type of focus where I'm able to check the charts every four to eight hours and I would say I'd get about five to 10 trades a week doing it that way. So I don't have to sit in front of the charts all day for hours at a time wondering should I get in, should I get out. It's more of a methodical bigger picture type of approach, if that makes sense.

Tim Bourquin: Absolutely. So what are you looking for on a chart? What kind of indicators do you use or if it's just price and volume, well maybe not volume, with the forex market but what do you look at for a good trade?

Phil DiMartino: Well I've got three basic indicators and they're proprietary and custom to what I've designed but they're very simple. They show me the trend, the momentum, and then a true turning point in the market. So I don't reinvent the wheel, I genuinely buy low and sell high, it just turns out that most people don't know how to do that consistently. So I've just put together a mechanical system that shows me when all of those energies are aligned and I go with the trend and buy the dips and sell the rallies.

Tim Bourquin: All right. Can you talk a little bit about, I know they're proprietary, but this will be awful short interview if we can't talk a little bit about what they look at. I mean, in terms of trend and momentum, can you give us an idea of the kinds of things that you're looking for?

Phil DiMartino: Well sure, the trend indicator is very similar to a moving average. It's much more dynamic and unique, though, where it will follow price and basically just looking for the trend to be either up or down and only going in that direction. I use an oscillator to show me the momentum when it's overbought or oversold, basically. It's interesting how a trending market could stay in an exhausted condition for an extended period of time.

NEXT PAGE: What Does He Look for?

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Phil DiMartino: So sometimes when you see these oscillators and see wow, it's overbought or oversold yet it can stay in that exhausted condition when the market is really trending. I look for that and then also have a candle pattern. There's a pattern in the market that the candles make. It's very simple, but it shows you if you've got a genuine high or low in the market and then I basically trade away from those highs and lows. It's not reinventing the wheel here. It's just the raw nature of how the market moves.

Tim Bourquin: Are you able to talk about that pattern? Is it a doji or what do you look at?

Phil DiMartino:: Well that's a great question. It's not a doji. It's not just a single candle. There's actually a five candle pattern that would represent a genuine high or a low in the market and then when I'm able to align that with the trend and the momentum, it's a powerful high probability setup. So I really have to show you a chart in order to understand that and grasp it but it is out there and it's apparent in all financial markets that you trade, not just forex. But when you learn this particular pattern, it repeats itself over and over again, and I would love to show you on the charts if we had that capability.

Tim Bourquin: Okay. Let's talk about the timeframes that you follow, Phil. Are you a five-minute trader, an hourly trader? What do you like to look at?

Phil DiMartino:: Yeah, thanks Tim. What I've found is that the longer that I sit in front of the charts and stare at them, the less money that I make. So I've traded the one-minute and the five-minute and the 15-minute and woken up in the middle of the night to trade the London session and that's actually just caused way too much stress and frustration. I found that as I zoom out to the bigger picture the four-hour, the daily charts, then I'm able to capitalize on larger movements of the market, but also enjoy a much better quality of life. I don't sit glued in front the charts.

I look at it methodically once every four to eight hours and really focus primarily on that four-hour and the daily charts. That allows me to even move into a weekly and monthly setup if I see that taking place. So there is something called aligning multiple timeframes and it's cool when you get all of these timeframes working in coordination and you can enter yourself into bigger moves.

Tim Bourquin: Okay and how many trades a day? I think you said five to ten trades a week. How long do they last?

Phil DiMartino:: Good question and what I've seen in this forex market is that it moves faster than anything else that I've ever seen. So typically, a trade will cash out and take profit even within four to 12 hours. Other trades would take one-three days. So the turnaround time is pretty darned quick but then it's not ultra-day-trader quick. So I think there's a big difference between a day trader and a swing trader and then I find myself somewhere in the middle there, getting the best of both worlds.

Tim Bourquin: How do you determine your risk to reward ratios and how much profit to expect and that sort of thing?

NEXT PAGE: How to Set Stops & Goals

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Phil DiMartino: Well, when we're looking at a market that's moving, if you get a great trade that's moving in your favor, you can actually move the stop loss behind the candles as they continue to move. So there's a distance behind those candles that you can follow them similar to a trailing stop, but I use more like a manual trailing stop and then it allows me to stay in that swing or that move as long as possible.

So I like to have a standard of a 1:1 risk to return ratio but there's certain trade setups that when the market really starts moving, you can all of a sudden be in a 3:1 or 5:1 risk to return setup. So I like to just take off the target completely and then follow it as it goes and see how far it can go.

Tim Bourquin: How do you set your stop losses?

Phil DiMartino: Basically, setting the stop losses on the other side of the swings. So if you've seen a swing high or a swing low, putting them at a place where it would invalidate your decision to be in the trade. So if you're genuinely trading away from a swing low or a swing high, then it would make sense that if the market traded on the other side of that point, then it's not doing what you wanted and it would be wise to exit with a small loss. So I'm all for predefining the risk and knowing how much risk is on the table knowing when is a good time to get out of that trade. I found that that's a general good way of setting those stop losses.

Tim Bourquin: Do you set a goal for yourself in terms of how much money you want to make or a return percentage or an ROI on your overall account every year or month or week?

Phil DiMartino: You bet. I've got goals and they're guidelines. If we focus too much on making the money or reaching the goal and then we can sometimes force something out of the market that's not there. So we can't force anything out of the market. We've got to flow with it. So, of course, it also depends on your risk threshold, as well. I generally take a little bit higher risk per trade because I've been trading for a long time and I've got a high probability of success.

So if I'm just to throw a number out there, it might be a little bit misleading in regards to the amount of risk that I would take per trade.

I coach all of my students to take very small risks maybe 1% risk or 2% per trade but that's very different for each person and what your goals and if you've got true risk capital on the table, a lot of different factors there. But you can set those goals but you also want to be flexible. You can't force the market to hit those goals and sometimes you're going to go way past them. Sometimes you might not even get there if it's a choppy market. So kind of flexible on that but there are some general guidelines.

Tim Bourquin: Okay. At your Web site you talk about the spirituality of trading, what do you mean by that?

Phil DiMartino:: Well, there is a spirituality of trading like a self-discipline, a practice that you take on. You know in most religions there is something called faith where we have to believe in the things that are unseen. In trading, we've got to have a hope and a faith that we're going to win more than we lose and so what I found is that there's a discipline, a patience, a courage, faith, trust.

We've got to let go and open up to uncertainty and then be very methodical with how we spend our days and how we spend our time. So it almost becomes like a spiritual practice and that's what I teach here to my students on LionHeartTrading.com.

NEXT PAGE: How Did You Learn to Trade?

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Tim Bourquin: What did you do before you got into trading?

Phil DiMartino:: Well, I had been involved in all kinds of different sales and marketing ventures and have owned my own business, was raised to do that. In 2008 when companies collapsed, I just made the decision that I didn't want to count on another company to take care of me. I didn't want another fund manager to take care of my money. So I've taken on this personal responsibility to learn how to trade over the last six years.

It's been the hardest thing that I've ever done but now it's very smooth and effortless because I've done that hard work. So, I had seen trading as an opportunity to create a passive income.

I was so burned out and tired of selling, didn't want to participate in that anymore and wanted that personal responsibility, wanted the business that I could work flexible around my schedule with the opportunity of an unlimited income and saw trading and took that on. Now, I actually even coach and mentor others to share that gift with them, too, so kind of cool.

Tim Bourquin: What kind of things did you do to learn how to trade yourself, did you read books, take courses what did you do?

Phil DiMartino:: Well, the foundation would be some of the Mark Douglas material Trading in the Zone, The Disciplined Trader, building some of the attitudes and beliefs for trading, very powerful. You know, the way that we're raised in this culture is not necessarily to be great traders. We're taught to avoid risk and to avoid uncertainty. We want to have control. Here we're in an environment that we've got to let go of needing control. We've got to trust and believe and that take guts. So it's really about developing the mind that I found. Once you get the methodology in place, your system, and your edge then it's about developing the mind that trades.

So I've really enjoyed the Mark Douglas material and have talked to him a couple of times. Also worked with Rande Howell and Trader's State of Mind. He has put together a beautiful course on developing the mind that trades. I know that Rande has written a great book but it's about bringing the empowered self to your trading. So bought a couple of different courses and tried all different kinds of techniques. I actually taught for two years for a gentleman in Australia. I taught his course and that was fun. But I've had to learn on my own through trial and error and then basically I've put together the best of everything that I've learned to start my own company, Lion Heart Trading, over the last two years to then bring that information forward to assist others.

So it's been a pretty incredible journey just learning everything that I could along the way and molding it into something great.

Tim Bourquin: So how did you come across, to develop your own indicators to do this? I mean did you try a lot of different things? What led you to that?

NEXT PAGE: Why Most Traders Stumble

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Phil DiMartino: Absolutely. Through that trial and error, through this persistent effort. I say that trading takes an uncommon persistence and if you've got that genuine desire to get the skill, you'll get it. Most traders who come to trading, they see the freedom and the possibility of an unlimited income and the prestige and they want that, but they're not willing to roll up their sleeves and do the work.

So I've found that you've got to go for the skill and when I started trading, I needed the money so was it any wonder that I couldn't get it because I didn't have the skills? So through course after course and mentor after mentor, I just put together something very powerful. It's the organic way that the market moves. It's not reinventing the wheel, but it's genuinely finding the trend, using momentum, and finding a turning point so that you can genuinely buy the dips and sell the rallies. Uncommon persistence, Tim, to get this far and I've been blessed to stumble upon something great.

Tim Bourquin: What do you still feel like you have to learn or get better at as a trader? What areas do you think you still could improve on?

Phil DiMartino: Well at this time, it's really about the emotional regulation and bringing forward the empowered self to my trading. Gets tricky when there's significant dollars on the line and emotion kicks and should I take this money off or should I get out of this trade? It's managing that fear and being very objective and calm and patient. So where I need to work on is to stay in my trades longer. It's pretty easy to achieve that 1:1 or 2:1 risk to return and often I'll see those dollars flash, it's like man I want that. I want to lock it in.

But if I could delay that gratification longer, then I'll get more of those 3:1 or 5:1 risk to return trades and that's what can really grow and develop an account. So that's where my focus is right now in my own personal trading. Just letting go and trusting and moving those stop losses to break even after they went a good distance and then following them as they continue to go to really maximize it. You get some huge swings in this currency market and it's fun to ride those waves.

Tim Bourquin: Why do you think most traders stumble when they're trying to get to where you're at and become a fulltime trader? Where do you see the most problems arising?

Phil DiMartino: Well, most traders don't have a coach. They don't have a mentor to take them step by step through this process and that's the biggest area that I see that they fail. Also just jumping in too fast, they want the money, and the type A personality that most of us have brought to trading that has worked really well in other areas of our life, it doesn't necessarily work in trading.

We can't force this. We can't push it. We can't make it happen. But we've got to learn that. So if you jump in the market before you've got the skill with huge high hopes and aspirations, chances are that you will not have long-term success. You might win a little bit in the beginning, but there will never be a consistent steadily rising equity curve. So what I have seen is that when somebody comes to the table for the skill and they're willing to practice and practice and practice, even in a simulated account for a minimum of six to 12 months until they've proven yes I can do this, I've got the confidence to trust myself, at that point you can look to step in in a live environment. I think when it's done that way, you have a much smoother and flowing result.

NEXT PAGE: Phil's Favorite Currency Pairs

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Phil DiMartino: Most traders traumatize themselves because they want the money, they need it now but they haven't yet paid the price to earn the right to have a steadily rising equity curve. That takes time. That takes practice.

Trading is a probabilities and numbers game and you've got to learn the patterns and you've got to learn to trust yourself and bring forward that personal discipline. It's really cool because then it becomes more than just the money. You've got to see this as a long-term deal not just a roll the dice and hit it big and get rich quick type of thing. That's not what it is. This can be a long-term life skill and then it becomes about who you're becoming in the process. That's way more than the money and that gets back to the spirituality of currency trading, this practice that you're bringing forward. It's an exciting journey to put forward.

Tim Bourquin: All right and then finally, I should have asked this in the beginning but do you have favorite currency pairs that you trade? I assume you trade the spot market, right, not futures?

Phil DiMartino: Right. So, certainly, I like the major currencies but like the cross currencies a lot. A couple of the new pairs that I've really enjoyed had been the pound versus the New Zealand dollar, the euro versus the New Zealand dollar, those are some of the new ones that they fly like freight trains. But I love those pound crosses, the pound/Aussie, pound/Swiss, pound/yen.

There's about 12 currencies that I start out with when I teach my course and actively I trade about 23 currencies and so from a swing trader perspective, having that many different currencies gives me a steady stream of opportunity. I don't have to wait days and days and days to get a trade but I'm also not doing 20 or 30 trades a day. That's just a great number of currency pairs for me and it's not managing 500 stocks, either ,so much simpler in my perspective.

Tim Bourquin: All right. Where do we find out more information about you?

Phil DiMartino:: Well, you can go to LionHeartTrading.com and read a little bit more about me and my journey. You could look through the process of how I actually teach. It's very unique. It's hands on. It's not just hindsight subjective information. It's very mechanical and relevant. So you could go there and request a free consultation if you want to talk more or join my newsletter there, but I would love to talk to anybody who's serious about building the skill of trading and things that they want to know a little bit more about currency trading.

Tim Bourquin: Okay, buddy, we'll link to that site in the transcripts today and Phil, thanks for your time.

Phil DiMartino: You bet. I hope that's been a value to some of the traders out there and would certainly love to go into more details for those who see fit. So enjoy the process my friends. This is a marathon and it's a great journey of who we're becoming. So hats off to you for your desire to continue to learn and to hone yourself and master your skill. I love this business so thanks so much, Tim.

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