Dhanji Varasani is a renowned trader and distinguished expert within the TradingView.com community. He has a significant experience in forex, equities and options trading. Dhanji spoke to EXANTE's representative Maria Goncharova and shared his trading experience as well as discussed some of his trading ideas using forex and bitcoins.
Could you please tell us about your first experience in trading? How did it all start?
I came from the background where any person trading with stocks in our community were viewed as a gambler and trading was foreseen as form of gambling. So it is quite strange that I have actually got involved in trading. When I left school back in 1970, recession time and generally things went very positive back at that time. I heard about stock market and about how it was falling and then we had another crash in 1987. Knowing the background i come from, those experiences of recession and collapse of 1987, I am very puzzled how I became a trader. What encouraged me most, one of my family members was involved in trading some stocks in London and he encouraged me to take part in this. However, he himself was not experienced, he did not have lot of knowledge about trading, he relied more on newspapers, articles and recommendations from the brokers. He was older than me, and I thought that might be I should take his hint and start trading too. Unfortunately, my initial investment all gone sour, so I stopped trading. Many years went by and in early 1990’s when under the premiership of Mrs Thatcher the UK government started floating utilities that they held. It was easier for me than, because you did not have had a lot of money and also you could buy a small amount of shares with part payment. So that was my initial introduction into trading and gradually that developed. As I became aware, I realized that just taking magazines and articles from newspapers or listening to brokers is not a way to really make money, because my experience haven’t confirmed that. So I then started researching, reading books and attending seminars and whatever I could find. Gradually, I grew my knowledge and experience of charting and in those initial days I made my major investment from early 1997 to 1998, which really paid off well. As I made money I became more and more aware that I need to be even better. So that is my initial introduction to stock market and trading.
You told that you made a big investment in 1997? Where did you invest?
As you know from late 1997 to 1998 the dotcom bubble really started taking off. Partly, it wasn't necessarily my knowledge and skills that enabled me to make some investments in that, however I had enough knowledge to say maybe some of these sectors will do really well. Partly, I was in the right place at the right time and partly I earned due to my charting skill. I really could not claim credit for a complete success, it was partly being in the right place at the right time, as I have already said. For example, one particular stock I bought 80 pence went up to 20 pounds! Some stocks I bought about say 5 pounds in later days sometimes they were going up by 5 pounds in a day! So it was really a dotcom bubble. By that time I was working in financial services at the regulative advisor and I was deeply aware of the fact that things can go parabolic and often they have a very disappointing end. So I was cautious. Those kind of things were my early successes and made be aware that I can't rely on anything rather than my own skill of technical analysis and using then that as basis of future success in investing.
You did, I believe, involve some of the fundamentals in your analysis before. Now you focus on the technical side only, neglecting the fundamentals?
I didn't really ignore the fundamentals; it was always a difficult question. I think fundamentals are very important factors so I do not dismiss them at all. However what I do realise, that there are so many fundamentals you have to consider and there are so many conflicting factors - some may be local, some international. For me, it is very hard because you do not know how much of fundamentals have already been reflected in the price, that is one question. Secondly, sometimes there may be no fundamental basis at all, just basic sentiment. I mean the dotcom bubble for example, was really not based on fundamental at all. It was just a sentiment. How do you weight a sentiment? It is difficult. Also, I found that I am limited in my ability to analyse the fundamental in that respect. Secondly I don't have the resources of bringing in the data from all over that many fund managers might have. Some of the data I might have may be already a week old or even older. So I said to myself that I will not dismiss the fundamentals, but I will rely heavily on my technical abilities which is where I am really good at.
What are the indicators you usually look at?
In the TradingView I have published a lot of charts on FOREX. I started using MT4 in 2012 and spend my time in the passion I wanted to develop - charting. Currency pair price actually reflects the fundamental background of two countries. For example, if you are looking at EUR/USD that would be reflecting an economical and fundamental background of the US dollar and European economic. So in the price there is already a lot of fundamental build in. So I take interest in the currency pair because it tells me a time where the equities might be going. I use several indicators; on my charts you will see RSI - the most commonly used. I use MACD and sometimes other indicators like ADX - directional movement. So those are the indicators that I use. Of course there are times when I use other indicators but most of the indicators will tell us similar story so I do not use necessarily to many on the chart. MACD and RSI indicators go together very well. Sometimes I use volume-based indicators too.
How do you choose a Forex pair to trade? What would be the criteria when choosing pairs? Tell us please about the most interesting pairs you worked with?
I normally avoid all exotic pairs, because I feel there is no need to trade them. They are too expensive because of the wider spread and they are often illiquid. So, I tend to stay in the arena of major pairs, major US dollar pairs and also cross pairs, for example GBP/NZD, GBP/EUR, EUR/NZD. So I trade major pairs and cross pairs. Some brokers give you 20 or more pairs, some you never even heard off like dollar against Turkish lira or Polish zloty. I think there is enough to trade from the major currency pairs. I do not trade too many US dollar pairs. So if I am trading US dollar pairs it either be something like: EUR/USD or GBP/USD.
The way I pick them is which one out of these US dollar pairs is stronger or weaker against the US dollar. So then I would just trade those. For the cross pairs, I like trading them, but I need to keep in mind that those pairs move very unpredictably often in other words they are extremely volatile. If you look at chart EUR/USD, it is a relatively clean chart but then if you compare GBP/CAD chart or GBP/NZD chart, sometimes they are so volatile that within 5 minutes you can have hundred moves. And it is not uncommon for cross currency pairs to have like 150 - 200 moves per day. I trade them as they give you the diversity rather than having everything related to dollar. But you have to keep your position size small. I do not trade short-term time frame, particularly if you are trading lets say 5 or 15 minutes time frame. This for sure cannot be performed when trading cross currency pairs. Some people of course can do it; I cannot, because I tend to focus more on larger time frame rather than on small movements. After spending all this time on analysing the market I can say that smaller time frame only allow you relatively small movement. Then, we have to remember that there is a spread on this and if you wait for confirmation of the candle on both ends or at least on one end, half of the movement might be already taken. So I tend not to trade on short term and trade longer term. When trading cross currency pairs- I definitely trade them on a long-term basis. Two weeks ago I posted a chart for British pound, which is really showing the trend that could last for several weeks. With US dollar pairs, which are a lot cleaner and not as volatile I will take a shorter term trades. Sometimes I will enter a trade that I might hold for a day or two. I will never wait for more movements to give half of my profit away.
How do you decide on a stop level?
First of all, the stop level has to be searched and it has to be acceptable to you from the point of view of the size of the overall account, as you do not want to make a heavy loss in case you were wrong. You need to be able to make small money without suffering heavy losses. If for example, somebody had an account size of 1000 USD, commonly in the industry people say that you can take a 1-2% potential loss. That is the beginning point in working out how much stop loss you should consider. That tells you that if for example you make a decision to risk 2% of the capital that means, potentially, 20 USD (on a 1000 USD account).
Keeping the position size small will help particularly in early days, to make sure you don't make significant loss. Tradeoff would be is that you wont make a lot of money, but the idea is not to get rich in few days or weeks. Idea is to build your account gradually, and the only way you could do that is making sure you do not lose all your money before you have a good trading opportunity. Making small losses means that you will be around for a longer period and hopefully by logic you will be able to have more trades to trade in the future, which will be profitable.
Which volume indicators do you like and use?
The most common and the simplest would be on-balance volume indicator or OBV. I am actually lost with all indicators that are available to traders today. Everyday you come across hundreds of different indicators. There is no limit to how many indicators traders can use and they have access to nowadays. But at the end of the day, they are showing you a slightly different version of what the price is doing. So I prefer to stick to most traditional ones, like MACD, RSI or OBV. OBV is quite powerful, however it is very lagging and it is only good on a long-term analysis. You need to make sure that you use indicators correctly for the right purpose.
I know that you trade bitcoin, which is a volatile instruments. How did it get into your portfolio?
The very first time I heard name “bitcoin” was in 2012 and i was told that it is very hard to mine and it is a rare element, like platinum and precious metals. I had no idea what bitcoin is at that time. One day I came across somebody's analysis saying that there is a direct correlation between bitcoin and equity market like S&P 500. When one of the bitcoin collapses took place in 2013 he (the one that created that analysis) was anticipating major collapse in stock market. Then another colleague said that I should draw chart for bitcoin and I did so. The reason why I did that is because of my reliance of Elliott wave analysis. Elliott wave is my general framework and I overlay that whenever possible on all my analysis because it gives me an insights to where things are likely to go if my analysis is correct. So using that I charted bitcoin. After that, my interest in bitcoin grew because it was a new element or asset, it was very volatile and I thought to myself that I want to prove myself against the most volatile instrument and see if I can do my Elliott wave analysis on it. That is the whole reason why I did charting from June and July 2013. Bitcoin to me was like a wild west, exchanges being hacked, some accounts being hacked etc, all of these were telling me that this is an area I should not go in. Until I see some degree of regulation and some structure, I will not put my personal money in there. At the moment bitcoin is not there. However during my association with bitcoin traders some of the friends in TradingView donated some bitcoins to me, so I have been trading that bitcoin. So now, I am trading bitcoins exactly the same way as I am trading other instruments. The reason why i was interested in it was not to make money on it, but to see whether my technical analysis skill is applicable to bitcoin and I think it very much is so. But I also have noticed now that bitcoin is a very risky instrument. If you think about risk than equity is also risky but is less risky. Now I see a correlation between the two. In the future the only time I would really engage in bitcoin properly is once it is regulated.
Can you tell us about the aha moments in your career?
In early days I read a book written by Robert Prechter called “Conquer the Crash”, the book that encouraged me to explore Elliott wave principle. When I actually read that book regardless whether it was right or wrong his comments made such a sense to me and made me feel like: this is a form of analysis I would like to explore. So for me this was a real aha moment. One of the things I could suggest is if somebody wants to trade - take a longer-term view. I would really suggest not taking risk without considering all details. If you really want to trade and succeed long term don't try to trade very short time frames. Even if you do that develop skill for longer-term frame. That is one thing. The second thing, do not jump from one particular style to another style because at the end of the day you have to find what really suits you the most and we all are different. Some people are much more perceptive about the fundamental data for example, other people are more visual, they want to see on a piece of paper or on a screen before they grasp the idea. Do not struggle by trying lots of indicators because it can happen that none of them will develop your skill in the end.
Source: webinar conducted by EXANTE and TradingView on 30 March 2015.