Forex Journal

Larry Pesavento is a 45-year veteran trader.  He began his career trading full time in 1967 while in graduate school getting an MBA in Finance following a Bachelor of Science in Pharmacy.  He managed the commodities department of Drexel Burnham Lambert in Southern California from 1976 to 1981.  In 1982, he became a member of the Chicago Mercantile Exchange where he was a local in the S&P and currency pits.  Then from 1985 to 1986, he worked for Commodity Corporation in Princeton, New Jersey.  In 1987, he wrote Astro Cycles – The Trader’s Viewpoint and published a newsletter called, Astro Cycles until 1995.

Currently, he resides in Tucson Arizona where he has spent the last decade working on artificial intelligence i.e. neural networks and genetic algorithms – using this technology to develop an auto trading system.

He has an extensive library on the subject of technical analysis and has trained over 1,000 traders in using pattern recognition swing trading methodology described in his books. Over the past 25 years, he has written ten books on trading. Part 1:  Who is Larry Pesavento?

TJ:  Please provide some personal background?  What were you doing before you became a trader?  When and how did you get into trading? 

Larry:  My educational background is in pharmacy.  I worked for Eli Lilly & Co. for 10 years and during that time, I traded rather actively.  As I became more successful, I eventually chose trading as a full-time career. 

TJ:  How did you get interested in trading?

Larry:  I became interested in trading in 1959 when my uncle bought 100 shares of a stock doubled in price for me.  It was when I was attending my MBA program that my interest exploded as my professor was an active trader and was driving a Porsche.  He gave me a few ideas about trading that worked well and I began to expand upon that. 

TJ:  What did you find interesting about trading? 

Larry:  Trading interested me because it is the ultimate venue for freedom.  You are the captain of your fate and the master of your soul.  You determine what you make, when you work and where you work.  These three things made it an easy choice. 

TJ:  What was it like when you first started trading? 

Larry:  My first experiences in trading were all very successful. This did not prepare me for times when things did not go quite so well.  The first 10 years were nearly flawless but during the period of 1974 and 1975, I realized that I had a great deal to learn and spent the next 18 months studying without doing any trading. 

TJ:  Did you receive any assistance when you started trading?  Where did you go for advice? 

Larry:  I have had three mentors in my trading career, Dr. Ruth Miller, who is still trading at the age of 88; John Hill, who is still trading at the age of 87 and Dave Nelson who died in 1979.  Each of them had a long history of trading and shared with me the best and worst of what they have learned and also the worst of what they have learned. 

TJ:  How long did it take before you considered yourself successful? And how would you define success? 

Larry:  How long before I considered myself successful? It was 1976 and I had just completed a campaign in soybeans that was very successful. Drexel Burnham offered me a job to run their commodity department in Beverly Hills and provided everything that I would need to be successful. I traded the firm’s money for the next six years with exceptional results. Success is not defined by how much money you make. Success is defined by the happiness that you have, the people around you and what you can give back in return for your success. Money does not make you happy and you certainly cannot take it with you when you go, but happiness travels with you everywhere. 

Part 2:  On Trading

TJ:  How did you get started in technical analysis? 

Larry:  I got started in technical analysis because I found that the fundamental approach did not work for me. Information that I was getting from reports and brokerage houses was either late or totally erroneous, and in some cases outright lies. One of my mentors explained to me that the good part about technical analysis was that people could not hide information from you or lie to you. 

If there were more buyers, prices would go up.  And if there were more sellers, prices would go down. It only took me about a week to realize that this was the way that I wanted to proceed. 

TJ:  You place a lot of emphasis Astro-cycles.  What is the link between the stock market and the economic cycles?

Larry:  My interest in Astro-cycles started with Dr. Miller in 1986. She was Professor of Economics at Indiana and had studied Astro-cycles extensively.  She explained to me that she had found a relationship between Astro-cycles in the Fibonacci summation series that could be related to the stock market with a high degree of accuracy. This was my starting point for writing my first book, Astro-Cycles – The Traders Viewpoint. 

TJ:  Do you use Fibonacci or support/resistance levels? 

Larry:  Fibonacci provides not just support and resistance levels but the ratios necessary to describe pattern recognition. It is actually quite simple because all we are doing is finding triangles are formed by price action from high to low to high – or low to high to low. By using Fibonacci numbers, it quantifies the triangle at a point where you should be prepared to be a buyer or seller. It is a little more complicated but it is the basis of how we start. 

TJ:  What exactly are you looking for?  Are you looking for trends?  Are you looking for momentum in the markets to determine trend direction? 

Larry:  The first thing I do when I look at a chart is determine what I think the trend is going to be. Trend is nothing more than higher bottoms and higher tops in an uptrend. Conversely, lower tops and lower bottoms is the classic definition of a downtrend. People confuse that the timeframe must be chosen to trade. The reason is that the hourly chart looks different than a five-minute chart because there are trends within trends starting with monthly and going down to tick charts. To determine trend is to define it by time and higher bottoms or lower tops. 

Momentum does not figure into my calculations for trading as it is a lagging indicator as are all oscillators.  Pattern recognition allows you to trade in the moment of the trade and is the easiest and at its lowest risk.  Waiting for an oscillator or a momentum indicator increases the risk since it is lagging the market. 

TJ:  Since you believe in the technical approach to trading, are there any technical indicators or chart patterns you prefer? 

Larry:  My favorite chart patterns are the Gartley patterns, which are nothing more than a way to select buying higher bottoms or selling lower tops. I also like the butterfly pattern, which is an extension pattern that gives a strong indication of a major price reversal. It is an advanced pattern only to be used by experts in trading that can understand the parameters of the pattern. There is just a sequence of numbers that lineup within the triangle of high to low to high or low to high to low. 

TJ:  I was wondering what you do when a market is in a trading range.  When a market is a relatively flat, do you stay out of the market, or do you try to trade smaller trends? 

Larry:  Trading range markets are actually the easiest to trade because they are many swings making up the trading range.  Strong trending markets that occur about 10% of the time were more difficult to trade because they do not have clear patterns to give an entry here on the short side or the long side. 

TJ:  When do you determine that a trend is beginning, and believe that there is a strong chance of it moving up or down? 

Larry:  Trends must be defined by the timeframe that you are trading. The daily trend will be different than the five-minute trend. Trend determination with pattern recognition is an easy thing to apply because you are dealing with these right triangles where you have a high to low to high or low to high to low. The next step is to apply the ratios of the Fibonacci series and look for higher bottoms for an uptrend and lower tops for a downtrend. 

TJ:  What do you consider to be the best way to enter a trend? 

Larry:  Entering a trade is rather easy when using pattern recognition. Pattern recognition is a leading indicator rather than a lagging indicator and as such gives you an exact point to be a buyer or seller. We use both limit orders and market orders and at the same time place the appropriate stop-loss orders to protect against loss should the position go against us. 

TJ:  Do you work in other markets such as currencies and indices? 

Larry:  My primary interest in trading is the Forex markets, futures markets, and especially the stock indices of the U.S. and Europe. 

TJ:  How is your analysis of these markets different or similar to that of the equity market? 

Larry:  The analysis in these markets is exactly the same.  Price action is constant in pattern and repetition over any market that is liquid and volatile. It does not work as well with initial price offerings until enough trading data has been accumulated from the new issue. 

TJ:  How do you decide which markets will make the money you are looking for?  Do you look at the whole universe of markets, or do you have a select group? 

Larry:  The decision on what I am going to trade has developed over two years. I particularly watch eight markets every day. There is a group of Forex trades such as the JPY/USD, EUR/USD, GBP/USD, AUD/USD as well as gold, crude oil, wheat, soybeans and copper. Occasionally, I will add something that is in the news that is making a pattern completion. 

TJ:  How do you handle the actual entry? 

Larry:  The entry is based upon the pattern completion and as long as there is not a huge gap near the pattern completion we take the trade because we never know which trades are going to work and which trades are not going to work. Trading is dealing in probabilities and you must learn to think in probabilities. 

TJ:  We know how you enter positions, but how do you exit positions? 

Larry:  The first exit on my trades is equal to the amount of risk that I originally assumed when I placed the trade. By taking off the original risk it allows the rest of the position to be traded risk free. I spend most of my time worrying about risk. Traders should never spend any time thinking about how much they are going to make. If they would focus on how much they are going to risk, if they lose they will be far better in trading. Winners think how much I can lose whereas losers think how much I can win. You must learn to reverse that process and think like a winner in order to be successful in trading. 

TJ:  On average, how long do you hold on to a position? 

Larry:  My average holding period is about three days. However, I do like day trading and I will place several day trades in the markets mentioned that I trade every day making the holding. I exit at the end of the day as I do not want to be in a position overnight because it increases risk exposure. 

TJ:  What type of capital preservation methods do you implement? 

Larry:  Capital preservation is the utmost in money management. The only way to preserve capital is by having a written trading plan and using protective stop orders to get you out of the market when you are wrong. Knowing that you are wrong is more important than knowing when you are correct. Losses tend to add up faster than profits, if you do not do anything about them. Worry about how much money you can lose not how much money you can make. 

TJ:  Does your allocation change from time to time – depending on the situation? 

Larry:  The allocation of my trades does not change very often. I only like to trade the first three hours of the day and manage the positions that are remaining the rest of the day to keep it as simple as possible. The excitement of watching a monitor all day left me many years ago, so I spend very little time in front of the monitor. 

TJ:  Have you made any trades that have been particularly memorable? 

Larry:  After 50 years of trading, it is really hard to pick one particular memorable trade but there is one that I always talk about.  In an October 1980, I was short gold at $720 an ounce over the weekend. The Sunday news reported that Iranian jets had attacked Iraq and that war had broken out in the Middle East. The price of gold was soaring in the Asian markets and in Europe. It was five o'clock in the morning in California and I scurried into the Drexel Burnham office prepared to take a huge loss. But what had actually happened was an accident and gold was only up two dollars per ounce but more importantly it ended down on the day more than $25 per ounce making it a very sweet trading success.  However, I payed the price in worrying before the market opened. 

TJ:  How do you minimize the negative effects of mind games and emotions that come in play? 

Larry:  Trading is a mental business and the quicker people realize this fact, the quicker they will be successful. The one thing that has helped me more than anything to overcome this is a book by Mark Douglas call Trading in the Zone. I read this book religiously every day, but I only read two pages each day. At the end of the year, I have read the book several times and the principles in the book are part of my psyche and act as an anchoring system to make me realize that I am only dealing in probabilities and not certainties and for that reason must prepare for losses. 

TJ:  What is the biggest cause of failure and how should people overcome it? 

Larry:  There are many causes of failure in the markets. First would be the lack of experience or knowledge. People want to come into this business because they want to make a lot of money, but they have no idea that our business is no different than accounting or law or medicine in that we have the same rules that must be followed. Does someone go into a profession without knowledge and become successful? They have to pay to acquire the knowledge. Many people who come into trading don't want to pay the entry fee of learning this knowledge.  They assume they can open an account and the money will start rolling in. Nothing could be farther than the truth.  Usually, it takes at least 1 or 2 years to train someone to be a successful trader. 

TJ:  What else should people keep in mind when they are managing risk? 

Larry:  Managing risk is the ultimate goal of a trader.  Risk is the most important thing that we can control. In fact, it is the only part of the risk/reward equation that we can control. We never know if we are going to be profitable on the trade nor do we know if the trade is even going to work or not. The only thing we can control is the amount of risk of the trade. New traders focus on how much money they can make instead of how much money they can lose – this is why they continually lose.  If they would reverse the process they would eventually be successful. 

TJ:  There are a lot people saying that the economy is recovering and they are seeing a rally.  Do you look at the larger picture or do you just go one day at a time? 

Larry:  I look at the long-term cycles related to astrology and in my view we have been in a long-term bear market since October 2007 in the United States. We had the greatest rally ever experienced since March of 2009. That rally ended with a Fibonacci ratio of .618 on April 25, 2010. 

TJ:  Do you have any thoughts on the current market? 

Larry:  I do not believe the stock market in the United States will bottom until sometime in late 2012. Keep in mind that the bull market started in 1982 and did not top until 2007. Five years down after a 25 year up move seems rather reasonable in my opinion. 

TJ:  What advice do you have for a trader who keeps hanging on to positions, hoping they will move back up? 

Larry:  I have some sage advice for those holding on to losing positions hoping that they will come back. ‘Hope’ is not an operative word in trading.  It is much better to be out of the market wishing you were in, than to be in the market hoping you are out. These folks do not have a trading plan or any defined risk and as such they are destined to fail. The problem is that sometimes they fail so badly that it destroys their soul and will not come back into the trading environment. 

TJ:  What would you suggest to someone who wants to become an expert in technical analysis?  How might they gain a solid understanding of the markets? 

Larry:  Traders that want to become expert in technical analysis have different ways to approach the learning process. First, they can acquire a vast library of books and learn everything on their own. The cost of this is rather prohibitive. Second, and the easiest way, is to hire a mentor who has had some degree of success in the markets and have them teach them what they know. They will learn the good and the bad but learn to focus on the good and learn how to take care of the bad. Gaining understanding of the markets only comes with experience. It is much like medicine. you would much rather have an experienced surgeon operate on your loved ones as opposed to a first year surgical resident doing his first operation. Trading is no different. There is no substitute for experience. Being in the war zone and experiencing the agony of defeat is a priceless learning experience, one that must be learned and not enjoyed. 

TJ:  What advice would you give to those who either want to start out trading and applying technical analysis or for those who wish to improve their trading? 

Larry:  Read a lot of books or get a mentor. 

TJ:  The U.S. dollar has been very volatile. Do you think another currency could replace the U.S. dollar as the world’s reserve currency? 

Larry:  I spend absolutely no time listening to financial reports or reading newsletters. I am a true technician and only look at the price and patterns presented to me each day. As such, I have no idea what could happen to the U.S. dollar either short-term or long-term. I do not need this information because I am trading what I see on the chart and not what I think. Thinking has caused me more problems than you can imagine. 

TJ:  There so many trading systems out there, each with claims behind them from various sources. They always show a phenomenal equity curve, suggesting their system made so much money during a specific timeframe. In your opinion, what is a reasonable method for judging a system? 

Larry:  I have looked at many trading systems over the years but I have not found any that are suitable for me even though I am sure there are some out there that are quite good. Before anyone should buy one of these, he should talk to someone that is actually using the product each day and can verify it with profit and loss statements that should be audited. It is very easy to show a trading system that has been incredibly successful by curve fitting it with backdated data designed to fit that system. Futures Truth, started by my mentor John Hill in Hendersonville North Carolina does a great job of exposing bad systems and suggesting good ones. It is a non-profit organization meant to help traders. 

TJ:  Given a chance to start all over again, what would you like to do differently? 

Larry:  If I had to start all over again I do not think I would change anything or could change anything. I was guided along the way by three incredible mentors and a love for the business. At 69 years of age, I enjoy trading everyday and had the pleasure of training over 1000 people in the past 33 years, many of whom are in contact with me on a regular basis. 

Part 3: Books and Seminars

TJ:  What motivated you to write so many books? 

Larry:  Writing a book the first time was rather difficult but enjoyable. I have written so many books on the subject of trading because I do not watch the monitors all day long. The books began as a series of notes that were eventually put into an outline that became the book after about 12 months of hard labor. Fifty years of experience gave me a lot of topics to cover – a lot of experience in the heat of battle on those topics. 

TJ:  Where did you get the inspiration and ideas for each books? 

Larry:  The inspiration for these books was a by-product of perspiration. I had been learning some of these things led me to write on the topics because people would continually ask me how I learned this and what was the meaning behind it. Having a lot of time on my hands during market hours, I would do a little bit each day and eventually the book would begin to unfold. 

TJ:  What is the central theme of each book? 

Larry:  I have written 10 books, the themes of which are quite variable. The first three were related to Astro harmonics and astrology. The last six were related to pattern recognition swing trading. The one book trading essentials is all about the mental part of trading and the things that I read and discovered about myself when trading. 

TJ:  What makes it stand apart from other trading books? 

Larry:  I don't know if my books actually stand out from other books. I have never really asked myself the question. I can say that traders that have read my books have come back with some wonderful accolades that make me believe I was on the right track in trying to disseminate information. 

TJ:  How could a reader get the most out of the books? 

Larry:  The best way for a reader to get the most out of the books is to read it many times and try to apply the principles that are in the book to chart patterns. Once the reader can prove to himself that the patterns work, the excitement level and inspiration to look further into the charts and more importantly to look further within themselves to see if they have what it takes to be a trader. 

TJ:  Have you incorporated any ideas from the books into your trading and analysis?  Which aspects have you incorporated? 

Larry:  Writing a book makes you very cognizant of what you must say and how you must say it. Nothing could be worse than disseminating information that is erroneous or even worth less than the cost of the book. So as an author, I tried to put down in print what I thought were the best things that I had learned in trading. Using examples both good and bad illustrate that we are only dealing in probabilities never certainties and we must repeat this to ourselves on a constant basis. 

TJ:  Do you train traders ? 

Larry:  Most of the joy that I have in trading these days is when I can mentor someone to be a successful trader. Nothing gives me more enjoyment. When you train someone you have the ability to change their life. It is much better to teach a man to fish than to give him a fish.  Giving him the fish feeds him for a short time, teaching him to fish feeds him for the rest of his life. 

TJ:  What do you teach at the seminars? 

Larry:  Seminars are a good venue for describing and illustrating pattern recognition swing trading. I particularly like live trading as the attendees can see in real time what is actually occurring and even more importantly the fact that it is working. 

TJ : Let’s talk about trading education.  How long do you think it would take someone to master the art of trading? 

Larry:  It takes a minimum of one year to train someone to be successful trader. Some will take several years and a few may be able to do it within a few months. This is the primary reason why I do not have a time limit on mentoring. Each student is different and must proceed at their own pace. 

TJ:  Do you have any final comments you would like to share? 

Larry:  I am looking forward to meeting all of the traders and sharing my trading experiences in Singapore.