leonardo-barataLeonardo Barata, is a 23 years-old Volume Spread Analysis (VSA) trader from Portugal. He’s been trading since 16 years of age and uses volume and price action to determine the positioning of professional money in the markets. Leonardo trades Forex, stocks and commodities, both intraday and on a daily and weekly basis. He’s also a coder at Analytical Trader, where he develops indicators based on his methodology to help other traders make it in this business.

In the show Leonardo reveals:

  • How he uses Volume Spread Analysis to follow professional money moves
  • How he trades intraday without staring at charts for hours
  • The free resource he used to become a VSA expert
  • What to mix with Volume Spread Analysis to get good risk to reward trades
  • Four correlated markets to be aware of

Interview

17: How Leonardo Barata became a Volume Spread Analysis Expert by Age 23
00:00:00 00:00:00

Recommended book

Master the Markets by Tom Williams

Platform & Broker

MetaTrader 4, Oanda

Interview links

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Transcript notes

Cam Hawkins:

Leonardo, tell us a bit about yourself, personally, and what first attracted you to trading?

Leonardo Barata:

My name is Leonardo, I’m 23 years old. Before I was studying Physics at University and trading came into my life quite early. I was 16 years old and it came to me as I was playing online poker at the time, since I was in my 15’s. I made quite some money in poker but then I realised to make serious money in online poker you had to be like 8-10 hours a day playing on the tables. And even though I was quite young still I had a lot of time to play and maybe in a few years I wouldn’t have as much time. I wouldn’t want to do that for the rest of my life. So, I looked for a smarter way to invest my money and that’s what led me later to trading.

This happened when I was watching a documentary on the great crash of ’29 in the NY stock exchange. And despite all the problems that it caused, of course, I found one thing very fascinating.  It was that speculators and finance in general had such a great impact on the general economy, on the lives of millions. So maybe I’m missing out on not knowing what’s happening in the markets. That really sparked my interests.

Another thing that I found very interesting was that a handful of traders in the great crash actually made a great fortune. Most of the people lost all their money, house, jobs, but there were a group of people that outsmarted all the others. And I found that really fascinating and my goal since then was to be one of those traders. To be able to outsmart all the others and make money in this business. And that’s how trading came to be in my life.

Cam Hawkins:

Can you give the listeners some insight into your trading? Your trading style, strategy, time frames, ave. trade duration, % winner’s, typical risk reward ratio… those sorts of things.

Leonardo Barata: 

I use Volume Spread Analysis. It’s a fancy name to say I use price action and volumes to determine the strength or weakness in the market. So my goal, like any other business, trading has professionals. Poker has professionals, art dealing has professionals, and the financial markets are no different. Anything that involves money has professional players, or traders. So, my goal is to try and understand what these professionals are doing because they’re the ones who have the money. Think of big funds, banks and so on. These traders, they approach the market in the following way. Maybe they have a team of 10 or 20 people. If they are investing in Gold they have a team of 10 or 20 people researching about Gold (the supply and demand in the real physical exchange). Many times they have inside information so they just have a lot more information than your average trader can possibly have.

So I don’t try to go into the fundamentals, instead I look at charts because what happens is what these traders can hide. They can’t hide their activity, their activity shows up on the volume. So, by looking at the volume and price formations you can actually see what they are doing and trade according to that.

I use this methodology together with trend trading, supports and resistance because you can many times see when a support is going to be broken or not, when a trend is going to continue or going to end. And that’s what I try to do.

In timeframes, I trade as low as M15 on the major pairs like EURUSD, Pound and so on. On the crosses, indices, commodities I trade the H1 or higher. And on the H4 and daily I trade a lot on the ones I mentioned and the exotic pairs like the Turkish Lira, Hong Kong dollar. I’m just everywhere.

About winning rates, I’m about 60% winning trades which isn’t very high but that’s not the point, because I think a key point is that you need to keep your losses small and your winnings large. So my average win is much higher than the average loss. That’s how I make money in the long term. As a trader, as a human being you will make mistakes. But when you make a mistake you have to keep it small so that your winners can pay off these mistakes and make you some profit. That’s what I try to do.

At the very least I choose a 1.5 risk to reward ratio. I don’t enter unless at the very least I don’t have that risk to reward. But most of the times I require 2-3 risk to reward, based on supports and resistance mostly.

And with this strategy I’ve been having an average return of 50% a year. A draw down, I calculated some time ago, I had 15%. I think I could do more if I traded more frequently but I think I’m on the right track with 50% and compounding I think it’s good for now.

I mix it up a lot. I do intraday trades and daily trades. Intraday they can go for a few hours and daily can go for a month. I’ve had trades open for even a month, so it will vary a lot.

Cam Hawkins: 

What does your typical trading day look like?

Leonardo Barata:

I usually trade the US session until the beginning of the Asian session on day trading. I’m not constantly screening all the charts I do this by alerts from my system (something that I coded) to come up. Then I decide when I want to enter or screen that chart more closely. So I don’t have to stare for hours at the markets which just wouldn’t really work for me.

So, for example if I get an alert for support nearby, I will look at that chart. I will see if there are the main signals before that could make me enter and those sorts of things.

Then, when I have open trades. I usually have 3-4 open trades. I try not to have much more than that because you need to be able to manage them properly. And when I enter a trade I set a stop loss and usually a take profit. It’s not necessary, but I usually set it even if it’s too far. And while I’m in the trade I pay attention to certain signs that will make me exit early.

For example, if I’m on a long trade I look for supply signals. Many traders have this experience. They’re on a long trade. Everything is going their way, price is rising and suddenly price crashes. They go to the calendar and no news happened and they don’t know what really happened. Most of the time, you can see a lot of supply behind it (a lot of selling) and so I look out for those things.

Meanwhile I’m doing this I’m also coding, either new tools, or improving some tools that I already have that can also help me in trading.

Cam Hawkins:

In the beginning, what differentiated you from the average Ma or Pa trader out there? What traits did you have, what actions did you take?

Leonardo Barata: 

When I first started trading my goal was simply to acquire knowledge. You need knowledge for anything and trading is no different. I read books, I remember the first book I read was about stocks, How to make money in stocks by William O’Neil. It’s a great book by the way. He mixes fundamentals and technicals. Along with this I got in touch with Volume Spread Analysis a bit later and while reading about that I also read forum threads about VSA. The forums can also help you a lot if you know where to look. There’s a lot of noise in the forums, you have to be careful about that. But once you find the right thread, the right people, you can really learn a lot from there.

After a few months of just doing this, just learning and demo trading, I thought I was ready to develop my own system based on my own learnings. So I grabbed a lot of charts from different instruments and timeframes on stocks, forex, commodities and made drawings and notes, rules. Then I saw a certain rule wouldn’t work, I scribbled it and made new ones. It was just months and months of testing to see what worked and what didn’t. And finally after some months I was confident enough I had my own system that I tested and I thought it would work in a real setting and that’s when I decided to put my own money on the markets and I think this is something many traders don’t get. They just jump into the markets thinking they are going to make a killing but they are really not. You need to put up some effort to get some money. There’s not really much else to it. Like any business you need to have a business plan and only after having one you can invest your own money in it.

Cam Hawkins: 

If you were a retail trader working a day job, what 3 steps would you take to start earning an income as a trader?

Leonardo Barata:

Apart from getting an education of course (this is very important). The first thing I would do is open up the daily timeframe for obvious reasons. You don’t need as much time as for day trading and it’s not nearly as stressful. It’s also a great timeframe to learn from. I think it’s much easier to start.

Step number two I’d say, open quite a few charts. Because since you’re trading on the daily your frequency of trading won’t be nearly as high as a day trader. And since you want to make some income you want to make a few trades a week.

The third one, get some sort of alerts. An alert indicator, so you don’t need to screen all your charts every day. This is really important because let’s say you have 30-40 charts open. If you’re going to screen all the charts at once every day you’re going to get tired really quickly, you’ll lose focus. So get some sort of an alert or a smart way to look at the best opportunities.

Cam Hawkins: 

Can you explain to the listeners your preferred trading strategy, the ins and outs of how it works and why you choose this type of strategy over others?

Leonardo Barata:

This strategy works by looking at the price formation. There are many patterns but one of them is when you have a narrow range bar. Let’s say you’re on a big rally, a big bull market, and you see a narrow range bar and really high volume. What’s happening here? Does this high volume have any meaning? It does. In this case since you are in a bull market you expect many retail traders to be buying, they don’t want to miss out on the rest of the move. And the Smart Money, the professionals know this. They don’t want to be as stupid as this and jumping into this market so quickly on long (they will be long already before that happened). So what’s happening here is that there is a lot of buying frenzy, the retail traders are buying because of positive news, bull market and so on. And the professional money are thinking the bull market has gone on long enough, the fundamentals are changing, I’m going to start selling. And they are going to wait for a moment of high liquidity because these are very large traders, they have a lot of money. They can’t just go into the market and put millions on sell. The price will depress against them. So, they have to wait for these opportunities where a lot of retail traders are buying and they’re selling, so that’s what causes the narrow range. They don’t let the price go higher. It doesn’t go down either because the retail traders are not letting it go down because of the buy orders. That’s a very typical sign of a bull market top, of distribution.

Then there are many others like you have the price making new highs and during the day (taking the daily timeframe) S&P goes to 2200 and closes on 2100. What happened here? What happened was with the price going up the Smart Money took advantage of that buy filling in sell orders again, and during the day they depressed the price so it closed low.

These are just some examples; there are many other types of pattern. The key then is to mix this with some sort of trend indicators, some support or resistance to get in with good risk to reward trades.

Cam Hawkins: 

Why were you interested in this particular strategy over all the others out there?

Leonardo Barata:

First of all I realised I didn’t know a lot about the markets. When you start trading it it’s just crazy what you didn’t know if you’re not using volume in your trading. And the fact that you can follow what the professionals are doing, what the really good traders are doing, it’s what got my attention because I wanted to be one of them.

Cam Hawkins: 

If you split your trading up into technical vs fundamental, what would that split look like?

Leonardo Barata:

This strategy works by looking at the price formation. There are many patterns but one of them is when you have a narrow range bar. Let’s say you’re on a big rally, a big bull market, and you see a narrow range bar and really high volume. What’s happening here? Does this high volume have any meaning? It does. In this case since you are in a bull market you expect many retail traders to be buying, they don’t want to miss out on the rest of the move. And the Smart Money, the professionals know this. They don’t want to be as stupid as this and jumping into this market so quickly on long (they will be long already before that happened). So what’s happening here is that there is a lot of buying frenzy, the retail traders are buying because of positive news, bull market and so on. And the professional money are thinking the bull market has gone on long enough, the fundamentals are changing, I’m going to start selling. And they are going to wait for a moment of high liquidity because these are very large traders, they have a lot of money. They can’t just go into the market and put millions on sell. The price will depress against them. So, they have to wait for these opportunities where a lot of retail traders are buying and they’re selling, so that’s what causes the narrow range. They don’t let the price go higher. It doesn’t go down either because the retail traders are not letting it go down because of the buy orders. That’s a very typical sign of a bull market top, of distribution.

Then there are many others like you have the price making new highs and during the day (taking the daily timeframe) S&P goes to 2200 and closes on 2100. What happened here? What happened was with the price going up the Smart Money took advantage of that buy filling in sell orders again, and during the day they depressed the price so it closed low.

These are just some examples; there are many other types of pattern. The key then is to mix this with some sort of trend indicators, some support or resistance to get in with good risk to reward trades.

Cam Hawkins: 

Why were you interested in this particular strategy over all the others out there?

Leonardo Barata:

First of all I realised I didn’t know a lot about the markets. When you start trading it it’s just crazy what you didn’t know if you’re not using volume in your trading. And the fact that you can follow what the professionals are doing, what the really good traders are doing, it’s what got my attention because I wanted to be one of them.

Cam Hawkins: 

If you split your trading up into technical vs fundamental, what would that split look like?

Leonardo Barata:

99% Technical, 1% Fundamental

Cam Hawkins: 

Diving a little deeper on fundamentals, what 3 things would you recommend a novice or intermediate trader educate themselves on?

Leonardo Barata:

If you’re doing day trading you need to look at the news because you don’t want to enter before semi important news comes up.

Cam Hawkins: 

Diving a little deeper, thinking about any price chart, what 3 things would you recommend a novice or intermediate trader educate themselves on when reading a chart?

Leonardo Barata:

The first thing, understand how to use volumes. You want to understand how the Smart Money is accumulating, distributing, when there is no professional support of the market, what the retail traders are doing, absorption and volume and the faulty accumulation and distribution patterns and those sorts of things. It’s really important to understand.

The second thing, I’d say, learn the different market phases, trending markets, ranging markets, erratic markets. This is really important because, for example, many times you may enter a trade and everything goes wrong. You lose very fast, you hit your stop loss very fast and you don’t know what happened. You’ll see you’re in the middle of a trading range where the price is very erratic and you shouldn’t enter in this situation. It’s just one of those things I learned from testing and experience. You may be going short when there is a big up trend behind. And so these sorts of things just give you another perspective on trading and give you a very good perspective.

Finally, I’d say inter market analysis. You need to know the relationships between different markets. Commodities, for example, the relationship of gold and the Australian dollar, Crude and the Canadian Dollar, Stocks and Euro Yen, Bonds and Stocks – this is really important.

Just before the stock market correction I was looking at the European and American indices and I saw a lot of selling in the European indices like DAX, but in the American ones I really didn’t see it. And the European markets crashed first. They went into a correction first and I thought it was odd that the American didn’t. But since there was so much weakness in the European markets I thought that these are very correlated markets. The American stocks are going to follow and so I shorted the S&P and made some money. It went into a correction a few days after. And this is really the importance of looking at correlated markets.

Cam Hawkins: 

Do you use any other indicators to support the VSA strategy?

Leonardo Barata:

Apart from the indicators I’ve coded. I use my indicators basically and volumes with average by session which is something really simple but useful. Not much.

Cam Hawkins: 

How long did it take you to go from trading newbie to consistently profitable trader?

Leonardo Barata:

2 years.

Cam Hawkins: 

What’s your mental approach to trading and what special techniques do you use to keep your emotions in check?

Leonardo Barata:

For any reason I don’t feel like trading or if my performance will be affected I simply do not trade. Reviewing bad trades also helps to see if I might have made any mistakes and if I didn’t I reassure myself this is ultimately a chance game.

Cam Hawkins: 

What’s your favorite entry setup?

Leonardo Barata:

You have a strong background, you look at the market and you see a lot of strength. Wait for demand to come in and after the short term trend goes up with the moving average you go long. That works a lot of the time.

Cam Hawkins:

What strategies do you use to exit and manage active trades?

Leonardo Barata:

Apart from selling at stop loss and take profit I usually use a trailing stop to protect the profits and, as mentioned, exiting on supply signals which most of the time happens before the market turns against you.

I use Average True Range, which is a standard indicator of volatility. Like 2.5, 3 average true ranges from the current price.

Cam Hawkins: 

What’s your recommended “must read” trading book?

Leonardo Barata:

Master the Markets by Tom Williams

Cam Hawkins:

Do you automate parts of your trading? If so, what have you automated, why and how does it help you?

Leonardo Barata:

I’m currently developing an order management EA. It does plenty of things. It moves the stop loss to one of the nearby supports after a wide bar, it has its own supply signals near resistance and so on. It helps a lot if you’re day trading because you don’t need to be monitoring the trades constantly and instead focus on entering at the right time.

Also alerts help a lot, alerts of nearby support and resistance, trendline, trend changing. It saves a lot of time and is very positive.

Cam Hawkins: 

If there was one thing you would recommend any retail trader spend the next month mastering, what would it be, why and how could they go about mastering it?

Leonardo Barata:

The game changer for me was really learning Volume Spread Analysis. When I got in touch with it I didn’t want to know about anything else, about any other methodology. It’s what made most sense to me from what I’ve read so far. So I recommend learning about it. You can read the book I mentioned “Master the Markets” that’s the way to start. Then there are others on Richard Wyckoff, forum threads and those sorts of things.

Cam Hawkins:

What trading related internet resource, like bloomberg.com, do you always use?

Leonardo Barata:

Forex Factory Calendar

Cam Hawkins: 

What’s the biggest mistake most retail traders make?

Leonardo Barata:

I think, trading without a plan. Like on tips from market analysts, forums or a friend. This is generally just a sure way to lose because how are you going to make money in the long term, in months or years just relying on tips or other people’s opinions. This, it just doesn’t work.

Cam Hawkins: 

What’s your preferred broker and trading platform?

Leonardo Barata:

My preferred broker is Oanda and trading platform Metatrader 4.

Cam Hawkins: 

If there was one mantra or saying our listeners should reminded themselves of each day, to help improve their trading, what would it be?

Leonardo Barata:

Keep you loses short and let your profits run.

Cam Hawkins: 

If you could leave our listeners with one piece of advice what would it be?

Leonardo Barata:

Treat trading as a business and you are the boss. If the business is failing, as yourself, what are you doing wrong and what can you change in your way of doing business. And if it’s successful over time just keep doing the same things that make money.

Cam Hawkins: 

Perfect! For those not in the know, my mastermind community are working towards creating a profitable trading system. If you’re not in the mastermind yet, just jump on 52traders.com and join today while it’s free.

So, Leonardo, today your task is this:

We’d like you to help us find a high probability exit point for our trading system. We already have a market to focus on (namely the S&P500), and we’re looking for specific standard indicators, candlestick formations, market events, those sorts of things…

So Leonardo, to help us pinpoint high probability exit points for our trading system what “3 golden nuggets” can you share with us today?

Leonardo Barata:

One of them is waiting, if you’re looking to exit, look for a narrow range bar with really high volume after a long rally, because that’s usually distribution.

Another thing is look out for low volume rallies on new highs because that shows there is no professional support in the market. Otherwise the volume would be high.

Another on the S&P, is look at other American and European indices as well as Futures which give a lot of clues of what’s going to happen.

Cam Hawkins: 

Before we wrap up what’s the best way for traders to get hold of you?

Leonardo Barata:

They can visit my website, www.analyticaltrader.com. You can contact me via email or skype. I’m also in the business of coding indicators that can help other traders so if you’re looking for a tool that can help you in your trading, I’m sure my tools can help you so I urge you to take a look at it.

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