Interview With Forex Trader Rodrigo Villela

BIO: With a background in economics and more than nine years of experience trading stocks, bonds, warrants, futures, and forex on his own and for other people, Rodrigo Villela is well-qualified for his job as the Trading Manager of Comercializadora Mediajet S.A. de C.V. Based in Mexico City, this international trading company specializes in import-export and the manufacture of marketing- and advertising-related products. Due to the global nature of its business, the company uses OANDA's services to hedge its exposure to foreign currencies and, with a portion of the excess cash flow that the company generates, to also seize the speculative opportunities that forex has to offer. Rodrigo has tracked the markets every day since 1998 and has traded with OANDA since 2003.

Can you tell us about your company?

Rodrigo: In essence, our company trades goods between different countries. We make deals in Colombia, China and Europe. We've been active since 2002, and we registered in 2004 when we spun off from another company. We aren't that big yet (20 employees), but we're growing and right now we're planning to get representatives in Europe.

We started trading with OANDA for hedging reasons. Sometimes we need to buy or sell foreign currencies in advance to protect us from undesirable movements. We also buy and sell silver promotional materials, so we hedge in silver as well.

Our trading volumes are getting bigger. It's a true global business. Our actual foreign currency requirements are something that we could not imagine in the beginning, and OANDA has been of great help. We also use OANDA to make some speculative gains with our excess company cash flow. Of course, this is money that doesn't put the financial health of the company at risk if something happened to it.

How long have you been trading with OANDA?

Rodrigo: I have traded with OANDA since 2003. Actually, I've been trading for eight years, but with equities and other instruments. I have experience with options and futures too, but in the end I moved to forex.

I found OANDA on the Internet when I was looking for the lowest spreads. At that time OANDA was the only company offering a 2-point spread on the Euro and was also the best platform around.

Why did you pick forex over interest rates or equities?

Rodrigo: There are many reasons: First of all, because of the high liquidity of the market. One thing I don't like about stocks is that if you want to day trade, you are very limited. Mostly, you have to trade what you can and not what you want. When you buy stocks you need more of an investment mentality—you are buying a piece of a business—so I don't want to speculate in stocks.

I wanted to take advantage of daily equity movements, so I also chose forex because of its volatility. But with forex, you can manage the risk much better than with stocks. Currencies won't usually move 10% in one day. And with the leverage available in forex, you can better control how much you want your equity to move.

Another advantage of forex is the 24-hour market, which means you don't see so many jumps from closing price to opening price the next day, except over the weekends. That is one thing I like a lot, because in stocks many of the biggest movements are from one day to the next and if you didn't enter the day before, you can forget about the profit.

Did you introduce OANDA to the CEO of your company?

Rodrigo: I've known the CEO since university. He always knew of my interest in the financial markets. He knew I was trading currencies and he got interested. He is a man with a great vision and is always looking for opportunities. Of course I told him about OANDA because of our interest in taking more control over currency fluctuations, but it was his idea to use OANDA to leverage our investments.

Are you a fundamentals trader, or a technical trader?

Rodrigo: Actually I don't think you can be profitable if you only take one side. I use both types, but in very specific ways. I use fundamental analysis to monitor opportunities and identify good potential movements.

I pay a lot of attention to everything that determines liquidity: the money in the economy, interest rates, rate differentials between countries, corporate yields, yield curves, all that stuff. Then I use technical analysis to find the right moment to enter into the market. I don't trade purely technically because you can't predict the future with technical indicators. I use technical analysis to get the best possible price or to capture the moment when I think there will be enough momentum to make a profit as fast as possible or to take the least risk.

I must tell you that you can't apply fundamental analysis and technical analysis the same way in all markets. For example, stock markets compared to forex are very slow. You have to look at stocks from other perspectives. Stocks are about business, so I need to analyze the economy, the whole market and then the companies themselves. For me, it's easier to invest in the stock market because somehow you can better estimate when stocks are cheap or when they are expensive.

It's not so easy with currencies. Many people see currencies as stocks that represent their country. But with currencies you don't have the same access to the components that make a country "profitable". It's very difficult to capture an image of the value of a country. So when it comes to forex, it's easier to be more technical and, in fact, there are some aspects of technical analysis that are more effective in forex and not effective in the stock market.

Which currencies do you trade in?

Rodrigo: We trade the principals. From the exotics, we trade only the Mexican peso (for obvious reasons). I watch the rest of the currencies, but I really don't like to trade in them because of the implied costs. The spread is too wide, the interest rate differential is not convenient, and if you want to sell them it's quite expensive.

Do you trade every day? Rodrigo: I've tracked the markets every day since 1998. What can I tell you? It's an obsession. Since I began I have always had an open position in one market or another. But for the company it's quite controlled and mechanical, so we don't trade every day, only when we see the opportunity or when we really need to do it.

Do you use OANDA's news service?

Rodrigo: Of course I use it. What I really like about following the news is that you can be in front of some things you wouldn't otherwise know about. When you see a movement in the chart, you can compare it with what you just read. What I don't like is that sometimes the news comes after the move in the market. In that case, you can just use it as an explanation for why the market moved the way it did.

Your trading decisions seem well calculated. Do you ever trade on a hunch?

Rodrigo: After eight years of trading, it's very difficult to tell when I'm trading on a hunch and when I am thinking it over carefully. I can't separate them. From personal experience, I can tell you that I caught the bottom of the German market because of a hunch. I wasn't even looking that carefully at the stock market at the time, but I just had this hunch when I heard on the radio that the DAX was approaching a new low, almost reaching the 2000 point level, and everybody was so scared of how low it could still go. I put in my order to buy stocks, and I just closed them the beginning of this year. It was just a feeling that it was time to buy.

What you have studied and what you have analyzed over the years becomes a part of you. You don't think about it anymore, it's not rational anymore. It's more a feeling, an intuition.

Would you consider yourself a disciplined trader?

Rodrigo: I have a high degree of discipline, not just in trading but in all aspects of my life. I think that any trader who wants to be successful needs it. I don't think you can get the best from yourself and enjoy life to the maximum unless you have a disciplined life. In that sense, my trading is also disciplined and it has become very mechanical, very routine. I don't trade for the emotion or the excitement—I trade for the pleasure of making money when my perceptions are correct.

Do you use stop losses and things like that?

Rodrigo: This is a very delicate topic. Trading is mostly about risk management. My trading system is roughly based on eight equations. I'm not saying it's mathematical, but it's expressed in qualitative equations that address the nature of the market, even if you can't use numbers in the system or substitute values directly into variables to make a profit.

Of these eight equations, just one considers the nature of the market directly. The other seven are all about risk management. For many people, the only thing they know about risk management is stop loss and that is completely wrong. If you use stop losses combined with leverage, the only thing you achieve in the long run is to deplete your account stop loss by stop loss. You have to be careful, not just where you put your stop loss and how you use it, but also how much you lose on it, and how it affects your account because of the leverage.

Let's say I buy. The market goes against me. Instead of putting in a stop loss, I try to capture a point. It can be a retracement, or a point where the price stops and then begins to gain momentum again. So I catch it before it goes further against me. I still take a loss then, but at a better time than if it were done in a purely mechanical way.

I don't like that the market is always hunting for stop losses. For my mechanical systems, I have to use them to program the exit points because of the nature of the system. But when I am trading personally I don't like to use them.

Don't you need stop losses and take profits for hedging purposes?

Rodrigo: We don't look for profits in hedging. When you use a hedge you are just buying to minimize a possible loss. Some commodities will cost you a specific amount of money, and you can't allow them to go higher because they will affect your production costs. You have to hedge, but not for a profit. It doesn't matter when you hedge if it goes against you—you just ensure the cost stays the same. That is the most difficult thing to explain to people who don't understand hedging. Most people think that if you hedge you also have to take an opportunity to make a profit, but that is a mistake.

What leverage do you use?

Rodrigo: Regardless of the available leverage, I rarely use more than 10 to 1. I like to have access to money, to a lot of leverage, but that doesn't mean I use high leverage all the time. I'd like access to more leverage than OANDA gives, but I realize it's an issue of security of funds. If OANDA allowed a 200 leverage, how many people would go bankrupt because they just don't have the knowledge or the discipline to stick to a lower leverage when they have access to more?

Do you use box options?

Rodrigo: No. I don't like options. Not because of OANDA, but in general. Options are doubly difficult. Not only because you have to time the market itself, but also because time is against you. You should never engage in a business where time is not on your side.

Q: Do you have any advice for new traders?

Rodrigo: Imagine a race where you are competing against thousands of pilots, some of the best in the world and driving the most awesome machines. However, the race takes place at night in the fog. That gives you a pretty good idea of what FX is about. We all want to be ahead, but if you go too fast, well, you won't last very long.

If you expect to trade for a living, just remember you will have to devote a very important part of your life to it. This is a business for the long run, so take it easy and don't risk too much. If you are still young enough, stay at school and take courses in math, statistics, macroeconomics, monetary theory—anything that might help you understand the markets. Read and research a lot before you begin trading. In other words, don't make haste.

The best traders have a deep understanding of risk, and the ability to calculate and to keep the risks to a minimum while trying to achieve a certain return. So start by trading small and compound all the way up to your financial freedom.

What are the biggest lessons you've learned trading forex?

Rodrigo: It's nice to be right, but you can be right and still lose money. You need to be able to change your opinion as soon as the facts change. In the end, it doesn't matter if you are right or wrong, but how much you made or lost.

It's very humbling. I've learned that I can't be overconfident about what I think I know. I fight with myself every day to be humble, to be patient, to look for the facts, to have a detached view about money, to keep my greed and other desires under control, to acknowledge and respect risk, to recognize the role of luck in my life and in the markets, to trust the truth behind certain principles, and above all to do the right thing in spite of how it might affect me.

What do you like or dislike about the fxTrade platform?

Rodrigo: The graphical interface is great. I think it's the best platform I've seen. It's beautiful, it looks good, it feels good, and it's practical. I can make trades quite quickly and I have a lot of information in a small area.

You don't have the problem so much anymore, but sometimes when important news came out, the platform would disconnect on me. These kinds of technical problems are risky for us.

The one thing I would add to the platform is some kind of sound alarm for when the price reaches a limit. I have a semi-automatic system operating 24 hours a day and I've programmed alarms in MetaTrader, so the system will let me know what's happening. I don't need to watch it all the time and can focus on other things. When the alarms go off I go and analyze the opportunities and choose to trade or not. The problem is that the data feed comes from MetaTrader and its spreads are different, so some of my alarms are not well suited to my OANDA trades. We recently got your API platform, but we are still in the development stage and it will take some time to set up the alarms. So if you were to integrate sound alarms for people who don't have access to the API it would be great. You might also want to let people personalize some of the indicators or put in their own formulas like those in MetaTrader or MetaStock.

Where do you see retail forex going in the next couple of years?

Rodrigo: It already has had astonishing growth. It's already the biggest market worldwide and it will keep growing, but I see a lot of people who are not aware of the risk, and at some point something will happen. The market has to be cleaned up. Right now I see those trends of the Euro/Yen. It's not that I'm a contrarian because I also know how to follow a trend, but there is a huge difference between following a trend and not being aware of the risks. All those Japanese housewives who are buying right now, selling Yen against everything else, they are going to be wiped out. I see the forex market growing massively, but I'm afraid there will be some kind of financial crash because of that growth. And that is something we have to be aware of.

Where do you see technology heading in retail FX trading?

Rodrigo: I think that technology and the growth of the FX market are very closely related. One of the aspects of technology that has helped fuel the forex market is obviously the Internet. When I began to trade forex, I didn't have access to huge banks or to huge capital. The Internet was really an opportunity to make the markets more democratic; the retail forex market is now one of the few places in the financial world where you can be small and still go for the riches. That is an opportunity we didn't have 20 years ago. Obviously technology will keep supporting the growth of the forex market, but I can't tell you how. Otherwise I'd be the next Bill Gates.

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