Forex Confidante [2nd ed.]

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The ideas presented in this manual are for information purposes only. Foreign Exchange and all futures trading are inherently risky financial instruments that should be bought and sold only by individuals that are capable of sustaining financial liability. Reproduction of any portion of the contents of this manual is strictly prohibited unless written permission is given by the publishers. Copyright © 2008, 2009.

Table of Contents [1] Introduction ...................................................................................................................................... 2 [2] First Things First: The Pre-Golden Rules ...................................................................................... 5 [3] The Confidential Golden Rules of Forex Trading ......................................................................... 9 [4] Understanding Forex Truisms ....................................................................................................... 13 [5] Money Management ...................................................................................................................... 19 [6] The Trading Game .......................................................................................................................... 29 [7] The Bid and Ask/Offer Spread...................................................................................................... 33 [8] Technical Analysis Part One: Anatomy of a Bar Chart .............................................................. 43 [9] Technical Analysis Part Two: How to Draw Trend Lines ........................................................... 46 [10] Technical Analysis Part Three: Fibonacci Price Projection ..................................................... 55 [11] The Secret Formula: W.D. Gann‟s Overbought/Oversold Indicator ...................................... 72 [12] The Confidential Codex Timing Strategy .................................................................................. 77 [13] Final Thoughts and the Complete Codex Reference .............................................................. 95

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[1] Introduction Fellow Traders, This is a book I never thought I would write; how many times have you read that before? However, I never imagined myself doing this project. I resisted it and looked the other way. But every time I turned around, there it was again: the friggin' hype. You've seen it. It's gumming up your email box every day. I'm sick and tired of seeing Forex Trading being touted as some kind of easy get-rich-quick scheme. Forex trading sure can be quick. It is a market with the volatility of a striking rattlesnake. Forex usually is a very quick and easy way to lose everything. Push a button, go to the poor farm. The emails all claim: No brains required. No knowledge of the markets required. And these “gurus” all scream about the unbelievable 99.9% guaranteed sure fire success rate of their “students”! Or your money back. They hawk their questionable wares for something like $77 or $97 or if the creator is really a bold toad: $197. A one-time payment, nothing else to buy with lifetime support and updates fully included. Hell, it‟s better than stealing; it's a friggin' license to print money like the phony Federal Reserve. Yet, if any one of these “systems” really worked the way the sales letter claimed, you can bet your farm with confidence that such a system would fetch millions on the open market. Not a mere $77 bucks with a bonus E-book thrown in to boot. Every major bank on the planet would employ these foolproof EA systems instead of human traders. You don't have to pay a piece of software a salary. Just set it and forget it. I, as a Chief Dealer for many of the world's major banks, would have loved to deal with computers instead of people any day. Computers don't slither into the office with attitudes like Darth Vader, nor do they come to work hung over or bleary eyed with true love for the pole dancing stripper they just met the night before. Nope. Computers just do what they're programmed to do. No lip. No sass. No ego to bruise, no chit-chat at the coffee machine to make. With any luck, this miracle piece of AI trading genius in a box will never be invented. Tom Sez: “The Forex market needs human interaction for its living, breathing, chaotic volatility. The market is a living thing due to the very fact that human beings are living, unpredictable bags of volatile emotions: the Forex Market is the sum of all the human participants fear and greed.

The Forex Market is always thinking. It is alive. It is you and I and everybody else who ponies up to take this ride. Forex is TRILLIONS large.”

For these reasons and more that I haven't even considered yet are why no computer program will ever be able to trade the Forex market like a seasoned professional trader can trade it. Forex trading can't be boiled down into a precise mathematical model that predicts market ForexConfidante

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behavior with godlike precognition. Raw, unpredictable human emotions move the markets. There are no computers that can gauge the constant shifts in the way the money flows into and out of the market. Mathematical models have been around since the late 1970s. And I have yet to see one to date that can outperform a well-trained trader. In the Forex market, you will find yourself up against some of the biggest, brightest, most greedy minds in the world. The biggest of these fish have literal control of the world's bankroll. They have the ability to stay in the game when you cannot. They are the smartest financial sharks in the ocean of investments. These predators are the International Banks. I have had the pleasure to trade with and against them. Names like Deutsche Bank (I started my career there), Credit Suisse, Citi Bank, Harris Trust Chicago, JP Morgan, Chase Bank, Union Bank of Switzerland, Credito Italiano, Swiss Volksbank, Banca CRT, Sakura Bank, Tokai Bank, Yasuda Trust of Tokyo, Barclays Bank...the list goes on and on. So...how can you expect to buy a system for $79 bucks and the proof of purchase off a box of Cracker Jacks to beat the world's most cunning and viciously successful professional investment bank traders? These Agents of the Financial Matrix hold ALL your orders. They SEE where all your stop losses are set to stop you out. They know where you plan to automatically take your profits. You, as a trader, have to think like they think. You know what they say: if you can't beat them, join them. It is my intention to give you the insights necessary to be proactive in your trading, and how to think like the bank guys (and gals) think. It might be a bit difficult to get your brain wrapped around this way of thinking, however, I am going to show you how to engage the markets the way that the market maker does. You will learn to buy when everybody else is selling, and sell when everyone else is buying (at predetermined levels). You can only win in this game if your head is in the game. A picture of a few friends in Bahrain. The way the market makers heads are in the game. They're in the game to win. Take no prisoners and walk away from the field of combat with all the booty. I have developed these skills and tested them against some of the greatest traders in the world (George Soros of the Quantum Fund for one example). Take a peek below: THIS is what those $79.00 systems are up against. This is the Union Bank of Switzerland Trading floor – 1500 traders strong. One of the largest dealing rooms in the world, if not the largest. JP Morgan Chase in NY is pretty large as well. It is about the size of a U.S. Football field. Keep in mind that they have branches all over the ForexConfidante

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world which are not as large as the World Headquarters. Monster Room at UBS

The rooms I worked in were about one-quarter that size – which is still pretty large. I can remember times when I would say to myself: “I have a bunch of rocks and a quiver full of arrows and I'm up against these guys who have nuclear weapons.” Next, let's have a look at Citi Bank London's trading room. I can remember trading from one of these huge trading rooms while I sit trading from my small home office now and I laugh to myself as I enter trades for one-tenth the size I used to trade when I worked for one of the big banks. I can still see and hear with vivid detail in my mind's eye how this very room would react to the different price levels. As a member of the Elite Forex Club ACI (Associate Cambiste International) I can recall the slogan: “Once a dealer

always a dealer.”

It holds true. Forex gets into your blood. It becomes a part of you. I do enjoy trading from my home as much as I did trading for the big banks, even perhaps a bit more so, and you will as well with the techniques I am about to teach you. Citi Bank in London’s Trading Room

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[2] First Things First: The Pre-Golden Rules As you begin your adventure in Forex trading, you have to understand that there is no easy road to profits. As a matter of fact, it is going to be more difficult to teach those of you who have had a taste of some fast profits. I have been in charge of a large currency desk, and had the most difficult time hiring and training other “seasoned” traders. The institution that I worked for was not one that allowed the desk to use customer orders against their trading P/L. In other words, the easy cream profits went to the bank. You had to trade just as if it was your own account. Many traders from other banks were not accustomed to this. They quickly lost the money allotted to them and washed out. In my bank, you were judged on your own profits. You were required to make 8x your salary. If you did not, you were like the villain riding shotgun in the James Bond ejector seat. If you reached your Global Stop Loss, you were out. So my trading systems and rules were adopted to keep my job. I was fortunate enough to work as a position clerk for one of the best European traders in the world. His name was Aldo Pizzoferrato. He was ½ French and ½ Italian. He was raised in Europe and spoke 7 languages. He taught me…fire and brimstone style. He expected only the best from me at all times and was always challenging me to become better. I was exposed to the trading of every major and minor currency pair in existence. Aldo was the Treasurer of the bank and I was his water boy for 5 years. It was here that I learned my skills. I would take his trading notes out of the garbage at night, read them to get insight. I clawed my way up and fought my way into the position of Chief Dealer. I had to outperform many a seasoned gent and one woman. I did it and that‟s when the real challenges began. I had to consistently make the most money in order to keep my position and the respect of the desk. On top of that, I was responsible for 15 other guys and ladies – one lady in particular. It was from her I took the job of Chief Trader and we had a rocky relationship as a result of that. But we respected each other. I was responsible for all of them. And all of their losses were my losses. So you could bet your ass that I fine tuned my trading techniques (and stayed on top of everybody else‟s). What I need to stress to you is that I realize that many of you buying this course will attempt these trades with a limited bankroll. When that‟s the case, you won‟t have a lot of room to maneuver. One small or medium loss in a day and you will probably be licking your wounds for some time to come. The Forex markets are very volatile. If you have traded before, forget what you think you know. You must look at this material with a mind that is like a clean slate. What we are going to go over is a game plan. Ways to pick your spots in the market that have lower risk profiles. You will learn to plan your trades, and in doing so, you will be more ForexConfidante

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fluid in your trading. I like to refer to it as aerodynamic trading. When you have a plan, you can think through and execute your positions with ease. You will fly through the market with ease. You will not get whip-sawed: buying at the top of a run or selling at the bottom, getting frustrated and doing it all over again.

IF YOU FAIL TO PLAN, YOU PLAN TO FAIL!!! Let‟s get into the preliminaries behind the Golden Rules…. Your success in the Forex Market is dependent upon your unique psychological make-up, your discipline (or lack thereof), and your experience level. Now let‟s deal with the idea that there are universal rules which must never be disregarded. The universal rules are universally dependent upon your own unique psychological make-up, tolerance of risk, discipline, etc. So that set of much vaulted Universal Rules Which Must Never Be Disregarded are not static and written in stone. You are the variable that makes the Universal Rules your own set. Your rules might work very well for you but will be a complete disaster for your brother Dan who has all the steely-eyed resolve of a French surrender monkey. Since your rules REQUIRE the traits of steely-eyed resolve, your Universal Rules aren‟t much use to Dan. Dan needs to understand his own psychological make-up, tolerance of risk, discipline, etc. before he can design his own version of the Universal Rules Which Must Never Be Disregarded. However, there are some Universal Guidelines that must be followed or you will end up losing your trading capital. Sooner or later, if you don‟t heed these baseline guides, you‟ll blow up your account and when you do, don‟t come crying to me that my system doesn‟t work. No, your complete disregard for managing risk is the final epitaph in your short-lived trading career. These are my rules and these rules have helped me to survive in a world that is straight-razor dangerous to the unwary. I had to think long and hard to isolate a set of rules that will fit into most everyone‟s trading style and psychological make-up. What I have formulated here is a framework that all intelligent speculators must adhere to at a minimum in order to survive and thrive in these explosive markets. What are these rules? How is one to master the Rules? Are there Exceptions to the Rules? Let‟s answer these questions top to bottom, first to last.

What are the Rules? The Rules will be laid out in the next two chapters.

How does one approach Mastery of the Rules? You master the Rules by Study and then Adoption, and thereby making the Rules your own. ForexConfidante

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Are there Exceptions? NO. The Rules have been designed with capital preservation as the foremost objective of importance to the currency speculator. The Rules will keep you from blowing up your account. The Rules will also keep your self-esteem in check. You won‟t have to be demoralized by setbacks to your trading plan. The Rules will scale you back to absorb the inevitable loss, and ramp you up to extend your wins. The perfect system can‟t work if you can‟t pull the trigger. I have compiled some ideas that I would like to review with you before I introduce you to the rules of the game. One of the most important pre-trading rules is “don‟t trade with scared money!” You have made the decision to trade. You have set aside the money to trade with (hopefully, you‟re not risking the rent money). This money has to be money that you can afford to lose. Understand that by making the decision to trade that you are now risking those funds. What I am saying is never, never think about the money. If your mental focus is on the money, you will be a basket case. You will be gun shy and not enter the market at the correct time, or worse, you won‟t enter the market at all. You will find yourself pulling the trigger late, chasing losses, missing your profit goals, your stops, while the market locks onto you as an easy target. When you are focused on the money, you are thinking of your position in the market purely in terms of profits or losses. This flaw in your thinking leads to major market mistakes. Fatal ones. You will enter positions like a bouncing ping-pong ball on crack. Then the head games will begin. You begin to beat yourself up. Self-sabotage is a trader‟s worst enemy. You will second guess yourself. Your mind will become like some screaming chorus right out of the bowels of Hell: “I can’t get in NOW! The market already MOVED!” So you get in late and as the market suddenly turns and moves away from you like some evil nitrous powered dart, rocketing deeper down into the black hole of financial doom, you‟ll hold out because “ I can’t get out NOW! I’ve already lost too much MONEY!” Then your broker stops you out because you no longer have the funds in your account to cover the margin requirements. That‟s how you blow up a trading account. This is the trader‟s mind on high-resolution money focus. The natural tendency of any rational person will be to try and regain heavy losses. It will turn into an ego issue. Ego issues are certain death for any trading account. The market is bigger than you and your trading account by about a dozen zeros. The market has the uncanny ability to kill you and your account deader than a hammer if you‟re not careful. At best, the market will demoralize and bamboozle you and that, in itself, will lead to loss after loss. You will lose your courage and ability to trade well. It is a negative pattern and a place you don‟t want to trade from. ForexConfidante

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The market doesn‟t give a high-octane rat‟s ass about you or your position. It will laugh at you as you are short 8 standard lots now and the price is 80 pips above your entry and you‟re bleeding your retirement funds out your backside like a hemorrhaging hemorrhoid. Cackling at you like some satanic ferret as you HOPE (HOPE is a four-letter word in trading) to see a correction in your favor. The fact that you are holding onto a losing position that should have been cut suggests that you are being a stubborn, pig-headed mule and that you are breaking the RULES. If you break the RULES, the market will be more than happy to hand you your ass in a brown paper bag. Why attempt to fight the market? It‟s like going to a gunfight armed with a toothpick. Too many traders (when they break the RULES) base their decisions on the irrelevant issue of an outstanding position. The time for counting money is AFTER the trading is done. Your execution of the position is what‟s important. It‟s HOW your position is monitored and CLOSED that matters. Concentrate on those skills and the money will take care of itself. Become aerodynamic. And being Teflon-coated doesn‟t hurt while you‟re at it. Check out the chart below; print it out and blow it up. Put it where you see it. Tape it next to your trade station. Remind yourself that you have a trade with your name on it that can

DESTROY you. That trade is out there, waiting for you to break the RULES. If you don‟t have RULES or the correct psychological make-up, you‟re just asking for the market to surgically remove your wallet. Don‟t let a loss become so big that you can‟t take it. Then make up a story why the market is wrong. The market is never wrong! Only idiots are. If you don‟t heed this advice, I promise that it will be YOU that ends up being the big loser! The FX market is not kind. It is where GREED and FEAR rule the streets like hordes of cannibal zombies in a B-grade horror flick. This is REAL MONEY we’re trading here! (Think about that. Violent moves are caused by FEAR of losing MONEY! That is the ONLY reason; other traders are piling on for FEAR of missing the MOVE.) I want to

take your money and so does every other professional trader worth his salt. So please don‟t actually USE what I teach you in this eBook. I will have less chance to profit if you really become disciplined and continue with this journey. You will also become a top predator. You will no longer be PREY. ForexConfidante

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[3] The Confidential Golden Rules of Forex Trading Rule 1: Once a position is built the golden rule is NEVER, ever, under any circumstances should you add onto a losing position…NOT EVER! Tom Sez: “Averaging down into a losing trade will assuredly take you out of the trading business.

Don‟t believe me? Just go visit Nick Leeson (in a Singapore jail somewhere, I believe). He singlehandedly bankrupted the 100+ year old Baring Brother Bank. A top-tier bank.”

Rule 2: Don’t Fall in love with your positions! Tom Sez: “Learn to trade from the strong side. This is the side it is easy to be on. You must be

willing to be flexible and change sides immediately when you find yourself on the weak side. You‟ll instantly know what this side is; it is the side that feels like shit and elicits mucho ass pain. Don’t

marry your positions. Just date them.

Rule 3:

Don’t hold onto losing trades. Cut your losses short! Tom Sez: “Aside from taking your capital away at warp speeds, holding onto a loser has huge negative psychological effects. It will cause you to become stuck. And as the trade becomes a bigger loss, you will start to HOPE. Hope that the market will reverse, hope that you will break even or just come out of this with the win you were…hoping for. Don‟t be a dumb ass. Hanging onto losers will just make you gun shy in the future, unable to pull the trigger on profitable trades.”

Rule 4: Stick to your exit rules! Tom Sez: “In order to prevent the sinking of your financial battleship, you must stay sharp and exit the trade at your stop-loss points. And on the flipside of that – you must exit at your predetermined profit points! (Don‟t second guess yourself, you greedy bastard – remember, the Greedy become the Needy.) There is nothing worse than your profit target materializing and then reversing because you didn‟t pull the trigger. Exit at stop losses and take profits.”

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Rule 5: Many Market Moves Are Meaningless! Tom Sez: “Markets trend approximately 15% of the time. Keep in mind that markets are moving within a tight trading range about 85% of the time. Thus short term violent movements to the upside or downside are meaningless most of the time. Keyword being „most’.”

Rule 6: Know your longer term Trend Lines! Tom Sez: “Make sure you take time to chart where the markets long term trend lines are for support and resistance. (Monthly and yearly time frames.) This will help you understand where you are on the market map. For example, if you want to trade the hourly chart patterns (the minimum chart time frame I trade), know where the daily support and resistance lies. If you trade daily charts, then know where the weekly support and resistance is – put it on your charts. Always know where these greater levels are located.”

Bonus 6a: The larger the time frame you trade from, the stronger the signal will be for support or resistance. A weekly support or resistance level is stronger than trend lines on a daily chart. Likewise, monthly lines will be honored by the market much more than weekly lines. Look for when these lines on different time frames line up to take advantage of the novices. Rule 7: Keep Your System Simple. Remember KISS – Keep It Simple, Stupid! Tom Sez: “Keep your trading system simple...so that a monkey and two chimpanzees could trade it. Take what you learn from me and apply what makes sense to you. However, don‟t over complicate your trading system. Leave the rocket science for rocket scientists.”

Rule 8: Enjoy the party, but dance near the door! Tom Sez: “Enter the markets swiftly at your levels – like a dangerous bird of prey. Exit just as swiftly, taking your profits or hitting your stop losses. Always enjoy the party. Just be the first one to exit stage left with the hottest chick ($$MONEY$$). Get the hell out before she gets all drunk and sloppy on you. Get her out of the party while she can still stand and your trading vehicle still has wheels to roll away on.”

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Rule 9: Everything always moves to the middle!! Tom Sez: “The market will move to extremes and fall back into the middle. Prices always move back to the middle. Your trading runs in cycles. You will have groups of winners and then you will watch as prices fall back to the middle. This is where you will experience losing trades. The object is to make more on the winners while losing less on the losers. There is nothing we can do about this other than to accept it and act accordingly by always following our rules.”

Rule 10: Hit the gas or hit the brakes. Tom Sez: “When you are winning, win bigger by trading larger positions (hit the gas). When you‟re losing, trade smaller positions (hit the brakes). Keep in mind everything always moves back to the middle.”

Rule 11: Remember what the Market is. Tom Sez: “The market is nothing more than buyers and sellers. It is a zero sum game. There can only be winners and losers. So, for me, the market is the sum total of all the morons and geniuses of the moment. I have been a moron and a genius many times. Sometimes in the same day!”

Rule 12: Never paper trade! Tom Sez: “Never paper trade. Really. Don’t do it. If you do, you develop the remarkable ability to disregard your stop losses and thus hold onto the losers while holding out for that bane of all traders, that four-lettered word spelled H*O*P*E. Don‟t be the Man From H*O*P*E. He‟s no Napoleon Solo. When you‟re paper trading, you seem to develop Alzheimer‟s and forget the bad trades while focusing on the winners. Don‟t paper trade. Testing a new strategy on paper is one thing. Keep a written log of all your results by following pre-determined rules of entry and exit. In other words, don‟t say you would buy here and 8 days later say „Oh, I made money!‟ The market has been getting bombed back into the Stone Age during those 8 days and you have the balls to say you made money. It‟s easy in hindsight. Let‟s see how you fair in the real marketplace, cowboy.”

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Rule 13: Never place your stops just below or just above Support/Resistance Levels. Tom Sez: “Never place your stop loss orders just above or below market Support/Resistance levels. Bank traders have a fiendish practice in their bag of tricks called „ Stop Running.‟ Remember, bank traders can see where all your stops are. They will run prices to trigger your stops. And we make a jolly excellent living doing it, too. Many novice traders „watching their money‟ place stops slightly above or below support/resistance levels. One of my trading systems takes advantage of this. Leave enough room for stops. Rule of Thumb: I use a Fibonacci Price ratio -9 pips on the downside (below support) and a Fibonacci Price ratio +9 pips to the upside (above resistance). I will explain how to do this later in the book. Now take these rules and live „em, learn „em, love „em!”

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[4] Understanding Forex Truisms

If you‟ve been around the Forex trading block a time or two, you have probably had more than one collision up against several or all of these popular truisms:

“Cut your losses short.” “Let your winners run!” “Never add to a loser.” “Always use stops.” I must safely assume that the reader has heard all of the above at least once now over the course of a lifetime. I will show you how you “trade” these truisms. Big pond traders often launch these platitudes into the masses without also providing the lecture on the prevailing trading principles which inspired these trading truisms to be uttered in the first place. This “omission” usually gets the novices scrambling into the Forex fracas in magnitude to the time when Jesus cast all the demons into the swine and then all those demon-possessed pigs charged off a cliff to their deaths. Of course, all the money that gets burned out of the noobs whom haven‟t a clue about the principles upon which the truisms are hung, all those hard earned Benjamins which should have been going towards the rent is now going towards a yacht payment for one of those big pond traders. The very same brass bastards that catapulted these nuggets of wisdom into the laps of the unwashed masses in the first place now reap windfall gains over the Joe Six-packs who think making several large in a couple of days should always be treated as a lottery or game show of some kind with blondes possessing artillery shell tits changing scoring tiles on the big board. This would be a good time to mention that blindly following ANY Rules, Systems, or Indicators will often result in losses. No single rule or technique can guarantee your desired end state ($$BIG PROFITS$$$) with a 100% success rate. That‟s not achievable. There will always be a downside and sometimes you will get caught in a direction that the market decides to reverse on a dime and drops like a bullet train to take your stop loss out. The only reliable method of risk mitigation is through the shrewd use of two things: a good system and solid money management. It is through the proper application of both a good system and solid money management that the truisms have been based. I will open up and share with you the tools in my toolbox that deal with the truisms.

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Tom Sez: “My bank trader mentor Aldo told me this in his own words: “Tom, it is better to live your life one day as a lion than 100 years as a lamb. You will never get rich in trading by following the crowd.” Aldo used to say this often as well: “Tom, you have to be in the train before it moves. Have the

courage to sell while everyone else is buying. Have the balls to buy when there is blood in the streets.”

Why I am a Technical Trader (Chartist) George Anderla, a French economist, has done some interesting research. He has claimed to have measured the rate at which civilizations have doubled their technical and technological information. This is the kind of information accumulation that results in something called “Progress.” Going from stone knives and bear skins to thermonuclear warheads. We‟ve vastly improved the club since cave days. Anderla found that from New Testament times through the Renaissance, information flow and accumulation had doubled. There‟s about 1500 years between Jesus and Leonardo. Between the Renaissance and about 1750 (250 years now), it doubled again. It doubled again around the turn of the century (1900). Currently, this doubling rate is happening every year. Civilization is so full of information now, it gets vomited in every direction, on all frequencies and bandwidths. The human brain, in everyday putz around the house mode, has a very limited ability to absorb and retain all the information that bombards it every second of every day. The human brain focused on the task of trading Forex cannot process the amount of instantly available information about the market to use in any meaningful way. Trading decisions can‟t be made when you are trying to focus on ALL the information about the market ALL at once then expecting a clear BUY or SELL command to blossom forth out of this signal soup. A trader who dares look at all the world‟s markets and economic news simultaneously while expecting to make sense of all that audio-visual bedlam is going to end up dizzy. Overloaded. Like trying to take a full force mouthful from a fire hose. Don‟t believe me? Try it. Go sit in front of live trading screens, with all the news alerts from Bloomberg, Reuters, API, Knight Ridder, etc. opening up new screens all over your charts with the latest market data claxons going off like all the seven legions of Hell howling at once. Try to make an intelligent trading decision in the middle of that craziness. How could anyone process all the information that is available? My answer: “You can‟t.” Early in my career, I thought that I could pay attention to all the data. I quickly learned the opposite. ForexConfidante

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I‟ve noticed that it is universally true that weak traders use all the available information out there as a crutch. It‟s a handy excuse when you need to duck all the inquiries about your trading successes. It becomes a good excuse to not pull the trigger. Heck, you‟ve got to analyze the data, man! Can‟t make the PERFECT trade without prior consultation with the oracle of the data. I‟ve watched them stay glued to their screens, trying to process as much information as was humanly possible and then some, for as long as their brains might permit.

Where The Data Wizard Ends Up Before these types can trade, they have to justify all the calculating B.S. they‟ve devoted huge amounts of their lives to now. They have to generalize, delete, distort, and force all this information down into a memory box labeled “The Perfect Trade”. Now, when they‟ve taken all the little bits of info that means something important and thrown everything else away, they immediately form a belief about what these important bits mean. They build beliefs around their distortions and deletions of the facts roaring through their laptops from the market info stream. So now they build a position in the market that has been forced by a biased interpretation of market data, cooked up to support a belief about what the market is going to do next. And what happens next, in the market, seems really amazing to these guys. They were wrong about what direction the market was going to go. They bleat: But it shouldn‟t have gone that direction! The market was WRONG! I‟ve seen traders who are long in a market where the current prices were 700 points lower than the price they bought in at. And they‟re telling me how wrong the market is right now. The market is supposed to be ABOVE where they bought in at. The prices should be there! The GDP numbers for the 2 nd quarter against the 3rd quarter clearly signaled a violent uptrend in world prices and what‟s more, comparing the GDP to the moving average of the past six years was way outside the Bollinger band waves, etc. etc. blah blah blah.

Tom Sez: “Who the f*ck cares? I do know one thing, Mr. Data Overload above is losing all his

money. The market is kicking his ass. All his talk and empty rationalizing doesn‟t change the fact that the market never does what you believe it should do. The market just is. And the market is never wrong.”

Check this out: If you don‟t have a system, you will trade your beliefs about the market. They say that when you are set into your beliefs, you will have a hard time changing them. When you trade on your beliefs, it is like you are insane. Not insane. Just like you are insane. When you are on this treadmill, the only time that this cloud of insanity will lift is when you are out ForexConfidante

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of money. The insanity might clear up enough that you will reflect back on what you have been doing as a trader and conclude that your idea was the runner up for all-time stupidest idea ever. Often the insanity doesn‟t clear up nor is it recognized for what it is. As soon as the Wizard gets more money to inject back into his accounts, he‟ll be at it again, trading his beliefs. Then the Wiz looooses all his money again. It‟s amazing this cycle. This cycle is very profitable for us professional traders. We love to take your money. Everything, if you‟ll give us the chance. We love to take your money so much we might even sit a spell to listen to your tales of market woe. How that market is soooo wrong all the time. A trading system can solve these problems. I say can because the system still needs you to adhere to the trading rules of the system completely. With no deviations. You have to trade the rules and only the rules of the system. Tom Sez: My mentor told me: “If you want to win in trading, you have to have progress in knowledge. Progress in knowledge comes from your efforts to find fault with your theories, rather than prove them correct. We are not in this game to prove our theories correct. We are in it for Money.”

In my career as a Chief Trader, I have had to fire many people for under performance. I did not like having to do this. However, when the P/L is not positive and the Treasurer says “Let that guy go” I had to follow instructions. I conducted exit interviews with the canned traders before showing them the door. I had an insight while conducting one of these interviews. This was one of those insights that is of a Higher Order and just come to you. Many of my exiting traders took the firings in stride; they knew it was coming. Traders have to make money and report the money they‟ve made every month on their P/L statement. A trader knows where he stands at all times. Anyway, back to my insight. One afternoon when I was in the process of letting a seasoned trader go, he asked me why I thought his performance has suddenly dropped so badly. I had known this guy a long time and knew his personal history. I just came to me, this thought. I told him “Everyone gets what they want out of the market. Including losses.” This trader was going through a time in his life where he was striving for attention. Think about that. Some assholes love to be the victim. Not me, I like the Maserati Gran Turismo and will happily take the stooge‟s money. Oh, I bet you thought I cared about that retard.

So What Keeps Me In Check? Two words. Well, three. My Money Management System. It keeps me in check and prevents ForexConfidante

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me from trading my beliefs. My technical analysis of the market keeps me focused on current price action. In my professional opinion, a bar chart offers me all the information I need. It tells me where supply points are (resistance). It tells me where demand points are (support). I shows me all the noise in between. I can look at it and test my theories in order to prove them wrong. I can then develop a game plan to enter low risk, high reward trades. Technical trading comes complete with a well known truism: Buy the rumor, Sell the fact. Remember that news in this day and age is already priced into the market by the time the news gets released. It‟s only the information junkies that lose when the news is released and the market has already reacted to it and moved on. Get this, often times, the news is already old and stale by the time it is released! The market has already discounted that news. Before it has been released.

The Relative Strength Index (RSI) This thing looks great on your chart to impress the chicks. It‟s got all the different lines shooting back and forth and dumps huge blots of color here and there indicative of something important. That is all it is really good for. Showing something important after it has happened. I have tried to use it for 3 years. To no avail. It never did me any good. If you are smart, you will heed my advice and stay away from this indicator. It will just clog your brain with more useless data. I have talked to Welles Wilder (inventor of the RSI) back in the late 1990s. I told him that I couldn‟t figure out how to use his indicator. He just laughed. I realized right then that Welles Wilder couldn‟t use his own indicator. I respect Welles (as a marketer). He marketed a system back in the late 1980s called DELTA. He sold memberships for something like $100,000. He bought the Delta System off a guy named Jim Sloman for one million dollars. Perhaps it is really Sloman who is the master marketer after all. This system would trade based on the cycles of the moon phases. ForexConfidante

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Every full moon was marked off on your charts with different colors. Then you had to find the pattern. I attempted to use this system and lost truckloads of money. It was an interesting idea but it was like trying to catch smoke. Too many gray areas for my style.

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[5] Money Management

This is the most important aspect to any trading system. It is also the most underutilized. Everyone who is new to trading is looking for the magic key. You know, the easy sure fire way to profits. There are many who will sell you their magic box that churns out profits with every new signal. (Too bad it‟s a box of shit.) Remember from our childhoods, we heard about the mysterious key that could open any lock? It was called a Skeleton Key. I am here to tell you that Money Management is the Skeleton Key. Every trading system will have its bad days. No system can win every day. If anyone tells you differently, they are a liar! Good systems win over time…with proper money management. Even the best system on earth is doomed if you don‟t plug money management into your plan of attack. You need to control yourself when you are in a losing period. Let‟s think about something right now. What are the odds of flipping heads in a coin toss? 50% right?

Well, isn’t it true that in any series of coin tosses, you could have 10 tails in a row? Maybe even 15 tails in a row. Point being…just because you have a 50% ratio, doesn‟t mean that you have a 50% probability in a short series of coin tosses. Good money management will help you survive when the coin tosses are out of whack. Remember, everything moves back to the middle. Even in nature we see this, a time of drought, then floods. However, the overall rainfall stays within the average over 10 years.

What is Money Management? Money management performs many functions at once. It is a means of protecting yourself from becoming a victim of your emotions. It will add fuel when you are winning, and cool you off when you are losing. It will help keep you insulated from extraneous items outside the realm of your market research. (You will know what your maximum risk is at all times.) Money management will force you to look at capital preservation as job number one. It will keep you to a strict trading discipline. Money management answers the most important question: “How much?” (Position size) This how much question is often overlooked. Proper money management will keep your risk/reward ratios in tune. These are your key components to trading success. If ever there was a panacea for all your trading ills, learning money management is the universal medicine you‟ve been looking for. ForexConfidante

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How Do You Approach Risk? Many of the articles you will see written for traders and investors will often mention money management but rarely expand upon what money management means. I am going to give you a winning system to follow. However, you will need to understand risk/reward ratios. How do you learn money management without risking your money? The common advice given is to paper trade. That‟s great advice – paper trade without knowing the rules of money management. The reason that this is the “standard advice” is because it comes from hacks. Hacks that‟ve never mastered trading or have never traded for a living. And furthermore, I taught you the Golden Rules of Forex Trading. Those rules say no paper trading. That‟s exactly what I meant. No means no. How do you assess Risk versus Reward? Here‟s how you need to think about Risk Vs. Reward. Truism: Cut Losses Short. Let Your Profits Run. Let‟s throw out a few questions, just to see how you fair. Ready? Pick one of the choices below. Which would you prefer? 1.) A sure loss of $9000? Or 2.) a 5% chance of no loss at all with a 95% chance of a $10,000 loss? Which did you choose? 1 or 2? If you are like 80% of the so-called traders surveyed, you will pick the gamble. However, the gamble works out to be a bigger loss! How? Let‟s do the math: ($10,000 x .95) + (0 x .05) = $9500 loss. Choosing the gamble breaks the first part of our truism: cut your losses short. This is the flawed thinking that gets traders stuck. They will keep thinking that the loss will turn around. Odds are it will not. As a result, the loss gets bigger and bigger and even harder to take. Now let‟s examine question 2: Which would you prefer? 1.) A sure gain of $9000. Or 2.) a 95% chance of a $10,000 gain with a 5% chance of nothing at all. ForexConfidante

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Which do you prefer now? 1 or 2? Again, if you are like 80% of the traders who took the survey, you grabbed the sure gain. Now in this case, the gamble works out to be a larger gain. How? Math time again…. ($10,000 x .95) + (0 x .05) = $9500 This time, we broke the second part of the truism: let your profits run. Without the proper discipline and knowledge, it is impossible to follow these truisms. Once people have a profit in hand, they tend to take the profit at any sign of a turnaround (even if they make the turnaround up in their head). Without a system, they have no objective information and become a victim of emotions. It is so tempting to avoid letting a profit get away. It feels so good to take it. It is almost sexual in nature. Many traders continue to lament over the larger profits they miss, as they close small profits. This is why we need to use my system and money management. Look at the chart below. So many traders miss the big moves for small thin profits. They may go in and out of the market 30 times, for 2 point profits at a time, while risking 30 points to make that measly two. One bad trade wipes them out. MORONS! If you‟re just looking for 2-5 pips, you can make more money with a part-time job washing cars and have no financial risk at all. Look at the chart: don‟t go for 2-3 pips at a time. Get in the game with a plan. Have a take profit and a stop loss. Get in the train before it moves. Ride in style and comfort to your predetermined destination. Let‟s hear from other professionals on the subject of Money Management: ForexConfidante

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“Risk management is the most important thing to be well understood. Under-trade, under-trade, under-trade is my second piece of advice. Whatever you think your position ought to be, cut it at least in half.” --Bruce Kovner “You have to minimize your losses and try to preserve capital for those very few instances where you make a lot in a very short period of time. What you can’t afford to do is throw away your capital on suboptimal trades.” --Richard Dennis Take this advice to heart and understand how important Money Management is. Money management is the difference between being a big winner and going bust, the difference between peak performance and poor performance. To really stress how important this point is, I will recount what I witnessed when a trader blew out his account when I was a position clerk on the desk of Banca CRT.

A Lesson on Draw Downs! Fall, 1986. I was newly promoted into the Head Position Clerk to the Treasurer. I was coming off a small desk as a Junior Trader for minor currencies. I was extremely excited at the prospect of working on the main desk, never mind that I had obtained the Head Position Clerk desk assignment. My job was to track all of the positions on the desk. I watched trader positions, stop losses, helped trade out of bank positions. I would confirm all the traders‟ positions and do reevaluations at 3 PM NY time. I would then report the daily P/L of the desk to the Treasurer. The following tale is taken from notes in my trading diary. I have kept a trading diary since I started trading. It helps me find my weaknesses and correct them before they have a chance to sink my battleship. (Hint: you should be keeping a trading diary as well.) What I witnessed came as a shock to me. I had known all the traders from my previous position as a Junior Trader on the minor desk. I saw firsthand how a profit can turn into a loss. How a loss can quickly spin out of control and destroy a person. I will call him “Ron” in this recount of the situation. Ron was into the DEM/JPY pair (Deutsche Mark/Yen cross which no longer exists with the launch of the Euro). He had built this position over the course of 2 months and was in the money. He was up over 350% and was very close to hitting his profit target for the year. ForexConfidante

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He left one evening with a 65 million DEM/JPY Long position at 91.56, the position‟s 3 PM revaluation. What occurred over the course of the next few days left a scar on me. The market tanked in Japan during the overnight session. It lost 5 yen in the Tokyo trading session. There was a rumor that the BOJ (Bank of Japan) had intervened and sold DEM/JPY. When they did, it triggered all the stop loss orders. The market opened in NY at 86.00. Ron not only was losing what he made, he was now digging into his Global Stop Loss as well. The Treasurer was never in the office at the NY open. He would stroll in about 10AM. However, he always checked in with his mobile phone. I was required to report the news. Knowing the Treasurer‟s personality, I was not looking forward to reporting the loss. I was right about being wary. The Treasurer was not pleased to say the least and he wanted to know why I had not put a stop loss in on this disaster. To which I responded that I was given none. I was then told to get Ron on the phone ASAP. Ron was trading heavily trying to make back some of the lost ground. Unfortunately, things were getting worse. DEM/JPY was once again slipping; it was breaking support levels at 85.35. Ron bought 10 million more on a head fake rally at 86.33. (That was costing another $73,000 to the loss already racking up.) I could see the stress building up on his face. He was a trapped animal. I had told him to call the Treasurer as soon as possible, to which he replied: “F*ck you, can‟t you see I‟m f*cked here!!” I didn‟t take it personal. You need dinosaur skin to work in a trading room. The tension was so thick I could feel it in my solar plexus. At the close of the day, things weren‟t any better. DEM/JPY closed at 85.44 just slightly above the short term support price. Ron‟s meeting with the Treasurer went over about as well as a turd in a punchbowl. Aldo, the Treasurer, never liked losing money or giving back profits. He loathed giving up profits and losing money all in the same trade. He always said that “losing profits was bad enough, but turning a profitable trade into a loser is the mark of a weak trader.” I was instructed to notify Aldo if Ron‟s position lost another $250,000. I told Ron that I would be calling him in the evening to see if he added or cut the position and that the Treasurer had to be notified if the position lost another $250,000. Ron just looked at me with a blank stare. Ron was shell-shocked over what had happened in the market over the last two trading sessions. He had lost his profits and was now losing 15% of his global P/L. I had asked him “Why not just cut the position?” He was convinced he could make the money back. After all, he was up 350% just two trading sessions ago. What would happen in Japan would be the key: would they rally the DEM/JPY ForexConfidante

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up again to test the BOJ resolve? I was not looking forward to staying up all night watching another trader‟s position. Witness the destruction of a Trader, one that did not follow sound Money Management principles. Ron needed some system to protect himself from himself. He did not have one. This is how the story ends: The market rallies up to the 87.15 level and Ron buys more on the way up, hoping for a breakout. I remember him telling me on the phone after the purchase “ I f*ckin got them by the

balls now, T!” What he got was a breakdown!

The market reversed and it was costing the bank an additional $375,000 by the time I could get the phone call through to the Treasurer. I can remember to this day how angry Aldo was. All he kept saying was “He did what? I don‟t think I can hear you correctly, Tom.” Aldo was the king of second guessing and as Treasurer he had that privilege. He kept saying “Why didn‟t he reverse? What an f*cking idiot! Tom, cut the position by 75% NOW!!” I couldn‟t get a price from our correspondent bank in Australia, all the lines were tied up, the market was in a wild sell off at this point and blood was everywhere. I called First National Bank of Chicago and they gave me a price 95 points lower than the price I told Aldo the market was at. I hit bid and felt really sick to my stomach with a lump in my throat. I watched as the market just stood at the Asian low of the day, the low I just made. I was hoping that the market would not bounce up. I would look like an idiot and get torn a new asshole by Aldo. It was at this point that I learned how important stop loss levels are. I watched the market all night; it proved to be a good sale. The DEM/JPY was 120 points lower than my sale price in the NY open. It ended up costing Ron 85% of his Global P/L. With Ron having only 15% left to make his number, the Treasurer called Ron and myself into a meeting. Here is what was said. Aldo: “Ron, do you agree with Tom‟s numbers?” Ron: “Yeah, I have small left to trade with to make my numbers, though.” Aldo: “How do you intend to make those numbers on such a small amount of capital? You have shot yourself in the foot, Ron. You can‟t win. In my experience, if you can‟t afford to

lose, you will lose.”

Ron: “Aldo, if the BOJ had not sold…” Aldo quickly cuts in not wanting to hear any excuses. “Ron, if my grandmother had a pair of balls, I would not be here. The simple fact is you‟re out of the market. I have to decide what I want to do. Ron, go to lunch. Tom, stay here.“

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Aldo then went into the lesson that I should learn from this and he asked me what I would do if I were in his position. I said Ron is a good guy, he has a family. Aldo then replied “So do I and so do the rest of the guys on the desk. I need to protect the group.” Ron was released that afternoon. Here is what Aldo taught me about draw-downs that afternoon. It is another table you have to print out and keep with you. Before we get into the chart, there is something I need to be straight with you about; account sizes of under $50,000 are considered small in Forex. The average account is approximately $10,000. Many people have the dream of turning $10,000 into $1,000,000. While this feat is possible in Forex, the chances of ruin are also higher. Your mathematical odds of failure are very high just because your account size is small. You are caught in a paradox. When you have a small account you need to risk more of it to succeed, when you risk more, your draw-downs are larger. However, I am giving you the skills and a money management system that gives you the overwhelming edge to succeed with a much smaller account. So let‟s look at the chart. Draw-Downs Percentage Needed To Recover 5% 5.3% 10% 11.1% 15% 17.6% 20% (Danger Level Yellow) 25.0% 25% 30% 40% 50%

(Stop Trading, regroup) (You‟re nuts!) (You Need Medicine) (You Are Done)

33% 43% 67% 100%

The next percentages are for those who just want to blow up! 60% 75% 90%

150% 300% 900%

So from the table above, you now know what your percentage of gains need to be to recover from a loss. A loss of 20-30% can be recovered to get back even. But a loss of more than 30% would require huge gains to get back even. Thus Ron needed a gain of over 900% just to get even. He had a small amount left to trade with and the odds were great that he would have lost that capital, too. So Aldo kicked him to the curb. Control your draw-downs please.

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Your Money Management Rules These are my rules and they have worked for me. If you are going to change the rules here, I would ask that you don‟t raise the percentages. Anything you can do to lower the risk is OK in my book. I have stressed enough how important money management is so I won‟t continue to belabor the point. This is what is known as the Base Equity Method. It is a simple formula to follow. It will determine your position size based on the amount of equity you have in your account. This system will have you trading larger when you are winning and smaller when you are losing. It will help to preserve your capital.

Size does matter; even in Forex Trading Position size is one of the most important aspects of trading Forex. It is what enables you to maximize your gains and minimize your losses. Most novice traders take a flippant approach to their trading positions. They use what I call the “gut approach.” It goes something like this: the novice trader has certain levels that he is going to trade off of. As the market approaches the level, the novice trader gets “a feeling” and that feeling starts to build up and becomes a belief that the approaching move is going to be huge. So as the market hits their level, they enter with a “size” that is massive as far as their account equity is concerned. These novices have a $10,000 account and enter with a $500,000-$1,000,000 position. They are not crazy people so they put a razor thin stop loss on the trade, only to have the trade fail and stop them out. The next time, they get the same “gut feeling” and they have a hard time entering with the same amount or they have now become gun shy, either pulling the trigger too late or not pulling the trigger at all. It becomes a vicious cycle forcing bad trading decisions and fostering frustration. Proper position size can fix this common trading error. With proper

position size all trades become part of an overall process, not individual events. After all, trading is a process not unlike a batting average. If you are going to be a trader, a REAL trader, one that makes money instead of blowing up his account, you must sit down and learn the technique of “How Much.” The Base Equity Method is a predetermined percentage that you allocate to each position. It is then deducted from your overall equity until the position (or positions) is closed. I do not exceed a maximum of 5% of my base equity on any one trade. As a matter of record, I do not exceed 4.5% and build up to that when I am winning. Let‟s go over a simple example before I go into the extra filters I implement. Let‟s start off with a $25,000 account for the example. You decide that you will risk 4% per trade. You base that on a number of factors including your own psychological makeup. Let‟s ForexConfidante

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enter the trading process. You first calculate “How Much” you can trade. Here is the math: $25,000 x .04 = $1000 Stop Loss. So you can lose 100 pips on a standard lot ($10 x 100 = $1000) with a 100,000 EURUSD trade, approximately 111 point loss in a 100,000 USDCHF trade. The Base Equity Method will deduct $1000 until we close the trade. If we enter another trade we will do our calculations based on equity of $24,000. We as traders have to take into account the amount of room we need to trade in order to prevent a razor thin stop loss. Adjust your size accordingly. The smaller your position size, the more room you have in the trade to let the market breathe. Back to the math: $24,000 x .04 = $960 Stop Loss on our next trade. Our risk capital on the new position will be $960. Size Matters. We need to focus on a position size that fits our stop loss. The Base Equity method subtracts each open position from the total, and makes adjustments when the trades are closed. So to take our example into the close, let‟s assume we won on the first trade and lost on the second. On trade one we captured 220 points for a profit of $2,200 and on trade two we lost $960. Here is our account statement: Base starting equity:

$25,000

EURUSD

$2,200

USDCHF New Base Equity:

-$960 $26,240

$26,240 x .04 = $1049 stop loss on our next trade. As you can see with the Base Equity Method, you will be trading larger when you are winning and trading smaller when you are losing. Experiment with these ideas, add additional filters. Perhaps only risk 2.5% equity if you have two losses in a row, then increase back to 4% after a win. Just realize that the model is designed to “size” your position according to your equity and thereby preserve your capital. My Base Equity Method Here are the rules I follow: I start my trading off with a risk of 3% of my total capital on any opening trade. I will continue with that percentage. ForexConfidante

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When I have three winners in a row, I will risk 4.5% of my total capital. Example: Equity $100,000 $106,876 x 3% $111,752 x 3% $119,628 x 4.5% $128,828 x 4.5% $123,051 x 3% $119,363 x 1.5% $117,573 x 1.5% $115,810 x 1% $119,578 x 1% $125,336 x 3%

Risk Amount $3000 $3206 $3352 $5383 $5797 $3691 $1790 $1763 $1158 $1195 $3760

P/L +6876 +4876 +7876 +9260 -5777 -3688 -1790 -1763 +3768 +5758 +4585

New Equity $106,876 $111,752 $119,628 $128,828 $123,051 $119,363 $117,573 $115,810 $119,578 $125,336 $129,921

If I have a loss, I will revert back to risking no more than 3% of my overall capital. If I have two losses in a row, I will risk only 1.5% of total capital. If I have 4 losses in a row, I risk 1% of my base equity until I have 2 winners, then I jump back up to risking 3% of my base equity again. With this system, we are trading larger sums when we are winning and smaller sums when we are losing. This system preserves capital. Always follow the money management sequence.

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[6] The Trading Game

This is a fun little game that is designed to simulate the madness of the market. You will have great dollar news followed by a catastrophic sell off. You encounter the very same scenarios in the real market every day. Okay, here‟s how to play. The game continues until 60 trials have been played out. The object of the game is to create the best possible return on the money you have started the game with. (Each player starts the game with an account size of $50,000.) The number of players is 4 to 8. Make it interesting and require a “pot.” Everybody contributes and the player(s) with the best portfolio at the end of the game gets or splits the pot. You‟ll need 10 colored marbles (5 solids of different colors and 5 see-through of different colors), 2 paper lunch bags, a bag for marbles, 1 die, calculators (optional), game score sheets, 5 minute hourglass timer, 100 paper strips of News headlines, 100 paper strips of market move headlines. Each turn or trial consists of the following steps. Once all the steps have been completed and results tallied, then one trial is over. Step One: All players decide which side of the position to take, long or short. Step Two: All players announce their orders in the market, to include sitting out this round. Step Three: Player One draws one piece of financial news and reads it to the group. All players now have 10 seconds to adjust their positions in the marketplace, to include canceling their orders. Once the 10 seconds is up, you‟re locked into your trade. Step Four: Now Player One draws a market move slip from the second brown bag. The market move is read to the group. Step Five: All players, one at a time in a clockwise motion, draw a marble, record it, then return the marble to the bag. Example: Player one draws a marble from the bag. It is a solid green marble. Player one notes this result, returns the marble to the bag and hands it off clockwise to the next player who will do exactly as Player one before handing the bag to the next player until all players have drawn and recorded a marble. Step Six: Calculate your profit/loss and modify your stake amount up or down accordingly. That‟s one trial or turn in the game. ForexConfidante

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Every five minutes, an unexpected piece of market news or market action takes place. When the five minute hourglass runs out of sand, player one will roll the die. A result of 1-4: draw a piece of Financial News and read it. There is no 10 second option to modify market positions. On a result of 5-6: draw a market move headline. Then reset the five minute timer and continue the current trial from where you left off before the intrusion of unexpected market news. How to build your position in the game Really, the point of this game is to reinforce our money management rules. (Hint, hint). So when you take your long or short position in the market, how big are you going to make

it? Answer: 3%. So let‟s watch Player one deciding how she is going to build her market position at the beginning of the first trial. She has $50,000 to play. She‟s smart and is applying the money management rules we‟ve just finished reviewing. So she‟s only going to risk 3% on this trade. So she‟s risking $1500 total on this trade. She will have a stop in place that will close the trade when $1500 has been sacrificed into the maw of the market. With $1500 to burn, what does this tell us about the size of the position we can realistically take? Okay, pip values at the start of the game are $10. That‟s what a standard lot usually yields in price movement, ten bucks per pip. So divide $1500 by 10. That means you have a 150 pip price channel for the market to whipsaw around in before getting stopped out. So you can take one lot and have a 150 pip stop loss above or below your entry price. Or you can have 5 lots and a 30 point stop loss. Or 3 lots and a 50 pip wide channel for the market to “breathe” in. Me, I like the 3 lot prescription. So that‟s what Player one does. Decides to go in the market with 3 lots and a 50 point stop. If she gets stopped, she‟ll lose $500 per lot. Total: $1500 or just 3% of her initial stake. Make a note: as you lose money and your stake shrinks, you will have to scale down your trading to mini-lots (1 pip = $1) and micro-lots (1 pip = 10¢). Calculating the position to take with a mini or micro is no different than what I just outlined above with the standard lot in the example. This is the correct way to size a position. Now Player one decides to be long in the market.

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Player one draws one piece of news from the news bag: “Federal Reserve Tells

Congressional Auditing Committee to “Go Pound Sand!”

Now, all players have the option to modify their market entries. They have 10 seconds to do so. One of the other players counts down from ten to zero. After that time, all bets are permanent. You‟ve strapped yourself to the bull and there‟s no getting off. Player one decides to leave her market order alone. The news didn‟t dissuade her at all. Now she draws a piece of market movement news from the second paper bag. “Chinese Yuan gains 1000 points against the dollar as Government of China dumps the dollar and adopts the Iraqi Dinar as their reserve currency.” Gotta love the market move news. Now Player one draws one marble. It is a solid green marble. She notes that and replaces the marble into the bag. She hands the bag to player two. Once all players have a marble and have replaced the marble into the bag, the trial is over. This is the outcome of Player one‟s decisions: Here‟s how the marbles pay off: SOLIDS #1 1:1 #2 2:1 #3 3:1 #4 5:1 #5 10:1

SEE-THROUGHS #1 1:1 #2 2:1 #3 10:1 #4 20:1 #5 30:1

Player one‟s marble pays off on 5:1 (in this game example, the green marble was designated to be the five to one payoff.) Now here‟s what the marbles mean for your positions: Draw a solid and win with a long position, lose with a short position. Draw a see-through marble and you lose if you are long and win if you are short.

Solid See Through

Long

Short

win lose

lose win

Player one is a winner. Her gains are based on the payoff ratio. Each listed ratio is the payoff value for one standard lot. So if your position is more than a lot, take the payoff ratio and multiply it by the number of lots you played.

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Player one wins at 5:1. Her pip value is $10. So, 5 x $10 is $50. She has 3 lots in the market so multiply $50 x 3 = $150 profit. So now her score sheet looks like this: TRIAL 1

EQUITY $50,000

$$ Risked 3%($1500)

$$ Won/Lost +$150

NEW EQUITY $50,150

That‟s the trading game in a nutshell. It will graphically teach you how to preserve your capital in the completely unpredictable world of the Forex market.

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[7] The Bid and Ask/Offer Spread

I am a student of Leonardo Bonacci. You can click this hyperlink and read all about the man and what he gave us. When I first started trading for a major bank as a junior trader, I started working with currencies (called minor currencies) that didn‟t move very much (we all start this way in the bank trading business). However, when these currencies did move, it was often violent and sudden. These currencies very rarely had any orders to execute. I was looking for ways to capitalize on these moves when they did happen. I was constantly trying to rationalize economic data that I was presented with. One piece of news coming in would be Bullish, the next Bearish, and the next two were neutral or slightly to the bullish or bearish of neutral. What the hell do you do with that? I was in information overload. I was stuck. I was being told to be long and short at the same time. As a result of this dilemma, I discovered my niche. I am an avid reader. One evening I was reading an article in National Geographic about ancient Rome. The author stated that the ancient Romans were wise enough to know that all commodities change and fluctuate. Salt was a major commodity in their day. In fact, salt was so valuable to the Romans that people were paid with it, hence the origin of the word salary. The Romans would look to the past in order to forecast the future. Janus, their chief Deity, symbolized this concept, with his one head looking to the future as the other head studied the past. It was through my exposure to this ancient idea that I devoted my studies to what is known as Pivots Trading. I began to look for pivot points that have high reaction from the market one way or the other. (I also call these points market rejection points.) I then applied certain techniques to react to these points while catching traders off sides. Moraji Desai wrote “Life at anytime can be difficult, life at anytime can become easy. It all depends upon how one adjusts oneself to life.” Trading becomes easy at these pivot points; we are going with the flow and have adjusted ourselves to the breath of the

market. I am a pure technical trader. I read no news. I certainly don‟t read anyone else‟s analysis of the market and I listen to no one‟s stories. I trade in a vacuum. The market tells me what it wants to do. I just listen. Do you want to know the secret to why a market rallies? Are you ready? ForexConfidante

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It‟s simple. There are simply more buyers than sellers in the market at that time. On the flip side, a market is bearish because, you guessed it, there are more sellers in the market at that time than buyers. I don‟t require any more information than that. I have written this book with both the complete novice and the seasoned trader in mind. We will start from the beginning with the Bid and Offer spread.

The Bid and Offer Spread We will be dealing off the market spreads, because you can‟t join a bid or an offer, or make an IBP (in between point). And IBP is going in between the prices quoted by your platform. For example, the EURUSD is currently Bid at 1.2340 and Offer at 1.2343. As a market maker, I could go in between this spread and get the Bid for 1.2341 or 1.2342. So my new price would be Bid one or two points better than you, the average electronic Forex trader. Maybe I would get hit, saving me a point or two and brokerage costs. In my electronic brokerage world, only the aggressor paid the Bro! So let‟s begin! Here‟s a look at a Reuters dealing screen, an inter-bank trading system. This system was around before the Internet and back then the screen was not in color. All major banks have these at their trading stations. It is the fastest way to get a price quote, and have a record of the trade so no one can dispute the transaction. With these systems, a team of traders can move massive amounts of money at the speed of light. In the large rooms, the Chief Dealer would orchestrate the selling or buying of Dollars, to cover a customer order, or deal out of a Global Bank Position. It‟s a huge rush, when you feel the sting of a financial battle, now you have the power as well.

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Get ready to move money at the speed of light: E=MC².

First things first: all Forex transactions involve the simultaneous buying of one currency and the selling of another currency. These two currencies are always referred to as a currency

pair. The seven most frequently traded currencies are known as the major currencies. These include the US Dollar (USD), the Euro (EUR), the Yen (JPY), the Pound Sterling (GBP), the Swiss Franc (CHF), the Canadian Dollar (CAD), and the Australian Dollar (AUD). Currency pairs look like this: USDJPY. The first currency in this pair (USD) is known as the Base Currency. This shows how much the base currency is worth as measured against the second currency (JPY). The second currency in this pair is known as the Quote Currency. Example: consider the USDJPY price quote at 106.12. This means that there are 106.12 Japanese Yen for every US Dollar. (Note: any currency pair containing JPY (the Japanese Yen) is always quote with only two digits after the decimal point. Every other currency price has four or five digits after the decimal point. Four is the most common.) All Forex price quotes include a two-way price, known as the bid and ask. The bid is always the lower of the two prices. The bid is the price at which the dealer (your broker) is willing to buy the base currency in exchange for the quote currency. This means that you are selling the base currency and buying the quote currency. The Bid is always the price on the left side of the quotation. What this means: take the quote for USDCHF at 1.4527/32. The bid price is the quote to the left or 1.4527. So you are SELLING one US Dollar for 1.4527 Swiss Francs. The ask (or Offer) is the price at which the broker will sell the base currency in exchange for the quote currency. This means that you are buying the base currency and selling the quote ForexConfidante

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currency. Back to our USDCHF example, the ask price is to the right of the slash mark or 1.4532. Translation: you can buy one US Dollar for 1.4532 Swiss Francs. The Bid/Ask Spread is the difference between the Bid and the Ask. From our example above, USDCHF the bid is 1.4527 and the ask is 1.4532. The spread is between these two quotes. That span equals 4 pips or points. This spread will be different for each currency pair you trade. Some are wider than others. Some are smaller. This spread is what market makers charge you to execute your trades. There are no commission costs in Forex. There is only the spread. Back to the USDCHF pair above. Let‟s say you wish to sell this pair. You click Sell inside your software order platform and you sell USD for 1.4527 CHF. This is the bid quote on the pair. Likewise, when you enter a market buy order on this pair, you will be buying USD at 1.4532 CHF. This is the ask quote on the pair. Not too confusing is it? Tom Sez: Bank trading terminology is slightly different than the more commonly understood terms found in any Forex trading book you might find on Amazon. In the bank trading world, we call the Bid/Ask the Bid/Offer. When we wish to sell the base currency, we say we are “ hitting the bid.” When we are buying the base currency, we say that we are “taking the offer.” For example, the USDJPY pair is currently 106. 10 Bid and 106. 15 Offer. You hit the Bid by saying “Yours” to your broker. You will place the amount you want to sell before saying “yours.” If you wish to sell (go Short) 3 million dollars against the Yen, you would say, “3 yours at 10.” You just instructed your broker to sell 3 million US Dollars against the Yen at 106. 10. What you‟ve just done is speculation. You are predicting for whatever reason you might have that the dollar is going to lose value against the Yen. Thus, if the price moves in your favor to say 105.60, you would have a nice little profit to feel good about. Likewise, when you “take the offer” you are buying Dollars or Going Long while selling Yen. You buy dollars and sell yen by saying “Mine.” Keeping with our above example, you would say “3 mine at 15.” You just instructed your broker to buy 3 million dollars against the yen at 106.15.

Profit and Loss (P/L) Let‟s look at how to calculate profit or loss. For the sheer feel good of it all, we will make money on our trades. Let‟s look at my example in the box above. We sold 3 million dollars against the yen at 106.10. We then closed out the trade by buying back 3 million dollars at 105.60. How much money did we make?

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=

106.10 105.60 .50 pips or fifty pips.

Now multiply your .50 by 3 million. Your profit is 1,500,000 Yen. To translate this into US dollars, divide your profit in Yen (1,500,000) by the price you bought your dollars back at ($105.60). Answer: $14,204.55. That‟s a nice move. Now let‟s do one for the feel bad side of the equation: figuring up your loss on a trade that turned against you. In this example we will continue applying the Golden Principle of protecting profits. Let‟s say we buy dollars on a bounce off the support line of 105.60. Once again, we are trading the USDJPY currency pair. We have a buy signal if price breaks out above 106.10. We follow our rules and buy 3 million at 106.15. Gadzooks! The market reverses on us and rockets off at warp speed in the opposite direction of our trade. We get stopped out at 105.88. How much did we lose and what was our total trading session worth? We went long 3 million at We were stopped out at

106.15. – 105.88

We lost: So our loss calculation is: Yen.

.27 pips. (27 pips) 3,000,000 x .27 = 810,000

To translate that into a USD figure: Divide 810,000 Yen by the stop price of 105.88. Answer: 810,000/105.88 = $7650.17. Now to figure out net profit/loss on these last two trades: $14,204.55 – 7650.17 = $6555.38 These two trades happened within five minutes of each other. No other market on earth moves as quickly or, at times, as violently, as the Forex market. I float these examples to whet your appetite for getting involved in the Forex market. There ForexConfidante

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are fortunes to be made and lost.

Value-Added Currencies The British Pound and the Euro GBP is the symbol for the British Pound. The GBP is also affectionately known as the Cable, Quid, or Sterling Dollar. EUR is the symbol for the Euro, the currency of the unified nations of the European Union. These two currencies are what is known as “value-added.” In other words, these currencies cost more than one US dollar. For example, at one point in time, the exchange rate for 1 GBP to 1 USD was $1.87. The GBP was worth almost two dollars at that time. (Today 5-14-09, the GBP is in the buck fifty range.) Likewise, the Euro is worth about $1.40 at today‟s exchange rates. So when it comes to the Bid/Offer components, it will be a bit different with these two currencies. When you “hit the Bid” with these currencies, you are selling GBP or EUR. When you “take the Offer” you are buying GBP or EUR. Also, notice when you open your trading software on the menu of currency pairs available for trade: you don‟t see one of these two, do you? 1. USDGBP 2. USDEUR When you trade one of these two currencies against the USD, the GBP or the EUR will always be the Base Currency. Let‟s do a few P/L problems with the value-added currency pairs. The EURUSD market price is: Handle 1.47

Bid Offer 20 / 25

If you wish to sell (go short) 1 million Euros, you would say to your broker, “1 million yours at 20.” You are selling 1 million Euros and buying $1,472,000 dollars. Thus, you are predicting that the Euro will drop in value against the US dollar. Say you believe that the price will drop into the 1.4700 range.

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When you want to buy the Euro (go long) you need to take the Offer. You would say to your broker, “1 million mine at 25.” Now you are waxing prophetic to a rise in value for the Euro against the US Dollar. In this trade, you will be short $1,472,500 dollars. Let‟s trade some Euro! The market is: 1.47

20/25

Your system gives you a sell signal for the Euro at 1.4720. You enter the trade by “hitting the Bid” for 2 million Euro at 1.4720. You have a take profit set at 1.4685. The trade slowly moves down to your target. The market now reads: 1.46

80/85

You take the offer for 2 million Euro at 1.4685 and square (trader talk for “Close”) your position. Are you starting to understand this? So what‟s the profit on this trade?

=

1.4720 1.4685 .0035

You made 35 pips on the transaction. To figure out the dollars and cents of it all, multiply .0035 by 2,000,000. You just made $7000 USD on this trade. In these examples, I am using amounts that you will be able to control by using leverage in your account. Obviously, the larger your account is, the more currency you will be able to control. It is very important to mention that you must trade within your means and not over leverage yourself. Please review the chapter on Money Management again in order to keep yourself and your account out of harm‟s way. This is one of the most important aspects to trading. I am giving you these examples in order to give you a baseline technique on how to calculate profits and losses. In the next section, we are going to go over trading the Sterling or GBP.

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GBP (British Pound) The GBP and the EUR follow the same rules. But it is good reinforcement to go over how to calculate the profit and loss in this currency. I have to warn you that the GBP has a nasty habit of disappearing off the charts and reappearing at a totally different price. The GBP, at times, becomes very illiquid in the NY Forex market. Major banks get large orders and deal among themselves attempting to unwind a position. It can become extremely frightening when you are long and there is no longer a price quote. You have no idea whether you are in the money or if you are now 100-200 points below your stop loss. It is important to note that even though you set a stop loss with your broker for the trade, when the price disappears like this, your broker will do what is known in the market as an “at best price” execution. Let‟s say you set your stop loss at 1.8710. However, there is a moment of illiquidity and the price reemerges at 1.8650/55. You will be executed on your stop at 1.8650. That‟s a big difference from where you actually set your stop on the trade. It sometimes happens. It is not the rule but the exception and you must be prepared for it to happen. Let‟s use a stable Cable market in our next calculation example: The market is: Handle 1.81

Bid 20

Offer 25

If your system gives you a sell signal for GBP at 1.81 20 (you hit the Bid). You would say to your broker, “2 million yours at 20.” You are banking that the price of the Sterling will go down to the 1.80 80/85 level. You have a take profit set at the 1.8085 level. Your stop loss that your money management percentages gave you was set at 1.8135. The market moves in your favor and you take the Offer at 1.8085 to square (CLOSE) your position. You say to your broker, “2 mine at 85.” Closing profits are calculated as such: 1.8120 - 1.8085 = .0035 35 pips on that one. Not bad. So what‟s the early Christmas bonus look like on this trade? ForexConfidante

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.0035 x 2,000,000 GBP = USD profit of $7000. Study these bid and offer rules. Study how to calculate a P/L (Profit and Loss). It is very important that you know what you have at risk on every trade. We don’t watch money during the trading day; however, we do plan the trades with the capital we have available.

Now it‟s time to test your knowledge. Sharpen you pencils and close your books. It‟s….

QUIZ TIME!! Part one: USDJPY Exam 1. 2. 3. 4. 5. 6. 7. 8.

What is the 106. portion of the price quote component called? At what price quote do you sell dollars and buy yen? At what price quote do you buy dollars and sell yen? When you “hit the Bid” what are you doing? When you “take the Offer” what are you doing? If you buy dollars, you are predicting the price of yen will move in what direction? If you sell dollars, you are predicting the price of yen will move in what direction? If you are “long” dollars, what have you done?

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9. If you are “short” dollars, what have you done? 10. If you went long dollars at 106.12 and the new market price is 106.00/05, are you in or out of the money? 11. If you went short at 106.12 and the market is now 1.0525/30, are you in or out of the money? 12. You are long 5 million dollars at 106.35. You hit the bid at 106.70. What is your P/L? Part two: GBPUSD Exam Market Price:

1.81

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1. 2. 3. 4. 5. 6. 7. 8. 9.

What is the 1.81 in the price quote component called? At what price do you sell GBP and buy USD? When you “hit the Bid” what are you doing? When you “take the offer” what are you doing? If you buy GBP, you predict what will happen to the price of USD? If you sell GBP, you predict what will happen to the price of USD? If you are “long” GBP, what have you done? If you are “short” GBP, what have you done? If you are long and the new market price is 1.82 25/33, are you in or out of the money? 10. If you are short and the market is 1.82 25/33, are you in or out of the money? 11. You are long 5 million GBP at 1.8110. You hit the Bid at 1.8088. What is your P/L?

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[8] Technical Analysis Part One: Anatomy of a Bar Chart If you are going to use my trading system, you are going to have to learn how to read and how to plot on bar charts. Bar charts are simple, so don‟t panic. Let‟s break down a bar chart to discover what everything in a price bar represents. It‟s simple. Five things immediately are understandable about price action when looking at a simple bar chart: 1. 2. 3. 4. 5.

Open Price High Price Close Price Low Price Trading Range

Each bar on a chart represents a period of time known as the time frame. This time frame can be as small as one minute or as large as a year. It doesn‟t matter what the time frame on a chart is; the bar chart tells you the same information about price action for that time frame.

Simple, like I said. The top of the bar is the highest the price action went during this time frame. The bottom of the bar tells you how low the price went in this time period measured by the length of the bar. The length of the bar itself also tells you what range the price moved in for the period of time being graphed. The left rung on the bar is where the price opened for that time period. The rung on the right is where the price closed at the end of the time frame. Thus, the market moves forward, zigzagging up and down the price axis, leaving us a history to use in determining our support and resistance levels. IMPORTANT!! WRITE THIS DOWN!!!

Our goal is to enter a trade at the extreme levels, the literal bursting points, for support and resistance.

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When done properly, we lower our initial risk and maximize our gains. You will find out later as we build our knowledge one level at a time how we can do these things with some simple, low risk, high reward trading systems that I have developed and successfully used in the Inter-Bank market. The first thing we absolutely must be a master of at this point is how to read bar charts.

Alert! Unusual Price Action Ahead Sudden Gaps in Market Price There are times, usually when least expected, when market forces cause inexplicable gaps or jumps in market price. If you happen to be in a position that is on the wrong side of this incredible disappearing price, it can eat your lunch and dinner for the next two weeks easy. This is why I urge all novice traders to close all their positions by the end of their market session. Here is another market truism: All market gaps eventually get filled. Bank traders target these gaps. It‟s a great way to head fake the weak traders… ( More about that in a future course.) When you are caught in a gap, it is not fun. Unless you think it‟s fun to be mugged and goatroped by Sicilian thugs in a back alley gin joint. Picture yourself tracking every tick of the price until….the price isn‟t right, wrong, it‟s just ForexConfidante

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GONE. Nobody knows where it might surface next. USDCHF has a nasty habit of doing this in

NY. So does GBPUSD. I have been caught in gaps that came back 200 points higher. Or lower. Been there, done that. Got the T-shirt. It is in this situation, if and ONLY IF your capital permits this stunt, it is good to know how to “leg into a cross trade.” This, too, is an art form all by itself. I will teach you how to do this in a later course. So my advice to you is to trade the safest currencies. Although gaps can happen in any currency, gaps most often happen in CHF, GBP. Stick to the most liquid currencies: EUR, JPY (Safest!).

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[9] Technical Analysis Part Two: How to Draw Trend Lines

THIS IS ENORMOUSLY IMPORTANT that you develop this skill. I was taught these techniques by one of the finest currency traders in the world. He was the Treasurer of UBS (Union Bank of Switzerland). He had amassed hundreds of millions of Swiss Franc profits for his bank. He also did just as well for himself. So well in fact, that he owns two jets and all the other toys that go along with having the personal means to absorb the costs of maintaining and running a micro airline. Let‟s get started. Pop quiz: What is the market? It is the sum total of all the buyers and all the sellers that decided to come out and play today. The market, like water flowing down a hill, moves in the direction of least resistance. Like that water flowing down the hill or that water from your garden hose as it rolls down the pavement, the water will flow in one direction until it hits something, like the tire on your car. Then the water changes direction to get around the obstacle in order to resume its flow in the direction of least resistance. That water analogy is a good way to look at what is known as Supply Points (Resistance) and Demand Points (Support). The market will ebb and flow until there are more sellers than buyers (a condition of resistance – the prices have gone as high as they can go because the sellers outnumber the buyers now). Then prices turn away from the high and ebb and flow back down until the bottom is reached, that point where the buyers now outnumber the sellers (Support level). Price begins to move up again. These points are also what I call rejection points. It is at these price extremes that the market is at its most unbalanced, out of equilibrium. The market quickly rejects the price point, punishing the traders caught in the illusion that price was going to continue this trend. You want to place yourself going in the direction of the snap back when the market rejects a price. We will go over how to do just that. How do we find these rejection points? Where are these support and resistance levels that cause the ebb and flow to change? What gives these points validity and when are possible points actually invalid? We‟ll examine what makes a rejection point valid first. Whenever the market reveals a resistance or support point, understand that there are fellow ForexConfidante

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traders now trapped at these levels. In the instance of a resistance point being established, many traders have just bought now to only see the price retrace down as the market sorely rejects the high that was just made. On the flip side, when a support level is established, many traders are trapped around the low, having sold just as the price rebound upward, the market rejecting the low. Now, as price action returns to these established levels of support or resistance, all those trapped traders are emotional wrecks. They will be eager and happy to get out with an honorable loss, rather than a bleeding new anal duct. This is what causes lower highs or higher lows. This will continue until the market washes all those trapped traders out to sea, most of them bleeding and broken in the most sensitive of bodily places, ripe and easy picking for the sharks trolling the high seas. Then the market will go back to its natural ebb and flow. This cycle will repeat itself for as long as there is a market and traders who are willing to trade it. The market always seeks equilibrium. That‟s the good news. There will always be new trades to execute. The challenging part is to forecast market elasticity (i.e. find the rejection points). As traders, we will be most active when we find and approach these rejection point levels in the market. We will fade the rallies (when our system gives us a signal to do so) or we will buy the breakout (if the system advises that course of action). On the downside, we will protect the support level (buying at support – if our system indicates that this action is the most probable course to profitability). Or we will sell into the support point, knowing that it won‟t hold and the price will crash through the floor looking for a new support point located somewhere in the basement of the Forex Market.

I. Resistance Points A resistance point (or supply point) is a price high surrounded

by lower highs on each side. Notice that the top (price high) is flanked on each side by two lower highs. This is a supply point or a resistance point. Two different ways of saying the same thing. This also marks and identifies a new rejection point as this was where the market retreated from that high, rejecting it because there are now more sellers in the game than there are buyers.

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Here is an example of a resistance line that holds up well, a series of highs surrounded by two lower highs that you connect. Next we will look at a resistance point that gets breached.

Notice the close the day before the breakout to the upside; it closed right at the resistance line. Amazing stuff. I will teach you price projections in the next chapter on Fibonacci ratios. Right now, we need to just get accustomed to finding these points for supply and demand.

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Two highs surrounded by two lower highs. Are you starting to get the picture here? These points make up our supply or resistance line when you connect them.

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Here, the EUR stopped at 1.4550 before it retraced and gathered enough steam to push through. I forecasted that move 3 days prior. Look at these two resistance trend lines. Notice how the momentum of the market is making these lines angle down sharply. Can you see why these are called “trend lines”? Which way is the market going? Down. Plummeting. With the help of these lines you can get on the easy side of the market. Which is being short for the time being?

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I. Support Points Definition: a low surrounded by two higher lows. Look for bottoms (lowest lows on the chart) that are surrounded by two higher lows. These are the Demand Points (Support Points). If is from these points that the market will rally. Why? Because there are more buyers now than there are sellers. As we stated previously, the market is always in an ebb and flow. What you are looking at in these charts is evidence of all the trapped traders, executing their trades to get out. Do all get out? No, however they will. Like I stated before, we all get what we want from the market. Some people only want losses and pain. The market will give it to them. In spades. Demand points, like resistance points, must be identified first before you can draw your trend lines. Demand points are low points flanked on the right and left by higher lows.

Whenever the market makes a series of these demand points, we have a support line being formed.

Now you must connect the demand points.

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Below is a market that stood above a support line for quite some time. The original line was adjusted over time. See if you can tell where it was before adjustments. Just look for lows surrounded by two higher lows.

Once this support line broke down, the price fell over 10 big figures. As prices develop and new bars are being added to your charts as time goes on, you will have to adjust your support lines to take into account the new demand points that have printed. Look at this example of a market that took off of its original support line. Here, if we connect to the next valid demand point to be revealed, you will see that the adjusted line is too steep and intersects price action. This is not a valid line. In this case, we must wait for another demand point to be revealed that makes more sense to connect to. Well, three days later the ForexConfidante

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new demand point revealed itself.

This chart shows the proper demand point to connect to.

NOTHING TO DO WITH TREND LINES: On a side note, here are my thoughts on MACD: it has nothing to do with trend lines.

This was the MACD that was showing at the bottom of the chart. It stands for Moving Average Convergence Divergence. Sounds great. Looks cool. However, most rubbish looks cool and sounds great. It‟s completely useless. Why? Well, because these indicators move ForexConfidante

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after price action, not before. Who needs that? We forecast market moves, not report the news. But hey, these indicators are great to know about so you can sound smart and BS people. For example, Charles walks up to me and asks, “Tom, how did you know to sell at that price?” “Well, Charles, my MACD was -.0678 and the RSI was positive, and we all know what that means.” I guarantee you their next reply will be, “Oh yes, of course. How did I miss that?” Final Note on trend lines: Once we have isolated these points, we are going to use the data to our advantage. There are the points that we are going to use to determine the future demand and supply points (rejection points). These are the points that we will fade or trade into. We move with the price action. We are dynamic. Highs need lows to have meaning and vice versa. Keep track of these points as they are being made during the trading session. Get ready to do quick, on the fly calculations. I call these “what if” scenarios. What if we break this support level? Where is the first retracement level likely to be? What is the Root Point Close (something I‟ll cover in the next chapter) on this trend line? What can I afford to add to the trade, where will my stop loss be if I am not reading the market correctly? Where will my take profit be? Is the trade worth the risk? These are the types of questions you should be thinking about. You should be preparing for anything. Because in Forex, anything can happen at any time. That‟s what makes it so exciting. It‟s like the Wild West. Before we move into the Fibonacci ratios, let‟s review what you should know at this point: You should understand what a bid and offer is. You should know that if you are long currency X, you are short currency Y. You should know your pip costs. You should have an understanding of how you approach risk and reduce it. You should understand how important money management is. You should understand draw downs, and how you should stop trading if you breach 20% in losses. Next stop: Fibonacci Ratios. ForexConfidante

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[10] Technical Analysis Part Three: Fibonacci Price Projection I am going to give you an overview of Fibonacci retracement levels to be used in conjunction with the Codex Trading System. I will then give you a complete example of how you should proceed with the system as a whole, with lots of chart examples. Most people say a picture is worth a 1000 words. For me, it‟s worth about 6000. Fibonacci was an Italian mathematician who lived a long time ago. I am not going to get into a lengthy history about him, if you want more information on him, Google the dude or use the link I gave you in the first sentence of chapter 7. As I have stated before, I am a student of the market and have tried numerous techniques to gain an advantage. The Golden Mean by Fibonacci is the only technique right out of the can that works. The Fibonacci series runs rampant throughout nature. An example would be the distance from the tip of your fingers to each of the joints. Every one of these distances conforms to Fibonacci numbers.

What Are Fibonacci Numbers? 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89…and so on. These numbers are obtained by adding the two consecutive numbers in the series to arrive at the next value. Example: 0 + 1 = 1, 1 + 1 = 2, 1 + 2 = 3, etc. As the numbers increase in value, the ratio (divide a preceding number by a succeeding number) approaches .618 and when you reverse the process, the ratio becomes 1.618 (also known as the Golden Mean). This is the only number series known which has this characteristic. Astute traders have realized that markets retrace and rebound approximately 3/8 to 5/8 a distance from tops or bottoms. It is finding the tops or bottoms that are the challenging part. I will show you my techniques for this. Please study the ratios below. Print them out and have them handy. You will need these ratios to do quick, on-the-fly calculations.

Fibonacci Ratios .382 .618 .8200 (my value) 1.382 1.618 2.236 2.618 ForexConfidante

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3.00 (my value) 3.618 Note: I have found the ratios marked as “my value” work well in the Forex market. HOW TO DO PRICE PROJECTION WITH FIBONACCI NUMBERS AND TREND LINES Part One: Support Line Projections In our first few examples we will be looking to project the future price of a currency using what I call the “What If” scenario. What if the EUR breaks this support line…where should it fall to? First, we must construct a demand line (support line). I will construct this line on my daily chart. I will then do the same thing on an hourly chart. Doing this helps me to understand the ebb and flow of the market. Let‟s look at an intra-day time frame to discover how and why I would use this indicator. Remember, in constructing a support line, we need to find low points surrounded by two higher lows. When we find these lows (support points) theses points need to be in an ascending sequence or moving in an upward angle.

You support line must look like this: See how the support points the further in time back we go (to the left of the chart) these lows are lower than the further to the right we go? If your support line is going down instead of up, you‟ve drawn it wrong and found incorrect support points. Once you‟ve found your support points, made sure that the general angle of these points ForexConfidante

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from left to right is in an ascending direction, you draw the line connecting the bottoms. The market is in a constant state of flux so keep these important highlights in mind: if your line is pierced by 8 pips or more, the validity of the line is suspect. You should expect it to be broken and reset. Take a look at this example:

As you can see, the line was pierced and reset a few bars later, only to be broken again. I will now go over a full example, so you can better understand this process. I will take you step by step. Now let‟s look at another chart below. I have all the demand points marked with a green buy signal arrow. ForexConfidante

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There are your demand points. But as the market moves, these points reset and we follow exactly what the market gives us. These points are Dynamic points.

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As the points change and reset, we must move our line to connect the most recent price activity. Look at the chart now:

We connect our points and the line is extended into the future. The line gets pierced and is starting to indicate that price is slowing down. And we now have another demand point that we have to adjust for. (See the last green arrow to the right.)

Finally, the support line is broken. Now we need to calculate the retracement levels. How do I use these levels? If I wanted to participate in the selloff, I would enter a short or add to a short on the break of the line. I would then use Fibonacci retracements to gauge market momentum and target areas to take profits. Now follow along as we figure out these levels.

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The point at which the market breaks the line is the critical high. We move backwards to the left on the chart to find a higher high. Next, identify the lowest point in between the two highs. This is the pivot low. This point is also something I refer to as the Root Point. It is the beginning of the whole line segment. It takes on a significant meaning. Now let‟s do the price projection calculations. Step One: Find the high of the bar which pierced the trend line. High of bar = 1.3327. Step Two: Find a higher high to the left of the bar that pierced the trend line. This high must be greater than 1.3327 in the example above. Step Three: Find the lowest point on the chart that is in between the two highs. This is the Root Point. Low point in between two highs = 1.3119. Step Four: Subtract 9 pips from the lowest price point. This becomes the new lowest

low for calculation purposes. 1.3119 - .0009 = 1.3110 ForexConfidante

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Step Five: Determine the closing price of the Root Point price bar. The Root Point

Close is an important price point. Closing value of the Root Point price bar = 1.3158. Step Six: Determine the value of the trend line at the point it was pierced by the price bar. Use the crosshairs on your charting software and put the x right on the trend line where the bar cuts through it. This will reveal the value of the trend line at that point. The value of the trend line = 1.3259. Step Seven: Subtract the pivot low from the high of the bar which pierced the trend

line. 1.3327 – 1.3110 = .0217 Step Eight: Multiply the answer in Step Seven by the first Fibonacci Ratio of .382. .0217 x .382 = .00823 Step Nine: Subtract the answer in Step Eight from the value of the trend line. 1.3258 - .00823 = 1.3176. This is our first target price retracement level. Use your line drawing tool and place it on your charts. Step Ten: Multiply Step Seven‟s answer by second Fibonacci Ratio of .618 and subtract the answer from the value of the trend line. This answer will be your second possible price retracement level. Use the line drawing tool and mark it on your charts. .0217 x .618 = .0134 1.3259 - .0134 = 1.3125 Step Eleven: Multiply the answer from Step Seven by my proprietary Fibonacci ratio of .8200. Subtract the answer from the value of the trend line. The answer is your third possible price retracement level. Draw this line on your charts. .0217 x .8200 = .0178 1.3259 - .0178 = 1.3111 Step Twelve: Multiply the answer from Step Seven by the fourth Fibonacci ratio. Subtract the answer from the value of the trend line. This is your fourth possible price Retracement level. ForexConfidante

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.0217 x 1.382 = .0299 1.3259- .0299 = 1.2960 Here‟s what the chart looks like with the price retracements marked up.

Notice the consolidation by the Root Point Close of 1.3158. Also, the EUR was rejected on the upside around 1.3176. The old Fib supports are now resistance. We eventually broke the 1.3111 level and traded lower. Ready for another example?

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We find point X, then move left on the chart. We are looking for a higher supply point – it‟s a rejection point and this point must be at least three points higher than X. Now once you have Y, look in between these two points and find the lowest low between these two highs. This is point Z. This point has higher significance because it falls between the two supply points. As we move into the future, the chart will evolve with us. The most recent price action is the most important. However, until this support line is breached, point Z will be our Root

Point. Where the Root Point closes is the most important price on this bar. Many people think this is the low. It is not. Statistically on a first time retracement, we move towards the close of the Root Point. The low is sometimes too far away and the market exhausts itself before then. This causes many traders to miss reversals and miss take profits because they expect the low to be tested. It is important to note that sometimes the Root Point Close is very close to the low of the bar. This is what has confused many traders who wish to make general rules for the sake of expediency. Another point about the Root Point: you will see the market consolidate around that price. It is from here that the market will retrace up again or break lower. As the market moves forward so do our lines of support and resistance. Down below is the new support line.

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Again, here is how we project our retracement levels. These are the areas we should square or add to our position if breached by more than 33 pips. (Mini-trading system if you like, just apply money management.)

Find supply point A, move to the left and find a higher high by at least 3 pips. That‟s supply point B. Demand point C is the lowest low in between A and B. Our first formula is to take the high of B and subtract is from the low of point C (remember to subtract 9 pips from the low of C making this point lower) which is then multiplied by the first Fibonacci ratio of .382. The answer is then subtracted from the value of the support trend line at the breach. Got that? ForexConfidante

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The next Fibonacci ratio is .618, next is my ratio of .8200, then 1.382. I‟m sure you get the point by now. Let‟s do the calculating and see how we can forecast these price moves. The method I am teaching you is the very same method a major US bank uses in their trading room. (Or did use; I don‟t know if the Chief Trader is still there.) He and I were introduced to a similar technique by a hedge fund manager (stock fund). We tinkered around with it until it worked well in the Forex market. The chart we will be looking at is an hourly. Use the hourly for intra-day price projection. The longer the time perspective, the stronger the signals, remember? So look to see if you have any overlap with the daily charts. Okay, back to our last chart: The high point of B is 1.2857 which we subtract from the low of point C. The low of point C is 1.2611 – 9 pips making the low we use for calculations: 1.2602. This chart snapshot was taken on Friday, November 14, 2008. It is the hourly for the EURUSD currency pair. Next we find the value of the support line. Easiest way to do this is to use your crosshair tool in your trading platform and place the crosshair right over the support line where the price bar breaks through. We find the value of the support line to be 1.2680. First Calculation: High of Point B: 1.2857 Minus Low of Point C: 1.2602 (1.2611 minus 9 pips) Equals .0255 Second Calculation: .0255 x .382 (1st Fibonacci ratio) = .009741

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Third Calculation: 1.2680(value of support line) - .009741 = 1.258259 This answer is your first price projection for the market to drop to if the support line is broken. So where did the fall to and bounce up off of? Let‟s have a look….

The EURUSD fell to the 1.2570-75 price level. It was a Friday and the price closed at the 1.2570 level.

It‟s good to be able to predict price action, wouldn‟t you agree?

That‟s amazing, isn‟t it? Can you see how much better your trading will be with these secrets in your arsenal? This is why the guys are really pissed at me. They don‟t want you to know these methods. It took me years to learn these techniques.

I calculate all these ratios before the trade happens. You have your trend line and you can see when the current price bar is about to make the breach. Using the crosshair tool, you can place it on the trend line ForexConfidante

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lined up with the current price bar and see where the breach point will be if that price bar drops enough to cross the line. Then you just do your calculations, draw your Fibonacci retracement lines below and stand poised ready to take the trade if the market falls through the floor. You know by watching price action if the market will test the support line and how much of a move is there to grab if the support line is broken. Part Two: Resistance Line Projections Resistance calculations are done just about exactly the way we did support breaks, but in the opposite direction. We add 5 pips to the top of the pivot on resistance projections, not 9 like we did on support breaks. The Setup: Again, the first, most important step is to draw in the trend lines for support and resistance. If you get these wrong, your calculations are going to be wrong.

In the chart above, we have both of our support and resistance lines correctly drawn in. Now we‟re waiting for the break, calculator ready to do a whirlwind of fast figuring in the event one of the trend lines breaks and price blasts through looking for new levels of support and resistance.

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The resistance line has been pierced at the price bar marked by the red arrow. Now we must do our upside calculations.

First things first. We must identify four things: 1. Value of the trend line at the break. 2. The most recent low touching the support line. 3. The next lower low to the left of the most recent low, also touching support. 4. Now we look for the pivot high in between the two lows. We add 5 pips to this price bar‟s high. Write these figures down on your paper. It helps to mark these on your charts as well like I‟ve done here:

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First Calculation: Add 4 to the Pivot High. Subtract the most recent low from the Pivot High. This gives us our range. Example:

Pivot High = 1.3086 + 5 pips = 1.3091 Most Recent Low = 1.2908 1.3090 – 1.2908 = .0183

This number is our range in pips from the low to the high. Now we multiply this number by our Fibonacci ratios. Remember those? Second Calculation: The first Fibonacci ratio is .382. Example:

.0183 x .382 = .0070 (rounded up)

Now we add that figure to the value of the trend line at the breach. The value of the trend line is: 1.2970. 1.2970 + .0070 = 1.3040 This number is our first Fibonacci price projection target. Third Calculation: The second Fibonacci ratio is .618. Example:

.0183 x .618 = .0113 (rounded up)

Now add this figure to the value of the trend line breach. 1.2970 + .0113 = 1.3083 This is our second Fibonacci price projection target. Mark this on your chart with a horizontal line. Fourth Calculation: The third Fibonacci ratio is my proprietary number of .8200. Example: .0183 x .8200 = .0150 Again, add this result to the value of the trend line breach point. ForexConfidante

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1.2970 + .0150 = 1.3120 This is the third price projection target. Mark it on your charts. Project at least three levels above the breach. This will give you more than enough room to work with on a breach of the trend line. Now let‟s look at what it did.

Check out where my pointer is on the chart. That‟s where the price stopped its upward movement and turned around. The info box to the left tells the tale of that price bar. The highest it got was 1.3029. Our projection for our first price target was 1.3040: 11 pips away. As you can see, the EURUSD rejected this first price projection TWICE. (Look to the left of the bar marked by my pointer.) It came up to the 1.3029 level twice. The price went on to reverse, break the support line (at which point you should have been calculating fools again) and traded down to the 1.2770 level. Can you see, armed with this knowledge, how you can enter into low risk trades? Next let‟s look at a more challenging example: when all our Fibonacci price projections are EXCEEDED. You must be long on the breaks above these levels and short them when the prices fall back down below the levels. It is not easy to trade these. The prices go back and forth several times throughout the trading day. So tight money management is needed. Okay, let‟s race through the math. I‟m not going to spell everything out because you should be all over this stuff by now. Here‟s what we‟ve got: Value of the Resistance Line at the breach is 1.2590. The Pivot High is 1.2592 + 5 = 1.2597 The Near Low touching support is 1.2450 ForexConfidante

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The Range from near low to Pivot high is .0147 Now let‟s look at the price projection levels: .382 = 1.2646 .618 = 1.2681 .8200 = 1.2710 1.382 = 1.2793 1.618 = 1.2828 1.236 = 1.2918 Now here‟s the chart:

The green arrow represents the low of 1.2450. The first red arrow is the pivot high point of 1.2592. The value of the trend line at the breach is 1.2590. As you can see, the move up was violent. As you can see, the price spiked up through every Fibonacci level but the last one. If you were quick enough, you could have bought the dip down off the first run up at the 1.2681 level, and then lobbed them out at the 1.2790 level. Okay, this concludes our lesson on calculating Fibonacci price projection targets. Keep working with these concepts until you can do these calculations without having to refer to the book. Make it second nature. In the next chapter, I will go over an indicator you can use to determine whether or not to fade the rallies or buy the resistance. (In other words, sell into rising prices or buy when prices are falling.) ForexConfidante

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[11] The Secret Formula: W.D. Gann’s Overbought/Oversold Indicator

After having calculated your support and resistance levels, this formula is a good indicator as to whether or not you should fade the move against the trend lines. (Sell into the rally, buy into the fall.) This is one way of determining how strong these price projection targets will be. This is the formula that W. D. Gann used. (I was told that, anyway.) Gann is a legendary commodity trader that makes Warren Buffet look like a hack. I was introduced to these formulas by a fellow trader who was a member of a private society. This information cost him over $20,000 per year to be a member of this private society. The society only trades using Gann‟s systems. My colleague gave me a rough idea of how to apply the formula. Gann has a different method for calculating support and resistance. I was fortunate enough to be at a major bank that gave me the resources to adapt the formula to my trend lines. The secret of this one formula is priceless. (Or it would cost you at least $20,000 to discover and apply through the secret Gann society.) Here is the formula: (High – Open) + (Close – Low) / (2 x Range) The formula for the Range is High – Low. Rules for selling: a ratio of 64% or higher. Rules for buying: a ratio of 37% or lower. Let‟s get some price data and use the formula: EURUSD Open 1.4360 High 1.4397 Low 1.4326 Close 1.4342 (1.4397 – 1.4360) + (1.4342 -1.4326) / [2 x (1.4397 – 1.4326)] (.0037 + .0016) / [2 x (.0071)] = .0053/.0142 = .373 or 37.3%. BUY INTO THE SELL OFF!! ForexConfidante

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When your ratio is greater than 67%, you SELL INTO THE RALLY. While performance results achieved through using this formula in the past have been respectable, I make no guarantees that this performance will continue. I have used this formula to good degrees and have been pleased with the results. However, I have heard that this formula is out of the bag, so to speak. I always get suspicious when too many people use an indicator. It seems to lose validity as more and more of the masses catch on and start using it. Now let‟s look at a technique you need to know if you are going to do fades (counter-trend trades). It‟s called averaging.

How to determine an Average With my systems we will be building and averaging into our positions. That means we will be starting off with predetermined amounts and add as support or resistance is broken. I have other systems where I start off small and add larger amounts as the market moves against me. Yes, I expect the market to move against me but I am not adding to an out of the money position. I am building a position. This is an advanced system, designed and tailored to take advantage of false breakouts. That‟s one I teach through personal coaching. Let‟s look at how we figure an average. For this example, we‟ll be using the USDJPY currency pair. Let‟s say that we‟ve had a breakout to the upside. We used the Gann formula and discovered that the market is overbought. We‟re over 67% in our ratio. So that‟s a SELL signal. We sell at 106.30. So we hit the Bid for 1 million at 30. Broker Xyz

Buy

Sell 1

Price 106.30

Net Position -1

Average 106.30

We have another predetermined sale at 106.50 for a predetermined amount of 1.5 units. The market moves to these levels and we execute our next trade. We sell another 1.5 units at 106.50. Broker xyz xyz ForexConfidante

Buy

Sell 1 1.5

Price 106.30 106.50

Net Position -1 -2.5

Average 106.30 ? Page 73

Here is the math: 1 x 106.30 = 106.30 1.5 x 106.50 = 159.75 Remember early in this book when I explained that when we hit the bid we‟re selling dollars and buying Yen? So what does that mean we are holding now? We‟re long 106,300,000 Yen on the first sell and we‟re long 159,750,000 Yen on the second sell. So add those together. 106,300,000 + 159,750,000 = 266,050,000 Now divide that by the number of dollars we‟ve sold thus far. 266,050,000/2,500,000 = 106.42 That‟s our average price now on the entire position thus far. Broker xyz xyz

Buy

Sell 1 1.5

Price 106.30 106.50

Net Position -1 -2.5

Average 106.30 106.42

Okay, we have another predetermined level to sell again at. It‟s 106.70 and the market goes there. We‟ve set to sell another 3.5 million at this level and we execute the trade (all within our risk levels, of course). Before this trade, we were short USD at an average price of 106.42 while being long 266,050,000 Yen. Now we‟ve shorted another 3.5 million USD at 106.70. Which means we‟re 373,450,000 Yen long? The new position and new average then is 373,450,000 + 266,050,000 = 639,500,000 / 6,000,000 = 106.58. Broker xyz xyz xyz

Buy

Sell 1 1.5 3.5

Price 106.30 106.50 106.70

Net Position -1 -2.5 -3.5

Average 106.30 106.42 106.58

Now, I want to make a note that as the market moves away from our average (into higher ground) we are moving further out of the money. As the price moves back towards our average, the less we are losing. Our breakeven point is 106.58. Through the use of the price projection techniques we‟ve learned, we are predicting that the ForexConfidante

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price is going to reverse and bottom out at 106.10. We will turn our position around at that price and become long 2 million at what price? Answer: we need to buy 8 million units at 106.10 to turn our position around and be long 2 million USD units. The market hits our predicted target and we buy 8 million at 106.10. 6,000,000 at 106.58 = 639,480,000 8,000,000 at 106.10 = 848,800,000 848,800,000 – 639,480,000 = 209,320,000/2,000,000 = 104.66 We are now long at 104.66 in a market trading 1.5 big figures above our new average cost.

Broker xyz xyz xyz xyz

Buy

Sell 1 1.5 3.5

8

Price 106.30 106.50 106.70 106.10

Net Position -1 -2.5 -3.5 +2

Average 106.30 106.42 106.58 104.66

Did you get confused? We were in the money when we turned our position around. We became long dollars at a much lower price from our initial short position. Let‟s break the trade down from a different perspective. Let‟s assume we just squared our position (closed it) at 106.10. We were short 6 million at 106.58 and we close the trade at 106.10. So what‟s the P/L? 6,000,000 x 106.58 = 639,480,000 6,000,000 x 106.10 = 636,600,000

-

106.58 106.10 .48 x 6,000,000 = 2,880,000 Yen Profit/106.10 = $27,144 USD profit.

Now let‟s add our USD profit into our next trade to see what our average becomes. We get a signal to go long 2 million USD against the Yen at 106.10. Let‟s roll our profit into the position and see our new average. Broker xyz

ForexConfidante

Buy 2

Sell

Price 106.10

Net Position +2

Average ?

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Take the $27,000 USD x 106.10 = 2,864,700 Yen New position is 2,000,000 x 106.10 = 212,200,000 Yen Let‟s roll in the Yen we made (which really means we subtract it out). 212,200,00 – 2,864,700 = 209,335,300 / 2,000,000 = 104.67 See, it all works out. Let‟s do a value added average. EURUSD as an example. 1st position is a buy for 1,200,000 units at 1.3874. (Buy Euro, sell Dollars). 1.3874 x 1.2 = 1.66488 2nd position is a buy for 600,000 units at 1.3907. 1.3907 x .6 = .83442 To figure out the average of these two positions: Add: 1.66488 + .83442 = 2.4993 Divide by total position size: 2.4993 / 1.8 = 1.3885

While we’re on the subject of the Yen….

Japanese Candlesticks In my opinion, this charting style is a total scam and a total waste of time. In trading, as in life, when you waste time it‟s worse than losing money. Money we can recover. We can never get a day back. The only thing you should be doing with a Japanese candle is using it to light up some geisha girl‟s apartment. You know what I mean? ;-) ForexConfidante

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[12] The Confidential Codex Timing Strategy

This one timing system has made me tremendous amounts of money. It is a system based on W.D. Gann‟s forecasting method of time versus price. Gann said, “Time is the most important factor when analyzing and forecasting market movements. ” Note that this is not Gann‟s system. No one really knows for sure what his methods were. Although for $20,000 per year you can go and see if the Gann society will slip you any secrets to life and the markets. I was given the opportunity to view trading diaries kept by Gann from the months of June, July, and September 1909 (this glimpse was provided by the friend I had inside the Gann society). It was with some of the ideas I saw in those diaries that I tailored my version of a short term timing system. This is part one of a three part trading system that I use. It is a stand-alone system, and the first one I developed in the bank. I incorporated Fibonacci points and ratios into the system. Some of the ideas that this system is based upon are what the Illuminati (Leonardo of Pisa, or Fibonacci, was a member of the Illuminati) refer to as the market paradox. I have come to call my whole system the Forex Codex. It took me many months and a lot of headaches and loses to fine tune this part of the system. But I got it. I had my staff run back test after back test. 6 years of computer data. This system makes money. But keep in mind the rules of money management. Not every system can make money every day. Systems make money over time, and this one has made tremendous amounts of money. So here is the background. During his early years as a trader, Gann focused on short term price movements. He later moved into long term price cycles. It was here that he lost me, when he pointed to the Zodiac as keys to the market. I find the keys to price action are located in the charts, not the stars. I combined my version of his time versus price action theory with Fibonacci Points and developed my proprietary trading system.

Law of Parsimony The law of parsimony states that “if a 10 word explanation serves to fully describe a situation, why use 100 words?” In this information age, the days of long winded explanations are obsolete. We no longer need to understand a situation in order to describe the situation. It is the

price direction we want to know and not what events force it to move there. With this law in mind, let‟s now consider how to trade the timing system. ForexConfidante

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Forex Codex System 1® Here is a quick overview of the RULES: All TIMES used in this system is EST (Eastern Standard Time). If the price is higher at 8:32 AM then at 8:31 AM, Buy it (go long). If the price is lower at 8:32 AM then at 8:31 AM, Sell it (go short). If the price is the same, use the Alternate Time Series: 8:38 AM and 8:43 AM. 8:30 AM 8:31 AM 8:32 AM

8:33 AM 8:35 AM 8:43 AM

Note the closing price for this minute of time Closing price Snapshot Execution Closing: Price higher than snapshot BUY/Price lower than snapshot SELL (Break the trade up into pieces. Enter with ¼ to 1/3 of a full position. Add at your calculated levels.) Watching price action Mid Point Price, observing price action Should be looking good. (Price is slightly moving in our direction.)

If the closing price at 8:32 AM is the same as one minute before, we revert to an alternate time series. The time series will be as follows: 8:38 AM will be the Snapshot Price and 8:43 AM will be our Execution Price (Buy if higher than snapshot, sell if lower than snapshot). If the price is the same again at 8:43 AM, stay out of the market. This, however, has never happened

to me. Note on the times: yes, we follow daylight savings time, but DST on the East Coast. We are really tracking what‟s going on in London. Let‟s use EURUSD as our example on a daily chart (only use daily data for this technique). Do your Overbought/Oversold calculation from yesterday‟s price data: Data from November 13th Open 1.2826 High 1.2833 Low 1.2746 Close 1.2753 Here is the formula once again: (High – Open) + (Close – Low) / (2 x Range) (1.2833 – 1.2826) + (1.2753 – 1.2746) / [2 x (1.2833 – 1.2746)] .0007 + .0007 / 2 x .0087 = .08 Oversold

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OVERVIEW ON HOW TO APPROACH THE TRADES We have an oversold indicator. Therefore, if our system gives us a sale, we will sell the rallies and exit (buy) at support. Enter with a position of 2/3 your full amount, sell 25-38 point rallies for the remaining 1/3. With this trade, we will be averaging down. We will be adding more if we break a resistance point. And we will be squaring (closing) at a support point. Our stop loss will be placed wherever our stop loss calculation value is based on our percentage of risk. So we start off with our maximum allowed according to where the range is. Always keep a bit on reserve to add as the market moves away from us towards our stop loss point. We would want to add to our position at that point because the risk is minimal and the reward is great. Example: We can risk 3% of capital on this trade according to our money management rules. So that‟s 30 points on 1 million EURUSD; 60 points on 500,000 EURUSD. So I would start 240,000 EURUSD, add 120,000 if the market moves against me 20 pips, add another 50,000 35-40 pips against me, and the final 90,000 EURUSD 10 pips from my S/L. Keep a trading diary with this system. This will help improve your trading and keep you focused like a laser beam. I will also force you to take your stop losses and your take profits as well. Start off small. It is not uncommon to get a buy signal and have prices retreat 30-35 pips. Buy more at that point with your risk capital maximum in mind. It is the opposite for a sell signal. Sell into the rally with your stop loss in mind. You will average into these trades. Selling the rallies and buying into the sell offs. Then look for capturing 60-150 points. Learn to use trailing stops when in the money. When you average down, sell some out at a 35-40 point profit (bettering your buy or sell average) then look for the home run. Always play defensive at first and then when you‟re in the money, go on the offensive. Close all trades at the end of the NY trading day (4:30 PM EST). Next, we will review the entire system at work, start to finish.

The Trading System The Forex Codex System® This is my Proprietary trading system. I have used this in the banking arena for over 9 ForexConfidante

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years and use it for my own personal account as well. Do not give this system away! We

will all lose if you do! Important note: the Codex System doesn’t “know” anything. It gives you a look. It “intuits”. This is an important point for the simple reason that by the time you “know” which way the market is going, the opportunity is lost or at least the risk/reward ratio is no longer in your favor. This system helps put “you in the train before it moves.”

PUTTING IT ALL TOGETHER As I write this, today‟s date is May 28, 2009. I have received feedback that many people want more details on this big picture procedure. I want everyone to fully understand the concepts and be able to implement them. Point of clarification: when you do calculations, all major calculations are done on the daily charts. My Fibonacci points, Overbought/Oversold percentages, pivot points, trend lines for support and resistance are all done first on an daily chart. I will then use the hourly or smaller time frames to zero in on the market, to observe momentum and price action. I will apply the same principles as the market develops throughout the trading day while using nothing less than an hourly chart. I will look for intraday support and resistance and calculate minor Fibonacci points (minor because these points are based off of the hourly charts). These techniques help me determine areas where I can add to trades (averaging). Let it be known that I would not use these methods on time frames of less than 30 minutes. Some traders I know use 30 minute charts. I use nothing less than an hourly chart for intraday calculations. Remember, if anyone has questions, email me. I‟m always glad to answer any of your questions. Open up a daily chart. All our major points will be calculated and setup before the trading session. First, let‟s go over the order of importance pertaining to our indicators: 1. Trend Lines 2. Fibonacci Points 3. The OB/OS Percentage Step One: Calculate the Overbought/Oversold Percentages. Use yesterday‟s price bar information off the daily chart.

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May 27th Data Open 1.3983 High 1.3999 Low 1.3823 Close 1.3825 Formula: (High-Open) + (Low-Close) / (2 x Range) (1.3999-1.3883) + (1.3823-1.3825) / [2 x (1.3999-1.3823)] .0116 + (-.0002) / 2 x .0089 = -.640 or 64% The market is almost to the overbought percentage. Therefore, support should be able to hold up under the first attempt to breach the trend line.

Tom Sez: Important Note: the OB/OS indicator is used to see how a market reacts to these levels (trend lines, Fibonacci Points, etc.). For example, we calculate that the market is in an oversold condition yet goes on to violently break a trend line. I am not going to buy it because the percentage is oversold; in fact, I may even sell it. The indicator will give us clues to market dynamics. It is excellent to use in range trading but not so good in trending markets. However, it is useful in showing market dynamics (the beginning of a trend or a continuation of a trend). So what I am saying is OB/OS has its place, just don‟t follow it blindly or you can trap yourself.

Step Two: Draw Trend Lines. Here are the two most recent demand points. I will draw my support line out to have my chart ready for battle. Draw on the daily price chart. This is a major support line.

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We have our support line drawn. Take note that the value of the trend line is 1.3686. This value is arrived at by using our crosshair tool. NOTE: The trend line

has not been breached yet. We are noting where the breach would take place if it were to be pierced by the current price bar we are using for our projections . We will now do our Fibonacci calculations.

Step Three: Calculate the Fibonacci price targets, downside and upside. First, we will calculate our Fibonacci levels to the downside. This is a unique situation. Look at the chart below. The first red arrow pointing up is the price bar for 28 May 2009 (I am doing this after hours on the evening of the 28th after the close). When I was preparing for battle this morning before the Codex signals printed, the bar for the 28th was still intraday. I went to the left, to the 27th of May and used this high. Next, we go to the left and find the next higher high (by at least 3 pips). It is the bar marked by the red down arrow from Friday, May 26th. This high was 1.4022. The Pivot Low (marked by the blue up arrow) in between the two highs is on the same bar: May 26th. The Pivot Low is 1.3859 – 9 pips = 1.3850. Now we calculate the range: 1.4022 – 1.3850. Next we multiply the range by our Fibonacci ratios in order to get the price amount to subtract off the hypothetical value of the trend line if breached on 28 May, 2009: ForexConfidante

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1.3686. Range = 1.4022 – 1.3850 .0172 x .382 = .0066 .0172 x .618 = .0106 .0172 x .8200 = .0141 .0172 x 1.382 = .0237

= .0172 1.3686 1.3686 1.3686 1.3686 -

.0066 .0106 .0141 .0237

= = = =

1.3620 1.3580 1.3545 1.3449

Let‟s mark up the chart with these levels and be ready for war when the Codex signals print.

I only went as far as plotting down through Fibonacci level 1.382 as a drop of over 200 points was far enough to project for a probable one day move. Now we have our support trend line and Fibonacci support levels set. Now we need to calculate our upside resistance levels. ForexConfidante

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Again, we‟re using the May 28th price bar as our hypothetical bar which will now breach the trend line to the upside. We have to look to the left and find the most recent low touching the trend line. It was made on 18th of May, 2009. We look further to the left for a lower low also touching the trend line. That lower low was made on April 28th, 2009. We look for the highest high in between. The pivot high is 1.3722. It will be used for calculations of upside resistance. Here is a point I want to go over: these Fibonacci points on the way up are valid until they are breached. If they are

breached, they will act as a support on the way down. When a new swing low is made, you will need to recalculate to get the new reactionary New points. retracement levels are calculated for support off the new highs. Many people have heard that old resistance acts as support or vice versa. That is true for Fibonacci points but not for trend lines. As stated above, once you have a new high or low, you must recalculate. These points are dynamic as the market is always changing. As seen to the left, our pivot high is 1.3722 (marked on the chart by the blue down arrow) which we must add 5 pips to. Subtract the pivot high from the most recent low (marked on the chart by the 1st red up arrow to the right) to get the range. Range = 1.3727 -1.3423 = .0304 .0304 .0304 .0304 .0304

x x x x

.382 = .0116 .618 = .0188 .8200 = .0249 1.382 = .0420

Value of the Trend Line = 1.4039 ForexConfidante

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Our Our Our Our

first resistance point off the swing low will be: 1.4039 + .0116 = 1.4155 second resistance point will be: 1.4039 + .0188 = 1.4227 third resistance point will be: 1.4039 + .0249 = 1.4288 fourth resistance point will be: 1.4039 + .0420 = 1.4459

These projections are far enough away from where price is currently at so there is no need to calculate further.

The chart above is what I refer to as the market map. This map gives me an idea of where I am at. I will use these as my major points and I will break the market down by the hour to gauge market momentum and to determine if there seems to be a shift in supply and demand. I will use the same techniques on the hour charts to determine minor points. Next, we do the same thing to the hourly chart.

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On this chart, the daily trend lines are in gold. The hourly trend lines are in pink. The arrows on this chart mark the critical highs and lows used to calculate the Fibonacci resistance and support points for the intraday moves. Now we are ready to trade the Codex System. Remember: the Codex System doesn’t “know” anything. It gives you a look. It “intuits”. This is an important point for the simple reason that by the time you “know” which way the market is going, the opportunity is lost or at least the risk/reward ratio is no longer in your favor. This system helps put “you in the train before it moves.” Many times we get moves that immediately go in our favor; at other times, we have to work for them. The Codex needs 113 for a stop loss. So calculate your position size accordingly. I always go in with 2/3 of my overall position with the signal. I will add 1/3 on a move of 33 points against me or if I am in the money. My stop loss calculation is based on a full size position entered upon getting the Codex signal. I will look for 70-200 points profit with this system. I will use the hourly charts to determine my exits. If you wish to trade the system automatically, you can. Just enter in the AM with the full position, put your stop loss in and close at the end of the day or with the use of a trailing stop. So let‟s peek into May 28th. The first indicator we have calculated is the OB/OS indicator which is showing the market is almost into overbought territory. Here is the price at 8:31 AM: 1.3873 ForexConfidante

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The Price at 8:32 AM is 1.3875. We have a Buy Signal. The Codex will get you in the market long if the price on the next 1 minute bar closes higher or short if the close on the next bar is lower. You will then add or subtract 113 pips from the signal price. Then calculate a position size based on this stop loss. Since we are going long today, we subtract 113 pips from our buy in price to place our hard stop. The Codex gives me a buy signal at 1.3882. I buy in with 2/3 of my total position size at this price. I will buy another 1/3 on a move that goes 33 pips against me or if I am in the money. Below is my trading diary for this day. I will put in chart .jpegs so you can see how I approach the market. May 28, 2009 Look at our hourly chart setup at the left. That red up arrow marks the 8:00 AM price bar (it is eight bars to the right of the most recent low for upside calculations). I entered the market in this bar. 8:32 I get a buy signal and the market stays in the signal range while I can take an offer at market. ForexConfidante

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8:33 I buy at 1.3874. My stop loss is 1.3761. I will look to buy my additional 1/3 at 1.3841 level. 8:34 Price point at 1.3875 level. 8:35 Market at 1.3882. I would expect to buy that dip soon. 8:38 1.3898. Up over 20 pips. Looks like I may pick up the 1/3 on the upside today. I place a buy stop at 1.3907 in anticipation that price continue to rise above 33 pips from my entry. 9:18 My buy stop is hit. I‟m in the market now with a full position. Price closes at 1.3908. 09:29 1.3941 and rising. 09:34 Closing in on resistance again. This is the second test and I think it‟s going to hold. I close my entire position at 1.3975. Trading Sheets for the day: Broker ACM ACM ACM

Buy 1.2 .6

Sell

1.8

Rate 1.3874 1.3907 1.3975

Net +1.2 +1.8 0

Average 1.3874 1.3885

Profit for the day: 169 pips.

-

1.3975 1.3874 0.0101 pips x 1,200,000 = $12,120 .0068 x 600,000 = $4,080 Total Profits: $16,200

Now we are going to go back to an oldie but goodie. I am going to show you Monday, February 2nd now. January 30th Data Open 1.2951 High 1.2957 Low 1.2761 Close 1.2809

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OB/OS Indicator (1.2957-1.2951) + (1.2809-1.2761) / (2 x .01964) .0006 + .0048 / .0393 .0548/.0393 = .1394 THE MARKET IS VERY OVERSOLD. Today, the closing price at 8:31 was the same as the close at 8:32. I had to revert to the alternate time series.

8:38 Market closes at 1.2742. 8:43 Market closes at 1.2751. System gives me a buy signal. I buy 2/3 of my position size at this price. Indicator has the market very oversold. Stop loss is 1.2641. 8:55 The high so far has been to the 1.2765 level. I am going to see if I can get a dip down to 1.2715 level to buy my other 1/3. 10:20 I get a dip down to the 1.2712 level and pay 1.2718 for the last of my position. This is close to the overnight low. ForexConfidante

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11:15 We attempt to get above the 1.2800 level and fail. Price is quickly pushed down to the 1.2745 level. 2:00 The resistance was broken I and will do a quick price projection to see where to sell.

The red arrow represents the critical price at 1.2710. 1.2710 + 5 pips = 1.2715 Go to the left and find a higher high (the other red arrow to the left). The pivot low is the green arrow. It is 1.2707. 1.2815 – 1.2707 = .0108 x .382 = .004125 1.2815 + .004125 = 1.2856 1st level of resistance .0108 x .618 = .006674 1.2815 + .006674 = 1.2881 2nd resistance level 3:00 We can‟t get over the 1.2845 level. I am going to move my stop up to 1.2805. 3:20 Market attempts to hit the 1.2855 level and fails. I sell 2/3 of my position at 1.2847. Place my stop loss for the remaining 1/3 at 1.2805. 3:30 Stopped out at 1.2803. ForexConfidante

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Trading sheets for the day:

Broker ACM ACM ACM ACM

Buy 0.8 0.3

Sell

0.8 0.3

Rate 1.2754 1.2718 1.2847 1.2803

Net +0.8 +1.1 +0.3 0

Average 1.2754 1.2744 1.2469

P/L for the day = .0334 pips on 300,000 EURUSD. 300,000 x .0334 = $10,020 You may have noticed that I am trading smaller today than on Thursday. It is because I took a draw down on a longer term trend following system. BONUS DAY FEBRUARY 3rd 2009 New Fib numbers off the new low of 1.2707 Data from Feb 2nd 2009

We have a new low at 1.2707. We move to the left to find a lower low at 1.2558. The highest high in between is 1.4720 + 5 pips = 1.4725. We take the difference between the pivot high and the new low of 1.2707 to find the range. 1.4725 – 1.2707 = .2018 ForexConfidante

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.2018 x .382 = .0771 .2018 x .618 = .1247 .2018 x .8200 = .1655

1.2707 + .0771 = 1.3478 1st Fib Resistance Level 1.2707 + .1247 = 1.3954 2nd Fib Resistance Level 1.2707 + .1655 = 1.4361 3rd Fib Resistance Level

OB/OS Data from February 2nd 2009 Open 1.2751 High 1.2899 Low 1.2707 Close 1.2814 (1.2899-1.2751) + (1.2814-1.2707) / 2 x (1.2899-1.2707) .0192 + .0107 / .0384 = .78 or OVERBOUGHT CODEX TIME SNAPSHOT 8:31 1.2841 8:32 1.2844 Buy Signal. 8:33 Codex gives a buy signal. I buy 2/3 my position at 1.2850. I have an overbought indication but market price action Bid. 8:45 Market attempted to break above the 70 level but could not. 9:20 I buy remaining 1/3 at 1.2823. 9:30 Market tested the 1.2800 level and bounced off hard. I am a bit concerned with the OB indication. I may look to liquidate the position if we can‟t break the 1.2870 level. 9:50 We attempt the 1.2830 level and get hit back down. Sitting at 1.2823. 10:00-11:00 1.2820-1.2836 levels, range trade, can go either way. 11:10 Market breaks the 1.2845 level and we will now take a shot at old highs of 1.2870. EURUSD breaks up through the resistance line; Fib price projection calculations. Quick Fib price projection:

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We have our recent low so go left to find a lower low. Highest price in between the two lows + 5 pips. Highest high + 5 pips – recent low = Fib Factor Fib factor x .382 = X. X is added to the value of the line at the breakout. Value of the trend line at breakout = 1.2853 1.2919 – 1.2807 = .0112 .0112 x .382 = .0043 .0112 x .618 = .0069 .0112 x .8200 = .0092 .0112 x 1.382 = .0155 .0112 x 1.618 = .0181 .0112 x 2.236 = .0250 Add these price projection factors to the value of the trend line at breakout: 1.2853. 1.2853 1.2853 1.2853 1.2853 1.2853

+ + + + +

.0043 .0069 .0092 .0155 .0181

= = = = =

1.2896 1.2922 1.2945 1.3008 1.3034 1.2853 + .0250 = 1.3103

11:45 With the overbought indicator I will look to sell a rally at the 1.2950 level if we can break up that high. 2:00 We attempt the 1.2920 level and break through. We touched 1.2940 but failed. The 1.2945 Fibonacci line held on the first attempt. 3:00 Price breaks up to the 1.2995 level and fails. I sell 2/3 my position at 1.2973. 3:30 We seem to be slowing down at this point. I square my position at 1.2957. 4:00 Today, I did not follow my rules. I let my emotions seep in a bit (the OB indicator had me concerned). I should have never squared my position at 1.2957. The trailing stop was set at the Fib level of 1.2947 – 9 pips. It never went there. However, I missed 80 pips more. The Fib calculations nailed the high for the trading day today.

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Trading sheets for the Day: Broker ACM ACM ACM ACM

Buy 0.8 0.3

Sell

0.8 0.3

Rate 1.2850 1.2823 1.2973 1.2957

Net +0.8 +1.1 +0.3 0

Average 1.2850 1.2843 1.2496

Profit for the day: 1.2957 – 1.2496 = .0461 pips x 300,000 = $13,830

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[13] Final Thoughts and the Complete Codex Reference

In closing, it was my intention to give you a good foundation to trade with and the money management skills to keep you in the game. The knowledge that I have given you is important. However, it is not a panacea that will make all traders wealthy. Markets do not give up their profits easily and most traders are ruled by fear and greed. I have given you a battle plan. The question is: do you have the ability to detach yourself from your emotions? Only you can answer that. Use these techniques in good health. I have tried to deliver a golden rule of reciprocity. I wanted to give you more in use value than I have taken from you in cash value. I believe wholeheartedly that I have done just that. To your success! Tom Strigano END. Tom Sez: This Forex book is dedicated to my three exquisite girls (beautiful wife and two gorgeous daughters). It is not easy being married to a Forex trader. I have spent many hours in my office and, at times, market moves forced me to miss important events with the family. They never complained and they only offered love and support. How could I not pay that offer, and go long with no stop? ;-)

My buddy Colin trading on the Liffe (London International Financial Futures Exchange).

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Forex Codex System 1® Complete Reference Sheet

**Place all information on Daily Chart first. Then drop down to the Hourly Chart for intraday calculations. I.

Overbought/Oversold Indicator (High-Open)+(Low-Close)/[2 x (High-Low)] Sell Signal: 64% ratio or higher(overbought) Buy Signal: 37% ratio or lower(oversold)

II.

Trend Lines a. Use most recent price action data b. Supply Points (Resistance Points): A high surrounded by two lower highs. Two or more make a trend line. c. Demand Points (Support Points): A low surrounded by two higher lows. Two or more make a trend line.

III.

Fibonacci Price Targets UPSIDE CALCULATIONS: 1. Find the Value of the Trend Line at the breakout. 2. Find the Most Recent Low touching the support line. 3. Go left, find a lower low touching the support line. 4. Find the highest point in between the two lows. Add 5 pips. (Highest High + 5 = Pivot High) 5. Find the Range. Range = Pivot High – Most Recent Low 6. Multiply Range by Fibonacci Ratios: .382 .618 .8200 1.382 1.618 2.236 7. Add Fib Price projections to Value of Trend Line at breakout. DOWNSIDE CALCULATIONS: 1. Find Value of the Trend Line at the breakout. 2. Find the high of the Price Bar which breached the Trend Line. 3. Find a higher high to the left. 4. Find lowest low in between two highs. Subtract 9 pips. (Pivot Low = Lowest Low – 9) 5. Find the Range. Range = High of Breakout Bar – Pivot Low

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6. Multiply Range by Fibonacci Ratios: .382 .618 .8200 1.382 1.618 2.236 7. Subtract Fibonacci price projections from Value of Trend Line at breakout. IV.

Forex Codex Rules 8:31 8:32 8:38 8:43

AM AM AM AM

EST EST EST EST

= = = =

Snapshot price at close Execution price at close Alternate Snapshot price at close Alternate Execution price at close

1. 2. 3. 4. 5. 6. 7.

If price is higher at 8:32 than at 8:31, Go Long. If price is lower at 8:32 than at 8:31, Go Short. If price is same at 8:32 as at 8:31, Use Alternate Time Series. If price is same at 8:43 as at 8:38, Stay Out Of Market Today. Set Stop Loss at +/-113 pips from buy/sell entry price. Entry = 2/3 full position. Buy/sell next 1/3 position when market moves +/-33 pips against position or when in the money. 8. Calculate target price levels when resistance/support trend lines are broken. 9. Square 2/3 position at Fibonacci target levels. 10. Set Trailing Stop at Entry Price +/- 50. Let 1/3 ride until stopped out.

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BIG PRINT GIVEITH; TIME FOR THE SMALL PRINT TO TAKEITH AWAY!! The ideas presented in this manual are for information purposes only. Foreign Exchange and all futures trading are inherently risky financial instruments that should be bought and sold only by individuals that are capable of sustaining financial liability. Reproduction of any portion of the contents of this manual is strictly prohibited unless written permission is given by the publishers. Copyright © 2008, 2009.

;-) Tullet Prebon International Currency Brokers HQ

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