The Freedom Trader Playbook

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The information in this book was derived from a live training we did in front of 1,100 traders. It is an advanced guide to investing in the currency markets using a layered approach. Just like Warren Buffet uses several points of reference before making an investment decision, I use a 5-step process to make currency trading decisions. Please read this guide carefully and take notes. If you have any questions, then don’t hesitate to email [email protected]

ThePatternTrader.com

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Copyright Notice. All materials and software published on or used in this document are protected by copyright, and are owned or controlled by Mark Shawzin and www.thepatterntrader.com. UNAUTHORIZED COPYING, REPRODUCTION, REPUBLISHING, UPLOADING, POSTING, TRANSMITTING, OR DUPLICATING OF ANY OF THE MATERIAL IS PROHIBITED. You may use any materials for personal, noncommercial, and informational purposes, provided that the documents are not modified and provided you maintain and abide by all copyright, trademark, and other notices contained in such material or if none, you include the following copyright notice in such downloaded materials: © Copyright The Pattern Trader. All rights reserved. All use subject to Terms and Conditions of Use set forth here.

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CHAPTER 1

The Man Who Got Kicked
 Off Wall Street My name is Mark Shawzin. By the way, I’m the guy on the left. The little guy on the right is my son Elon whom I love and adore. Right now, I’m known as one of the most successful market reversal pattern traders with over 1,000 traders following my analysis online today. However, it wasn’t always like this. I started my career all the way back in 1979. My father was doing business with a fellow named Graham Loving who was an investment banker. On the side, Graham was trading the commodity futures markets. Everything from cocoa to orange juice to pork bellies to gold, silver, and anything that had a price fixed to it. He was doing this very, very simply, using a price action methodology. You have to remember that this was 1979. I don’t know if you remember back then, but it was a very turbulent and chaotic economic time.

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You had gas embargos by the Gulf States, you had gas lines in the United States, you had oil going crazy, you had gold for the first time running to $1,000. The Hunt Brothers cornered the silver market and the silver ran to $50. It was just a crazy time in the investment markets. At that time, Graham was trading everything under the sun using a very simple price action trading methodology. He got a simple piece of graph paper with an X and Y-axis and he drew a graph with price and time. He put cocoa at the top, or live hogs, or whatever he was trading, up to about 22 different markets. Every day, he would just plot the closing price from one level to the other, and after a couple weeks, it would form an uptrend or a downtrend. He used to say to me, “Mark, I simply want to buy a market that’s going up or sell a market that was going down.” Graham was very kind enough to take me under his wing and teach me all this technical price action methodology. At this time, I was in my last year of USC Business School wondering what I was going to do for a career. I was taking investment courses that taught me how to evaluate investments based on fundamental information. Basically, you had to examine

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all the investment metrics in order to make a determination when to buy or sell something. Now, Graham was just showing me how to make that determination on some very exotic instruments, looking at only the prices. It was that simple exposure to Graham that launched my career. I knew what I wanted to do and I was seeing the money that he was making. He was making so much money that when he invited my dad to join him in a trading account, my dad leaped at the chance. In 1979, my dad put in about $50,000 and Graham put in $450,000 into a trading account so all told, they had $500,000 about at the start of the year. At the end of that year, that account was well over $5 million, again, just using a very simple price action strategy. I remember Graham used to come over for dinner or stay overnight and in the morning, he would get up and watch the financial news channel. They would have the commodity clacker boards. They were called the clacker boards because they were actually metal so that when the prices turned over, you could hear this constant clacking in the background. Page 6 of 83

Every day, Graham would wake up and gold would be limit up because of all the embargoes and things of that nature. He was just making money hand over fist. Of course, I thought this would be an interesting way to make a living. So it was based on what Graham exposed me to that I started building a career and a journey in trading. My first job in 1980 was at Merrill Lynch. I never just wanted to be a customer man, taking orders over the phone. I really wanted to learn how to trade the markets and be financially independent for myself. I began at Merrill Lynch. I eventually started a commodity division for EF Hutton and went on to work for four major Wall Street firms over the ensuing decade. Over that time, I evolved a trading strategy that was authentic to myself that was based on the simple principles that Graham had exposed me to. The next decade spent on Wall Street, I developed different nuances and other ways to approach the market that was very, very successful. On the basis of that, I was able to attract very high net worth investor accounts as well as small institutional accounts to trade.

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I was doing fantastically, making money hand over fist and then I basically lost everything due to a very bad decision I made. At one point, my brother shared with me some information on a company he was looking at. I ended up buying the stock. I never understood that eventually it came to pass that my brother learned about it by virtue of inside information, and I got entangled with the SEC in a nine-year lawsuit. I tried to tell them that I had nothing to do with it and I had no inside knowledge. At the end of the day, I didn’t even pay a fine, but it ended up putting a blemish and a stain on my career, and effectively my time on Wall Street was over. As I tell my son, when one door closes, another one opens. It was actually the best thing that happened to me. In 2002, my son was born and I ended up wanting to spend a lot of time with him. So I decided to be a stay-at-home dad. To make money, I ended up taking all the things that I learned in the markets, while on Wall Street, and applied it to my own small account and myself.

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I very quickly grew it to a sizable account just trading from home. Then in about 2010, I met Peter Visser. We talked about my trading strategies. He quickly became very fascinated with what I was doing. He kept pestering me about doing something online. He wanted me to sell my services and my knowledge. Frankly, I really resisted the notion of doing this. I liked being independent. I didn’t want the pressure of having a lot of retail investors. I really resisted his attempt for many, many years up until early 2015. He came to me and he said that he would do all of the grunt work that I didn’t want to do. He would do the website, the marketing, and just leave the trading to me. Eventually, I agreed to Peter’s proposal and we kicked off the Pattern Trader. It’s become very, very successful very, very fast. It’s always fascinated me that the statistics in this industry are really so poor.

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It’s estimated that greater than 98% of traders in the Forex world actually lose money. It’s estimated that greater than 98% of traders in the Forex world actually lose money. After online trading became available, I started noticing most of the things that you have been exposed to and taught are dead wrong. I often get emails from my competitors giving me all kinds of hype and different ways of trading that I know aren’t going to work on a consistent basis. MISCONCEPTION #1 There are several misconceptions and big lies that you’ve been exposed to. Of course, the first big lie is that Internet marketers would have you believe that their past results mean that you can make money using their systems. This simply isn’t true. Now, coming from Wall Street onto this online world, I couldn’t believe what I was seeing. There was one big lie, and while people on Wall Street would never fall for it, it was different in the retail Forex world. So let’s put this to bed... Page 10 of 83

Past results do NOT guarantee future returns. When you see past results, a lot of the time they have been manipulated by back testing or simulations, or not done in a live account. It’s very misrepresentative. Now don’t get me wrong. This isn’t your fault. You’ve just simply been misled by this industry. However, I promise you that the real pros on Wall Street and the City of London do not rely on any third party verified systems like My FX Book. ๏ They analyze the core trading strategy. They dissect it and see whether it actually makes sense for the long term. Then they test it for themselves. The questions after this book you need to ask are: ๏ Do you understand this trading methodology that I explained? ๏ Does it make sense? ๏ Is it logical? ๏ Does it appear to have longevity? ๏ Does it appear to have a unique edge? ๏ Can you replicate these trades?

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Again, I would admonish you never to make a trading or purchasing decision in this business based on past performance results alone. It truly is no indication of future results, and you’ve simply been misled by internet marketers and scam artists. MISCONCEPTION #2 So the other big misconception – I won’t call it a lie but it’s a bit of a misconception – is that you need to win most of your trades to make a long-term consistent income and be a successful trader. Again, this is simply not true and I have a way of proving that over and over again. Traders out there obsess with the win/loss ratio, which is also known as the number of winners versus the number of losers. On Wall Street and Chicago, the traders who are most successful (by a long shot) are the ones who lose most of their trades yet still come out on top. I’ll prove this to you in just a minute.

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CHAPTER 2

The Naked Chart A few months before this book, I was sitting in on a webinar. The image below is the screen that was shared before me of the trading strategy that they were advocating. Again, I couldn’t make heads or tails of what they were trying to say. You have hundreds of different indicators on here, Stochastics, moving averages, Bollinger bands, and the like. I have a feeling this is what most traders’ screens look like, where they’re looking at very short-term trading time frames, whether it be a five, ten, or 15 minute charts overlaid with many, many different indicators.

Figure 2 - This chart gave me a headache.

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Whether this strategy could make money or not, I had to disengage from this webinar just because it was giving me a headache. Below is an image of what I look at. It is a simple, clean chart, which is also referred to as a naked chart. The reason it’s called a naked chart is you’ll notice there’s no indicators on this chart whatsoever. There’s not a moving average. There’s not a Stochastic, and there’s not a Bollinger band. All I look at are bar charts with the high, low, and close. I look for very simple trends or very simple patterns based on this naked chart that you see in front of you. This is what I mean by a bar chart.

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All I look at are bar charts with the high, low, and close. I look for very simple trends or very simple patterns based on this naked chart that you see in front of you. This is what I mean by a bar chart.

It simply represents the low to the high of one daily session. For my methodology, as you will come to understand, it’s very important for me to see where a market closes relative to the high or the low of the day. Some people like to look at OHLC bars. It is exactly the same, but it includes where price opened for the day. I am not particularly bothered about where price opened, especially not in the Forex market. There is so much liquidity that price is pretty fluid.

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Now, by closing at one end of the bar or the other, it denotes who won the day. In the blue bar above you, the buyers were in control of that day. Below you is an example where the sellers won the day. The market started much higher, eventually fell much lower, and then closed towards the low part of the day.

Everything is the same except where the close is. You have a high, low, and close… but this time, the close was to the lower end of the bar. This represented that the sellers were in control of the day. We’ll be looking at a lot of charts and I’ll be clarifying this as I go on.

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CHAPTER 3

The Phase Of The Market The first step of my trading strategy is defining the phase or the condition of the market. At any given time, I have a trading terminal with about 30 different instruments that I look at. I also look at gold. I look at crude oil. When I’m going through my charts at the end of each trading day to determine whether or not I have a trading opportunity, I look at the phase to determine whether or not there is a good risk:reward. We’ll get into that soon, but first let’s identify the phase. Typically, you’ve heard that there are three phases of the markets. The markets can either be going up, it can be going down, or it can be going sideways.

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But I’d like to add a couple other nuances. In my mind, there’s also two other trading conditions that are very important. One in where the market has been trading down and then all of a sudden, out the blue, it just turns around and goes the other way.

This is actually where I think I have a tremendous strategic edge. Being able to detect a turn or a change in the market very, very early. I don’t confine myself to being a swing trader, a reversal trader, or a trend trader. I don’t like to put any kind of definition on what I do. But in the end, most of the money is made on these big turns where the market just reverses from one direction to the other. Although it catches a lot of participants by surprise, if you look closely, the market has a way of indicating when it wants to make these turns. We’ll drill down to these in a minute.

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This part of the strategy is fairly simple. Where is the market going? Is it going up? Is it going down? Is it going sideways or is it turning from bullish to bearish, or bearish to bullish?

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CHAPTER 4

The Historical Precedent The second part of my methodology is to isolate, what I call, a historical precedent or a chart pattern. Within each phase there needs to be one of these patterns. Remember, I don’t just make trading decisions in a vacuum. Everything needs to line up. There are principally five major chart patterns that I look for. The first is a double top or a double bottom, which looks something like this.

Figure 8 - The double top and bottom

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In this case, you see price moving up. It makes one peak and bounces back down. It then tries to attack a new high and fails. Then when we join this by the lows, you get the neckline and it forms this “M” top or this double top. This always indicates an area where the market has key resistance and is rolling over. Conversely, a market that has been going down, reaches a trough or a support area where it bounces. It then goes back and bounces off roughly at the same level, forming this “W” bottom or double bottom joined by the neckline. One of the other patterns I look at is called a head and shoulders or an inverted head and shoulders.

Figure 9 - Head and shoulders pattern

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It looks just like a man or woman’s head and shoulders. Price makes the first peak, goes down, makes a higher peak, goes down, makes another peak, and then reaches the neckline. In the end, you have a left shoulder, a head, and a right shoulder. We have the converse, which is what’s called an inverted head and shoulders where you have the left shoulder, the head, and the right shoulder. Now I should tell you that these technical chart patterns can be found on many different websites and many different textbooks dating back 150 years. They are very simple. They’re very vanilla. They’re very easy to understand, but they can also be a little bit confusing as to when something is a double bottom and when it isn’t. That’s why I use several layers to confirm the analysis that I’m looking at. Just because I see one of these formations appear doesn’t mean I just don’t jump in willy-nilly. Again, I’ll explain that in further detail in a minute. The third pattern that I look at are ascending or descending triangles.

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Figure 10 - Ascending and descending triangles

This is a pattern where prices are being increasingly squeezed or compressed until it gets to the vortex and shoots out the other side. This is a cup and handle:

Figure 11 - Cup and handle pattern

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Which is kind of just a little bit of a broader definition of a double top or a double bottom. The market comes up to the neckline, consolidates at the neckline, and puts on this little handle. It’s referred to as a cup and handle, much like a teacup. Then it breaks out of there. I was very successful in gold trading out of a cup and tea handle position just like this. I’ll show you that trade in a minute. These chart patterns play themselves out over and over again in many different markets, whether it be the stock market, commodity market, Forex markets, gold, etc. The fifth pattern I look at is simply price channels.

Figure 12 - Channel pattern

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In this case, we’re looking at a horizontal price channel. Basically, price just bounces back and forth in a nice little channel. First, I look at the phase of the market. Then, within the phase of the market, I drill it down to these patterns to see exactly what’s going on. Is the market going to continue or reverse?

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CHAPTER 5

The Insurance Day Bar Once I’ve identified the phase of the market, and the pattern within that phase, I then attempt to spot, what I call, an insurance day bar. I’ve coined this phrase, insurance bars, because they put the risk:reward and the momentum in my favor, and most importantly, they tell me how to assess the risk in a trade. Simply put, I wait for the market to coil and then point where it wants to move. Believe me, if you drill it down to the simplest component, the market actually points where it wants to go. There are two types of insurance day bars I look at. The first type is a key reversal bar.

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Figure 13 - A simple key reversal

Imagine if you will, this is a market that has been going down, and all of a sudden, it makes a new low and then reverses course. By the end of the day, it closes towards the high. This tells me that the institutions on Wall Street pushed price down so that they could get a good foothold in the market. Or some kind of “news event” caught them by surprise. Either way, it doesn’t really matter. It is telling me where it wants to go. The larger the range, the more significant the signal.

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Again, I just don’t leap in when I see one of these. You have to take the trade within a pattern, which is within the phase of the market. This is like a market pointing to where it wants to go. When you see these things, they actually tell you in the direction where they want to go by closing at the high part of the bar. Here’s another illustration. The image below is representative of a market that’s been going up. All of a sudden, it makes a new high, and then reverses course and closes on the lower end of the bar.

Figure 14 - A key reversal down

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Can you see how it is pointing downwards by closing lower? If this pointing is confirmed by a historical precedent or a chart pattern, then we have what looks to be a high probability setup. You will see these reversals happen over and over again, but it’s very important that we analyze them within the context of either the phase or the condition of the market AND historical precedent or chart pattern. The second insurance day bar comes in the form of an inside day bar. So what do I mean by that? This is where the high and the low of this little bar is within the high and low of the previous session. These can also be termed as narrow range day bars. This represents a coiling much like a beach ball held under water. Picture, if you will, you push a beach ball further and further down, you let your hand off, and then the pressure just pops out. This is exactly what this looks like.

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Figure 15 - The inside day bar going up

This market is coiled like a spring ready to jump out and when prices shoot out of here, it just skyrockets. In the illustration, we can see a key reversal AND an inside day bar. A combination of those two is always fantastic.

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The converse of that is true in an up trending market, and then all of a sudden we have this key reversal bar where the market makes a new low and then closes in the opposite direction pointing lower. Then in the following session, we have this inside day bar, this compression if you will, this squeezing where the high and the low is within the low and high of the previous day.

Figure 16 - Inside day bar going down

This is a compression. It is stored energy in a tiny bar. And when that energy gets released, it shoots out with a vengeance. I recently saw this same compression, a market reversal combined with this inside day bar in the Euro versus the Australian Dollar (EURAUD) where it did exactly this. When it breached the inside day bar, it just fell about 500 pips.

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CHAPTER 6

The Confirmation The fourth stage of my trading strategy is to confirm everything. Up to now, everything has been my own analysis and my own subjectivity. In the end, I’m fallible but the market is always 100% right. So I always look for the market to confirm what I’m looking at in the form of a pending order. I always place my pending orders between 5pm and 8pm EST. That’s when the European markets are closing. Let’s pretend the bar below is a signal for us to go long.

Figure 17 - The order execution strategy

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I position my pending order in the form of a buy stop or a resting order above the high of the day. Then I would strategically place my stop loss below the close of the previous day. The stop loss is designed to be placed at a point where we’re not going to be prematurely taken out of a trade, but not so far down that our risk becomes unacceptable. Typically, I position my stop loss 20 to 35 pips below the previous day’s close. If price goes against me, the broker will automatically close the trade for me. This protects my account. Below is an example of how this would work. In this case, we have our key reversal and insurance day bar. The market made a new low, and then reversed and closed at the opposite end of the day, pointing higher.

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Figure 18 - Entry scenario

I would strategically place my pending order just above the high of either the key reversal bar and/or this inside day bar. Again, I would require the market to confirm my analysis. If the market didn’t confirm my analysis and price kept on going down, no harm, no foul. A buy order wasn’t triggered. We weren’t put in the market and we didn’t risk anything that day. If on the other hand, our pending order is triggered, then I would expect to take advantage of the market going up. It could be triggered 20 minutes after I placed the buy stop. It could be triggered two hours or it could be triggered at two in the Page 34 of 83

morning when I’m sleeping. I don’t care. The market will put me in at a price and time that it’s ready to go, not when I want it to go. If I’m wrong, I have my stop loss positioned just behind the previous day’s close at a place where I have an acceptable risk on that trade. Below is an example of a pending order for a short trade. It is a day where the market made a new high and then closed towards the lower part of the bar, signaling a key reversal to the down side. I would look to put a sell stop strategically below the low of this key reversal bar in the form of a sell stop order or a resting order.

Figure 19 - Short entry (pending order)

Again, I will place my stop loss 20 or 30 pips above the close of the previous day and if this is triggered, it will automatically close the trade and protect my account balance.

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Here is a hypothetical example again where the market makes a new high and closes on the low.

Figure 20 - Short entry scenario

In this case, we have a reversal and we would put our pending order just below the low to go short. Here’s a quick recap: I look for the condition or the phase of the market. Is the market going up? Is it going down? Is it going sideways or is it turning from bullish to bearish, or bearish to bullish?

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Within the phase or the condition of the market, I then look for a historical precedent, a chart pattern. Do we have a double top, a double bottom, an inverted head and shoulders, a cup and handle, or a channel within the phase of the market?

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Then once we’ve isolated the phase of the market and/or the chart pattern, we drill it down in even further. We look for a key reversal bar or an inside day bar that then tells us the market is ready.

Then we drill it down to a pending order (execution strategy) in the form of a buy stop or a sell stop.

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I look for each part of the trading methodology to layer one on top of the other. With each layer of confirmation, I get closer and closer to the bull’s-eye.

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CHAPTER 7

Trade Examples This is representative of a trade that I would open up on my trading platform:

The first question when I’m presented with a market is what phase or condition is this market in? In this case, I’m looking at a market that’s previously been going down and looks like it’s turning and going up.

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Once I’m attuned to that, the second question I ask is if there’s a historical precedent or chart pattern that alerts me to a turn in this market, and indeed, here it was:

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Remember that double bottom or that W pattern joined by the neckline? There we have the presence of two components of the trading strategy, a market that appears to be turning from bearish to bullish and also the appearance of a chart pattern that confirms my analysis. The third component of the analysis is if there is an insurance day bar, and, in fact, here we go:

That’s exactly where it is. We had this key reversal into this major double bottom chart pattern. We had a 400 pip reversal in this trade where the market went from 1.64 to almost 1.68 and then closed at the very high part of the bar - pointing in the direction it wants to go.

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Remember how I said how the market points in the direction it wants to go? Here you have something within the context of the pattern and within the context of the phase of the market. Remember, this is a layered approach. One layer confirms and consolidates the other. This is actually not a hypothetical example:

This is an example of an email that actually happened on this particular trade that I sent out to our traders. In this particular instance, the currency pair was EURNZD. The entry order was in the form of a buy stop at 1.6687. We had a stop loss just the other side of the previous day’s close at

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1.6611 and we had a take profit at 1.6987 so we had a potential reward on this trade of 300 pips. This is a little closer look at the chart in the email:

With the double bottom, the key reversal, and the buy stop … this is what happened:

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We entered the trade at 1.6687 and eventually the market went to well over 1.71, tripping our take profit so we took home a nice 300 pip gain on that analysis.

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Below is another chart and the first question, of course, is what is the phase or condition of this market?

This is a market that had been going down for some substantial period of time.

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Once I delineated that the market was in a downward trending phase, the second component of the strategy is to ask if there is a historical precedent or chart pattern? Indeed, here it was:

There’s the double top. Again, if you remember, we isolated that “M” top as one of the chart patterns. However, I don’t just rush into the trade. I wait for a third confirmation in the form of an insurance day bar. Indeed, here was the insurance day bar in the form of this key reversal:

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The market made a new high and closed toward the lower end of the bar. Here is the email I sent out with the following details. It is spot gold: The entry order was a resting or sell stop at $1,152. The stop loss was a little bit higher, above the previous day’s close at $1,165. The initial take profit was at $1,111.

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Remember that I said that I look to see how the market develops, and then I’ll alter my take profit? In this case, I remembered that I had altered the take profit and we actually took a little bit more profit out than the $1,111 price target. So the potential reward on that trade was 430 pips:

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This is what it looks like on a slightly expanded scale when the email went out:

A couple days later, it still was going down:

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We were trailing it with our stop loss, allowing it to go further and further, and further:

Eventually, our take profit was triggered, about seven trading days later, for a 430 pip gain in the XAUUSD spot gold chart. Here’s another trade example:

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Again, the first question we ask is - What is the phase or condition of this market? In this case, it was kind of a stair step pattern downward:

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The second question we ask is – Is there a historical precedent or pattern? In this case, we had a channel bounded by a support and resistance line. See the image below:

In this particular case, price had hit support AND we can instantly see that energy was being stored in the form of an insurance day bar right here:

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We have an inside bar where the low and the high was within the high and low of the previous day. So it looks like this market is moving towards the upper end of the channel. For that to happen, it would have to explode out of this inside day bar. And here was the email I sent out with my pending order:

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The “entry order” was a buy, or resting, stop at 2.0538 with a stop loss about 48 pips lower and a take profit of 149 pips higher. Here’s what the chart looked like in a slightly expanded version when the email went out:

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Below is an image of what it looked like when we took our entry long. We put a resting order just above the inside day bar and we were triggered into a 149 pip win in the first day that it exploded beyond that:

You can see that this market actually went a little bit further. I thought that it might go to the top of the channel, but this was actually a down trending market. Even though I thought it would explode out of this area, I didn’t want to give it too much room to come back in my face. Eventually, this market collapsed and went much further down. I do take trades in a counter trend fashion if there is a good opportunity to do so.

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One important thing to remember is that I don’t always win on every single trade. In fact, most of my trades end up being small losers. Here are some examples:

I lost 54 pips on a USDCHF trade. I lost 55 pips on an AUDJPY trade and I lost 42 pips on a NZDJPY trade. This is not uncommon. It’s just part of the game we play here. It’s a cost of doing business.

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CHAPTER 8

How Much You Can Expect To Win & Lose Using This Strategy Let’s put this into context and compare the winners to the losers. If you recall, in EURNZD we made over 300 pips, 430 pips in XAUUSD, which is spot gold, and 149 pips in GBPAUD. Then conversely, we lost 54 pip, 55 pips, and 42 pips. On average, I lose 50-70 pips compared to the average big winner of 293 pips. That means that one winner can easily make up for five losers. In essence, I only need a couple winning trades every month to make a big fat profit.

I can literally have ten losers in a row and I wouldn’t care. It frankly doesn’t matter. That’s the whole premise of what I’m trying to do. Page 58 of 83

My strategy is to find one or two big trades a month that extend for 300 to 500 pips, and just those one or two trades will make up for all the inevitable losers that come along the way. That’s how I’m able to be a consistent and long-term winner in this business. Hopefully, that risk:reward scenario makes sense to you. Frankly, I think this is the shortcoming of most trading strategies out there where their systems are just not designed to have the adequate risk to reward. If you think about it, most people are focusing on a five, 10, or 15minute price chart, their timeframes are going to be much more compressed, and their take profit by definition is also going to be compressed. Most traders are happy with taking out 10, 15, or 20 pips on a trade but in my mind, in order to take out 20 pips profit, you have to risk 10, 15, or 20 pips. You also have to overcome the broker spread and the slippage, and so in that example, you have to be 80 to 90% correct over time in order to come out a winner. Frankly, that’s just not sustainable. That’s why I’m able to come out with a lower winning to losing ratio. Most months I lose more than 50% of my trades and still come out with 500 plus pips in the green. And that’s because my take profit or my strategy is designed to take advantage and capitalize on the really big moves that occur in most of the markets. I’m not interested in taking out the 10 or 15 pips in a move.

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Below is a typical month’s performance for me:

In this month, we took 29 trades and lost 16 of them. That means I was incorrect most of the time. In fact, this was only a 44% win/loss ratio where I won 44% of the time and I lost 56% of the time. However, I still came out with a profit of 653 pips. What does this mean in terms of cash in the bank? Now, the value of a pip will change for each one of these currency pairs but by and large, it’s roughly around $10 per pip. If you were to place a one-lock trade and you made 653 pips in that month, you would have made $6,530 during this trading period, just to put this in perspective. If you had a $50,000 account and you were trading one lot for each of these trades, you would have made $6,530 which would Page 60 of 83

be a little over a 12% return. Similarly, if you had a $5,000 account and instead of one lot, you were trading 0.1, also known as a mini lot, you would have made $653 or still 12% in a given month. My target is to make three to five percent a month. And I’ve been fortunate enough to do a lot better than that for many months in a row now. However, there will be periods where I don’t make a dime for 3-4 months. I may even lose for several months in a row. This happens when the market goes into a period of low volatility. There’s nothing you can do about it. You just have to keep trading, keep your risk low, and wait it out. Most people tend to give up during these periods, but it is important to know that it doesn’t last forever. Investments don’t go up in a straight line. Big funds of Wall Street go through 6-18 month losing periods before pulling out ahead again. That’s just how it works. Luckily, my strategy doesn’t go through such long periods of no growth, but you should be prepared for several months where you break even or lose. Just keep reminding yourself that a small winning streak can make up for months of losses.

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On average, I make about 300-500 pips per month during the good times and lose 100-200 pips during the bad times. Your income is going to vary based on your risk. The more you risk the bigger the winners. However, the losing trades will also be harder to stomach. Everyone will make different decisions. No two trading accounts look the same. How many lots to put on a trade and what kind of risk you use will affect your results. You need to make an informed decision based on your own financial situation and risk appetite. When in doubt, risk 0.5% of your trading account per trade. After 12 months of trading, you can decide, based on experience, which level of risk is appropriate for you. Hopefully, I have hammered home the uncomfortable truth. Managing risk and preparing for losses is the most important part of trading. Having said that, in my professional opinion, being able to lose more than you win yet still come out with consistent profits is the holy grail to trading. You don’t have to worry about being wrong or making a mistake. You don’t have to worry about a string of losing trades. You simply know that this is part of the business you are in. And understanding that could give you true lifelong financial freedom. So how do you manage your risk? Page 62 of 83

Quite simply, I use a risk calculator from a website called MyFXBook.com. It is incredibly simple. Here are some basic instructions on how to use it. Hopefully, they don’t change the website as soon as this document gets published. On their homepage, go to “Forex calculators.”

On the very next page, click on “Position Size Calculator” towards the bottom.

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Once you click on that, you’ll see this screen:

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Simply follow the instructions and you’ll be able to control exactly how much you can lose on any given trade. Proper risk management is the key to your success.

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CHAPTER 9

Live Q&A Session At this point, you probably still have some questions. That’s why I have included a transcript of the Q&A session we did with hundreds of traders. Some of it I answered by sharing my screen and demonstrating it. Unfortunately, I don’t have the luxury of doing that here. However, I still believe you will find some value in it. Enjoy!

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--- TRANSCRIPTION STARTS HERE ---

Memit says, “Would someone please mention money management for a $5,000 account?” Mark:

This is a very overlooked component of trading. I’m

glad somebody brought it up. Thank you for addressing that. I’m going to take you to a link. This is imbedded on my daily emails. I think a lot of people overlook it. here’s a whole resource section even below the email that’s sent out every day with a link to a broker if you’re looking for one. If you’re looking to trade gold or other things, there’s a link to a broker. There are videos, access to the members area. One of the links we have here is a link to a position size calculator. Money management, as I indicated, is one of the most overlooked aspects of trading and probably the most important that will really separate you from the rest of the people who are In fact, there was somebody in our Facebook group who said he was taking 5% risk per trade. He was making a bundle on some of my trades but one of the months, I think I lost eight out of ten trades, in which case he would have lost 40% of his account if he risked 5% on a single trade, even though I was a big winner by the end of the month. Page 67 of 83

You don’t want to take those big of risks. I advocate anywhere from half a percent to 1%. If I’m making 500 pips a month, you’re still going to make eight to 10%, taking half percent risks. The turtle wins the race and it’s best to take very small risks on an individual trade. Sometimes in my email I’ll get really excited about a trade and I’ll say, “This is a really good trade and if you want to expand your risk slightly, that’s up to you,” but let me give you an example of how you should be using a position size calculator to calculate the risk on every single trade you make. There should never be a question or an excuse that you didn’t allocate the right risk. This is at the position size calculator [refer to MyFXBook section in document]. You can do a calculation in a lot of different currencies depending on where your account is denominated. In this case, I’m just going to assume the US dollar. Let’s just assume that this person has a $5,000 account size. I typically advocate you take a half percent risk, so that would be 0.5 in this calculator. Let’s say I put through a trade and the risk was 58 pips. We were looking at the euro versus the yen. Let’s say you got a trade tonight, buy the euro/yen with the risk of 58 pips on a $5,000 account and you wanted to risk only half a percent. If you hit this calculate button, it would then show you the

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number of lots that you could put in your $5,000 account and equate it to a half a percent risk. Let’s say we risked the 58 pips, the world came to an end, we were completely wrong, our stop loss got triggered. Guess what? The worst case scenario is you risk half a percent or $25 of your account on a given trade. That is how you use this position size calculator to calculate your risk. Again, this is pretty important for a lot of people because sometimes I’ll risk 50 pips, sometimes 75 pips, and I’ll get emails like, “I can’t take 75 pips on an individual trade on a risk.” The thing is, it doesn’t matter if it’s 75 or 175, or 7.5, if you keep your risk to the same percentage, you’ll always be risking the same. All you’re doing is actually reducing your lot size. If the pips go higher and you still want to risk the same, just the amount that you’ll do is lower. I don’t know if that’s clear to everybody.

Don says, “Can you recommend a broker?” Mark: Yes, Don, yes Dennis. You can email [email protected] to ask for broker recommendations. “Please how do you calculate your take profit?”

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Mark: Okay. That’s a bit of an amorphous answer to that because it’s really a function of the market environment. If I’m in a market environment that’s less volatile and there’s less flowing from one level to the other, necessarily my take profits are going to be smaller but it’s also based on the chart pattern I’m looking at and based on my assessment of that trade. By definition, when you see a double top, it has the word “top” in it so I expect that market to go down for days and perhaps weeks, and have an extended move. In the case of gold, I saw that double top and this key reversal, I snuck in my trade to sell it at 1152. Then I put the take profit at or near where there was a previous support area. Typically, what I like to do is see the market unfold every day and then adjust my take profit. If I get a look from the market that tells me that that move is over for the interim, then that will adjust my take profit. In this case, I put in the take profit at or near the old support level. It turns out I could have taken out a lot more out of this move, but you can see it got a little bit messy after that. The short answer is “it depends.” It depends on the market environment. It depends on the strength of the chart pattern that I’m looking at and my confidence in that pattern.

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Do you trade on non-farm payroll and big news?” from Janine. Mark:

I don’t trade based on the news. I don’t trade the news.

The way I view news is that it should support whatever the pattern or the phase of the market that I’m looking at so I look at the way news affects the market, not the other way around where I’m looking to trade directly off that news.

Edwin says, “Do you sometimes close a trade prematurely before the take profit?” Mark: That would be based on market action. If I see something that looks like is adverse market action, there was something we were in a trade a couple days ago, what I like to do is I like to see trades explode out of my pending order. It’s a function of both assessing the environment, assessing the phase and condition, assessing the pattern. Then I like the price action to support what I’m looking at. Again, when I see a reversal or an inside day bar, my expectation is prices should explode from one level to the other. If prices kind of explode out of there and then they just sit and they don’t seem to be getting much energy, then I might advise you to get out of the trade and reassess. Page 71 of 83

Peter: All right. Zoran says, “My name is Zoran. My account has grown by 200% in two months.” Wow, that’s amazing, Zoran. You may want to dial down your risk a little bit there.

“Are there any specific trading platforms to trade from to match Mark’s trades?” Mark: It’s really not important which platform you use. You can take my trades and put it into any broker platform you’re using. Most people are using the MetaTrader 4 platforms for currency trades. The trading platform is really not important. You might be referring to the charting packages that I look at. Frankly, I use a couple of free charting packages. As you can see, I don’t need anything fancy. I don’t need to buy any software program that’s going to be a diagnostics. I don’t overlay it with any indicators, whether it be Stochastics, moving averages, or Heikin-Ashi, or anything fancy. I just look at a clean or naked chart. I use Ninja Trader. You can demo it. You can download a free demo or I use something on the Internet called NetDania. I think it’s out of Denmark, NetDania.com.

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Shawn says, “How precise are you with the inside day bars? Do they need to be exactly within the high or low of the previous day bar?” Mark:Not really. If it’s a narrow range day, meaning that the high and low is much narrower than the preceding three to four trading days, it can also pretty much qualify as either a narrow range bar or an inside day bar.

Miguel says, “What is your time frame?” Mark: I look at the long-term charts and I do that because I want to see the big picture. Again, remember my strategy objective is to try and take out the bigger moves that occur in the market. I’m not looking for intraday moves of 20 to 30 pips. I’m either stupid or greedy but I’m looking for the bigger trades, the bigger moves that really occur in the market. I like to stand back and see the forest for the trees. I drill it down from monthly, weekly, and pretty much trade on a daily timeframe. My emails are usually based on the daily chart analysis, so again, I’m looking at the longer term time frames to exact the bigger moves, which I’m going for the quality of trades, not quantity. It typically works out I guess 20 to 30 trades a month.

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“How do I lock in profits in a longer running trade?” Mark: Glenn, you just move your stop loss.

Trevor says, “Is this for real?” Mark: Absolutely, Trevor, this is for real. This is not bots.

Edwin says, “What is the drawdown percentage?” Mark:

Again, it’s hard to allude to any one individual trading

account because your risk parameters are going to be different from the person sitting next to you so it’s hard to address that. All I can say is that I’ve been well in the pip column, 500 pips plus for many, many months on end. There will be strings of losses within those months. One month, I lost eight of ten trades in a string, so depending on what your risk was in that drawdown, you’ll have a certain drawdown percentage, which will be different from somebody else who used a lower or higher risk allocation. It’s hard to address drawdown or percentages on an individual basis. Everyone’s results are going to be different. Some are going to take all of the trades. Some are going to cherry pick trades. Some are

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going to pick half percent risk of trades. Some are going to do 2% risk per trade. I can’t really speak to percent, specific performances.

John says, “What account leverage does Mark use or suggest?” Mark:

Again, by and large, I suggest that you only risk half a

percent per trade. I went on the position size calculator to show you how you do that. Sometimes I’ll tell you I really like one trade over another and if you want to bump your risk to a percent or a percent and a half, that’s up to you but you can make an awful lot of money just risking half a percent a month. Remember the turtle wins the race, and where that becomes really important is where you see a string of losers come through. I promise you they will. While my focus is on the big winners, sometimes my approach is a probing one. Sometimes I’ll take two or three losses trying to probe a market before I tag into that 300 or 500 pip move. You need to be positioned adequately to endure that so if you get a string of three or five, or seven trades that don’t work out, you don’t want to have your risk so high that you’re going to risk a big piece of your account at any one time. Half a percent to one percent trade is plenty as a general allocation.

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Tom says, “How many pips above the bars do you place your entry?” Mark: Typically, just one or two. I’m looking for the market to confirm the move so I’m looking for the market to take out the previous session high or low, depending on if I’m looking to go long or short.

Dan says, “You have a lot of small wins though.” He’s talking about that typical month you showed. He said, “There are a lot of small wins as well.” Mark: As I indicated, I’m only looking for one or two big wins of 300 plus pips a month or more. If I can string together two trades with 300 plus pips, that 600 pips, then if I’m making 40 or 60 pips on other trades and losing 50 and 60 pips on others, at the end of the month, I’m looking to be an overall winner. That’s the name of the game. I don’t know when those big trades will come. Will it be in the beginning of the month, middle, the end? Sometimes, you’ll come on, you’ll become a new trader, and you’ll have missed the trades that came just before you, and you might have to wait another month until you tag another trade.

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Again, a lot of that is market dependent. As I always say to my clients, I can only do as well as the market environment will allow. This is a very robust environment and I’ve done very well for an extended period of time and hope to do that. My strategy has proved itself on a long-term timeframe but again, if you come in, it may not work that way for another 30 or 40 days, or two months, or whenever that is. I don’t really care what my win/loss ratio is, frankly. I just care about the outcome.

Edwin says, “What if there is major data to be released? Do you look at economic data?” Mark:

I don’t look at the data per se, but if I’m aware that, for

instance, there’s an FOMC meeting, Federal Open Market Committee meeting on interest rates or maybe non-farm payrolls, I may elect to stay out of a trade that is questionable or whatnot. As I indicated, to me the news or events should only support what I’m looking at. If I’m looking at a double bottom, by definition, that market has bottomed and it wants to go up. How it goes up and when it goes up and how it gets there, that’s always the unknown but when I see that pattern, I know that.

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“Usually you just look at price, right?” Mark:

Pretty much, yes, because price really discounts the

information so when we’re looking at price and we’re looking at patterns, my thesis and my philosophy is that the market is well ahead of the information. It’s always interesting how you’ll hear on the BBC or CNN or whatever your local news program is some extraordinary news event that catapulted the market down 500 points today, but actually there was probably a pattern two or three weeks or two or three months preceding that that gave us an insight to that market fall well ahead of the event. People in this group are well in the know, well ahead of the events so when these big moves happen, we’re already positioned well ahead of those big moves.

Ernest says, “I have £2,000 in my account. How much risk can I take per trade?” Mark: Ernest, the risk you should take per trade is completely up to you, but I would recommend between £10 and £20 per trade to risk if you have a £2,000 account. I think the answer is always the same, whether you have a $5,000 account or a £2,000 account. If you take half a percent risk, it’s half a percent of whatever your account balance is and that profit Page 78 of 83

calculator will calculate based on your balance. That’s part of the inputted values. You put your account value in there, you put the risk that you want to take on your account balance, you put the number of pips that we’re going to risk, and it will automatically spit out a position size that is commensurate with whatever account balance you’re trading with, whether it be £2,000 or $500,000.

Rich says, “If you’re in the UK, a spread betting account is tax free and tells you your trades in pounds and not lots.” Mark: Yes, it does make it easier, Rich. Got to watch out for some of the spread betting firms, though. I’ve seen some of them do some unethical stuff so just make sure you’re with the right ones.

How long does it take you to analyze the markets every day? Mark: I pretty much know what I’m looking for. Like I said, I have about 30 instruments I can go through fairly quickly. It usually takes something to meet my eye before I zone in on something, and I can pretty much zone in on these patterns and trends pretty quickly, and then I like to look under the hood. It depends. Page 79 of 83

Sometimes your mind and your eye will trick you and you think you see something, and then I like to really look under the hood and peel it back. I do a lot of visualization in what I do so I try and project that if my pending order gets elected. I like to see that the price could actually go from one level to the other. I like to see within because the market actually has a structure. It’s not as random as people think. I like to see. It’s just a visualization process. It doesn’t take me very long, just because I know what I’m looking for but once I zone in, I like to digest it. It really depends what’s going on in the environment and the complexity of the environment, and whatnot. It’s really I’d say 15 minutes to 30 minutes at the end of the day to hone in on really select opportunities, but I know what I’m looking for.

Melinda says, “Just to confirm, your entries expire in 24 hours?” Mark: That’s a good question. Yes, every day you’ll get an order in the form, typically a pending order or a resting order that’s designed to be triggered at a certain point. Let’s say the market doesn’t confirm my analysis and the order does not get triggered. Then the idea is to cancel it at or near the Page 80 of 83

beginning of the next session. The likelihood is now the market is trading well away from that pending order, it’s not valid, and then we’re going to look at another trade setup going into the next session, and you should just cancel it. By the time you get the next email or at the end of the daily session, you should look to just cancel that from your trading platform.

Shawn says, “Can you recommend a Forex spread betting account for the UK?” Mark: I know you’ve asked that a lot of times, Shawn. Sorry I’ve not got to you with that answer yet. I can’t because I don’t do spread betting.

Janine says, “What’s your take on Heikin-Ashi?” Mark: For those who don’t know, Heikin-Ashi is just another way of looking at the markets. They’re intriguing. I can’t pretend to know a lot about them. I do check them, especially they’re helpful if you’re in a prolonged trend, but I really reduce it down to the very simplistic things that I look at which is direction, price action, price patterns, and then couple it with my pending order strategy. It seems to work insanely well so I’m not trying to fix what isn’t broke. There’s many different ways and styles of analyzing the Page 81 of 83

market. I don’t disparage or uphold any. If it works for you, great; I know what works for me. I developed something that is authentic to what I look for in terms of the objectives I’m trying to target and it works very well. Whatever I’ve laid out for you today is exactly what I do day over day and when you join, you’ll get a feeling for it very quickly, and then you’ll be able to be empowered to do this on your own. This is really designed to empower you into a style of trading that is very simple but very powerful and very effective.

Hussein says, “All pending orders not triggered should be cancelled before the opening of the next daily session, 24 hours from now. How long do you keep the trade on – until the target or five PM or eight PM?” Mark: Yes, Hussein, if the trade has been triggered, you keep that trade open until the market tells you otherwise. You don’t just close out a trade after 24 hours. If the pending order isn’t triggered, if the trade is not triggered, then you cancel the order, so the trade wasn’t entered. It will be very clear once you start taking the trades on a regular basis that some trades don’t get triggered. Page 82 of 83

Then you just take that order off and delete it on whatever platform you use. You can even on some platforms say, “Hey, keep this order live for 24 hours,” so it can automatically cancel. I don’t know how to do that. I’ve not done that before but I know some brokers can do that.

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