the bankers edge

8/10/2019 The Bankers Edge

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The Bankers Edge

By Jimmy Young

All content in this document is copyright 2006-2007 Jimmy Young. All rightsreserved. No portion of this document may be reproduced in any form without priorexpress written consent. The EURUSDTRADER educational trading system iscopyright 2006-2007 Jimmy Young. All rights reserved.Publication Date of The Bankers Edge - January 1st2007 Volume 1 Issue 2

Web site: www.eurusdtrader.caEmail: [email protected]

Important Notice

Jimmy Youngs EURUSDTRADER system and trading strategies referenced in this guide book are analyticaltools only and are not intended to replace individual research or investment advice from a licensedprofessional. Unique experiences and past performances do not guarantee future results. Testimonials arenot representative of all clients.

Trading in currencies is not suitable for all investors. The possibility exists that you could sustain a loss ofsome or all of your investment and therefore you should not invest money that you cannot afford to lose.Always use a demo trading account when practicing new trading systems. You should be aware of all therisks associated with foreign exchange trading and seek advice from an independent financial advisorbefore trading. We recommend that you consult the appropriate professional advisor, including your

accountants, attorneys, brokers and investment and financial advisors, to obtain additional and morecomplete information about investing and prior to trading.

Jimmy Young makes no representations that any party will or is likely to achieve profits or losses similarto the results or examples used for educational, illustrative or informational purposes. Hypothetical orsimulated results do not represent actual trading and have limitations. They are designed with hindsightand thus, can be biased to select favorable performance results. Also, since the trades may not have beenexecuted, the results may have under or over compensated for certain factors such as the lack of marketliquidity. Examples of trades and investment strategies do not include the costs of interest and dividendsand other expenses. Keep in mind that these costs affect whether an investment is profitable.

This trading guide is based on the information from sources which are considered reliable, Jimmy Youngand his consultants do not represent, warrant or guarantee, expressly or implied, that the informationcontained herein is complete or accurate. Ad-additionally, no responsibility is accepted to inform you ofany matter that subsequently comes to its notice, which may affect any of the information contained inthis document. Any links provided, or URL mentioned to other server sites are offered as a matter of

convenience and in no way are meant to imply that Jimmy Young endorses, sponsors, promotes, or isaffiliated with the owners of or participants in those sites, or endorses any information contained on thosesites unless expressly stated.

Jimmy Young specifically disclaims any liability, whether based in contract, tort, and strict liability orotherwise, for any direct, indirect, incidental, consequential, or special damages arising out of or in anyway connected with access to or use of this trading manual including liability in connection with mistakesor omissions.

The Bankers Edge by Jimmy Young - Copyright 2006-2007 - www.eurusdtrader.ca 1

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Table of Contents

Table of Contents _____________________________________________2

How to use the Home Study material ______________________________4

CD Lessons________________________________________________________4

Manual ___________________________________________________________4

Members Only Website_______________________________________________4

Introduction _________________________________________________5

EURUSDTRADER System ________________________________________6

Technicals_________________________________________________________6

Fundamentals______________________________________________________6

Market Sentiment___________________________________________________6

Part One Technical Trades _____________________________________7

Why Time Based Technical Indicators are Fundamentally Flawed ______________7

The 60 Period Simple Moving Average___________________________________8

Momentum & Confirmation Trading _____________________________________9

What is Confirmation? ______________________________________________13

Identifying a new High or Low for the day_______________________________13

Getting Tradable Signals Later in the Day _______________________________15

What is a Swing High or a Swing Low? _________________________________16

How to Draw Swing Highs and Lows on the 5-Minute EURUSD Chart __________16

GBP/USD and momentum/confirmation_________________________________17

Rules for GBPUSD momentum/confirmation trades________________________17

Taking profits on GBPUSD momentum / confirmation trades ________________20

Stop Loss Strategy for Momentum/Confirmation Trades ____________________21

Example of buy trade being stopped out (worse case) _____________________22

Jimmys Bands ______________________________________________24

Jimmys Bands on Big Days __________________________________________27

Determining if it is a Range Day or Big Day______________________________28

Range Day Action Plan ______________________________________________28

Big Day Action Plan ________________________________________________28

Is Price Action Up, Down, or Neutral? __________________________________28

Strategy for Taking Profits ___________________________________________28

Range Trading the EURUSD Pair with Jimmys Bands ______________________29

Key points about EURUSD statistics____________________________________29

Stop loss strategy for EURUSD Range Trades ____________________________30

Example of a stop loss that is triggered_________________________________31



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The Right Currency Pair _____________________________________________32

Being Aware of Upcoming News_______________________________________33

The Bigger Picture on Direction _______________________________________34

Setting up the 4 Hour Chart__________________________________________35

Identifying a Change in Trend on the 4 Hour Chart Early On ________________37

Part Two News Trades _______________________________________43

Why News Trading Works____________________________________________43

Economic Indicators (News List) ______________________________________45

Select Economic Indicators __________________________________________46

Key Points of Key Tradable Indicators __________________________________47

Why Interest Rates?________________________________________________47

How To Profit From Interest Rates & Anticipated Rate Changes ______________48

Inflation _________________________________________________________49

How To Profit From Inflation Changes __________________________________49

The Economy _____________________________________________________50

The Key Cyclical Economic Indicators __________________________________50

How To Trade GDP and Employment Releases____________________________51

How To Trade Second Tier Economic Indicators __________________________51

Structural Indicators _______________________________________________51

Historical Track Record for Key Indicators _______________________________53

Tracking the Unsuccessful Key Indicator Trades __________________________54

High Volatility & Price Spikes _________________________________________59

There are 3 ways to trade key releases_________________________________59

Reverting to Technicals When a Release is Close to Forecast ________________60

When News Is Tradable _____________________________________________63

Tracking Trades that Succeed & Fail for Future Reference___________________64

How to Trade Tradable News _________________________________________65

Getting in after the initial spike immediately following the release ____________67

Getting in Using a Specific Risk / Reward Calculation ______________________67

Getting in Using a Fibonacci Retracement _______________________________71

Correlations ______________________________________________________73

Trade or No Trade _________________________________________________73

Courage Under Stressful Conditions____________________________________73

Glossary of Key Fundamental Terms______________________________76



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How to use the Home Study material

CD Lessons

The CDs contain a series of live presentations given to students one-on-one and tosmall groups of traders. Please view the movies on the CD by inserting them into

your PCs CD ROM drive. The interactive lessons contained in the CDs are organizedinto different categories for easy access and review. Watch them several times.

Manual

After viewing the CD lessons, use this manual to provide a quick reference and aidmemory to the essential points of this system. The booklet is intended as asupplement to the services offered by the website, specifically the News TraderWeekly and the Daily Review/Preview broadcast.

Members Only Website

Login to the Members only section of our website at www.eurusdtrader.caand learnfrom the archive of daily Review/Previews, trades examples, lessons and guesttraders contributions to the knowledge base of Jimmys EURUSDTRADER System.You will find Jimmys bands, the daily support and resistance levels for the EUR/USDpair, published on the website as well. To login use your email address and passwordyou used when you accessed the purchasing section of the website. If you requireassistance please contact [email protected]


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Introduction

This trading system has been developed within the realities of todays market placeand stands up to the rigors of statistical analysis and on-going superior tradeperformance. You will learn the tools to enable you to make trade decisions on yourown and not rely on signal services or trade call/chat rooms to be profitable.

It all starts with what kind of a day will it be today. EURUSDTRADER systematicallydecides whether it will be a range day or a big day. This is important because ittells the trader what kind of trades to look for. Clearly, on a range day the tradershould be looking for the market to stay in a range and therefore should be relativelyquick to take profit (because the market is not anticipated to go too far) and also tothink about buying support and selling resistance the idea being the same if theview is the market will not move to far today then once it has moved to support orresistance it is likely to stop and reverse and remain in the expected trading range.

On a big day the trader is directed to look for the bigger moves and consequently thebigger profits. Range trading strategies like buying support and selling resistance is

ignored completely because these strategies are out of sync with the type of dayexpected (big day). The system quantifies the type of day anticipated and thenqualifies the type of day anticipated; meaning sometimes the numbers lie (quantifiedapproach) and the system will override the quantified approach and state why itthinks the qualified approach is more logical and more statistically probable thanwhat the numbers indicate.

What about if the system is wrong in deciding what type of day it will be?EURUSDTRADER has a stated and specific maximum stop loss price on every tradethe system triggers. Traders can use discretion in moving stops as conditionsdictate but under no circumstances should the risk on the trade be increased(moving the stop in such a way as to take more of a loss in the event the tradefails).

What about taking profits? The EURUSDTRADER mantra is profits take care ofthemselves but losses dont. That is why the system focuses on providing anintelligent stop on every trade that is reasonably close by and also far enough awayto give the trade a good chance to be successful. Securing profits on trades is acase-by-case decision and no two trades are exactly the same. We will discuss manyways to take profits and traders are expected to adapt the right profit tradingstrategy that suits the particular trade as well as the individual traders trading styleand trading plan. No trading system will succeed without good money management.

To increase your chances of success to near certainty requires knowledge; acquiringknowledge takes hard work, study, dedication and focus. Compile your knowledge

base and do not take any shortcuts. You can be successful but it may take sometime to master your trading skills. Most of it will be up to you and your level ofdevotion.



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EURUSDTRADER System

The EURUSDTRADER system is not just a technical trading system, not just afundamental trading system, and it is not a system that focuses exclusively onmarket sentiment. The system considers all of these factors simultaneously andprovides systematic guidance on what and how to trade on a particular day.

Great traders concurrently consider all the key factors technical, fundamental, andsentiment before entering a trade. They carefully choose the most importantpieces of each factor and disregard all the unnecessary parts that cloud their mindand divert it from the essential; the essential is finding the trade that will work rightnow. They have a systematic strategy for entering and exiting trades, whilereserving the right to change their mind based upon the most current price action,fundamental information and market sentiment. The bottom line is having asystematic approach is key but flexibility is equally important in a dynamic marketsuch as foreign exchange.

EURUSDTRADER focuses on what it believes are the essential technical, fundamentaland market sentiment factors. It first presents them in easy to understand language

and then systematizes them into a complete trading system. The hierarchy is clear the forex market is technically driven in the absence of news. When news is releasedthe market estimates the value of the news and immediately adjusts price toreflect the estimated value of the news.

At this new news adjusted price level the technicals reassert themselves anddominate trading until the next important news is released. At which point theprocess of pricing in the news re-occurs, followed by a return to the technicals onceagain. This cycle of technicals / news / adjustment / technicals / news / adjustmentis the most important dynamic of currency trading.

Technicals

Computers have expanded the technical playing field tremendously. Tradestation, forexample, has 1,400 technical indicators. The EURUSDTRADER system uses just twovery basic technical indicators momentum, support and resistance. It identifieswhat it believes to be the best trade opportunities and provides clear, precisestrategy for profiting from the trade opportunities identified.

Fundamentals

Medium-term traders need to know whats going on in the market. A trader couldhave the ideal set-up and a faultless entry point, and still get crushed by a statementby a key government official or a key economic indicator that significantly missesforecast. The EURUSDTRADER system trades a proprietary list of key re-occurringnews events that have a clear history of causing predictable price moves when thenews is a surprise. It also spotlights how to profit from unscheduled news surprises.

Market Sentiment

Foreign exchange rates have been determined by the net effect of people buying andselling currencies for the past 35 years. Due to crowd behavior the currenciesthemselves tend to fluctuate back and forth between an overbought condition and anoversold condition, as the crowd continually overacts to the latest fad. Consequently,price tends to reflect sentiment as much as or more so than the implicit fundamentalvalue. EURUSDTRADER recognizes this and makes market sentiment a key tradedecision factor.



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Part One Technical Trades

Why Time Based Technical Indicators are Fundamentally Flawed

The knock I have on new FOREX traders these days is they are too scientific. Theyignore the leading indicators (fundamentals) and the obvious (simple up and downprice movement). Basically, if it doesnt require a scientific calculator, they dontfocus on it. Here is what Einstein would say We must learn to differentiate clearlythe fundamentally important, that which is really basic, from that which isdispensable, and to turn aside from everything else, from the multitude of things

which clutter up the mind and divert it from the essential. In currency trading newnews is fundamentally important and how the market responds to it (the priceaction that follows) is basic. Everything else, like Stochastic, Relative Strength,MACD, Bollinger bands etc., is clutter.

These exotic technical indicators all have an additional common denominator TIME. I have no use for time in any of my FOREX trading analysis.

First of all, the FOREX market is only volatile between the European opening and theEuropean close. There are exceptions such as extended price action on major U.S.economic release days, where the fun lasts into the New York afternoon, but mostdays the market is dead by New York lunchtime. The lack of price movementbetween say 12pm and 12am generates all kinds of technical trading signals.Common sense the price is not moving because nobody is trading what can thesesignals be possibly signaling? Suggestion make sure your technical signals arereflecting price action and not the lack of it.

A second serious flaw in time / price analysis is the impact of derivatives on theFOREX market that has only come about in the last 15 years. Its key to realize themomentum based technical indicators were developed during the 1970s and 1980BEFORE derivatives impacted the FOREX market. So for example, in 1980 whenBoeing Aircraft needed to sell 500 million GBPUSD they called a Bank and said sell500 Pounds. The first couple of hundred the bank sold would be for the tradersaccount and a few key players in the trading room. Next would come the clientsinterest. The trader would sell 300 and if the price seemed offered he would sell thefull 500. At that point the client is called and given a fill; the average sale price onthe 500 sold on behalf of the client. Now comes the good part.

As soon as the salesman is done reporting the fill to the client the trader covers thebanks 200 short position, sold at designer prices before the clients sale, at ahuge profit. The trader may buy an extra 200 to boot, depending upon how it feltcovering the initial 200. As you can imagine given this scenario, which was a daily

ritual, independent traders, not privy to the banks doings, but using technicalindicators did very well. The old MACD would get them in on the initial selling andMACD or any other indicator would alert them when the tide had shifted.

Fast forward to 2006. Boeing has a FOREX expert handling its foreign exchangebusiness. Boeing will be receiving 500 GBPUSD in six weeks time; the related importtransaction has a reference rate of 1.8800.

The Boeing person calls a Bank salesman and asks what the market is doing inPounds. The Bank salesman and the Boeing FX expert have a conversation and thesalesman gets the feeling Boeing has Pounds to sell but is reluctant to do so because



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their view is bullish on Pounds and perhaps they can wait for a higher rate. Thiswould suit the salesman perfectly; in 2006 because of transparency and competitionthe bank cant make any real money on a spot transaction anyway. So the salesmangoes into his act. He suggests Boeing writes a double knockout option. It works likethis. Boeing sells the right to the bank to buy 500 GBPUSD at 1.8900 in six weekstime, provided GBPUSD trades at 1.9000 (knock in) and does not trade at 1.9500(knockout) or 1.8600 (knockout).

The bank will pay $3,750,000.00 for the option; thats the equivalent of 75 GBPUSDpoints. Lets look at possible outcomes for Boeing. 1) Best case. The GBPUSD goes to1.9501; the option gets knocked out, Boeing sells the Pounds at 1.9500; earns$3,750,000 for the option plus $35,000,000 on the sale of the Pounds (700 points on500 million Pounds). 2) Worst case. Pound declines to 1.8600; option gets knockedout; Boeing sells the Pounds at 1.8600; add back the 75 points earned on theoption Boeing sold the Pounds at 1.8675; just $6,250,000 less than 1.8800 salewould have yielded. Whats key is expert gets to trade his opinion for a low cost andhuge upside potential. Now lets think about how this derivative contract will impactthe spot GBPUSD market.

Lets say five and a half weeks down the road the pound reaches 1.9475. At this pointthe bank has a profit of $25,000,00 on the option. However if GBPUSD trades at

1.9501, the bank has a loss of $3,750,000. Conversely, Boeing at 1.9475 has a profitof $8,750,000. At 1.9501 however Boeing has a profit of $38,750,000. It should beobvious that the bank has a hell of a lot of incentive to stop the Pound from reaching1.9501 and it should be equally obvious that Boeing has a lot of incentive to makethe Pound trade at 1.9501. This is a classic option barrier war in the making. Therewill be a winner and a loser of the war. One thing for certain, the bank and Boeingwill be fighting out a private battle that only they know about.

Conclusion

Most of the time based technical indicators came about from the price action datacollected by the IMM in Chicago in the late 1970s and 1980s. Before derivative

FOREX products these indicators proved very useful in FOREX trading. Todayhowever, I believe they give as many wrong signals as right signals because theforces in the market today are completely different than what they were 20 yearsago, yet these indicators remain the same. I believe a trader can do much better ifthey forget about time based technical indicators entirely and focus on the newnews and how the market reacts to it. This requires a basic understanding of FOREXfundamentals and simple chart reading techniques.

The 60 Period Simple Moving Average

Momentum is one of our leading indicators when taking a trade. To make it easier tospot momentum we put a 10-point band around the 60-period simple movingaverage (60 SMA). The band is nothing more than a line that is 10 points above the60 SMA and 10 points below the 60 SMA. So if the 60 SMA is 1.2698, the bandabove is at 1.2708 and the band below is at 1.2688. A number of different chartingsoftware can be enabled with 10-point envelopes around the 60 SMA (there is avideo on the CD and on the website that covers the setup on a free charting servicefrom netdania.com)

Keep in mind we are looking at the 60 SMA to find momentum only during thecurrencys specific hours for taking trades (outlined later). Outside the normal hoursfor finding trades the 60 SMA loses its relevance. As you can see on the following



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chart the 60 SMA band is calculated from simply adding and subtracting 10 pointsfrom the 60 SMA.

Momentum & Confirmation Trading

Momentum/Confirmation is among the best and simplest short-term trading systemsavailable to the retail trader. The first pre-requisite for a momentum/ confirmationtrade is momentum. We define momentum in terms of the direction of the

momentum. Identifying momentum starts with a 5-minute chart and a 60 periodsimple moving average.

Upward momentumis when price goes from 7 points or more below the 60-period simple moving average to 11 points above the moving average.

Downward momentumis when price goes from 7 points or more above the 60-period simple moving average to 11 points below the moving average.

At times it makes sense to tweak the momentum requirement. For example, if the 4-hour chart is giving a buy signal and the upward momentum starts at 6 points belowthe 60 SMA, it may make sense to consider it good momentum if all the otherrequirements to take the buy trade are in order.



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Find directional short-term price action with confirmation that the momentum will continue.When both momentum and confirmation exist, trades are signaled and taken.

Upward momentum (green arrow) not tradable

Took more than 24 bars to go from 7 points below the 60 SMAto 11 points above the 60 SMA

Downward momentum (red arrow) is tradable

Took less than 24 bars to go from 7 points above the 60 SMAto 11 points below the 60 SMA

Momentum has currency pair specific requirements (filters) that must be met formomentum to be tradable meaning for the momentum to be good enough to go tothe next step, which is finding the confirmation. If there are any momentum filtersfor a currency pair we will explain what they are when we cover the particularcurrency pair. One such momentum filter is found in the EURUSD pair -themomentum must occur within 24 five-minute bars or two hours.

When to take momentum/confirmation trades starts by defining what the trading dayis on a 24-hour basis. For the EURUSDTRADER system the trading day is starting at5pm Eastern Time and ending at 5pm Eastern Time. Mondays trading day starts at5pm on Friday and ends at 5pm on Monday.



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In the example below we are looking at the trading day for Friday September 29,2006. The trading day for the EURUSD pair starts at 5pm Eastern Time on Thursdayand goes to 5pm Eastern Time on Friday 24 hours.

The best time to trade a particular currency is during the morning hours of thecurrencys country. The best times are as follows:

For the Euro and Swiss franc 2am Eastern Time (ET) to 4am ET For the Pound 3am ET to 5am ET The US dollar 8am ET to 10am ET Canadian dollar 7am ET to 10am ET Aussie dollar 5pm ET to 10pm ET New Zealand dollar 5pm ET to 10pm ET

When to take short-term momentum/confirmation signals

European currencies (EUR, CHF & GBP), the US & CAD 2am ET to 10:30am ET For the Yen 7pm ET to 10:30am ET

For Aussie and Kiwi 5pm ET to 10:30am Eastern Time

For the European and America currencies in particular we look for short-termmomentum / confirmation signals between the hours of 2am Eastern Time and10:30am Eastern Time. Trades that are already open can be maintained andmanaged outside the 2am to 10:30am trade signal window.

Dont waste your time outside these hours (the exception is the 2:15pm Fed interestrate announcement once every six weeks, which is worth being around for). Zeroingin closer, the 2am European opening and soon thereafter is an excellent time toenter new trades in the euro. Just after 4:30am is an excellent time to find trades in



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the pound. And just after 8:30am and to a lesser extent just after 10am are the besttimes to find trades in the US dollar.

For European and America we take new trades between 2am and 10:30am ET

For Japan and yen we take new trades between 7pm and 10:30am ET



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For Aussie and New Zealand we take new trades between 5pm ET and 10:30am ET

Once we have tradable momentum and we are in the tradable time frame for theparticular currency pair, the final step is to identify confirmation a reason to thinkthe momentum will continue.

What is Confirmation?

There are many possible confirmation indicators a trader can use to confirm that the

momentum will continue. The EURUSDTRADER system focuses on just oneconfirmation

Breaking the high of the day making a new high for the day

Breaking the low of the day making a new low for the day

Identifying a new High or Low for the day

For the EURUSD pair we look for trades starting at 2:00am Eastern Time (ET).Our trading day begins at 5pm ET the day before. Therefore our look back period todetermine the high or low of the day so far is 5pm ET to 2am ET (assuming you areup and trading at 2am ET) if you are, you would be looking for trades as of 2am ET.



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The line indicating the high and low is redrawn each time a new high or low is made(for purposes of determining a break of the days high or a break of the days low asconfirmation for momentum - and the basis for taking a trade signal).

In the EURUSD example above, the new high for the day after 2am did not generatea trade signal because the upward momentum took more than 24 bars tomaterialize. The new low did generate a sell signal because the downwardmomentum did occur within 24 bars. As a good rule of thumb, the faster themomentum materializes the better. So for example, if the momentum occurs in

3 bars, that can be the basis for a very strong signal provided the confirmation anew high or new low occurs as well. In the example above the downwardmomentum took 8 bars thats good. The new low occurred on the ninth bar thisis also good.

EURUSD momentum/confirmation trades should however be taken when the 4 hourchart is indicating a clear upward or downward directional bias.

In terms of the number of points the EURUSD pair moves up and down from theopening it is usually much less than the GBPUSD pair and therefore the GBPUSD isgenerally preferred for momentum / confirmation trades. EURUSD is the preferredcurrency pair for range day trading (buying support and selling resistance) moreon that later.

To be clear, when we take our short-term momentum/confirmation trades

we anticipate immediate price action in the desired direction.



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Fast downward Momentum Tradable

Break below the low of the day morethan 30 points from the 60 SMA

Not tradable - so no trade istaken

The second momentum filter found in the EURUSD pair - The new low or new highfollowing tradable momentum must occur within 30 points of the 60-periodSMA. Above is an example of the second momentum filter on the EUR/USD pair.

The reason for this filter is that if the price moves more than 30 points from the 60SMA before the trade is taken then the momentum identified has already caused aprice move and the price move has occurred before we would enter the trade.

A key point to the EUR/USD pair is that both the momentum signal and theconfirmation must be tradable to generate a trade signal.

Getting Tradable Signals Later in the Day

Early in the day (2am to 5am) getting tradable signals in the EURUSD pair is verycommon and straightforward tradable momentum and a timely break of the low orhigh of the day. As the day wears on, the range for the day starts to widen andgetting through the high of the day or low of the day to confirm a momentum andtake a trade becomes more difficult.

One solution is to use the swing highs and swing lowsas confirmation.



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What is a Swing High or a Swing Low?

Swing highs and lows are highs and lows that occur during the trading day that arenot the actual high or low of the day, but clearly define turning points that hadoccurred during the day. The swing highs and swing lows occur inside the actual highand low for the day.

How to Draw Swing Highs and Lows on the 5-Minute EURUSD Chart

Starting at 5pm Eastern Time identify the first 20 point move up or downfrom a high point to a low point or a low point to a high point

Draw an arrow to show the swing. The swing will continue until a 20-pointmove in the opposite direction occurs. At that point you draw an arrow toindicate the new swing.

Breaking of a swing low with tradable momentum as in the following example is avalid trade signal. Because the swing lows and swing highs are not as powerful asbreaking the actual low or high of the day it makes sense to add an additional filter(in addition to the momentum requirement of course). The additional filter is two

consecutive closes below the swing low (see example next page) or two consecutivecloses above the swing high.



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GBP/USD and momentum/confirmation

We like to think of the GBPUSD as the EURUSD on steroids. The fact is the movesare much bigger in the GBPUSD and the profit potential much larger. The drawbackis the GBPUSD pair gives more false signals than the EURUSD pair.

For the GBPUSD we are not interested in selling resistance and buying support we

can do that with range trading with the EURUSD pair. We focus on momentum/confirmation trades in the GBPUSD pair because there are at least 3 100-pointmoves (from the opening) in the average week and on average half the time there isat least a 60 point move (from the opening).

When trading momentum / confirmation trades in the GBPUSD be prepared to dotwo trades each day. The first momentum confirmation signal the GBPUSD pair givesis not always the right one, if the first signal is wrong the loss is generally small.Allocate daily capital such that you will have enough daily trading capital left to takethe second GBPUSD momentum / confirmation signal in the event the first signalfails. Most days one of the first two signals results in a very significant price move.The loss on the first trade (if thats the case) will generally be more than offset bythe profit on the second trade.

Rules for GBPUSD momentum/confirmation trades

Momentum and confirmation less than 5 barso Just price penetration of both 60 SMA and high or low

Momentum and confirmation more than 4 bars and less than 25 barso One close beyond both the 60 SMA and the high or low

High of the day 1.8642

GBPUSD momentum confirmation

buy signal

90 points

GBPUSD 5 minute chart for Tuesday October 17 all day

Momentum / confirmationoccurred in 1 bar



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An example on the previous page of GBPUSD momentum and confirmation less than5 bars, it requires just price penetration of both 60 SMA and high or low to take atrade signal.

The GBPUSD requires momentum but does not have the 24 bar maximummomentum filter, instead the GBPUSD price has to close below the low or abovethe high for two consecutive barsto take the trade. This reduces the number offalse signals while not materially reducing the profit potential on the trade. The look

back period for the GBPUSD is 5pm ET to 2am ET, same as the EURUSD pair. Theband size is 10 points either side of the 60 SMA same as the EURUSD pair.

The GBPUSD also has the 30-point-beyond-the-60 SMA filter, same as the EURUSD.

Momentum and confirmation more than 4 bars and less than 25 bars requires oneclose beyond both the 60 SMA and the high or low as shown below.

GBPUSD 5 minute chart for Friday October 20 all day

Momentum / confirmation buy signal

60 points

Momentum / confirmation occurred in 10 barsFirst close above 60 SMA and the highwas 12 bars



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An example below of momentum and confirmation more than 24 bars, it requirestwo closes beyond both the 60 SMA and the high or low as seen below.

GBPUSD 5 minute chart for Thursday October 19

Momentum/ confirmation buy signal

Two close above the 60 SMA and the high

Momentum / confirmation occurred in 73 bars

Second close above 60 SMA and the high was 74 bars

95 points

The USDCHF pair below is traded exactly the same as GBPUSD same rules.

Buy Signal



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Taking profits on GBPUSD momentum / confirmation trades

Profits take care of themselves, loses dont.With the desire to optimize profits,most traders take profits much too soon. The best way to take profits is when themarket spikes in your favor. For GBPUSD momentum / confirmation trades anotherway to take profits is to use the 60 period SMA line once the trade has gone 25points beyond the signal price.

Another way to take profits is to use 10 points beyond the 60 period SMA line oncethe trade has gone 25 points beyond the signal price

GBPUSD 5 minute chart for Thursday October 26

Buy signal 1.8818

Take profit signal

Once price reaches 1.8843

Use one point below the 60 SMA line

as your stop loss / take profit signal

The downside is this will result in making 10 points less on the trade then you wouldusing the 60 SMA line itself, on the upside, it allows you more of a chance of makingmore profits in the event price turns around and makes another move in the desireddirection.

Remember to consider the key news close trades prior to key news and

re-establish the position if:

The news is as expected and the immediate price action does not change thetechnicals significantly

The news is favorable for the technical trade (when the technicals say yesand the news says yes thats the ideal trade scenario

The news is somewhat in disagreement with the technicals but the priceaction indicates the technicals are winning

The news is tradable opposite the technicals but the price doesnt sustain anymomentum in the direction indicated



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Stop Loss Strategy for Momentum/Confirmation Trades

Stop Loss on BUY momentum/confirmation trades - Start by setting the stop loss 10points below the low of the day at the time you entered into the buy trade.

GBPUSD 5 min Wednesday September 6

Momentum / confirmation

buy signal

See black broken line for stop loss price 10points below the initial low of the day

Stop loss price set 10 points below the initial low

Determining the Stop Loss Price

At the time the buy trade is entered the stop loss

loss is set 10 points below the low of the day

See red arrow and red line for initial low of

the day and that low indicated by red broken

line)

Initial low of the day at the time the buy trade was entered into

Determining the stop loss price when youre actively monitoring the buy trade. Worstcase will be:

The lesser of 10 points below the low at the time you entered the trade If price moves from near or above the top band to below the lower band in

less than 5 bars -Just price penetration of both 60 SMA and the low Price moves from near or above the top band to below the lower band in

more than 4 bars and less than 25 bars - one close beyond both the 60 SMAand the high or low

Price moves from near or above the top band to below the lower band inmore than 24 bars - two closes beyond both the 60 SMA and the high or low



22/81

Example of buy trade being stopped out (worse case)



buy signal

If you are watching the trade then the stop loss can be

determined using the same criteria as used for entering

the trade in reverse

Only difference is the worst case is 10 points

maximum

Stop loss price set 10 points below the initial low (worse case)

Initial low of the day at the time the buy trade was entered into

Example of watching this trade and then stopping yourself out based upon the priceaction.

Price goes from the top of the band through the bottom of the band in lessthan 24 bars, therefore the stop loss would be the lesser of 10 points belowthe low of the day.

First close below the initial low of the day determined at the time the buytrade was initiated.

See the chart on the following page.



23/81



buy signal

If you are watching the trade then the stop loss can be determined

using the same criteria as used for entering the trade in reverse

Only difference is the worst case is 10 points maximum

This buy trade

Would be closed one point below the initial low of the day

Because its the lesser of 10 point below the initial stop loss

price or a close below the low of the day

We choose one close below the low of the day because price

moved from the top of the band through the bottom of the band

and through the low of the day in more than 4 bars b ut less than

24 bars

Stop loss price set 10 points below the initial low (worse case)

Price closed one point below the initial low of the day

Trade would be closed out at that price

Initial low of the day at the

time the buy trade was entered into

Initial low

of the dayat the

time the

buy trade

was

entered

into



buy signal

Price closed one point below the initial low of the day

Trade would be closed out at that price

In addition to closing out thebuy trade the new sell signal

is taken as well

Therefore you sell twice

Once to close the buy trade

And once to open the sell

trade

The profit on the second trade usually more

than offsets the loss on the first trade

Stop losses on SELL trades would be determined in exactly the same way as stoplosses on BUY trades except put your stops above the initial high of the day insteadof the low.



24/81

Jimmys Bands

Jimmys Bands are a modern, fresh approach to defining intra-day support andresistance points. They are based upon looking at the actual highs and lows in acurrency pair each day for the past 6 years and statistically determining where theprice moves run out of steam that is the true resistance and support.

We identify a support range (S1, S2) for each currency pair and a resistance range(R1, R2) for each currency pair. The range is fairly narrow (at current EURUSDprices for example the range is 20 points) and allows for a very specific actionablestrategy.

The strategy is to sell when price gets into the resistance range and place a stop lossjust above the resistance range in the event the price action on a particular dayturns out to be an outlier an unusual day. Most days however are usual days andhence the resistance range and the support range hold and the price trend reversesallowing us to profit from selling in the resistance range and buying in the supportrange.

Jimmys support and resistance bands are based upon a very simple concept and

calculating the next days bands from the days opening price (the 5pm Eastern Timeprice) is straightforward and easy to do. Based upon statistical analysis it wasdetermined that the support and resistance bands for the EURUSD pair should beplaced 0.39% and 0.54% above and below the 5pm ET price. As of 5pm ET we canbegin the process of building our game plan for the next day. We can start bycalculating the support and resistance bands for tomorrow (all we need to makethese calculations is the 5pm price)

R2 = (Opening Price) + (Opening Price x 0.54%)R1 = (Opening Price) + (Opening Price x 0.39%)

S1 = (Opening Price) - (Opening Price x 0.39%)S2 = (Opening Price) - (Opening Price x 0.54%)

For those of you who need a mechanical approach the bands will serve you well. Andfor those of you that are creative there is one more step to consider. BecauseJimmys bands are calculated from the 5pm ET price it is possible that the price at4:55pm could have been 5 points different and hence Jimmys bands could have



25/81

been 5 points different. To make up for the fact that the bands have their limitationswe do the following:

If a recent high indicates that R2 should be a bit higher we move R2 to thehigher level (maximum 15 points and do this very sparingly)

If a recent low indicates that S2 should be a bit lower we move S2 to thelower level (maximum 15 points and we do this very sparingly

We also pay close attention to prior highs and lows for the past 5 days or more.Clearly, when these important highs or lows are broken the extent of the price actioncan be more than what we would normally expect.

How to trade the bands depends upon what kind of day we expect and what kind ofday it becomes (news can change the kind of day more on this later) and the bias(if any). Here is the actual price action the following day Note the notation Rangeday in the lower left portion of the chart. Because a Range day was expected, andnot a Big Day, buying in the support zone and / selling in the resistance zone wasthe right strategy. The stop loss is 10 points below the S2 or a close below the S2.



26/81

Jimmys Bands can be used to close momentum /confirmation trades as well. Alogical place to close a momentum /confirmation trade on a range day is when pricegets into the support or resistance band.

Jimmys Bands are calculated separately for each currency and the bands are basedupon the actual price action that occurred during the past 6 years. Here are thebands for the EURUSD pair and the other major currency pairs.


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Jimmys Bands on Big Days

A third option for using Jimmys bands is to confirm potential Big Days. When pricegets beyond the 0.50% area (R2 and S2) the price tends to close the day around the0.50% area or beyond it. Although big days are defined as a move from the openingprice of 0.75% or more, the statistics show that once price gets beyond the 0.50%

area it is much more likely a big day will actually occur.

Taking a new buy trade on an anticipated big day when price reaches 10 pointsabove the R2 or closes above the R2 or taking a new sell trade when price reaches10 points below S2 or closes below S2 is a sound confirmation and a good strategybut a risky one. The drawback is the stop loss. There is no logical close by stop lossthat is statistically relevant. For this reason the system does not like this particulartype of trade.

Here is an example of when the S2 break can be useful in signaling a bigger moveKey point is the day before was a big day and another big day today could not beruled out.

The fact that extremely bearish Euro news started the move, followed by a break ofthe days low and finally a new low was made just prior to breaking the S2 allcontributed to making a break below the S2 a likely good new sell point. Once again,

the drawback is where to put the stop loss.



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Determining if it is a Range Day or Big Day

At the end of the trading day decide what kind of trading day to expect tomorrow.Here is the process the EURUSDTRADER system uses:

Tomorrow will be a Range Day unless:

1) Today the EURUSD pair moved 100 points up from the opening price or 100points down from the opening (in percentage terms we use roughly 0.75%)

2) Key tradable news tomorrow gives a trade signal. A range day can become abig day if key news is released and tradable (a big surprise that can likelydrive a big price move).

Unless today was a Big Day then tomorrow is expected to be a Range Day.Everyday is an anticipated range day unless EURUSD moved up 0.75% from theopening (5pm Eastern Time) or down 0.75% from the opening the day before. Whena big day is signaled from a big move the prior day, take a look at what caused thebig day and decide whether it is likely to be repeated.

Big days occur just 10% of the time so they are special. Whats peculiar about themis that they do tend to happen back to back (two consecutive days in a row) butnot all the time.The likelihood of two big days occurring in a row increases when abig day is driven by key tradable news or a strong trend or trend reversal is in play(more on this later). If keys news is released tomorrow and its tradable (significantlydifferent than expected) then from that point on the day is no longer expected to bea range day.

Range Day Action Plan

--Take GBPUSD momentum / confirmation trades--Take EURUSD buy-support, sell-resistance trades

Big Day Action Plan

--Take GBPUSD (only momentum) / confirmation trades--DO NOT TAKEbuy-support, sell-resistance trades

Is Price Action Up, Down, or Neutral?

--Direction up--Take only uptrades--Direction down--Take only downtrades--Direction neutral--Take upor downtrades

Strategy for Taking Profits

Range Day --Direction Neutral --Take profits quickly (30-50 points)Range Day --Direction Up or Down --Be more patient (30-50 points), Possiblyhold position overnight (100-150)

Big Day --Direction Neutral --Take profits same day (50-100)Big Day --Direction Up or Down --Take profits same day (50-100)Possibly hold position overnight (100-150)



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Range Trading the EURUSD Pair with Jimmys Bands

EURUSD is the preferred currency pair for range day trading (buying support andselling resistance). From the chart below you can see that most of the trading in theEURUSD pair takes place in the area up and down 0.50% from the opening price.

The price often times will rise or fall 0.35% to 0.50% from the opening price and

then turn around and go the other way. It appears from looking at the past 6 yearsof data that the EURUSD pair has not really defined its true direction for the day untilit has moved more than 0.50% in either direction from the opening price.

Daily Highs and Lows 2000Daily Highs and Lows 2000-- 20062006Open to High and Open to LowOpen to High and Open to Low

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

1/3/00 1/3/01 1/3/02 1/3/03 1/3/04 1/3/05 1/3/06

Most trading takes place between 0.5% up and 0.5% down

Key points about EURUSD statistics

There are 5 open to highs and 5 open to lows each week for a total of 10

events (moves up and down in the EURUSD from the opening price (5pm)

EURUSD moves of up to 50 points appear to be random (the likelihood of a 20

point move or a 40 point move appear to be about the same)

Above 63 points the moves follow a clear pattern

The bigger the move the less the likelihood it will happen Between 44 and 63

points the moves tend to peak out

The range trading strategy identifies the price area between 44 and 63 points andlooks to do reversal trades. The prices between 44 and 63 points are identified as

follows: S1, S2 and R1, R2.



30/81

When price is in between S1 and S2 or R1 and R2 we are on the lookout for areversal. If we get below S2 or above R2 we assume its not going to be a totallyrange kind of day and so we forget about range trading for the day. If we soldBetween R1 and R2 we close the trade above R2 and take the loss.

EURUSD 4 hour chart for Thursday as of 10:20pm Eastern time

R2 1.2665

R1 1.26465pm 1.2602

S1 1.2558

S2 1.2539

High Low Close

0.52% -0.05% 0.36%

Yesterday's changes

Today expected to be aEURUSD range day

The daily Review/Preview states the prices for Jimmys Bands and draws the lines forthe upcoming session. S1, S2 and R1, R2 are shown on the 4 hour chart, but can be

plotted on the 5 minute as well for easy reference. The Review/Preview also stateswhether we anticipate a range day or not. If we anticipate a range day (most dayswe do) then trading the support and resistance bands (between S1 and S2; betweenR1 and R2) is suggested as a good strategy for trading the EURUSD pair. TheGBPUSD pair is better suited for momentum/confirmation trades on either type oftrading days.

Key points about trading with Jimmys Bands. Use your head its a wonderfultrading tool! Size up the situation and decide the best way to trade the bandsspecifically related to the day and time youre considering putting on the trade.

Stop loss strategy for EURUSD Range Trades

When buying as price approaches S1 or buying when price trades into the buy zonearea (between S1 and S2) the stop loss is as follows:

10 points below S2 or a close below S2 on the 5-minute chart

When selling as price approaches R1 or selling when price trades into the sell zonearea (between R1 and R2) the stop loss is as follows:

10 points above R2 or a close above R2 on the 5-minute chart



31/81

Example of a stop loss that is triggered

Assume we were looking buy trades and decided to buy as soon as S1 was reachedWe would stop ourselves depending upon what happened first:

Worst case 10 points below S2 Close on a 5 minute bar below S2

In this instance the close below S2 was our stop out point. Why? Because ithappened before the price reached 10 points below S2.

R2 1.2680

R1 1.2661

5pm 1.2617

S1 1.2573

S2 1.2554

Worst case stop loss 10 points below S2

Trade closed because the close of the 5

minute bar was below the S2

S1

S2

Key Point Had we waited for a 3-bar reversal after S1 was reached we would NOThave done the buy trade.



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The Right Currency Pair

GBPUSDis a preferred currency pair because it moves the most points. There isopportunity for about three 100 point or more price moves up or down from theopening price (5pm Eastern Time) on average each week. There is ample (30%chance) opportunity to catch big trades 95 points or more on average everyweek. Half the time, the move up or down is 60 points or more plenty of room to

catch decent (30 points or more) momentum trades, even on average move days

AC E

+316 +470

G+264

I+342

B-368

F-438D

-489 -381H

If the 4-hour chart has been showing big swings then big days are more likely. Bigswings indicate more big moves.

What do the statistics say? Average week price moves are as follows:

Point Movement (Range) Likelihood

160.5 494.0 10%120.4 160.4 10%95.1 120.3 10%

Average 3 of 10 extremes perweek of 95 points or more

75.0 95.0 10%

60.1 74.9 10%46.6 60.0 10%35.2 46.5 10%23.5 35.1 10%11.8 - 23.4 10%0.00 11.7 10%

Average 3 of 10 extremes perweek of 95 points or more



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Being Aware of Upcoming News

The fact that there is key news out does not indicate a big day unless the news isin fact tradable meaning the news itself when released is enough of a surprise togenerate a news trade signal. So if the technicals indicate a range day we trade rightup until news time as if it was a range day, employing the range trading strategies.We close out all technical trades just prior to the key news release as a precaution.

We are trading not gambling on news that can drive the price in either direction.Summary - Determine if big day or small day. UK tradable news surprises accountedfor much of the price action for the week seen below.

10/20 GBPUSD buy signalBullish UK GDP 1st Estimate

10/19 GBPUSD sell signalBearish UK retail sales

10/17 GBPUSD buy signalBullish UK CPI

The premise for news trading is very simple. If everything known is reflected in thecurrent price that would include what the consensus forecast is. If the actual releaseis significantly different than the consensus forecasts then the price needs to adjustto reflect the new and different information.

The extent of the price adjustment is influenced by many factors besides the severityof the surprise. We will discuss all the possible factors as we go over all the nuances

and strategies that can be used to trade the news profitably. It should be noted thatany trading strategy assumes a certain percentage of unsuccessful trades. Thisshould not only be expected but it should be counted on losing trades is aninevitable part of successful trading.



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The Bigger Picture on Direction

When trading short-term (looking for the 30 to 40 point moves) it is important tohave a bigger picture perspective. Sometimes the direction of the next 50 to asmuch as 150 points appears to be about a 65/35 probability. That being the case,taking trades only in favor of the 65/35-probability direction yields an additionaledge on the short-term trade.

Because the forex market has so many diverse influences at times, the momentum/confirmation signal may be driven primarily by a disinterested third party transactionsuch as an importer or exporter transaction to fulfill a real transaction in goods orservices.

When the primary driver for a momentum / confirmation trade is a one off tradeoftentimes the signal does not work initially and starts to trade in the wrongdirection. However, if the bigger picture on the four-hour chart is clearly indicatingthat the next 50 to 150 points are in the direction of our trade then its likely ourtrade will eventually turn around and go our way prior to reaching our stop lossprice.

Because of this we make a determination if the 4-hour chart is giving us a clearsignal. If it is we take only short-term momentum / confirmation trades in thedirection indicated by the 4 hour chart. If we figure out whats happening in thebigger picture on direction, we can then use the smaller time frames to structure agood, low risk, high probable trade.

In other words we increase our edge whenever possible when the evidence is clear.Lets review how to extract the information about the next 50 to 150 points from the4-hour chart.

Purpose of the 4-hour chart is to provide a bigger picture or perspective forour short-term trade decisions.

We do not take trade signals directly from the 4-hour chart We do take momentum / confirmation trades from the 5 minute chart and use

the 4 hour chart as a guide. The 4-hour chart indications are also used to structure our support and

resistance trades.

When new news is released in the direction of the trend it is a strong signal essentially the technicals and the fundamentals are in harmony expect good strongdirectional price action.

When news is released in the opposite direction of the trend consider it a likelycorrection anticipate price struggling to reach the news profit target and then thetechnical trend reasserting itself and price eventually moving in the opposite

direction of the news.



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Trending

Between the red lines we anticipate directional price action in the absence of newnews (above). From time to time the news will be strong enough to break thetrend indicated on the 4-hour chart - but clearly this is the exception.

Setting up the 4 Hour Chart

Focus on the most recent price action (apparent change of trend) or trend that canclearly be identified. This can be a one day breakout of an old trend or a month old

mature trend We will go over 50 or more 4 hour charts to hone your skills inchoosing the right information from the 4 hour chart so no worries.



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What we focus on are the trends within the trading channel and more specificallywhere the price is within the trends within the trading channel. The fact that theoverall trend is down is not material for our purposes its too long term!

Very specifically, we are looking for the price to be moving into the second and thirdquadrant when the arrow is pointing up and looking for the price to be moving intothe third or second quadrant when the arrow is pointing down. When the arrow isshowing the direction and the price is in the second or third quadrant we areanticipating that the move will continue until the journey from 1 to 4 (up move) or 4to 1 (down move) has run its course.

If price is in the 1st or 4th quadrant it is neutral - direction is not clear. Price isoscillating up and down in a narrow range and deciding its next move. When thishappening there is no bias and no directional indication. Hence the 4-hour chartprovides no guidance for our short term trades.



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Identifying a Change in Trend on the 4 Hour Chart Early On

When the trend line of the existing trend channel is significantly violated it is usuallya sign of the beginnings of a new trend channel. There are ways to anticipate whatthe new trading channel may be beforehand. Here is the obvious up trend channelbreakout that preceded the current down trend channel.

We anticipate that the new channel will develop slowly; we expect price tostill go back up and at least try to re-establish the up trend.

We start with a 78.6% retracement prediction as a guide for where price mayretrace.

Clearly, below we have no guidance from the 4-hour chart. We are searching forguidance.

78.6%

Channel breakout

The retracement did stop at 78.6% and started to go down again.



38/81

We can now start a potential down trend channel. It is not truly defined just yet butit is the best we have to work with at the moment. The other drawback is that it hasno angle to speak of. It is almost straight across.

However, given what we have to work with we would assume we are looking forshort term sell trades only; because a quick glance indicates its moving from the topof our channel back into the third quadrant.

What happens next is not what we are looking for. Keep in mind we are only lookingat the 4-hour chart for direction. Our trade signals MUST occur on the 5-minute chartfor us to actually initiate a trade.

Because price moved strongly in the opposite direction of our view, it is entirelypossible we did not get any sell signals! This would be true for the momentumconfirmation trade. The selling resistance trade would of course end in tears.



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At this point we need to redraw our trend channel to an up channel. Price reached anew high and price action clearly indicates the upside. Eyeballing it, we are rightnear the top of the channel meaning we would be neutral, meaning we take buy orsell signals.

The following day the trend reversed again. We clearly rejected the higher prices andthe tiny up trend appears to be breaking. There is no indication for the next day fromthe 4-hour chart, so we take both buy and sell signals. We measure the fibonacciretracement to decide where prices might bottom out on this down move from thehigh.

78.6%



40/81

We can add a potential trend line in advance as well as a potential trading channel

The 78.6% fibonacci level holds and price starts up again but falters twice. Once thefib level held and price started to go up we would have been looking for buy tradesonly. The choppiness and lack of upside follow true would indicate failed momentumtrades. It is unclear how buying support trades would have worked out.



41/81

The up trend channel is broken and the beginning of the present down trend channelthat has persisted since mid-August begins.

We redraw the trend channel and look for the pullback. Right here we can take buyor sell trades, as the price location is neutral. It should be clear by now that thedirection of the trend itself is unimportant what is important is the trend within thechannel and the price location.



42/81

As you can see the trading channel stayed intact and then had a one-day breakoutabove the top of the channel but did not sustain the move. When this happens weredraw the top channel, especially if price does not retry the topside.

Redraw to the top line as the channel forms. Below is the trend since mid-Augustwith the trend channel lines (quadrants). You get the quadrants by drawing a parallelline that divides in half, the space between the top line and bottom line. Then addtwo more parallel lines dividing in half, the newly created top half, and bottom half ofthe trading channel. Five parallel lines.



43/81

Part Two News Trades

Why News Trading Works

The premise for news trading is very simple. If everything known is reflected in thecurrent price that would include what the consensus forecast is. If the actual releaseis significantly different than the consensus forecasts, then the price needs toadjust to reflect the new and different information.

The extent of the price adjustment is influenced by many factors besides the severityof the surprise. We will discuss all the possible factors as we go over all the nuancesand strategies that can be used to trade the news profitably. It should be noted thatany trading strategy assumes a certain percentage of unsuccessful trades. Thisshould not only be expected but it should be counted on losing trades is aninevitable part of successful trading.

The impact and importance of both scheduled (on an upcoming economic eventscalendar) and unscheduled (not on any calendars but impromptu significant newsthat immediately and sometimes for extended periods of time drives a currencysexchange rate) is something I have been aware of and have taken advantage of inmy trading for the past 25 years.

As a Bank FX trader the most difficult part of my job was to execute customer stoploss orders during news spikes. Most customers of the Bank took advantage of theirother relationships with the bank (primarily large deposits) and demanded excellentexecutions on their stop loss orders regardless of market conditions. Because thebank viewed the total customer relationship as a whole, I as the trader wasresponsible for providing the customers with excellent fills even though I would

sustain a substantial loss executing the business at the best available prices.

When I retired from banking back in the spring of 2003 and opened my first retailbrokerage account I was astonished to find out that the retail brokers guaranteed allstop loss orders under all market conditions. I immediately pounced on this marketniche and began putting in very tight stop loss entry orders on both sides of themarket just prior to the release of key economic numbers. I knew this strategy, ifapplied consistently, would yield huge profits. My hunch was correct and before longI had about 400 retail traders trading the news releases along with me those werehappy days! The biggest problem we faced was when to get out. We found we wereleaving a lot of money on the table by getting out too soon or getting out too late.Thats when I started keeping spreadsheets. I wrote down the date and time ofrelease, the consensus forecast and the actual release, and the price action starting

exactly at release time and extending for the next two hours.

As an aside, I was singled out by one of the top 2 retail brokers as the mastermindbehind gaming the system and taking advantage of the brokers by doing straddletrades on news. My response was I have made a career of taking advantage ofmarket niches and I felt I did nothing wrong. I still feel that way today.



44/81

Some key brokers initial response to news trading was to state they would no longerguarantee stop loss entry trades (summer of 2004) but would continue to guaranteestops on existing positions. That suited me fine For US indicators I started to buyEURUSD right before the news with a 10 point stop and also sell GBPUSD rightbefore the news with a 10 point stop. If you think about it this was the exact samestrategy as the straddle. The news will drive the US dollar and the Pound and Euro

will move about the same amount on the news. So what would happen is I wouldhave a 10 point loss on the wrong trade and get stopped out and at the exact time Iwas getting stopped out on the wrong trade I was up 10 points on the right trade. Sobottom line I was getting into the right trade 10 points from the pre-release price!Think about that. It was in fact the exact same thing as the straddle!

Finally in August of 2004 the non-farm payroll report convinced me it was time toabandon the gimmick news trading and focus on a strategy that could not beundermined. What happened that payroll day was as follows: I was long a goodamount of EURUSD about 10 points below the current price at release time. Theconsensus forecast was 240,000 and the actual number was 32,000.

EURUSD immediately skyrocketed 150 points accept on my broker platform on

my broker platform it dropped about 30 points first and they skyrocketed 200 points!I called to complain and I was told they were inundated with EURUSD sell orders. Isaid, non farm payroll is 200,000 less than expected and you were over run bydollar buyers. They said, Yes. I was not the only person that got stopped out lots of people did. In the end they offered to make me whole, which meant accordingto their definition close my original trade at breakeven so no 200 point gain but atleast no loss. I reluctantly agreed.

From that day forward I stopped trading the news in that manner.



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Economic Indicators (News List)

The EURUSDTRADER system trades a proprietary list of re-occurring news eventsthat have a clear history of causing predictable price moves when the news is asurprise. Here is the complete list:

Country Economic Indicator

Canada Bank of Canada Interest Rate DecisionCanada Labor Force SurveyCanada Survey of Manufacturing (ShipmentsCanada CAD CPI ex 8 most volatileCanada Retail Sales (Headline)Canada Trade BalanceCanada Monetary Policy Reports & Updates

Great Britain CPIGreat Britain Inflation Report (Quarterly)Great Britain Current AccountGreat Britain GDP 1stEstimate

Great Britain MPC Minutes (vote count, other)Great Britain MPC Interest Rate DecisionGreat Britain Retail SalesGreat Britain Industrial ProductionGreat Britain CPIS Services PMIGreat Britain CPIS Manufacturing PMIGreat Britain Trade Balance

United States FOMC Interest Rate AnnouncementUnited States FOMC MinutesUnited States Fed Chairman TestimoniesUnited States Fed Chairman StatementsUnited States Advanced GDPUnited States Trade BalanceUnited States ISM ManufacturingUnited States Retail Sales (excluding autos)

United States US Import PricesUnited States Preliminary GDPUnited States Non-Farm PayrollUnited States CPI (excluding Food & Energy)United States Current Account (Quarterly)United States Conference Board Consumer ConfidenceUnited States Empire State Manufacturing SurveyUnited States New Homes SalesUnited States ISM Non-ManufacturingUnited States Final GDPUnited States Philly Fed SurveyUnited States NAPM ChicagoUnited States Durable Goods (ex-transportation)United States Treasury International Capital (TIC)

Europe Trichet Press ConferencesEurope Interest Rate Announcements

Australia AUD Interest Rate Decision

Japan JPY CPI excluding fresh food (Y/Y)



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Select Economic Indicators

The EURUSDTRADER system breaks down the news list into key tradable indicatorsthat are likely to result in a significant price move on surprise news and also likely tochange the technical trend if the news surprise is counter to the prevailing trend. For

clarity purposes we are talking about the trend within the trend on the 4-hour chart.Here is the list of key tradable indicators that can cause a significant price move andchange the trend.

Country Economic Indicator

Canada Bank of Canada Interest Rate DecisionCanada Labor Force SurveyCanada Survey of Manufacturing (ShipmentsCanada CAD CPI ex 8 most volatile

Great Britain CPIGreat Britain Inflation Report (Quarterly)

Great Britain Current AccountGreat Britain GDP 1stEstimateGreat Britain MPC Minutes (vote count, other)Great Britain MPC Interest Rate DecisionGreat Britain Retail SalesGreat Britain Industrial Production

United States FOMC Interest Rate AnnouncementUnited States FOMC MinutesUnited States Fed Chairman TestimoniesUnited States Fed Chairman StatementsUnited States Advanced GDPUnited States Trade BalanceUnited States ISM ManufacturingUnited States Retail Sales (excluding autos)United States US Import Prices

United States Preliminary GDPUnited States Non-Farm PayrollUnited States CPI (excluding Food & Energy)

Europe Trichet Press ConferencesEurope Interest Rate Announcements

Australia AUD Interest Rate Decision

Japan JPY CPI excluding fresh food (Y/Y)



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Key Points of Key Tradable Indicators

Fundamentals are everything not related to charts and technical analysis. Howfundamentals impact exchange rates is profoundly impacted by market sentiment.To get in tune with market sentiment requires study of what the key fundamentals

are and how they impact exchange rates. This knowledge is derived from comparingprice action to the news on a case-by-case basis, over extended periods of time andconcluding whether a particular fundamental actually drives price consistently andshould be traded accordingly.

For actual trading decisions we focus on the very short-term impact of fundamentalchanges as represented by the news itself and the price action that immediatelyfollows. By knowing the fundamentals and the relative importance of the news weprovide ourselves the opportunity to stretch a short term winning trade into amedium term winning trade when appropriate.

The most important currency fundamental is the current interest rate and market

perception of where that currencys interest rates are going. When the marketaggressively bids up the value of a currency in anticipation of future interest ratehikes this is referred to as pricing in future rate hikes. Where the marketanticipates interest rates will be in the future can be seen quantitatively by looking atwhere the interest rate is for short-term interest rate securities.

There is no set standard but the 3-month rate is oftentimes compared to theovernight or day to day rate to make the determination of how much the marketis anticipating interest rates to change in the near future.

Why Interest Rates?

Because the Government adjusts the level of very short term interest rates to pointthe economy in the best possible direction, which is defined as maximum sustainableeconomic growth with stable, low inflation.

All of the Governments around the globe agree that low stable inflation is a pre-requisite for maximum sustainable economic growth. Therefore, the number onepriority of the Government is maintaining stable, low inflation.

The way the Government keeps inflation stable and low is by raising interest rateswhen inflation starts to rise more than the particular Governments comfort zone orinflation target. By raising interest rates the Governments anticipates they canslow down the economy enough to slow inflation and bring it back into the target

zone.

Its key to remember that a currency is an asset and the interest rate is the yield onthat asset. When interest rates are raised the asset yields more and therefore theasset itself becomes more valuable. So a rule of thumb is higher interest rates higher currency.

Whats equally perhaps more important to remember is the reason interest rates areraised in the first place the economy is usually overheating, meaning the economy



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is growing too fast. A country that is doing that well would tend to have a strongcurrency anyway because its a good asset. A good asset with a rising yield wouldnaturally tend to appreciate.

The same is true when interest rates are lowered. The reason the Governmentlowers interest rates are to provide a boost for the economy. The fact that the

economy is very weak is reason enough to sell a currency; add to that a decliningyield and it becomes crystal clear that selling that currency makes perfect sense.

Hence the equations:

Higher interest rates = higher currencyLower interest rates = lower currency

How To Profit From Interest Rates & Anticipated Rate Changes

First of all, by the time interest rates are actually raised or lowered the price action

in the currency related to that change has already been fully priced in by the marketand oftentimes the market has actually priced in even more than that particularinterest rate change warrants. That is so because the market is forward looking. Sotodays interest rate change is perceived as a forerunner for further interest ratechanges in the same direction. So as traders we want to find the earliest signals thatinterest rates may be changing in the future because that is when the currency startsthe journey of reflecting the future interest rate change.

The earliest signs that interest rates will be changing can be found primarily in twoplaces the inflation rate and the economy itself.

The earliest signals that interest rates may be changing are found in the statements,speeches, and testimonies of the key Central Banker; the one guy who heads a

committee that decides on what interest rates will be in a particular currency(country).

The change in the Central bankers tone is the earliest warning signal that a changein interest rates will be coming. Followed by a change in the specific words thatindicate the change is more imminent. To understand why the interest rateadjustment starts with the key central banker requires that one understand what thecentral banker is trying to do. What the central banker is trying to do is to provide asaccurately as possible the future direction of interest rates and the economy so thatbusinesses will be confident enough about where things are going so that they willbe willing to make long term investments. Long-term investments are what driveproductivity (output per man hour); the more productive an economy is the more it

will grow in a non-inflationary way.

Non-inflationary is what really matters. For example, the economy can be growingvery fast in nominal terms but actually not growing at all or declining in real terms.For example, if the US economy grows 3% that means the total value of all goodsand services produced increased 3%. But if prices are growing at say 5% (inflation)then, the actual amount of goods and services produced is actually 2% less in realterms. For this reason Governments focus on real growth. And they want to keepinflation low and stable so that the growth reported isreal!



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Inflation

If should be clear by now that inflation is a key player in the interest rate decisionprocess. As such, changes in inflation, particularly when inflation goes above the

comfort zone or inflation target is a clear signal that interest rates will be raisedand the currency will become more sought after for the higher yield. Moreimportantly, the place to start buying a currency is when inflation starts to increaseand the market takes the view that a sustained period of interest rate increases maybe necessary and forthcoming and the currency starts to increase in anticipation ofthese future expected interest rate hikes.

How To Profit From Inflation Changes

Each Government has its own particular key measure of inflation. For example, inthe United States, the FOMC (Federal Open Market Committee), the committee that

decides on the level of US short-term interest rates, focuses on two inflationindicators. They are the CPI or consumer price index and the PCE or personalconsumption expenditures. The CPI is released monthly. There are actually twonumbers that are released, the headline number and the core number. The corenumber excludes the two most volatile items, which are food and energy. The FOMCfocuses on the core number because the headline number is too volatile on a month-to-month basis and doesnt accurately reflect the current underlying inflation trend.As traders we can find out what the core CPI is expected to be each month and whenthe actual number is released each month we can trade surprises in the corenumber. The thinking is that the market consensus forecast for the core inflationnumber is reflected in the current price of the currency. If the actual core inflationrate is significantly different than the markets consensus forecast, then the price ofthe currency needs to adjust to reflect the magnitude of the surprise.

We trade this price adjustment because it makes sense. Clearly, if inflation is muchhigher than the market thought then interest rates are extremely likely to rise inresponse to the higher inflation rate. And furthermore, the currency is very likely torise to reflect the higher yield and equally important, the implications that theinflation is being caused by an economy that is likely stronger than previouslythought.

Lastly, because the economy is stronger than previously thought, the outlook for theeconomy going forward must be upped a notch as well market expectationsincrease, which causes still more buying of the currency.

Bottom line is higher than expected core CPI inflation tends to result in an immediatejump in the currencys value. This can be traded in the same way a breakout abovekey highs in a currency on a chart is traded (bought) as an indication that thecurrency wants to go higher still.

Hence the equations:

Higher inflation = higher interest rates = higher currency andLower inflation = lower interest rates = lower currency



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But dont forget if the core CPI is released as expected then no currency pricemovement is anticipated and hence no trade signal. Only when the core CPI issignificantly different than market consensus is a trade signal generated.Core PCE or core personal consumption expenditures are the FOMCs preferredinflation gauge. It too is tradable in a similar way to core CPI.

Each country has its own key inflation gauge, which will be a monthly release thatcan be traded each month when the number surprises the market.

The Economy

We learned that inflation surprises could be traded because they foreshadow interestrate changes, which in turn cause currency price change. One step further back iswhat causes inflation changes the answer is the strength or weakness of theeconomy.

When the economy gets too strong inflation tends to increase and that results in

interest rate hikes and that results in a stronger currency. When the economy getstoo weak inflation tends to decrease and that results in interest rate declines andthat results in a weaker currency.

Hence the equation:

Stronger economy = higher inflation = higher interest rates = strongercurrency. Therefore stronger economy = stronger currency

And the equation:

Weaker economy = lower inflation = lower interest rates = weakercurrency. Therefore weaker economy = weaker currency

We can trade surprises in many of the key economic indicators related specifically to

the strength or weakness of a particular economy. These are called cyclicalindicators because they relate to the cycle of the economy, which goes backand forth between strength and weakness - in cycles.

The Key Cyclical Economic Indicators

The two most important cyclical economic indicators are GDP and employment.

GDP or gross domestic product is released quarterly (Advanced GDP) and reducesthe entire economys performance to a single number. When that number

the bankers edge

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