uations in the difference between the in-terest rates set by the Bank of England and the Bank of Japan. The darkgrey bars in the bottom of the chart represent the numerical difference be-tween these rates. For example, in January 2004, at the far right edge of thechart, the base interest rate set by the Bank of England was 3.75 percent.The Bank of Japan was entering the fourth year of its zero-interest rate pol-icy. So the difference between the rates was 3.75 percent. Does that makesense?” (see Figure 20.1).
Sisler nodded. “Yep. Gotcha so far.”
“Now,” Winnipeg George continued, “The thin line floating above thegrey bars is the spot rate for the GBP/JPY currency pair. And now it be-comes quite simple to analyze the chart. Let’s start at the far left and workour way forward. We can notice that in 1990, the two central banks di-verged farther from each other than they have ever since—the differencebetween the base rates was over 10 percent in May of that year. But thespot rates kept rising even afterward. In fact, between May and August1990, the pair rose an additional 2,200 pips, even while the interest rate dif-ferential started to actually fall lower” (see Figure 20.2).
“This same dynamic plays out over and over again, all the way up tothe present time. The conclusion is that it takes the market time to digest
 
Presenting Our Findings 191
 
 
= 301
— sna TSKKIR 281
Spotirate|peaks, +201
TESTO 151Ariasrateldifferential
PEELS ESOS 5
Feb 1986 - Jan 2004
FIGURE 20.2 The interest rate differential drops.
Interest Rate Differentialayey y0ds Adf/dad
 
the changes in interest rates, so that it is actually possible to use the inter-est rate differential to forecast future moves in the spot market.” WinnipegGeorge took a deep breath and waited.
Sisler did not speak.
“Folks, what do you think?” he asked to the traders who had gatheredaround.
One trader spoke for everyone else. “That is a boatload of data. And it’sfantastic.” Then he looked at Winnipeg George and posed the question thatall of Sisler’s traders were dying to ask: “Can I have a copy of that?”
We all laughed. “Of course,” replied Winnipeg George. “No problem.We did this for the GBP/USD, the GBP/CAD, and the GBP/CHF, too. Youcan have all of that.”
Sisler then spoke up. “So how does this fit into a system you're alreadyfollowing?”
“Well, sir,” replied Roddy, “You see, we don’t really have a system thatwe've been following. These interest rates combined with some of the sup-port and resistance stuff that Harry’s been studying, well, we think we'vegot something good we can follow in the long term.”
Sisler nodded. “I like what I see. Very much. Where did the two of yougo to school?” he asked.
Winnipeg George answered that he had attended Yale. Roddy had grad-uated from the London School of Economics. Then Sisler repeated, stilllooking at the graph: “I like what I see here.”
 
  
 
192 ADVENTURES OF A CURRENCY TRADER
Then it was my turn to speak up.
“T think I've also found something that might be a good addition to thisresearch.”
Everyone looked at me, eager to hear what I could add. Suddenly, I re-alized that they were including me. I was part of their world. It felt strange,and it felt right. I hoped I didn’t screw any of this up. I started: “Mr. Sislerasked me a few weeks ago to find a way to produce a carry trade on a retailplatform, since that’s what I'll be trading on for the foreseeable future. Healso said that the purpose of the carry trade is to earn interest at a very lowrisk. At first I didn’t understand how it would be possible, since the stan-dard carry trade done by hedge funds requires lines of credit with Japanesebanks, or access to currency options and fancy formulas for figuring thefuture value of currencies. I can’t do any of that. But I did find somethingon a retail platform that can’t be used by a bank or a hedge fund. And itmight be even better.”
Everyone now sat on the edge of their seat. To them, this was betterthan a movie. IfI had told them I needed them each to sing the theme songfrom the Brady Bunch before I continued, they would have all brokeninto song.
“What I found is that I don’t need options. I don’t need futures con-tracts and I don’t need lines of credit with Japanese banks. I can just buythe GBP/JPY in one account, and sell it—or hedge the buy trade—in theother. That way, I would be pip-neutral. I wouldn’t earn or lose any pips atall in either account because they would be matched against each other.”
“But Harry,” began Roddy, “you're gonna get charged interest in thesell-side account.”
“Ha!” I cried out. “That’s what I thought. I did. But I was wrong. I foundthree currency dealers that don’t charge interest.”
“What? That’s impossible. The dealer would go bankrupt offsetting thetrades and paying the interest themselves.”
“That’s right. Here’s what I found. Today, I asked a sales trader on thefloor who his clients were. Not specifically, you know, but just in general.And he named three or four retail dealers that I hadn’t ever heard from. Healso added that they were always heavy on one side or the other—he no-ticed that these clients rarely had a balanced or hedged portfolio of curren-cies. It didn’t mean anything to me at the time so I asked what thesignificance was. He said that these retail currency dealers were probablymaking fairly reasonable, and hugely profitable, bets that their clients weregoing to lose all their money.”
Winnipeg George’s eyes lit up. “So why offset the trades in the firstplace? They’re not getting paid by the spreads. They’re betting that most oftheir clients are going to lose all their accounts—so they trade against their
 
Presenting Our Findings 193
client directly and then take the entire amount of the losses when thetrades go badly.”
“Right,” I answered. “So I knew, naturally, that if they were not offset-ting the majority of the positions, that they wouldn’t care about interestpayments. So I called one of them up and said I was interested in opening alarge account, something in the neighborhood of a hundred thousand dol-lars. And that I preferred not to pay or be charged interest.”
“And they agreed?”
I nodded. “The account rep had to check with his manager, but thencame back quickly and agreed to do it.”
Sisler was now superimpressed. “You could earn a lot of money just ininterest alone in a trade like that. Are you going to do it?”
I laughed. “Are you kidding? I’ve got the paperwork filled out already.”
“How can you be sure this will last?” asked one of Sisler’s traders.
“I can't,” I replied, “but I’m going to make the most of it while it lasts”(see Appendix A).
We sat for a while longer and talked with George. A few of the tradersasked if I would let them put some money into the retail carry trade, and Itold them I'd talk with them later about it. They didn’t want to talk laterabout it: They wanted to split the profits and go in as soon as possible.These were traders who were used to pouncing on a good idea and bleed-ing it dry. Sisler was as much impressed with the fact that I’d found a wayto game the retail currency trading system as he was with the charts.
I promised that we would test the retail carry trade and let them knowsoon.
Winnipeg George and Roddy bought me lunch afterward and told methat they were working on something else—something big, something thatthey couldn't tell anyone else. And that they would share the secret withme at the end of the week.
 
  
 
 
Back inthe Game
 
Winnipeg George and Roddy and I planned and took. This would be
my first live trade since I had blown up my account. Even with Har-vey’s blessing, I still felt reluctant to take any live trades. I wasn’t sureabout his insistence that I fund the account with the same amount ofmoney that I had lost—$5,000—and I started to wonder if I could plan livetrades as well as I planned the paper trades.
Notwithstanding my doubts, my wife and I funded the account with$5,000 of our savings and on Monday I met up with Roddy and WinnipegGeorge.
We had been waiting for days for the EUR/USD to fall down to 1.1850.Iliked the foundation for the trade—it was based on the EUR/USD line at1.1850. The week before, on Wednesday morning, Roddy called up to thelaw firm and started screaming into the phone. He was elated that he’dstayed in his short Euro position (the one from my first Post-it note) all theway from 1.2200, and now it was getting close to 1.1850. He got WinnipegGeorge on the phone, too, and we talked about what we wanted to do. Thiswas all happening in between the other trades that I’ve already described.
After just a short discussion, Roddy decided that if the EUR/USD fellwithin 20 pips of the 1.1850 mark, then he was exiting his sell trade (takinga huge amount of profit) and reversing to go right back in the other direc-tion. Winnipeg George and I wanted to see the pair fall all the way to atleast 1.1855 and then buy. By 9:30 a.m., Roddy got his wish when the pairfell as low as 1.1866 and he went long (see Figure 21.1). At the time, I was
h ow is a good time to bring you up to speed on another trade that
194
 
Back in the Game 195
 
 
 
 
EURUSD - 15 min
9:30 am, April 14: | 1.1980Euro falls within 20 pips |, ,..,of the 1.1850 mark, L100pity, ty and Roddy has a cow. 1.19901) Beh b14920}ras10+1.1980118701.1850 lisse+1840
a ae ma DO eas aS RO The Tae Tel We) Toms
FIGURE 21.1 Roddy goes long.
still paper trading and decided that even though I would only be riskingfake money on the trade, I didn’t like it until it fell further.
We needed a take profit target on the trade and that was relatively sim-ple: Roddy wanted to hold on for 1.2200 and not let go. Planned like this, itwould be a complete reversal of the exact trade that he had just exited.Roddy was convinced that until September we were going to see a range-bound market, and he could just keep buying and selling between theselevels. He started off with a stop loss of 116 pips, so that he would be pro-tected all the way down to 1.1750, or 100 pips lower than the original entryidea of 1.1850 level.
This made me wonder why he just didn’t simply wait for the originalentry price in the first place. Anyway, this is what Roddy’s trade looked like:
Buy EUR/USD 1.1866, Stop: 1.1750, Target: 1.2200
As I said earlier, Winnipeg George and I stayed out of the trade for thetime being. A few other of our trade ideas opened, and I paper-traded thoseas well. Then came the weekend, the Sunday meeting with Harvey Win-klestein, and the Monday meeting with George Sisler. On Tuesday, theEUR/USD fell to 1.1850 and I took my first live trade since blowing up theaccount. Winnipeg George and I kept the 1.1750 stop loss and 1.2200 profittarget that Roddy had used.
Five days later, I was having a cow. In fact, we were all a bit afraid forme—the EUR/USD, which at first had cooperated, had now fallen all the
 
  
 
196 ADVENTURES OF A CURRENCY TRADER
 
EURUSD - 60 min
My entry
}.1980
   
 
+1 1080
yptWt bee
 
 
 
Roddy's Early Entry "1.1750 sceuncauce ett oe aaStop lossan 00 16:08 “4h Tm 61400 am 11:00 «(18:00 423 200 ans
FIGURE 21.2 Harry's first live trade since blowing up the account.
way down below 1.1800 and was rapidly approaching our stop-loss (Fig-ure 21.2).
But it never fell farther than 1.1757, and we narrowly escaped stoppingout. This trade stayed open through one more scare, on May 13, and then itshot like a rocket to 1.2200 on May 27. We had held the trade for over amonth, and gained 350 pips. We twice experienced drawdowns of 90+ pips,but we never stopped out. I had traded 1 mini lots, for $1 per pip. I hadrisked $100 of my account (100 pip stop loss times $1 per pip, or 2 percentof my account). I gained $350 on the trade.
That was a7 percent gain in my account, for one trade. Could I repeatthis again? Was it simply a fluke that I could produce a profit in my ac-count? Could it last?
 
 
Return to theThirty-FirstFloor
 
One evening not long after the EUR/USD trade was closed, he called up
to the law firm and asked if I would pay him a visit downstairs. Down-stairs on Floor 31, I found him working in one of the glass conferencerooms off the trading floor. I knocked lightly on the glass and he waved mein. Once behind the soundproof glass, he welcomed me and asked how Iwas doing.
“I’m doing very well, Mr. Anderson. I want to say thank-you for provid-ing some space for me to work. It has been a huge help. I don’t know whatto say, really.”
He chuckled. “No, I suppose that I wouldn’t know what to say in a spotlike this, either. But you haven't only taken from us. You’ve planned somegood trades, Harry. We made some good money from those trades, Harry.I’m sure we wouldn't have taken them without you. And they came at atime when the London office was having some problems, not to mentionsome of our own problems here, which you're already familiar with. Hav-ing you here took some focus off those challenges.”
“I was happy to be a profitable distraction,” I replied.
“Well, profitable is the operative word here,” he added. “That’s why Iwanted to give you this,” and he handed me an envelope.
“What's this?” I asked.
“Tt can’t be a commission based on your trades, or a bonus, since youdon’t actually work for us. But we can consider you an outside consultant.”
Jerse the very next week why Anderson had been so kind to me.
197
 
  
 
198 ADVENTURES OF A CURRENCY TRADER
I desperately wanted to look inside the envelope right then. How rudeof me. But who wouldn't want to know how much was in there?
“T appreciate this. I don’t know how to every repay you. If I can everhelp out, in any way, I don’t even know how I would, but I'd be willing to doanything.”
He replied so quickly that I imagined he might have been hoping that Iwould make that offer. He said: “If you don’t mind, I would like to ask youa favor.”
“Sure. Anything.” Now I started to feel uneasy.
“There are some files upstairs that I’d like to take a look at.”
Phew. That wasn’t a big deal at all. Files, I could get those. We hadstacks of Anderson/Ernest Wellington files upstairs. For all I cared, hecould camp out in my cubicle and I'd bring him files and coffee until morn-ing. “Which ones do you need? I can make copies and bring them down inthe morning, or even tonight, if you need something right away.”
“Tonight would be fine, Harry,” he replied. “Ineed the some documentsfrom a case entitled Falkenburg v. American Banking Company, and it’sfrom at least a couple of years ago.”
I remembered the file. It was a case nearly as large as the Andersonmatter. But what would he want with that?
“T’m not sure I understand.”
“Well, Harry, I’m technically not supposed to see those files, but I’d liketo. There is some information from those proceedings that never made itinto the court filings, some information about a few of our former tradersthat are now causing us some problems.”
“T can talk to Mr. Johnson about it in the morning. I’m not sure whathe’s going to say about this.”
“Harry, I'd prefer it if you didn’t mention this to Herb. Or anyone else atthe firm.”
“What?”
“The Falkenburg case ended in a settlement right before the jurystarted deliberations. Part of the settlement agreement included the seal-ing of the files. Mr. Johnson has pretty much made it known to me that hecan’t help me out. That’s where you come in.”
Where I came in? I thought. This isn’t where I came in! This is rightwhere I would be stepping off. Anderson’s kindness made so much moresense now that he was asking me to violate the trust I had with the lawfirm. Giving him access to those files wouldn’t just cost my contract withthe firm, but could land me in jail.
“T can’t do that, Mr. Anderson.” I looked him in the eye. “I just can’t dothat for you.”
He looked down at the envelope in my hand. I looked down at it, too.
So he was offering money not for the trade ideas, but to buy somesealed case files! All along he’d wanted those files, and he thought he could
 
Return to the Thirty-First Floor 199
get them through me. If I had been as dishonest as I'd been a few weeksago, I would probably have taken the money and given him the files. Butnow I had a life ahead of me as a trader, and no reason to destroy the trustTd regained with Mr. Johnson and the law firm.
Ihanded the envelope back to him. “I can’t accept this from you. Ihavetoo much to lose.”
He smiled warmly as if I’d just offered him a brand-new car or a backmassage. He wasn’t bothered at all, and I could see how he got his reputa-tion for staying cool even when traders were blowing up, or the London of-fice was losing money, or when he was being sued. “No hard feelings,Harry. I understand where you stand on this issue. That’s all.”
And then I left.
 
  
 
 
SettlingMy Tab
 
planned to work alongside the newcomer for at least a month to
make a smooth transition. I met in person with Roddy and WinnipegGeorge every evening in my cubicle at the law firm to plan longer termtrades. We no longer met down on the trading floor, and I let them knowthat I no longer felt like I could take up space at Ernest Wellington withoutgiving something back. They didn’t care one way or the other—every daythey still called me at least once every hour to give me a blow-by-blowaccount of how our trades were doing. In fact, they watched my retail trad-ing accounts for me during the day so that I didn’t have to take my focus offmy work.
Roddy and Winnipeg George’s secret was that they had raised nearly$25 million from their clients and they were setting out on their own. Theyhad formed a hedge fund which they called, and I am not making this up,Paycheck Partners. By July, it would be up and running and they wantedme to join them as a trader. I wouldn’t own any of the company (which Ididn’t care about), but at the end of the year, I would be paid 30 percent ofall the profits from the trades that I made.
I talked to Harvey before I accepted the position, and he wonderedwhy I was even asking his opinion. It was obvious to both of us that thiswas a chance of a lifetime.
Harvey and I had spoken in person every day since the day that he hadshown up at Mass. Within a couple of weeks, he was repeating a lot of whathe already had said, and although he always checked my notebooks to
To more weeks passed. I hired a replacement at the law firm and
200
 
Settling My Tab 201
make sure that my wife had signed off on the trades that I took and the riskthat I incurred, he kept telling me that he was no longer worried aboutwhat kind of trader I would become.
I could sense that he had less and less that he wanted to teach me, andmore and more that he wanted me to teach him about what I was doing. Hedidn’t need the information because he was going to trade like me; rather,he wanted me to teach him what I was doing so that I could prove that Iwas focused.
And I was definitely focused! I only traded support and resistancefrom the daily and four-hour charts. That doesn’t include the retail carrytrade, which I opened the very next week with $20,000, and which I talkmore about in Appendix A.
Ashort time later, I reported to Harvey that I'd taken my 50th trade andthat 35 of them had been profitable; 15 had been losers. My average winnerwas about 164 pips—less than I would have liked. I found that I had a hardtime hanging on to the winners. The longer that I held a winning trade, themore worried I became that it might turn into a loss. But at least I was hav-ing winning trades in the first place.
The flip side of this was that the losers were really small. I averaged 67pips per loss, much less than I had expected, and for the same reason. I justcouldn’t stand to watch myself lose money, and I was very likely to cut alosing trade fast and then get back in later, than I was to ride it out for a bigdrawdown.
I still traded for $1 per pip, and I'd made what to me seemed an aston-ishing number of pips: 4,774. I had nearly doubled my trading account. Thenext step would be to double the size of my trades from that point forward.Harvey took me to Little Italy to celebrate over a pound of olives, Italiansodas, and a mountain of pasta.
Harvey approved of my plans to double my trade size.
“You're going to find that you can make more money, more quicklyfrom your trading at the firm,” he said. “So you might want to pause insome of your own trading so that you can focus. Or you might find that youdon’t really want to work at the hedge fund—you just want to rent somespace from them and trade there. Don’t overcommit to any course of ac-tion right now. I have a feeling that you can do great things on your own.”
“I don’t know how I can repay you,” I told him.
“Well, there is a little matter of payment that we need to settle,” hereplied.
“Tm happy to do anything that you want me to do. Pay you anythingthat you charge. I already get the feeling that you don’t want my money.”
“Right,” he said. “I really just want your time.”
“You have it. As much of it as you want. I don’t know what I can reallydo to help you, but I am willing.”
 
  
 
202 ADVENTURES OF A CURRENCY TRADER
He smiled. “I want to bring a friend of mine to New York tomorrow,and I'd like for you to show him around the city and tell him about Pay-check Partners.”
I wasn’t sure about that. “The offices are in an old warehouse in Brook-lyn. Are you sure you want me to take this person out there? He'll think I’mgoing to kill him and throw him into the East River.”
“No, he won't think that. I want him to see how cheaply you can get by.I want him to see that a twenty-five-million dollar hedge fund just startingout has offices that are far worse than his own office. I’m trying to teachhim the lesson on scaling down. Of becoming lean and hungry.”
“Why not take him to Sisler’s hedge fund?” I asked. “The amount ofmoney they manage over there is far more impressive.”
“Well, I could take him there. But this guy already knows about you.And he’s driving me crazy. Sisler wouldn't be able to stand him for threeseconds. Plus, you told me two months ago that you wanted to meet him.So, Harry Banes, you're going to meet Larry Ho tomorrow, and if you don’tpoke your eyeballs out by noon, I'll be surprised. See what you can teachhim about not blowing up his account.”
“Tl do my very best.”
“T know you will, Harry.”
And with that, Harvey stood up, finished off the last olive, and walkedout of Di Palo Fine Foods.
 
Epilogue
 
have nothing to do with entries and exits, they give me a strangelook. Generally, they don’t have much more to say to me, espe-cially if they are looking for the next latest and greatest trading system.Harvey taught Harry in three weeks what Harry might never have learnedotherwise: that the entries and exits were the easy part. It was the disci-pline and the attitude that came only after a lot of suffering and hard work.There is a myth out there that a stay-at-home mom, or a union electri-cian, or a cardiologist can pick up the skill of currency trading with just afew hours a week or a few minutes per day, and soon they can be on thepath to riches. The truth is that anyone peddling a trading system with thatpromise is a liar. They are appealing to our innate sense of greed. I wasgreedy when I first started trading. I wasn’t any different from Harry Banes.I wanted something for nothing. And, like most new currency traders, Ilearned the hard way that although trading for a living could be the mostprofitable career in the world, it could also be the most expensive.Another myth that still pervades the universe of new traders is thattheir initial losses can be considered “tuition” in the school of hard knocks.Well, that’s crap. Imagine if your best friend knocks on your door oneevening and announces:
\ N Then I tell aspiring traders that the most important laws of trading
Your BEst FriEenp: I crashed your car tonight. I totally wrecked it. But Iwant you to know, I learned a really good lesson.You: What! What did you do? What lesson did you learn?
203
 
  
 
204 EPILOGUE
Your ForMEr BEsT FRIEND: I learned that I should not smoke a pound ofmarijuana and drink a case of beer and then drive on the wrong side ofthe freeway. The good news is that I have learned this lesson now, and Iam not going to do it again. Never again.
You: [speechless!]
Your ForMEr BEstT FrrEND Wom You ARE ABOUT TO KILL: Oh, by theway, your iPod was in the car. I think you're going to have to get a newone.
Why do new traders talk the same way about losing their account?They say things like “Now I know that I should never risk half my accounton a single trade,” or “I’ve now learned my lesson to not just jump into atrade because I saw the market moving.” I wonder: did they really need toexperience the losses to know they were making a mistake? Some traderstell me that they needed to lose money before they could become really se-rious about trading.
I say that’s hogwash. Maybe losing some money is a rite of passagefor traders. Maybe most successful traders have experienced a damagingloss somewhere along the way. But they don’t keep doing the same thingover and over. Right? If they did, they wouldn’t be successful. And I seefar too many new traders blowing up account after account after ac-count, and making the same mistakes. That’s why I say that the most im-portant laws of currency trading have nothing to do with entries andexits. Here are the laws:
¢ Thou Shalt Never Lose More Than 25 Percent of Thine Account.¢ Thou Shalt Test Before Trading.¢ Thou Shalt Stand Accountable to Another Person for Thy Trades.
Harvey taught Harry those laws. I invented Harry and Harvey andRoddy and Winnipeg George, and all the others, in the hopes that youwould gain something from reading about their experiences.
You've already noticed that Harvey didn’t teach Harry how to drawsupport and resistance. He didn’t even stick around to help Harry learnhow to test! Harry had to do all of the hard work by himself. But the magicof it all lies in the fact that once Harry committed to obey these three laws,he never had to worry again. Even if his system of support and resistancetrading broke down, he would be able to fall back on the three laws andcreate a brand new system.
It is possible to support yourself from trading. You can trade for a liv-ing. But you have to commit to obey the laws. If you were attracted to trad-ing for a living because of the freedoms that it would offer, I applaud you.We all want financial freedom, and the opportunity to plan our own days
 
Epilogue 205
and spend more time with the people we love. But to obtain that freedom,you have to be willing to sacrifice.
The sacrifice is worth it.
I know you can, too. I hope you stay in touch and let me know howyou're doing.
PS. In the Appendixes that follow, you'll find more examples oftrades that Harry took in the two years after he joined Roddy andWinnipeg George’s hedge fund. For even more examples, and informa-tion on the interest rates and carry trades, point your Web browser tohttp://www. HarryBanes.com.
 
  
 
 
 
The RetailCarry Trade
 
by hedge funds all over the world.
To review: A hedge fund like Sisler & Company would borrowmoney at low interest rates in Japan, and then invest those loan proceeds inhigher-interest bearing financial instruments. What makes the trade super-profitable is that they can actually invest two, three, five, or even ten plustimes the loan amount because they are allowed to trade with leverage, justlike a retail currency trader, or a stock trader who trades on margin.
In retail currency trading, every currency pair has a swap rate, or anovernight interest rate. If you are buying a high interest currency and sell-ing a low interest currency—say, if you bought the GBP/JPY (GBP high in-terest, JPY low interest)—you would earn interest for every day that youheld the trade. Actually, you only needed to buy it by about 4:45 p.m. east-ern time and hold it past 5:00 p.m. eastern time the same day, and you wouldearn the interest. If you sold the same currency pair, you would be selling ahigh interest currency and buying a low interest currency. This meant that