would wait for it to hit 193.00even because, according to my new trading partners, this was a currencypair that tended to obey the round numbers. At this point, I was ready totalk about stops and profit targets (see Figure 18.1).
Winnipeg  George  believed  that  195.00  represented  a  perfect  exit  forthe pair; it would give us a 200 pip target, and it was also the same placewhere the currency pair had stalled on three different occasions: first, onMarch  18,  when  the  currency  pair  had  fallen  to  the  195.00  figure  andstopped dead in its tracks before heading lower. Second, on April 6, whenit had finally risen above the 193.00 level. And third on April 8. On each ofthese collisions with 195.00, the currency pair had only managed to breakthrough by 50 pips or so. What I liked the most was that 195.00 had alreadyplayed the dual role of support and resistance.
I wrote down:
Long GBP/JPY 193.00, Stop: 192.00, Profit target: 195.00
Roddy and Winnipeg George took the trade for the firm (Figure 18.2).
It was enough for me to watch them with the trade.
This trade opened and closed while George and Roddy were workingthe overnight shift—it opened on April 13 at 3:00 in the morning and closedalmost exactly 48 hours later.
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FIGURE 18.2 George and Roddy’s trade.
I still didn’t have any desire to do any trading of my own. The lossesfrom the week before were still fresh in my mind. Maybe I would be readyin  a  month  when  Wakeman  gave  me  my  first  check.  Maybe  sooner.  Thiswas a decision better made with Harvey Winklestein’s help, and I hoped tosee him again soon.
Harvey’s absence certainly didn’t keep me from planning more trades,however.  Together  with  Winnipeg  George  and  Roddy,  I  analyzed  andplanned for four more trades. Two of them were based on the GBP/USDone-hour chart and each of them netted 40 pips. I was not present to seeeither of those trades open. Another trade was based on the EUR/USD 15-minute chart and gave us 50 pips. I didn’t like the short-term chart as much,but Roddy and Winnipeg George convinced me that I needed to know if thesystem I was using would work on the short-term charts. It did, and thatwas  enough  proof  for  me.  I  was  still  determined  not  to  base  my  tradingplan on the short-term charts.
During this time, we also began to call this trading system the “Win-nipeg Special,” mostly because Roddy forced us to do so, in honor of Win-nipeg  George’s  home  province  and  also  because  it  confused  people  whoasked what we were doing. Roddy thrived on that. Most traders, includingCraig, had generally left us alone for the entire week and my trade ideaswere no longer the popular flavor. I realized that most traders at EW wereinterested  in  the  hottest  ideas,  wherever  they  could  be  found.  But  theydidn’t focus for very long on any idea in particular. Also, they were engagedin a lot of other stuff, like quoting prices for customers, trading options,
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futures,  and  other  instruments.  My  Post-it  notes  were  simply  not  sexyenough to hold their attention for long.
My focus on learning to trade for myself made up for the lack of inter-est  other  EW  traders  showed  in  my  ideas.  With  each  trade,  I  grew  moreconfident in my abilities. I had a goal to test 1,000 trades by the weekendand  record  the  results  in  my  spreadsheets,  and  I  was  making  excellentprogress.
Winnipeg George showed me how to build a spreadsheet that wouldlog the entry price, the original stop, the profit target, the largest draw-down  during  the  trade,  and  the  final  result  in  pips.  It  also  showed  myoverall win percentage and the size of the average win and loss. He saidthat this information was absolutely critical to my success. I would learnwhy later.
By Friday I had done over a thousand practice trades and logged theminto  the  spreadsheet.  I  had  been  operating  all  week  long  on  very  littlesleep and had essentially avoided my family entirely. It was then I realizedthat  I  owed  George  Sisler  a  ton  of  research  on  interest  rates,  and  I  hadhardly started.
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TeamBanesBegins Anew
Winnipeg George and Roddy were positive that the interest rate re-
search  was  easy  to  do,  and  invited  me  to  spend  all  of  Saturdaynight into Sunday with them, to gather the results. But I had prom-ised my wife that I would attend Sunday morning Mass with her and thekids—something that I rarely did—and I was determined not to let themdown. I’m glad that I didn’t.
Sunday  morning  was  bright  and  cheerful  and  I  was  happy  to  spendtime  with  my  family.  Over  breakfast,  Gini  was  excited  to  hear  about  theprogress I’d made at the law firm, where I had been able to interview sev-eral  promising  candidates  for  my  replacement.  I  hadn’t  told  her  muchabout Winnipeg George and Roddy, so I explained that they were helpingme compile a lot of research. I told her about the trades from that weekand what I might be looking for in the weeks to come. She was more inter-ested in hearing that I was finally figuring out how to do my own analysisand less about how much money I was helping George and Roddy make.
“It  would  only  seem  fair  that  Anderson  or  even  George  or  Roddywould pay you something for the work you’ve done. You’ve made them alot of money.”
“Over 300 pips in the last week alone. It’s hard for me to believe that Icould help plan those trades at all. And they really are paying me back bydoing a bunch of research for me today while I spend time with you.”
“Maybe. But I still think that if you’re helping them make money thenyou ought to be paid for it. I’m not surprised that you’re doing well at it. Iknew you could.”
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Hearing this made the week’s hard work worthwhile, and I smiled forthe entire walk down to our church, where the priest was standing at thedoor,  greeting  the  faithful  one  by  one.  Father  Gonzales  pulled  me  asidewhen I approached him, and I was sure that he would suggest that I couldgain great blessings by attending more regularly with my family. I couldn’tdisagree with that, but it wasn’t what he wanted to say.
“There is a gentleman inside who would like to see you. We had a nicechat about you this morning, Harry,” and then he patted me on the backand handed me back to my family.
Inside, I knew exactly who to look for.Harvey  Winklestein  was  sitting  in  the  last  pew  and  grinned  broadlywhen he saw me. He rose to introduce himself to my wife and children. Hehad  a  large  paper  bag  beside  him,  which,  he  explained,  contained  treatsand  surprises  for  whoever  behaved  themselves  the  best  during  the  ser-vices. My wife invited him to our home for dinner and he agreed.
He then told us that he would take a walk around Brooklyn, say hello
to an old friend, and then meet us again after our services were over.
I hardly listened to Mass that day. I lost track of where to stand up, sitdown,  and  kneel.  Instead  I  thought  of  Harvey’s  wide  smile  and  happy  face.Just over a week ago I had decided that I was the worst trader in the world.Harvey had agreed with me, or at least agreed that I was bound to lose all mymoney if I continued to trade. What a difference a week could make! I hadn’ttraded at all, but I had proven that I knew how to do my own analysis and test-ing. I had spreadsheet upon spreadsheet that I wanted to show to Harvey later.Harvey Winklestein also turned out to be the best dinner guest we hadever known. He read to the children while Gini and I prepared the meal andhe  finished  two  helpings  of  my  wife’s  meatloaf,  and  then  demanded  therecipe.  When  the  kids  finished  and  left  the  table  to  go  play  in  their  bed-room, Harvey was ready to talk about trading.
THE BANES TEAM IS FORMED
HARVEY: I wanted to talk to both of you today. From this point on, you area team in this, and you both need to be involved. This includes you, Gini,even though you will probably not be doing any of the trading.
GINI: I want to be involved. I think I have been included in most of it up tothis point. Even if I heard about trades or whatever a few days late, atleast I’ve heard about them.
ME: I  do  want  her  to  be  a  part  of  all  of  this.  I  can  see  how  that
will help.HARVEY: How?
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ME: She  needs  to  be  aware  of  the  amount  of  money  we  have  in  the  ac-count, the amount of money we have at risk at any given time. This isher money, too, and I am hoping to be ready to trade again soon. But noton my own completely.
HARVEY: This is good to hear. Gini, this means that you are going to haveto meet with Harry at least once every day. Preferably before any newtrades  are  open,  to  talk  about  what  trades  are  being  planned,  whattrades  are  already  profitable  or  not,  and  how  much  is  at  risk.  Theremight be times that you both agree to scale down the risk, or scale it upand make a bigger trade. You will know how to do those things as youwork together.
ME: I want to show her my spreadsheets, too.HARVEY: I want to see those as well. Tell me what you learned about test-
ing.
ME: I learned, first of all, that the money management principle you taughtme—the  75/25  rule—made  so  much  more  sense  after  I  did  hugeamounts of testing.HARVEY: Why is that?ME: Because I had an appreciation for the benefits of a winning system.You  taught  me  never  to  let  my  account  go  below  25  percent.  Testingshowed me that I could develop a system, test it, and give myself a posi-tive expectancy of gains. By filling up a thousand rows in a spreadsheet,I found that I didn’t have to trade on emotion. And that trading on emo-tion didn’t have a positive expectancy.
HARVEY: No, it doesn’t. It has a negative expectancy, in fact.ME: And while I did the testing, I realized that I wanted to only take tradesthat  I  could  feel  confident  about.  And  I  couldn’t  feel  confident  abouttrades unless I understood how those trades fit into a larger picture, abigger overall system. It wouldn’t bother me now to lose 100 pips on atrade because I know that first of all, I won’t ever risk very much on thetrade in the first place, and second of all, that over time I am going tohave more winners than losers. And the winners are going to be biggerthan the losers, on average.
HARVEY: How much bigger?ME: It depends. When I tested the daily charts, I tested at least three hun-dred trades across the GBP/USD, the GBP/JPY, and the EUR/USD. Myaverage winner was 212 pips, and the average loser was 88. So for thattime frame, I had a win-to-loss ratio of 2.5.
GINI: What exactly does that mean?ME: It’s good news, because it means that on average, my winning trades
are going to be two and a half times larger than my losing trades.
GINI: But what if you lose more than half the time?
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HARVEY: Great  question!  Harry,  in  those  three  hundred  trades,  did  you
tally the wins and the losses?
ME: Sure  did.  Two  hundred  thirty-two  winners  and  seventy-eight  losers.That means that over the course of a few hundred trades, I am likely tohave 77 percent winning trades.
GINI: So this is a good system. A really good one.ME: Right. But it wasn’t the best. I did better on the four-hour chart thanany  other.  I  tested  over  six  hundred  trades  across  the  same  currencypairs.  I  ended  up  with  an  average  winner  of  267  pips  and  an  averageloser of 94. I had a 74 percent win percentage as well.
HARVEY: Impressive. Is that the chart you are going to focus on now with
live trading?
ME: Yes, as soon as I’m ready. Until then I am going to keep paper trading.HARVEY: Good. We’ll talk about that in a moment. For now, I have more
questions for the two of you.
ME: Okay.GINI: All right.HARVEY: Gini, what if Harvey starts trading, let’s say, this week, and for therest  of  April  he  only  has  losses.  He  has  ten  trades  and  all  are  losers.What should he do?
GINI: I’m  not  sure  what  you  want  me  to  say.  I  think  I  would  tell  him  to
keep trading.HARVEY: Why?GINI: Because over time he is going to make money with the system that
he tested.
HARVEY: That’s right. That’s a brilliant answer. But, Harry, what’s the other
side of that answer? What are we assuming about your trades?
ME: We’re  assuming  that  I  am  only  risking  very  small  amounts  on  each
trade, so ten losses really does not damage the account.
HARVEY: Perfect! That’s the next point to make. If you open another accountwith five thousand dollars, then I suggest that you trade for just one dollarto three dollars per pip. If you have an average loss of 100 pips, then eachtime  you’re  only  risking  a  few  percentage  points  of  the  account.  Thesmaller the trades, the better. That way you can last much longer.
GINI: It’s going to be hard to earn a lot of money from trades that small,don’t you think? Why not put in more money and take the same percent-age risk, but at least have the chance to earn more money?
HARVEY: That’s  not  a  bad  question,  but  it  takes  the  focus  off  where  itshould  be.  For  the  next  month,  Harry  should  concentrate  on  takinggood trades, checking them with you, continuing his testing, and prov-ing the validity of his system. He is working at Wakeman again so it’s nota  question  of  how  much  money  he  can  make  from  trading  now.  It’s  a
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question of how much he can make from trading down the road, if hecan prove that he can do it now.
GINI: That makes sense. Trade with as little money as possible now, while
he is still learning to trade.
ME: And learning to be responsible with the money. If I lose five thou-sand dollars more, at least we know that I can stay at Wakeman for awhile longer. In a way, it’s money that we can afford to lose.
HARVEY: There is no such thing as money that you can afford to lose.GINI: [silence]ME: [silence]HARVEY: Do you move into an apartment, and say to each other, well, it’sokay if the apartment burns down? We’re only going to move into apart-ments that we can afford to burn down?
ME: No.HARVEY: Your trading account is your next apartment. It’s the Park Slopebrownstone you want to buy. Do you want to trade to earn the money tobuy the brownstone, and then lose that money? Would that be moneythat you can afford to lose?
GINI: No way. Harry?ME: Whoa, I’m sorry! I didn’t ever think of it that way. But it’s true. If I lost25 percent of my account now, it would be like losing 25 percent of ourfuture home. That’s right. That is exactly why I didn’t treat the first ac-count with a lot of respect. I didn’t think about what it took me to earnthe money in the first place, or what future goals I was throwing awayby not being responsible.
HARVEY: I  could  not  agree  more.  If  you  can  learn  to  show  respect  for  aone-hundred-dollar account for these reasons, then you can take care ofa million-dollar account. The amount of money won’t make a differencebecause you will agree that you will never do anything to damage yourdreams.
ME: Agreed. I promise. And Gini will oversee it.HARVEY: Harry, where do you stand on the emotional scale? How have you
felt the past week or so, not trading?
ME: I  haven’t  cared  much  about  it  until  now.  I  don’t  feel  compelled  totrade  on  emotion  anymore.  If  I  had  any  desire  at  all  to  start  makingtrades this week, it came in just the last day or so because I now have atested system and I had seen so many examples from that system that Ican’t  really  know  much  more  about  how  it  works  until  I  trade  it  withreal money.
HARVEY: All of this is exactly what I wanted to hear. Now we’ll get down tothe last law of trading: I will hold myself accountable. Harry, your wife isgoing to hold you accountable, and she is going to make sure that you
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follow everything that we’ve said so far. You will need to keep a note-book  of  your  trades.  In  that  notebook,  you’ll  write  down  your  tradeplans, including the size of the trade, the entry, the stop, and the limit.You’ll write down your thoughts about the trade, and how it compareswith other trades you’ve already taken. You’ll include thoughts and a re-view once the trade is closed. If you can, you should print off a screenshot of the chart from the trade and include that in the notebook as well.Gini will sign off on every closed trade, which means she will have seenexactly what you planned and if you followed through on the plan.
GINI: I like this. I like the idea of being included in the trading.ME: I like it too. This is going to definitely help me maintain some disci-
pline.
HARVEY: Gini, how do you feel about Harry doing some trading, starting
this week?
GINI: As long as we abide by the rules you’ve laid out, then I am excited to
give it another try.
HARVEY: Then let’s see what Harry Banes can do. For real this time.
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CHAPTER  20
PresentingOur Findings
R oddy wore his oldest suit the next day. This was to show off in front
of George Sisler. The fact was that the only thing that could impressGeorge Sisler would be a ton of interest rate data.
And we had it.Winnipeg George and Roddy had hardly slept on Saturday or Sundayand had produced an astounding amount of information. On that Mondaymorning I had done some of my own research, finding the time by taking ahalf day off work. I hadn’t seen Roddy or Winnipeg George that morning,so they didn’t know what I was going to say. But it would dramatically in-crease the profits in the system that we were following.
At lunchtime we met in the dark lobby of Sisler & Company, and wewere  buzzed  onto  George  Sisler’s  trading  floor  right  on  time.  I  could  tellthat Roddy and Winnipeg George were unimpressed, to say the least, withthe offices. They had heard more about Sisler than I had, and so they’d ex-pected  to  see  a  sparsely  decorated  office,  but  not  a  downright  ugly  one.Later Roddy would tell me that he was going to sign Sisler up for a sub-scription to Martha Stewart Living magazine.
George  Sisler  had  set  aside  an  hour  for  us,  and  some  of  his  tradersgathered around as well. He explained that they were curious to see whatwe’d discovered about interest rates, since they had been doing their ownresearch. And then we let Winnipeg George launch into our presentation:“Mr. Sisler, our basic conclusion is that interest rate differentials lead crosscurrency values by several months if not more. I want to start off by tellingyou how we approached the project and then, in a roundabout way, let youknow how we can use this information in our trading.”
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FIGURE 20.1 The interest rate differential is 3.75 percent.
“Sounds fine to me, boys. Let’s dig right in.”Winnipeg  George  opened  his  laptop  and  produced  a  chart.  “You  cansee on the graph here that between February 1986 and January of this year,there have been some wide fluctuations 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
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FIGURE 20.2 The interest rate differential drops.
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 gathered
around.
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 already
following?”
“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 you
go 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.”
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Then it was my turn to speak up.“I think I’ve also found something that might be a good addition to this
research.”
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. If I 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  the
sell-side account.”
“Ha!” I cried out. “That’s what I thought. I did. But I was wrong. I found
three currency dealers that don’t charge interest.”
“What? That’s impossible. The dealer would go bankrupt offsetting the
trades 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
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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 then
came back quickly and agreed to do it.”
Sisler was now superimpressed. “You could earn a lot of money just in
interest 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