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 know
soon.
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.
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CHAPTER  21
Back inthe Game
Now  is  a  good  time  to  bring  you  up  to  speed  on  another  trade  that
Winnipeg George and Roddy and I planned and took. This would bemy 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.I liked 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
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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
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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 a 7 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?
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CHAPTER  22
Return to theThirty-FirstFloor
Idiscovered the very next week why Anderson had been so kind to me.
One evening not long after the EUR/USD trade was closed, he called upto 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 I
wanted to give you this,” and he handed me an envelope.
“What’s this?” I asked.“It 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.”
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I desperately wanted to look inside the envelope right then. How rude
of me. But who wouldn’t want to know how much was in there?
“I 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. “I need 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 Anderson
matter. But what would he want with that?
“I’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.”
“I can talk to Mr. Johnson about it in the morning. I’m not sure what
he’s going to say about this.”
“Harry, I’d prefer it if you didn’t mention this to Herb. Or anyone else at
the 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.
“I can’t do that, Mr. Anderson.” I looked him in the eye. “I just can’t do
that 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
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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 trustI’d regained with Mr. Johnson and the law firm.
I handed the envelope back to him. “I can’t accept this from you. I have
too 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.
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CHAPTER  23
SettlingMy Tab
Two  more  weeks  passed.  I  hired  a  replacement  at  the  law  firm  and
planned  to  work  alongside  the  newcomer  for  at  least  a  month  tomake 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-blow account 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
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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.
A short 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,”  he
replied.
“I’m happy to do anything that you want me to do. Pay you anything
that 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 really
do to help you, but I am willing.”
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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  of
money 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.”
“I’ll do my very best.”“I know you will, Harry.”And with that, Harvey stood up, finished off the last olive, and walked
out of Di Palo Fine Foods.
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Epilogue
When I tell aspiring traders that the most important laws of trading
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:
YOUR BEST FRIEND: I crashed your car tonight. I totally wrecked it. But I
want you to know, I learned a really good lesson.
YOU: What! What did you do? What lesson did you learn?
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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 BEST FRIEND WHOM 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
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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 how
you’re doing.
P.S. 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.
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APPENDIX  A
The RetailCarry Trade
by hedge funds all over the world.
The retail carry trade is an adulteration of the same type of trade done
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 thatyou would have to pay interest instead.
Each Wednesday was “triple interest day,” or the day when instead ofpaying  or  charging  one  unit  of  interest,  a  currency  dealer  would  pay  orcharge three times as much. Why? Because a currency transaction has asettlement date, and Wednesday’s settlement date was Saturday. The cur-rency market isn’t technically open on Saturday or Sunday (until 5:00 P.M.or so), so a transaction opened on Wednesday can’t fully settle until Mon-day. This means that any interest due or owed on the transaction would be
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triple. Remember, interest doesn’t sleep: if you owe money on your creditcard,  you  don’t  get  to  stop  paying  interest  just  because  your  credit  cardcompany isn’t open on Saturday or Sunday.
When  I  discovered  a  few  currency  dealers  who  would  allow  me  toopen an account that did not earn nor would be charged interest, I discov-ered an astounding opportunity. This would allow me to open a sell posi-tion on the GBP/JPY and avoid paying any interest on the position.
I invited Harvey to the house one evening soon after I discovered theno-interest opportunity, and I presented the idea to him and Gini. It didn’ttake long for Harvey to realize that this no-interest game wasn’t going tolast forever. He encouraged me to take advantage of it as quickly as possi-ble. This strategy did not require very much management and thus had avery low risk.
With Harvey’s blessing (he was equally enthusiastic about seeing howwell this strategy could work), the week after I found out about this trade,I deposited $10,000 with a No Interest Currency Dealer (which will remainnameless). At the same time, I opened a $10,000 account with Inter-DealerForex  Trading,  which  paid  slightly  higher  than  average  swap  rates  andwhich had excellent customer service.
In the No Interest Currency Dealer account, I sold 2 standard lots ofGBP/JPY. At exactly the same time, in the Inter-Dealer account, I boughtthe same amount of the same pair. Then I held on. To say I was nervousabout this is to grossly understate the feelings I had: I was terribly anxiousabout the outcome.
The greatest element and one calming feature of this trading strategywas that during the trade I was completely pip neutral: If the trade in oneaccount  was  losing  money,  the  trade  in  the  other  account  was  makingmoney. And I had a 500 pip buffer—the trade could go against me 500 pipsbefore the losing side would get a margin call. Roddy and Winnipeg Georgehelped me to set up a model for determining when to withdraw funds fromthe winning account and wire them to the losing account, so that I couldavoid the margin calls if possible.
From  day  one,  I  earned  more  interest  than  I  thought  possible.  I  wasused to savings accounts at the local bank that would pay, back in 2004,about 1 percent per year. But by trading those two standard lots in each ac-count, I was making over 1 percent interest on the total amount invested—the  $20,000—every  five  days.  Five  days!  I  paid  a  spread  to  open  thetrades—but  it  only  took  a  week  to  earn  enough  interest  to  pay  back  thespread that I’d paid to enter the trade in the first place.
In the first 12 months that this trade was open, I closed it six times onmargin calls, and each time I closed it, I reinvested the gains that I’d madefrom the account earning interest. I made deposits as often as I could, toput more money into the trade. Within 12 months’ time, I had over $60,000
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invested in the trade; $25,000 of that money was interest profit. The other$35,000 came from my own deposits into the accounts. By July 2006, withno further deposits, the investment had nearly doubled to $116,000.
But that’s just the small money.In January 2005, after I had fully tested the strategy for balancing theaccounts through real experience with the trade, and four months after Ijoined Paycheck Partners as a trader