also use very close stops (10 pips) and/orhigh-ratio risk/reward parameters (5:1 or more).As you adopt new market pairs and crosses to trade, you will find with experience that some markets do require money management parameter adjustments. However, if a pair takes you out of your trading profile, perhaps it isbetter to seek another opportunity.I talk about using this information in Parts 3 and 4. For now, we arehappy to just add the basics to your codex.
Breaking EvenIt may sound strange to hear that your overall goal is to break even. However,especially for the new trader, that is exactly how it should be. We know most
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new traders lose quickly and are shown the door long before they even have thetime to develop their trading style or learn to use their trading tools. The bestway to avoid this calamity—and be around to learn the markets and profitthereby—is to think about risk first, reward second.Breaking even does not mean closing a trade after only a few minutes, although I have done that exact thing many times when I felt something waswrong or the market environment changed rapidly. As long as you don’t overtrade, the costs of doing business in FOREX are small enough that the tradercan afford such luxuries. If you start with the USD/EUR pair, you will pay onlytwo or three pips per trade.Statistically, you have a higher overall winning expectation with ten 10-piploss trades than a single 100-pip loss. A 100-pip trade is a calamity to mosttraders; 10 pips is very survivable.Breaking even does require giving most of your pretrade consideration tothe risk involved in a trade. If a trade doesn’t fit into your profile parameters,you had better make sure you have very substantial reasons for going off-board.
Trade SizeIn Chapter 6, I discussed briefly setting a trade size and sticking with it. Eachtime you double your money—should you be so fortunate—you may thendouble your trade size.If you’re on a beer budget of $2,000 or less, you’ll need to begin tradingwith what is called a mini-account. Most broker/dealers now offer miniaccounts. OANDA (www.oanda.com) and www.efxgroup.com are two youmight consider; there are many more. You can work backward from your traderprofile and money management parameters to determine a reasonable trade sizebased on the 10 · 3 trading campaign concept I introduced in Chapter 6.Again, I recommend that newbies use a fixed-loss amount for each trade.The trade size calculation is:Risk per trade =
Trading capital / 3 campaigns10 trades
All other money management parameters can be derived from this formula and your trading profile.
Market Entry and ExitThe methods for market entry are numerous. Some traders use charts to enterand exit a trade, some traders use ad hoc rule sets, and others use indicators.
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FIGURE 7.1 Fixed Price Stops.Beginner traders should start trading with ﬁxed price stops and ﬁxed priceproﬁt objectives. Each successively higher trading proﬁle may realisticallyset higher and higher risk/reward ratios.
Entry and exit off a chart is the most transparent; you don’t have to translatethe meaning of one tool to another to make a decision. It is also faster, and themarkets move so quickly that whoever hesitates is indeed lost.Exit is a little different from entry. You make an independent decision toenter a market. Exit decisions may be due to your profit target being attainedand/or the market hitting your stop-loss. Those new to FOREX should set astop-loss order for their fixed loss amount as soon as they have confirmation ofa market entry. See Figure 7.1.My FxCodex approach uses the entry and exit techniques inherent inGetting Started in Currency Trading, namely GSCS. I show you more of these inPart Three. In Chapter 8, I discuss using GSCS to both enter and exit the market. For now, use it only to enter, and add the exit techniques later, after youhave had a few months’ experience trading.I believe any codex approach should use the chart entry and exit method,if not with GSCS, then with some other internalized technique, even if it is afixed price method.
Monitoring a TradeBetween entry and exit, there is not too much the trader can or should do beyond keeping the trade closely under observation. You’ve made your decisions,
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paid your money—now it’s time to watch. Use this time to examine other candidate trades or update your reports. Don’t use it to troll the blogs or forums.There are reasons you may be advised to close an active position before iteither attains your profit objective or hits your stop-loss:Reasons to Close an Active Trade• An unexpected announcement is pending.• The market environment changes suddenly.• You are called away for a period of time from the markets.• Your Internet or trading platform goes down.• You suffer an emotional crisis.Processes work best the less they are interrupted or altered. If you findyourself frequently closing an active trade, it may be time to reexamine theprocess itself.
SummaryFrom the information in this chapter, you should determine your trader profileand complementary money market parameters, including trade size and stoploss values. Add all this information to your codex notebook along with thetrading techniques you have selected for your personal codex.
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8Chapter
Setting Up Your TradingPlatformYou’ll make most of your money sitting on your hands.—Charles B. Goodman
n the codex approach to FOREX trading, all the elements must work together in harmony. This includes the broker/dealer trading platform, sometimes referred to as a trading station.
I
Selecting a Broker/DealerSelecting a broker/dealer is discussed in detail in Getting Started in CurrencyTrading (GSICT). Since that book was written, we can all be grateful for anumber of happy occurrences. Many of the borderline broker/dealers are gone.New capital requirement rules have taken effect, and all the major trading platforms have become both more stable and more robust. In fact, so many features exist in a typical dealing station that it sometimes becomes confusing.Most of the major broker/dealers also have arrangements with third-partyvendors, which allows you a great deal of flexibility in selecting a toolbox.However, I recommend starting with just the charting tools integrated intoyour broker/dealer’s trading platform.Your primary interest is in broker/dealers’ bar charts, because these arethe backbone of the codex trading approach.The first criteria (beyond the due diligence covered in Chapter 5 ofGSICT) are the look and feel. How do the charts look to you? What about the
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overall feel of the platform? This is strictly a personal choice. Select a marketpair and a specific time range and time frame. Look at and work with this chartfrom several broker/dealers. Remember that most trade stations allow you tocustomize the look and feel of a chart.You’ll be watching the screen for many hours, so make a good initialchoice and try to stick with it. Just changing chart color schemes midcoursecan be an enormous distraction. Spend some time here and try to stick withyour selections. Figures 8.1 and 8.2 will give you an idea how different parameters can make charts look much different.
Demo AccountIf you are a new FOREX trader, you should download the demo of at least fouror five broker/dealers and spend a few hours working with each of them.The second criterion is the feature set. Does the trading platform havethe tool set you need and the money management capabilities? Appendix B
FIGURE 8.1 Sample Chart 1: A 10-Minute, 1-Day Chart.Colors, chart size, and time frame can all create a different look and feel.Experiment with a variety of trading stations and ﬁnd the ones that seembest to you. Then stick with them.Source: FXtrek IntelliChart™. Copyright 2001–2007 FXtrek.com, Inc.
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FIGURE 8.2 Sample Chart 2: A 10-Minute, 5-Day Chart.Shading, color (if you use other than black and white) and sizes can alterthe appearance of a chart dramatically.Source: FXtrek IntelliChart™. Copyright 2001–2007 FXtrek.com, Inc.
contains a list of broker/dealers meeting codex requirements with respect tofeature set. None of them have everything, however. As I have mentioned,swing charts are not popular right now and are more difficult to find.All retail broker/dealers offer a demo account. (See Figure 8.3.) Try atleast five of them, more if possible.Be sure a trading platform has as many as possible of the tools you needand use. You can find almost anything from third-party vendors, but the moreyour primary platform includes, the better and easier it is for the trader. Just afew of the more popular:www.efxgroup.comwww.oanda.comwww.gftFOREX.comwww.hotspotfx.comwww.gaincapital.comMost brokers ask for only the basic information to open a demo account.
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FIGURE 8.3 The Account Due Diligence Process.
Be sure a trading platform has as many as possible of the tools you needand use. You can find almost anything from third-party vendors, but the moreyour primary platform includes, the better and easier it is for the trader. Just afew of the more popular:www.gaincapital.comwww.efxgroup.comwww.FOREX.comwww.gftFOREX.comwww.hotspotfx.comMost brokers ask for only the most basic information for a Demoaccount but you will be on their mailing list.
Setting Up Your Trading PlatformThe two most critical features you will need to trade the codex approach arebar charts and flexible stop capabilities. If you can trade from the chart, thatwill be a small but significant advantage. Some of the newer dealer platforms
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allow you to simply click on the chart to execute a trade, rather than manuallyenter a price.One feature I miss is being able to set the range values on charts; these areautomatically set for the trader when the trader selects the time scale.If and when you trade multiple markets, you will probably want a computersystem with two separate monitors. You can, of course, keep multiple browser sessions open, but clicking from one to another can be distracting. One of the monitors will be for your actual trading activities, the other(s) for your charts.For trading the codex method, you need three bar charts for each pair orcross you are trading. How you organize charts is up to you. Experiment asmuch as you like, but be fully satisfied with the arrangement before trading.After you’ve selected a broker/dealer and a trading platform, it is timeto set it up for trading. Having spent some time with the broker/dealer’sdemo account, you should be comfortable with the methods for doing a simple setup. The key elements are your charts. You’ll want full visual referenceto your three bar charts according to your trader profile for the USD/EUR. Ifyou have space, add the primary (middle chart time frame) of three otherpairs (not crosses) that appear to meet your personal codex criteria.The author had hoped to show the reader a typical trading platformsetup. We asked permission from five different broker-dealers: Gain Capital,EFXgroup, DukasCopy, FXsol, and HotSpotFX. Gain Capital was kindenough to reply and was anxious to oblige, but because of third-party chartswas unable to oblige. The others did not respond to our request.I recommend the serious FOREX trader have at least a 20-inch widescreen monitor with a high-end graphics card. Many traders use multiple monitors; I’ve seen systems with a dozen monitors. I use two monitors—one for mydealing station and one for my charts. You can manage everything on onemonitor but the constant opening, closing, and resizing of windows can be distracting and time-consuming.Initially you will find following three charts for a single pair to be a fulltime job. As you gain experience you will become more comfortable watchingmultiple markets. Everyone has a limit, in psychology it is called ‘channelcapacity’ and your trading method also impacts how many markets you cantrack comfortably. My limit seems to be five or six and I am very comfortablewith three or four.
OverkillThe key to success is spending most of your trading time analyzing a few markets very thoroughly and minimizing distractions that force you to change focus too often. Keep it simple.
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FIGURE 8.4 Charting Services.FXtrek (www.FXtrek.com), maker of IntelliCharts, has a superior chartingservice. It is integrated or can be integrated into some broker/dealertrading platforms.Source: FXtrek IntelliChart™. Copyright 2001–2007 FXtrek.com, Inc.
I have seen trade stations for individual traders with up to fifteen monitors! That is overkill. I simply don’t think an inexperienced trader can follow somany markets, charts and indicators—and make a rational decision about atrade. Frequently shifting from one market to another is not good. Two monitors should do; one for your broker-dealer platform, another for charts and indicators. You may wish to keep your primary markets on the monitor withyour trading platform. Use the second monitor to host charts of your secondary and tertiary markets. If you do need ultra-high power and multiplemonitors, check out: www.alienware.com and www.tradingcomputers.com.Do not forget a backup power supply and a backup internet connection.Tip—do not skimp on either the quality of your monitor(s) or graphicscard. When you get rich from trading and retire to Hawaii you will want tosave your eyesight for the sunsets.
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SummaryThis concludes Part Two of Getting Started in FOREX Trading Strategies. Youhave now assembled a toolbox, defined at least your initial trading style, anddecided your money management parameters. You’ve selected and explored abroker/dealer’s trading station with a demo account and perhaps worked withsome of the choices residing in your codex. Finally, you’ve done the initial setupon your trade station with charts, stop-loss parameters, and any of the othercodex tools the platform offers.You do know the trading platform inside and out and are extremelycomfortable with using it. You don’t know how to put all of this together asyet, but you are already ahead of 90 percent of all traders with respect to tradepreparation.
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3Part
The Codex Methodof Trading FOREX
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9Chapter
Tracking MarketsFear and greed loom large once you take a position in the market.—Charles B. Goodman
e are now ready to walk through a trade and show how the variouselements—toolbox, style, and money management—work withinthe codex process. I include information on tactics and market filtersin this chapter because they are easier to understand with specific examples.Part Three is very visual. I’ve used many screenshots from the Gain Capital www.gaincapital.com trading platform to show the codex process in action.Whatever broker/dealer and trading platform you select, the similarities will bemuch greater than any differences.There are six steps in the codex trade process: (1) tracking, (2) analyzingand selecting, (3) entering, (4) monitoring, (5) exiting, and (6) reviewing.
W
The Process in ReviewTracking —> Selecting —> Entry —> Monitoring —> Exit —> Postmortem
It may help to look at the process in reverse. Our goal is to complete awinning trade in the USD/EUR pair market.We will use GSCS as our primary tool to make our entry and exit from themarket. I am using only two of the GSCS ideas in this part of the book: thedouble intersection and the return. I also emphasize ordinal rules over cardinalrules.
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If you decide to use GSCS as your primary chart interpretation method,use only the ordinal principles first; there are many good trades waiting to bemade this way. After you have mastered the ordinal rules and feel confident inyour ability and experiences, you can concentrate on the cardinal rules.My web site, www.fxpraxis.com, has a Goodman Discussion Board forthose who trade with me through my Introducing Broker relationship. TheGSCS section of the web site also has other Goodman articles, including atime-based counting system for advanced traders.The codex approach uses bar charts, swing charts, or point and figurecharts to monitor and define a market within the context of your trader profile.
Tracking CandidatesThe first step is the act of finding qualified candidate trades. If you have no active trade in the market, then you are monitoring both the EUR/USD pair andthe three monitor pairs you selected.Primary, Secondary, and Tertiary MarketsTier 1: USD Major
Tier 2: USD Major
Tier 3: Cross Rate
EUR/USD
GBP/USD
EUR/GBP
USD/JPY
AUD/USD
AUD/JPY
GBP/USD
USD/CHF
GBP/CHF
New traders should focus only on tier 1 pairs and move on to tier2 pairs and tier 3 crosses only after success in tier 1.
After you have traded for a few weeks, the three-tier approach is ideal.Initially, I recommend only two tiers:• Tier 1: the three charts of the USD/EUR selected in accordance withyour profile.• Tier 2: the three candidate markets for which you are monitoring onlythe middle-range chart. For candidates, I recommend pairs that show arelatively high degree of thickness. Don’t trade or monitor crosses(pairs not including the USD) until you have traded with real moneyin your account for several months.
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Two Market TiersTier 1 Chart ScalesGuerilla trader: tick, 1 minute, 5 minute.Scalper: 1 minute, 5 minute, 15 minute.Day trader: 5 minute, 30 minute, 1 hour.Position trader: 30 minute, 1 hour, daily.Tier 2 Chart ScalesGuerilla trader: 1 minute.Scalper: 5 minute.Day trader: 30 minute.Position trader: 1 hour.All traders should step back and review the price behavior ondaily and weekly charts at least once a week.
I use bar charts exclusively to monitor candidate markets. GSCS is usedto select trades and enter and exit the market. The other tools in the FxCodextoolbox I use primarily to check my conclusions and perhaps catch opportunities I may have missed.Look at your candidates from several perspectives:• Does the market under consideration meet your stylistic requirements?Directional movement, volatility, thickness, and rhythm should all beexamined.• How do those characteristics match up with your profile? See Table 9.1.Candidate MarketsCandidates should meet all of these criteria:• Appropriate pair or cross.• Suitable market environment.• Good money management.• GSCS criteria.
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TABLE 9.1 Candidate Markets versus ProﬁleProﬁle
Yes
No
Pair (cross)Market environmentMoney managementGSCS criteria
If the candidates’ characteristics match up well with your profile, continue. If they don’t, keep monitoring. Never accept a less-than-perfect-lookingcandidate. Sit on your hands until one shows itself to you.Does the candidate have the basic swing characteristics for a GSCS trade?You will need some experience with GSCS—or whatever interpretive methodyour codex includes—to make this determination intelligently. If you are usingGSCS, stick with the return and double intersection formations for now. Thisrequires anticipating how formations are built over time and requires a bit ofexperience. The more charts you study, the more you will be able to quicklyspot candidates. See Figures 9.1 and 9.2.
FIGURE 9.1 A Goodman Return Candidate.This is the basic paradigm for a return candidate. The fourth wave(endpoint circled) is the critical return wave.
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FIGURE 9.2 A Goodman Double Intersection Candidate.This is the basic paradigm for a double intersection candidate. The circledendpoint represents the double intersection of the 50 percent move of twowaves—the waves of the ﬁrst three smaller waves and the wave of the thirdwave. It is the author’s considered opinion, after 30 years in the market,that the return and double intersection are the two most useful formationsin all of trading. For more information please see “Currency Codex” onwww.fxpraxis.com.
Look for markets with the appropriate characteristics and attempt to visualize the GSCS wave potentials in them. See Figure 9.3.
SummaryFor a potential trade to move from candidate to select, it must meet further criteria; to move from select to trade, even more. This layered process approachcan seem tedious and at times boring. Most trades will never make it all theway from candidate to trade status.When you are able to watch two or three markets and monitor four orfive more, you will have all the opportunities you can handle, irrespective ofyour profile.Because you are actively trading only a single market (USD/EUR), thetime between trades may be longer than you would like. The guerilla and thescalper will find more trades than the day or position trader simply by virtue ofthe time frames of the charts selected by each type of trader.
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FIGURE 9.3 Waves in Progress—Mapping.Anticipating wave propagation is key to success in trading GSCS. Whichwave is primary and which wave is secondary? In this example, is wave3 the beginning of wave 3 of the ﬁrst wave or is it wave 2 of the secondwave? Reference to the next larger chart scale often provides importantclues. If this is a 15-minute chart, refer to the hourly chart to determine theprimary trend of the market.
But by using this filtering process, you are assured not to miss anything inyour codex. The trades you make will be the strongest of the strong.
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Selecting MarketsPassing a good trade is better than making a bad one.—Charles B. Goodman
selected candidate is a strong candidate, but it is not a trade just yet. Itneeds to meet more criteria to move up the ladder.
A
PerspectiveEveryone wants to trade the major trend of the market. But what is the majortrend? To a guerilla it may be the direction on a five-minute chart, while a position trader may reference something as broad as a weekly chart for perspective.I am using a day trade as an example, and assume you are keeping inmind the codex adjustments required to make it pertinent to you. For mywork, the perspective chart is a daily chart. I want to trade the daily trend, or atleast the session trend.Perhaps your losing trades occur mostly when you fight the perspectivechart trend? Chapter 14 discusses post-trade diagnostics.
Close ExaminationNext, go the other direction and examine the elements of the trade, beginningwith your detail chart. Does anything there contradict your selection? If youare using GSCS, what are the smaller formations telling you? Do they confirmthe trade chart?
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Not all markets are good Goodman candidates. But given three pairs tradesand three chart scales you will find enough opportunities that you can be selective.Markets with high volatility and low directional movement should be passed up.
GSCS CharacteristicsDirectional movement: medium to high.Volatility: low to medium.Rhythm: regular.Thickness: medium to high.
Conﬁrming EvidenceHere I would look for any confirming Nofri formations and make sure the TMAand TOA indicators are also confirming. If you are using any indicators, now isthe time to look at them and see what they are telling you about the market.This is the perfect time to eyeball the chart. Look for the four eyeballcharacteristics:• Directional movement• Volatility• Rhythm• ThicknessNofri CharacteristicsNofri trades rely more on rhythm than the other market environmentcharacteristics. Rhythm should be regular.Directional movement: low to high.Volatility: low to high.Rhythm: regular.Thickness: low to high.
Money Management ParametersWhere will your initial stop belong? Where is your objective? Does the ratio ofthe two fit into your money management parameters? If not, it’s a pass until orunless they come into conformance.
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Tactics and FiltersLook at your trading calendar for the two currencies making the pair. Are anyannouncements pending? Has an announcement been made recently and is themarket still working it off?What time of day is it? Check charts going back a week or two for thesame time period. Does the market exhibit erratic behavior this time of day, ordoes it generally behave normally? By erratic, I mean exhibiting volatility spikesor sharp changes in directional movement. See Figure 10.1.Back to our old friends of directional movement—volatility and thickness. Have any of these changed dramatically on the trade chart recently?What are the eyeballing characteristics—directional movement, volatility,thickness, and rhythm? Are they steady? Have they changed recently?Mapping the TradeIf you are using GSCS now, try to visualize your ideal outcome. Then visualizealternative outcomes and—especially—the worst-case scenario. See Figure 10.2.EURUSD Time of Day Chart (Fridays)
2-, 7- and 15- Minute Range (1/1/2005 to 4/14/2006)565452504846444240383634323028262422201816141210864200000 0100 0200 0300 0400 0500 0600 0700 0800 0900 1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 2000 2100 2200 2300 2400
FIGURE 10.1 Time of Day.Avoid the peak volatility periods. This coincides with Federal Reserveand other USD announcements. Caution: Pip spreads for somebroker/dealers may expand enormously during these periods, up to30 pips for the EUR/USD—another good reason to sit on your hands.
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FIGURE 10.2 Visualize the Possibilities.This chart of the AUD/USD has excellent GSCS and Nofri characteristics. TheAUD/USD is typically a good trader for beginners with a reliable mid-rangemarket environment proﬁle.Source: FXtrek IntelliChart™. Copyright 2001–2007 FXtrek.com, Inc.
Close Your EyesFinally, close your eyes for a full minute (unless you are a guerilla trader; thenkeep it to 10 seconds!). Think of something pleasant other than the markets.Clear your head and ask yourself whether your emotions have been making thedecisions or your codex.
SummaryIf everything is in alignment, your candidate is on high priority. It’s time to pullthe trigger and make a trade.
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Making a TradeOnly pull the trigger if the gun is loaded.—Charles B. Goodman
he actual trade process is relatively short and simple. All the decisions havebeen made and all the criteria of your codex have been examined. Whatremains is to look for an entry point and place an initial stop-loss order.
T
How Did We Get Here?Let us review the codex process thus far. There are almost as many methods fortiming market entry as there are trading tools.Entry Techniques• Volatility• System• Ratio• Support/resistanceSimilar to placing stops, an entry may be based on volatility, your tradingsystem, or on a flat ratio where profit objective and stop are calculated a priorias a function of your trading profile.I do not recommend either entry or stops based on support and resistancelevels. These are used by so many traders that they seem to occur too often atthe same price. Professional traders