looked back at the current chart. How could I know that is whereit would stop? The night before, my planning had started with a numberthat Craig and Harvey had given me, and then I backed into a reason forjustifying a trade at that number. But this was entirely different. Would I bewilling to write this number down on a Post-it? And leave it on my desk?
More confirmation. I wanted more confirmation. I needed anotherchart to back me up.
So Ilooked at the weekly chart, but it was no help at all. It showed thatin October 1998, the pair had some trouble with the 1.1850 mark. But hadthe Euro even existed back then? How could they do charts for a currencypair that didn’t exist?
I deleted the weekly chart and wondered what Harvey would do inasituation like this. I decided that first of all, he most certainly would notrisk losing money on this trade. So I definitely wasn’t going to suggest abuy trade with a stop and a profit target. No way. But would it be appropri-ate to express my view that I thought the EUR/USD would stop movingdown once it hit the 1.1850 mark? Roddy had asked me, after all, where Ithought it would fall to. Why not write that down? It was just paper trading,after all. No one was going to get hurt.
So I wrote down: “EUR/USD Stops: 1.1850” on a Post-it, stuck it to mydesk, gathered my things together, and left. As I shut the door of the trad-ing floor behind me, I heard Roddy scream out.
Somebody had lost a paycheck.
 
  
 
Testing
 
rency analysis, for when I arrived at Wakeman, Butterman, and Bailey
at 7:00 a.m. (over two hours early, because I was intent on starting topay back stolen time, even if I could never catch up), my voice mailchirped that I had received, and I am not making this up, 37 messages.
I peeked around the corner. Herbie’s light was on. He was always inthis early, but it couldn’t be him. He would leave a note, telling me never tocome back. It wasn’t like Herbie to leave 37 voice messages, either. Thiswas something entirely different.
The first message said it all. It was Roddy from down on the 31stfloor, and it had come in two hours earlier: “Harry, you left a bloody notedown here and the traders have all gone mad. They’re running aroundwonderin’ if you’re buyin’ or you're sellin’ the Euro at 1.1850. Call downto 31, don’t be callin’ me. I’m at home and I’m sick of the phone ringin’here just because I saw yer note first. Bugger! Don’t leave any morebloody notes!”
The next messages were from all sorts of traders I’d never met and Ihad no idea how they got my number or why they would care. I was inearly, anyway, so I had a couple of hours to sort all this out and then I couldreturn to Wakeman in time to start the day. Although I didn’t like the ideaof falling behind on the filing, I most certainly didn’t like the idea of havingour receptionist flooded with phone calls as soon as she got in.
Before I could pick up the phone, my extension rang again. It wasCraig. There were loud voices in the background. He must have been sur-
T= next day I learned that I needed to be far more clear about my cur-
164
 
Testing 165
rounded by other traders. He said: “Harry, you had better get down here. Idon’t know what’s gotten into these guys. But they want to talk to you.”
“All right,” Lagreed. How had Ibecome so popular, just from one trade?What in the world was happening? Craig’s tone let me know that he wasn’tparticularly amused that he was the representative secretary who had totrack me down. I also rightly assumed that he didn’t much like an inexperi-enced trader like me getting so much attention. When I arrived on the 31stfloor, I waved my badge in front of the door, and walked out onto the trad-ing floor. It was loud. It was chaotic. It almost seemed like something hadgone terribly wrong. Craig seemed out of place in the midst of it all.
When I found him, I first asked him what in the world had happened.“Tt’s just a bit crazy here right now,” he admitted. “There’s word that one ofour London traders took a huge hit. Massive. Like more than a hundredmillion dollars.”
“A currency trader?”
“Right. So it’s sent all the fixed income guys—everyone down here—into a frenzy.”
“Why would that affect them?”
It was so loud in the room that we nearly had to shout to hear eachother. The upside was that no one recognized me and they weren't payingattention. Business television was covering the story on all the screensabove us, and between the comments from the reporters, I heard everysort of vulgarity imaginable.
“This isn’t the most stable of trading desks in the world,” he told me.“These guys aren’t noted for their adherence to Zen spirituality or peacefulliving. They are like a bunch of sharks. They smell blood in the water. Theysense change. Some of them are already calling headhunters and trying tosee if they can move into other jobs on the Street. Some are wondering ifthere will be cutbacks, and if they will make the cut.”
I wondered if Roddy or George were part of the panicking crowd. “Tmet a guy named Roddy last night. And a guy from Canada named George.Are they in trouble? Are you?”
He shook his head. “Roddy, no way. He’s an Asian session expert andhas contacts all over the world. He makes prices for some really large com-panies. Some of them are in London but he doesn’t want go back there.Having too much fun here winning everyone’s paychecks. He's gotnowhere to go but up in all this. He might have a chance for a promotion inall this, as long as he’s willing to go back to London. George, he’s fine, too.We call him Winnipeg George, because he’s from the province of Winnipeg.And George is a great trader. He’s been working closely with Roddy for along time.”
“And you?”
“Me? I'm fine. I’m having a great month.”
 
  
 
166 ADVENTURES OF A CURRENCY TRADER
“That’s excellent. It almost seems like you don’t fit in here with thiscrowd.”
He shrugged in a way that told me he agreed but that this wasn’t thetime or place to admit it.
“By the way, Harry,” he said, “I sold Euros at 1.2200, and I’m still in thetrade, too. Why did you tell these guys to make that trade? Anderson toldme he gave you a desk but you're not working here. What’s going on?”
Now it was my turn to shrug. “I can’t explain it. I am sort of shockedthat a bunch of bank traders would care at all what I said.”
“Ordinarily, they wouldn’t. But Anderson really put you on a pedestal.”
“Really?”
“Yes, really.” There was a hint of jealousy in Craig’s voice. “What didyou tell him? I thought your trading was going terribly. I told some guysthat Harvey was teaching you and they flew threw the roof—that news,combined with Anderson’s endorsement, it was too much for them. Marchwasn't easy on the short-term traders here and some of them got bit, mak-ing prices for some clients last month. They wanted to get back on trackand they’re looking to you now.”
“Well,” I replied, “first you need to know that I told Anderson that I wasa terrible trader and that I’d lost all of my trading capital. That, apparently,was not a big deal to him.”
Craig gave me a quizzical look. “It just doesn’t make sense.”
That stung a bit. Maybe I had drained my trading account. Maybe I hadnot been a disciplined individual. Those things were true. But I wasn’t acomplete moron. I was facing my challenges and I had been able to plan agood trade with Harvey’s help.
Craig realized what he’d said and tried to backpedal. “Sorry, Harry. Ididn’t mean it like that. I meant to say that it doesn’t make sense that, well,”and then he paused. He looked at me square in the eye: “Okay, I probablydid mean it like that. And I should not have said it. Your trade was actuallyreally good. We got the entry from Harvey, but you planned the stop lossand the profit target.”
“But why would these guys follow someone they’ve never met?”
“They do it all the time. Every day they’re talking to each other, swap-ping ideas, talking about rumors. That part isn’t a surprise. And I know thatAnderson can be a great judge of talent. So I’m not completely shockedthat he sees potential in you. But to give you space down here? Give you apass to get in the door? That's a lot of trust for someone he hardly knows.Something seems odd.”
“T can’t disagree. I’m not sure what to say.”
“Coming here today and yesterday, and hearing all these guys talkabout your trades, made me remember when I first started here and that Ifelt like I was on top of the world after one good trade.”
 
Testing 167
I knew where this was going. But I did not interrupt him. He contin-ued: “I've already told you this. But it’s like I see some of myself in you.That you have this temptation now to go over the top. To do more of thesame. That you can do no wrong. You can get into so much trouble soquickly like that.”
I nodded. He was telling me what I needed to hear. Last night I’d beentempted to plan another full trade. But I hadn’t. I’d stopped when I realizedthat I lacked the confidence to plan another trade. Rather than do that, Isimply started the next idea—with a number at which the Euro was likelyto stop (at least in my opinion). Maybe I was too close to the loss of my en-tire trading account, but I simply didn’t feel like I wanted to go out and con-quer the world. I still felt like I wanted to do my work at Wakeman. That Iwanted to earn back the trust of my wife. That I wanted to make Harveyproud that I could get my emotions under control. And then, most of all, Iwanted to discipline myself so that I could gain the chance to trade again.And trade profitably this time.
Ineeded to go. I had so much work upstairs and I wasn’t getting paid tosit and shoot the bull with a bunch of wild traders. Already, other tradershad begun to surround us and were asking me questions. They mostly justwanted to know if I was planning to buy Euros at 1.1850. It only took a fewmoments to explain that I was simply offering what might be a good profittarget on the original trade, if I hadn’t already picked a different target. Infact, I sort of wondered why they couldn’t come up with their own profittargets. Didn’t they know more about trading than I did?
RISKING ERNEST WELLINGTON’S MONEY AGAIN
 
Work raced by. Friday shot past and the only reason I stopped downstairswas to say good day to Roddy and Winnipeg George, who weren't thereanyway. The entire trading floor was empty. I checked the price of theEUR/USD and it was hovering at 1.2100, hardly having moved at all duringthe entire day. Having opened the charts, I figured I might as well take alook to see if I could justify any type of trade at the 1.1850 level. It didn’tmean much just to say that price would probably stop down at that price. Ifit was going to stop down there, why not buy it for even just a few pips?
Topened up the 4-hour chart again to see the places where 1.1850 hadbeen hit, and then I opened a 15-minute chart to get the finer details ofwhat happened exactly at those times.
The most recent example was November 18, 2003: at 10:15 on thatday, the pair rocketed through the 1.1850 mark, never stopping for abreath of air. Perhaps an interest decision had been made that day and it
 
  
 
168 ADVENTURES OF A CURRENCY TRADER
overwhelmed the market. In any case, price flew upward 127 pips beyondthe level, and didn’t fall back below it for six days. When it fell backthrough, it fell hard, but Ihad to believe that I would have exited the tradeby then. Taking a loss of 127 pips seemed too great. On a sheet of paper infront of me, I wrote:
November 18, 2003: Loss/127
Then I moved back in time to the next example, from November 16.Price rose upward and came within 5 pips of the mark (to 1.1845) and fellbackward 122 pips, almost immediately, which I confirmed with a shorterterm chart. It never reached higher than 1.1845 before taking this huge re-versal. Did this qualify? I said yes, since I wasn’t going to bicker with 5pips. From now on, I might go ahead and be willing to sell within 5 pips ofthe line. This seemed perfectly reasonable. Now I added another trade onthe piece of paper in front of me: November 16, 2003: Profit/122.
Next I looked back to October 24. Price rose up to a high of 1.1856, andthen fell backward immediately. It didn’t even stay in the 1.1850 area formore than two 15-minute candles. Then it fell all the way down to 1.1720, or130 pips, within two days. Another good trade. I wrote: October 24, 2003:Profit/130.
On October 23, price reached as high as 1.1843 but not any higher. Al-though it would have created an excellent trade, I stayed with my rule of a5-pip-buffer zone. Staying with the rule meant that I couldn’t take this su-perprofitable trade. But I realized that if I started changing the rules now, Iwouldn't have a very good set of results (see Figure 17.1).
On October 10, price reached 1.1845, never went higher, and droppedall the way down to 1.1547 in just seven days, before making its next climball the way back up to 1.1843 on October 23. This was nearly 300 pips ofgain and hardly any risk. I wrote: October 10, 2003: Profit/297.
The next example was October 9, which netted at least 150 pips. I hadtaken a short trade at 1.1845 to 1.1850. It only went as high as 1.1857. Obvi-ously, this level was important. Maybe as important as the 1.2200 mark.
I then found six more occasions on which the pair had hit that level andreversed. Three times it stretched over the 1.1900 mark before it fell backlower. Once it went as high as 1.1931, not quite 100 pips. Two trades only took30 pips of profit, if I adhered to the rule of finding the lowest point the pairreached before starting back up to hit the 1.1850 region. All I wanted to knowat this point was the maximum number of pips available on each trade.
The total number of trades I found—11:1 loss and 10 profitable trades.If I kept my stop loss at 100 pips, then my average loss would be 100. Myaverage profit across all trades was 171.1 realized that this time I had onlylooked at selling the EUR/USD, never buying it at the 1.1850 level.
 
Testing 169
 
EURUSD - 15 min
October 23, 2003: October 24,2003: — 1080Trade NOT Taken Trade Taken
}1 1980
; M "
WWE ow E
 
 
 
p1.1780Price gets close but not close I sreenough. Consider increasing "buffer zone". LisiTeas Dea WED Te Gas Toe Toes WG dows Tome Sas TS tous Wat mats
FIGURE 17.4 = Harry's 5-pip-buffer zone rule.
Ipulled out a Post-it note and wrote:
Short EUR/USD 1.1850 (if rises from underneath)Stop: 1.1950Profit: 1.1700
That seemed completely reasonable. But how far did the pair have tofall below the 1.1850 mark, and then rise back up, to create the trade?Maybe I should consider a buy trade at that level. I’d have to talk to Roddyor George, or Craig, if he was interested, to find out if I could reverse thesystem.
In the meantime, I knew that it would be unsafe to simply plan a buytrade. No Post-it note for this one. I'd have to wait. If I missed it, who caredanyway? I was trading on paper and I was doing this to build up some ex-perience and confidence, without putting money on the line.
Well, not my money at least. Perhaps some of Ernest Wellington's.
This work had taken me over three hours and it seemed like only 15minutes had passed. This analysis work appealed to me as much or morethan trading. I experienced the wonder of discovering new stuff, and noneof the pain or emotion of having to commit to a trade or live through it. Allmy trading up to this point had been impulse driven. But now analysis andstudy were driving the trade planning.
And [had only scratched the surface. I had a zillion questions:
 
  
 
170 ADVENTURES OF A CURRENCY TRADER
Could I apply this to any currency pair?
Could I apply this to shorter time frames, if not for trading, then at leastto prove the concept of horizontal support and resistance trading?What about interest rates? George Sisler had wanted me to study up oninterest rates. What’s more, I’d already seen how an interest rate deci-sion could send the market into a frenzy. How did rates fit into all ofthis?
Icalled my wife and told her that I wasn’t coming home. I was ona roll.
A WILD WEEKEND
 
By Saturday morning, I had hit the mother lode of information. At 7:00 a.m.,I went home and had breakfast with my family, kissed them all, and re-turned to Ernest Wellington. My wife was completely supportive, and al-though she didn’t understand what I was talking about, she was happy thatI was putting extra time in to figure it all out. We both had a feeling that Iwas finally taking a rational, methodical approach to trading, so much sothat it began to seem more like investing. We liked that.
During the next two days, not only did I research the so-called crosscurrency pairs, but I had found information on the Internet about interestrates—a lot of information. I was now convinced that George Sisler hadgiven me a huge gift in directing my focus to studying interest rates. I hadsome ideas about how I could combine what I had learned about horizon-tal support and resistance with interest rates, but I would have to talk tohim first.
Late Sunday afternoon, Roddy and George were the first ones into theoffice. They came in on Sunday because they worked the Asian hours, andit was already Monday in Asia. They were in good moods and immediatelyapproached me: “Banes, are you makin’ bloody trades for the entire officehere again?” That was Roddy.
“No, Roddy. Just on your account. You are short a hundred million Pol-ish Zlotys.”
He laughed. “Good one!” He slapped me on the back. “Want to start offthe week with some paychecks?”
George cut in: “Harry, don’t listen to him. We had a bit of a wildweekend.”
Who knew what trouble they’d been in. What bars they’d been to, howmuch they’d drank, what parties they’d gone to. It couldn’t hurt to ask.“What kind of a wild weekend?”
 
Testing 171
“Testing!” Roddy exclaimed.
Testing? Drug testing? Testing for sexually transmitted diseases?
George nodded. They were nearly giddy with excitement. “We’ve beenbacktesting a new short-term strategy and we had a breakthrough. Wehaven't slept for 48 hours.”
I nodded. “Neither have I.”
“Banes!” Roddy yelled. He actually picked me up and bear-hugged meand screamed: “You've been testing, you bugger! Haven't you!”
I couldn't help but laugh. He was twice my size and had 50 times theenergy of a normal human. I admitted to them that I’d been testing and hadsome breakthroughs of my own, but I needed to talk to people who knewmore than I did to confirm what I’d found.
“You can talk to us,” George offered, and then pulled two chairs upnext to me. Roddy was too excited to sit down and couldn't wait to hearwhat I'd found.
I decided to share with them my testing of the horizontal support andresistance. They ate it up.
THE LESSON IN BACKTESTING
 
Roppy: So how many pairs did you look at?
Me: Only five. The EUR/USD first, then the GBP/USD, the GBP/JPY, theEUR/JPY, the USD/CAD, and the EUR/CAD.
WINNIPEG GEORGE: What time frames? Mostly long-term?
Me: Right. All long term. But I did drill down to the shorter time frames toverify stops and profit targets.WinnrPeGc GeorGE: This is really similar to what Roddy and I’ve beenlooking at. We call it “short-term trading from the longer term charts.”Me: That’s a good name. I kind of feel the same way. I’m just jumping onfor some pips on a reversal. Most of the trades aren’t open for more thana couple of days. I liked planning them from the four-hour and the dailycharts the most, but I have a feeling that this would work on the one-hour charts, too.
Roppy: You've got a good feelin’, Banes! It shorely does work on the one-hour! That’s me favorite chart!
Me: Why is the one-hour your favorite?
WINNIPEG GEORGE: It’s his favorite because he doesn’t have the attentionspan to look at anything longer term than that.
Roppy: Not true! I can look at the fifteen-minute chart all day long!
WINNIPEG GEORGE: That’s shorter term.
 
  
 
172 ADVENTURES OF A CURRENCY TRADER
Roppy: Oh. Right you are!
Me: I did a lot of work to analyze this stuff. I looked at twenty trades oneach of the pairs, and kept notes on all of them.
WINNIPEG GEORGE: Your notes are all over the place. You wrote all of thisdown by hand?
Me: Yep. I guess there is an easier or better way, but I started rolling alongand couldn’t stop myself.
WINNIPEG GEORGE: You need to start keeping this information in spread-sheets.
Me: I don’t know how to use spreadsheets.
WINNIPEG GEORGE: Well, you can worry about that later, but let me showyou an example of why it’s so important. I’m opening one of our testingspreadsheets right here. We just type in the entry price, the closingprice, and the spreadsheet tallies up the wins and losses. It gives us afinal pip count for wins and losses. It tells us how big the average win-ner is, the average loser. It tells us our win percentage—which is howoften we can expect to have a winning trade, based on the informationwe've already provided.
Me: And you do this for all of your testing?
Roppy: Don’t leave home without it! We never test without it. We spread-sheet everything. We have spreadsheets on top of bloody spreadsheets.I can hardly keep track of all of ’em. Banes, did you say that you've onlytested twenty trades so far?
Me: Yes! Twenty per currency pair. So I actually finished testing one hun-dred, in total.
Roppy: One hundred’s not enough, boy! You gotta do better than that!
Me: How much better?
WINNIPEG GEORGE: Well, we spent the entire weekend testing. We gotthrough about a thousand trades.
Me: [silence]
Roppy: Yeah, Harry. Did you do a thousand trades? I think not!
Me: How did you get that many done?
WINNIPEG GEORGE: We sat on the couch with our laptops—one of us withcharts and the other one with spreadsheets. We had food brought in, andwe watched basketball, baseball, and cartoons, and only took breaks togo to the bathroom. We didn’t shower, answer the phone, or interact withhumankind in any way. It was complete focus.
Me: And you tested the same system, over and over again?
WINNIPEG GEORGE: We actually did five hundred trades each on two vari-ations of the same system. The main system we tested was a combina-tion of the CCI [Commodity Channel Index] oscillator with long-termsupport and resistance. The second variation, that we tested simultane-
 
Testing 173
ously, was to look at Fibonacci retracements for exits, instead of usingset profit targets.
ME: How did you do that?
GEORGE: It would take too long to describe here, but let’s just say that wefound a few fib retracement levels that we really liked. Using the fibexits, we increased our average profit by 20 percent.
Me: Are you ready to start trading it?
Roppy: I am! I’m divin’ in this afternoon.
GeEorGE: That’s a bit of an ongoing discussion. I'd like to actually watch itfor a week without opening any trades. We've been putting the pieces ofthis together for a long, long time. We have been testing every weekendfor about seven months now. We’ve changed strategies and rules a mil-lion times but now we think we've found something that we can livewith for the long term.
Me: And what are you trading in the meantime? I mean, you still have tomake trades.
GEORGE: Oh, we do a lot of price making for clients. Remember, that’s ac-tually our first job, to quote prices for clients. You already know howthat works, I’m sure.
Me: Yes. A manufacturer or a hedge fund might call the bank and saythat they want to buy some British Pounds. And you've got to give thema price.
GeorcGE: Right. That’s what we do all day. We generate profit for the bankby the difference between pricing. Sometimes we offset the trade byselling or buying on the spot market. Sometimes we keep the trade if wethink it will be profitable for us.
Me: So how does this new system fit in?
Roppy: Don’t say a word, Winnie!
Me: Winnie?
Roppy: That's the name I’ve got for George. Winnie! He’s from Winnie-peg,Canada. So that’s his nickname.
Me: I think I’ve got a lot of work ahead of me. One hundred trades isn’tgoing to be enough.
GeEorGE: But don’t feel like you can’t start paper trading, like you’vebeen doing. You make a lot of sense with the levels you’ve chosen fortrades so far. The 1.1850 level is something that we're looking at, too.
Me: For a buy or a sell?
GEORGE: For a buy. The pair has stayed above that level for sometime now, and we think the tables are turned. What used to be resist-ance is now support. We’re going to happily buy Euros at that price.All we can. What are you going to do next? Which pair are you goingto test?
 
  
 
174 ADVENTURES OF A CURRENCY TRADER
Me: All of them. But first I need to talk to George Sisler again.
GeEorGE: Sisler? The hedge fund guy? You're going to talk to him?
Me: Yes. If I can. I met him last week and he wanted me to do some re-search into interest rates—which I’ve done. But now I have more ques-tions than answers.
GEORGE: Mind if I come with you?
Me: I don’t mind at all. I’m not sure he'll actually meet with me. But Iamgoing to try.
 
Homework
 
doubted that George Sisler would talk to me without Harvey. Anyone
running a zillion-dollar hedge fund wasn’t going to just waste his time
on someone like me. Perhaps Harvey had told George that I had takenharebrained trades and lost my account, in which case a meeting withGeorge would even be less likely.
So I was surprised when George took my call the next day. I called himas soon as I arrived at Wakeman at 7:00 a.m., and he picked up the phone.
“George Sisler.”
Thad anticipated a secretary or a receptionist. I paused to collect mythoughts, and in that small amount of time, George hung up the phone. Ob-viously, he was very busy. I called and this time he answered again:“George Sisler. Who is this?”
“It’s Harry Banes. The guy that—”
“Harry! Did you do your interest rate homework?”
“T did. I did a lot of work. But I have some questions before I cancontinue.”
“Tl see you at lunch,” he told me, and then he hung up.
I worked my brains out that morning so that I could spare a couple ofhours for lunch. It had been a personal goal of mine to not leave for lunchat all in the next few weeks, so that I could pay back time lost at the firm.But a meeting with George Sisler took precedence over that for now. Atlunchtime, I hopped in a cab and hoped that I wasn’t making a mistake byshowing up without Harvey.
175
 
  
 
176 ADVENTURES OF A CURRENCY TRADER
It didn’t seem to matter. George saw me right away. The office wasn’tany different from the last time I’d seen it. Just as dumpy as before. Thistime I had a new appreciation for it. I started to wonder what George’shouse looked like. Did he live in his car, or under a bridge?
I would soon find out. But first he had questions for me. Lots ofquestions.
“What did you find?” he asked.
“You specifically asked me to find out ifI could figure out a way to takethe carry trade on a retail platform,” I answered. “That was my focus. Istayed up all night on Friday and did a ton of research on it.”
“And? You found that it’s impossible.” This was a statement of fact,meant to encourage me to move on to the next point. So he was not somildly shocked when I announced: “Oh, it’s very possible. Just not in theexact same way that you do it.”
His eyes brightened. “Really? Now I want to hear more.”
Ipulled out my notebook and flipped open to the tab I'd marked “Inter-est Rates—Retail Carry Trade.” Then I began: “You talked about borrowingcheap money and then investing in high-interest currencies. I sat down forat least two hours and learned why that works. It