you 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
T" retail carry trade is an adulteration of the same type of trade done
207
 
  
 
208 APPENDIX A
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
 
Appendix A 209
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, I told Roddy and Winnipeg Georgethat I wanted to take a million dollars of the fund’s money and put it into aretail carry trade. I couldn't keep this savage profit taking to myself, espe-cially considering that I felt I owed a great deal to my partners—the peoplewho had made so much of this possible. They told me that under no cir-cumstances would they give me a million dollars.
They gave me two million.
Yes, two million bucks. And the No Interest Currency Dealer took thetrade. No questions asked. Remember: in the no-interest account, I washolding a sell trade on a currency pair that tended to go lower and lower allthe time, which meant that they had the opportunity to make a lot ofmoney from me because I was letting a losing trade stay open until a mar-gin call in some cases. All they would need to do is to take the other side ofmy trade and not offset it by making a similar trade in the interbank mar-ket. By not offsetting the trade, all of my losses would be their gains.
This two million dollar retail carry trade is still perfectly lodged in mymemory; I can still remember that on January 4, 2005, I put one million dol-lars on the sell side, opening the trade at 196.77. But I got a bad fill on thebuy trade a few moments later, getting in at 196.90.
To make the margin calls less likely, I used a $500,000 slush fund ac-count to wire money to each side of the trade that required an inflow ofcapital.
By February 4, 2005, the trade had gained $98,000 in profit.
In March and April, it gained another $220,000. Because I had so muchmore capital now, I then closed the trade and reopened it with the realizedgains. I also got a call from the no-interest dealer—they were wondering ifI wanted to do some more active trading in the no-interest account. I real-ized that they had probably not offset the sell trade, and they didn’t like theexposure to the sell-side trade, and that some active trading would help. Idecided to open a $250,000 account for the hedge fund, and from that pointon, if I took a currency trade of any kind for the hedge fund in the regularaccounts, I also mirrored the trade in the no-interest account. At least theywere earning some spread on the trade and this kept the phone from ring-ing. At least for a while.
By December 2005, the carry accounts had a combined balance ofabout $3.5 million. That represented a better than 50 percent gain for theyear on that original $2 million invested. Roddy was hysterical about it and
 
  
 
210 APPENDIX A
wanted to put the entire hedge fund’s capital into the carry trade. Of coursehe didn’t mean that (I think), and in any case, all the other trading wasgoing quite well so there was no need to do it anyway.
My take from those profits? It was 30 percent, just the same as foreverything else I traded. Four hundred, forty-nine thousand, five hundred,forty-three dollars. And sixty-two cents.
If you're thinking that the retail carry trade sounds too good to be true,well, you're right. At least for the time being, it’s no longer possible. In July2006, I had the no-interest side of the trade going in four different accountswith four different currency dealers. The trade had produced a 43 percentgain for the year up to that point, but then suddenly all of our dealersturned us off. One by one, in a matter of two weeks, each dealer called meand said that no matter how much regular trading I was willing to do inthose accounts, they could no longer offer me a no-interest account.
We had gamed the system for as long as we could. In total, we hadearned over three million dollars in interest profits, using nine differenttrading accounts.
 
 
How IGot SixHundred Pips
 
chastic oscillator to the horizontal line trades, and it had tested verywell. This was one of the first examples when I used the stochastic tofilter the trade.
I looked for times when a currency pair would pause at a level on theway up, and then on the way down. It was okay with me if the pair brokethe level in between, as long as it did indeed pause at support and resist-ance separately.
In August 2005, I noticed that the GBP/USD had paused at about 1.7800on the way up (a month earlier, in July). Then in late August, it had tried tofall lower and stopped near the same number—at 1.7820. In fact, the sup-port had been so strong this time that the pair jumped upward 600 pips injust a few days. This was a good candidate, so I made sure to watch thispair every afternoon to see when it got close to the 1.7820 number again(see Figure B.1).
On September 23, the currency pair dropped all the way to 1.7820. Ihad found that if I checked the stochastic oscillator first, I could bettertime the buy trades. As long as the oscillator showed that the pair wasoversold, I had two pieces of information in my favor: It was hitting a linethat was likely to demand respect, and it was oversold.
The stochastic showed the pair at oversold levels, so I bought a starterposition at 1.7810 (it had fallen a bit before I could get in). I determinedthat if the 1.7820 area proved strong enough to reject the currency pair, Iwould add another position. I placed a stop loss 100 pips away, added aprofit target at the recent peak that it reached at 1.8500, and left it alone.
Te was a trade from late 2005. For some time I’d been adding the sto-
211
 
  
 
212 APPENDIX B
 
GBPUSD - Daily
 
Stops twice insame place.
            
by,
 
 
[an eT] "hog BesFIGURE B.1— Monitoring the GBP/USD.
Five days later, the trade stopped out at a 100 pip loss (see FigureB.2).
But this wasn’t the end of the position. Now that the level was broken,was willing to buy the pair if two conditions could be met: first, that it fellat least 100 pips lower and then rose back upward; second, that when theair hit the level, the stochastic was above 80, showing an overbought
 
1.7820
(SM GBPUSD - Daily |[f
   
9
Entered ma stopped out 7
 
 
 
FIGURE B.2 The trade stops out at a 100 pip loss.
 
Appendix B 213
 
GBPUSD - Daily
Entered here |...
   
 
FIGURE B.3__ Time to buy.
situation. On October 6, the pair rose up as high as 1.7812, but the stochas-tic was stuck near the lower range, not even close to 80.
But October 26, the pair not only rose up to hit the 1.7820 level, but italso found itself in an overbought area. That meant it was time to buy. Isold a starter position exactly at 1.7820, set an order to buy back the posi-tion at a loss if it went 100 pips against me, and set a profit target at1.7220, six hundred pips lower and an area that marked a recent low (seeFigure B.3).
This trade was open for about 20 days, and it netted the full six hun-dred pips. Along the way down, I had added several positions onto my win-ning trade so that the total gain from this trade was $240,000.
 
  
 
 
 
 
Index
 
 
A
Account, trading:account:funding with credit card, 5-7opening, 5-7protecting balance, 151size, 82-83Accountability, 187-188, 204Amazing Forex Profits software (infable), 3, 6, 18, 47-48, 58-60, 65Anderson (in fable), 20, 23-26, 30,43-45, 49, 51, 66, 89, 150-157, 160,161, 166, 183, 198Apple, Gerald, 125Auction game, one-hundred-dollar,133-139
B
Backtesting, 171-174Banes, Gini (in fable), 8-9, 12-15,31-32, 54, 58-62, 77-78, 97, 127,131-132, 151, 185, 201Banes, Harold, Sr. (in fable), 16-17Banes, Harry (in fable):broken toy story, 6buying wife iPod, 14, 15, 131fantasies:alternate reason for getting fired, 61Attentive Server, 19-20
Mom catching peeing in Gonzalesyard, 50, 51-53Priest conducting his funeral,91-92financial debt/scaling down, 11-15,79-80job as filing manager (Wakeman,Butterman, and Bailey), 1, 3-10,16-21, 53, 62, 65getting fired from, 49-56return to, 146, 147-148, 149-163,164, 181, 183, 200lies, 7-8, 22, 52-54, 62, 66, 77-78, 97,127, 151, 201making amends, 97-103nightmares:his, 57-62his wife’s, 12-15technological incompetence, 4, 72trader, desire to become:early overconfidence, 6-10, 27,77getting started, 3-10homework, 175-183lessons learned, 33-44mapping out a new career, 73-78optimism, 11-15recognition of, 21-27, 62, 192sneaking into U.S. National Bank,63-72team Banes begins anew,183-188
 
 
215
 
  
 
216
Banes, Harry (in fable) (continued)testing, 164-174trip to 31st floor, 16-27turn for the worse, 45-56two promising conversations,28-32trading track record:accidental profit on first trade,8-10as beginner, 8-10, 22, 24, 26-27,86-87, 127-132as disciplined trader, 201, 204,211-213“first kiss,” 161paper trading, 153-163, 173, 186Web site (HarryBanes.com), 205worst fear, 145-146Bank of England, 190Bank of Japan, 190Bear Stearns, 109Bloomberg Channel, 58, 59Books about trading, 71, 73-75Borrowing at low interest rates,108-109. See also Carry trade, onretail platformBritish Pound versus Japanese Yen,176. See also Carry trade, on retailplatformBrokerage firms, 109
Cc
Candles, dark/light, 75Carry trade:defined, 108on retail platform, 109-110,120-121, 176-178, 192CCI (Commodity Channel Index)oscillator, 172, 179Chart(s):backtesting, 171-174candles, dark/light, 75daily, 70-71, 160, 162hand-plotted, 69indispensable, 23
INDEX
long-term, 70-71, 74, 84point and figure, 69short-term, 70-71, 110-113tick, 70time frames, 70-71, 74, 84,110-113, 123-124, 158, 160,162, 171weekly, 70-71Chart examples:bad timing, 129, 131big loss, 60Craig's profit target (GBPUSD—Daily), 64, 74currency pair hits 1.2200(EURUSD—240 minutes), 154daily (EUR/USD), 163Euro trades (tasty profit), 159EURUSD, 5 minutes (Harry’s badtiming), 129, 131EURUSD—four-hour chart (hugemove on Friday), 123five-minute chart and 1.2200, 1555-pip-buffer zone rule, 169George and Roddy’s trade, 181GPBJPY spot rate vs. IR differential,190GPSUSD—15 minutes (Harry’s tradedies), 59-60Harry chokes (EURUSD—5 minute),128Harry’s first chart (EURUSD—240minutes), 126interest rate differential, 190, 191long-term chart, 74margin calls, 59-60, 129stops and profit targets, 180stops out at 100-pip loss, 212strength of 1.2200, 155trade example, GBPUSD, 212, 213wild ride, NFP (April 2, 2004), 75Checklist, trading, 100CNBC, 67, 72Cochrane, Mickey (in fable), 108, 109Cockiness, 44, 45, 55, 115Commodity Channel Index (CCI)oscillator, 172, 179
 
Index
Consumer Price Index economicreport, 76Cost cutting, 111Craig. See Taylor, Craig (in fable)Credit card:debt, 12-13funding trading account with,5-7Currency(ies):charts (see Chart(s))cross, 170, 189daily trading volume, 74dealers, no-interest, 192Euro (EUR), 5Great Britain Pound (GBP), 5Japanese Yen (JPY), 5liquidity of market, 74major, 5pairs, trading in, 5, 170, 171, 189quote, reading, 5U.S. Dollar (USD), 5Cutoff point, 144-145, 156
D
Daydreams (in fable), 19-20, 50, 51-53,61, 91-92Daylight Limit:forced, 86, 115-116, 143Net Asset Value Calculation (NetNAV) as, 86personal, 142-147Discipline, 141, 147, 188Doorecker, Hank (in fable), 83, 84, 87,88, 98, 125-126, 156Drawdown, 152, 185
E
Economic reports, 76Consumer Price Index, 76FOMC Interest Rate Decision andMinutes, 43-46, 51, 54, 58-59,63-64, 67, 69, 75, 76, 85, 86
217
Non-Farm Payroll (NPF), 68-69,71-72, 75-76, 85-86, 91Trade Balance, 76Emotion, trading and, 185Entry price, logging, 185Ernest Wellington and Company (infable), 21-27, 34-35, 43, 66, 70,72, 81-82, 143, 149-163, 167-170Euro (EUR), 5, 88, 91, 93in charts, 123, 126, 128, 129, 131,154, 159, 163
F
Fake trading (paper trading), 153-163,173, 186
Federal Open Market Committee(FOMC) interest rate decision,43-46, 51, 54, 58-59, 63-64, 67,69, 75, 76, 85, 86
FOMC Interest Rate Decision andMinutes, 76
Fees, 111
Fibonacci retracements, 126, 173
Flank, Charlie (in fable), 28, 63-72,79-93
FOMC Interest Rate Decision andMinutes. See Federal Open MarketCommittee (FOMC) interest ratedecision
Forex (foreign exchange) market, 3,14. See also Currency(ies)
Francis, Melissa, 67, 68
Futures, 178, 182
G
George. See Sisler, George (in fable);Winnipeg George (in fable)
Gini. See Banes, Gini (in fable)
Goldman Sachs, 108, 109
Gonzales, Emilio (in fable), 80
 
  
 
218
Gonzales, Father (in fable), 184Great Britain Pound (GBP), 5, 84, 119,176in charts, 59-60, 64, 74, 190, 212, 213
H
Hansell, Ellen (in fable), 153Harry. See Banes, Harry (in fable)HarryBanes.com, 205Harvey. See Winklestein, Harvey (infable)Hedge fund (in fable) 3-billion dollar,103, 104-113Hedging, 118Ho, Larry (in fable), 141-142, 202Homework, interest rate, 175-183Honesty:Harry’s refusing Anderson's request,198-199trading and, 95-97Horizontal line trades, 171, 211
I
Indicators, 125, 127
Information access, and trading, 119
Institute for Supply Management (ISMServices) economic report, 87
Insufficient funds notice, 129-130
Interest rates and retail carry trade,170, 175-183, 189-190, 192-193,207-210
Investing with leverage, 109. See alsoCarry trade
J
Japanese bank, 108-109, 190
Japanese Yen (JPY), 5, 190
Jimmy (in fable), 138-139
Johnson, Herbert (in fable), 17-20,23-24, 25-26, 42, 48-56, 61, 89, 92,
INDEX
96, 101, 147-148, 149-163, 164,198-199
L
Laws/rules, trading:basic principles, 120Don’t Become Cocky, 44, 45, 55,1155-pip-buffer zone, 168-169I will hold myself accountable,187-188most important laws, 203-204Thou Shalt Never Lose More Than25 Percent of Thine Account,204Thou Shalt Stand Accountable toAnother Person for Thy Trades,204Thou Shalt Test Before Trading, 20425/75 rule, 145, 185, 204Leverage, 34-35, 76-77, 109, 177Long-term, 70-71, 74, 84. See alsoTime framesLoss cutoff point, 144-145, 156Lot, standard size, 111
M
MACD. See Moving averageconvergence-divergence(MACD)
Margin calls, 58-60, 130, 131-132
Marianne (in fable), 138-139
Martin, Alistair (in fable), 158
Mentor, secret, 86
Mickey. See Cochrane, Mickey (infable)
Mind-set, changing, 144
Mindy. See Swanson, Mindy (in fable)
Money, meaning of, 41, 42, 85
Money management, 119
Morgan, John Pierpont, 67
Moving average, 125
 
Index
Moving average convergence-divergence (MACD), 125-126, 127
Murphy, John (in fable), 7-8, 28-32,40-44, 45-46, 48, 49, 51
Myths about traders, 102-103, 119,203-204
N
Needleway, Scott (in fable), 3-4, 7-10,17-18, 20, 21, 26-27, 46-50, 53-56,72, 149-150, 157-158Net Asset Value Calculation (Net NAV),86Nightmares:Gini’s, 12-15Harry’s, 57-62Non-Farm Payroll (NPF) economicreport, 68-69, 71-72, 75-76, 85-86, 91Notebook of trades, keeping, 188
oO
One-pip system, 110-113Options/futures, 178, 181Oscillators, 125CCI (Commodity Channel Index),172, 179Stochastic, 126, 211Outsourcing accounting function, 113
P
Paper trading, 153-163, 173, 186Paycheck game, 160-161, 163, 165, 170Paycheck Partners (in fable), 199,200-201, 202, 209Pip(s):auction game, 133-137, 138defined, 5logging final result of a trade, in, 182one-pip system, 110-113Plan. See Trading system
219
Pounds. See Great Britain Pound (GBP)
Price making for clients, 173
Price movement, dark/light candles, 75.See also Chart(s)
Priest fantasy, 91-92
Professional Currency ChartingSoftware, free trial (in fable),59-60
Profit target, 64, 74, 163, 180
Q
Quote, currency, 5
R
Release form, 54-55Retail carry trade, interest ratesand, 170, 174, 176, 178-183,189-190, 192-193, 207-210Retirement money, 77-78, 80Revenge trading, 145Risk, limiting:balancing with options or futures,178Daylight Limit:forced, 86, 115-116, 143Net Asset Value Calculation(Net NAV) as, 86personal, 142-147Roddy (in fable), 160, 162, 163, 165,167, 169, 170, 173, 178-180, 188,190, 199, 209-210Rumors, traders and, 166
Ss
Santelli, Rick, 69
Scott. See Needleway, Scott (in fable)Secret that there is no secret, 141Self-direction/responsibility, 14475/25 rule, 145, 185, 204
Severance pay, 77, 150
 
  
 
220
Short dollars, 24
Short-term trading, 110-113. Seealso Time frames
Sisler, George (in fable), 105-113,114-121, 138-140, 143, 159, 170,174, 175-183, 188, 189-193, 202, 205
Size of trades, 111, 186-187
Spreads, 18, 110, 192
Spreadsheets, 172, 178, 182, 195
Standard size lot, 111
Stealing time from employee, 96-97
Stochastic Oscillator, 126, 211
Stops, 180, 185, 212
Supermarket deal (in fable), 107-108
Supply and demand, 85
Support/resistance, 162, 171, 172, 204
Sutherland (in f