P1: JYS fm JWBT195-Smith November 27, 2009 20:51 Printer: Yet to come How to Make a Living Trading Foreign Exchange i FOR SALE & EXCHANGE www.trading-software-collection.com Mirrors: www.forex-warez.com www.traders-software.com www.trading-software-download.com Join My Mailing List P1: JYS fm JWBT195-Smith November 27, 2009 20:51 Printer: Yet to come Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and mar- keting print and electronic products and services for our customers’ pro- fessional and personal knowledge and understanding. The Wiley Trading series features books by traders who have survived the market’s ever-changing temperament and have prospered—some by reinventing systems, others by getting back to basics. 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HG3851.S59 2010 ′ 332.4 5–dc22 2009031709 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 iv P1: JYS fm JWBT195-Smith November 27, 2009 20:51 Printer: Yet to come To my parents and my foxhole buddy v P1: JYS fm JWBT195-Smith November 27, 2009 20:51 Printer: Yet to come vi P1: JYS fm JWBT195-Smith November 27, 2009 20:51 Printer: Yet to come Contents Preface xi CHAPTER 1 The Basics of Foreign Exchange Trading 1 Sell a Yard of Cable 2 Don’t Want to Trade! 4 Transaction Costs 7 It Never Stops 8 My Biggest Losing Trade 8 The Bottom Line 11 CHAPTER 2 Trend Analysis 13 What Is a Trend? 14 How to Profitably Trade Bull and Bear Markets 18 How to Trade the Trend 21 Megaphones and Pennants 25 Average Directional Index 27 The Bishop 28 The Bottom Line 30 CHAPTER 3 Channel Breakouts 31 The Beginnings of Channel Breakouts 31 What Is a Channel Breakout? 32 Better Channel Breakouts 35 The Pros and Cons of Channel Breakouts 39 vii P1: JYS fm JWBT195-Smith November 27, 2009 20:51 Printer: Yet to come viii CONTENTS The Bishop 40 ADX Filter 43 The Principle of Instant Gratification 46 Rejection Rule 46 The Last Bar Technique 51 Tactics 52 Taking Profits 52 The Bottom Line 53 CHAPTER 4 The Conqueror 55 The Beginnings of the Conqueror 55 What Is True Range? 56 Enhancing the Conquistador 57 Adjusting the Stop 63 The Bottom Line 65 CHAPTER 5 Stochastics 67 What Are Stochastics? 67 How to Use Stochastics as an Overbought and Oversold Indicator 69 Trading Signals from Crossovers 71 Profitability of Stochastics 74 Warnings 75 The Best Way to Make Money Using Stochastics 76 Go with the Trend 81 How I Use Stochastics 81 Interview with George Lane 82 The Bottom Line 89 CHAPTER 6 Pattern Recognition 91 Inside Days 91 Double Whammy 94 Multiunit Tactic 95 Reversal Days 97 P1: JYS fm JWBT195-Smith November 27, 2009 20:51 Printer: Yet to come Contents ix Riding the Rejection Rule 101 The Bottom Line 103 CHAPTER 7 Risk Management 105 Stopping Bad Risk Management 105 How to Make Sure We Are Never Wiped Out 108 Good Risk Management: Fixed Fractional 108 How Many Contracts Should I Put On? 109 Highly Correlated Positions 109 Kelly Formula 110 Trade Your Equity Curve 114 Take a Time Out 115 Turning Poor Systems into Good Systems 115 How Big a Position Should I Take? 116 The Bottom Line: Diversify through Time 117 CHAPTER 8 Slingshot 119 The Importance of Minimizing Losses 120 Beware of Taking Profits Too Early 121 Psychological Profits 122 Confirmations 123 Maximum Excursion Analysis 124 Using the Slingshot for Profits 125 The Mini-Slingshot 128 The Bottom Line 130 CHAPTER 9 The Psychology of Successful Trading 131 Why Do You Trade? 132 The Pressures of Trading 136 Why Do You Lose? 137 Addressing a Lack of Knowledge 138 Addressing a Lack of Capital 140 Addressing a Lack of Self-Discipline 141