Forex Trading system and the mundo currency

The Mundo is a pragmatic concoction of co-author Jim Bickford and represents a syn-
thetic global spot currency. In some ways it is analogous to the U.S. Dollar Index
(ticker symbol DX), which is an openly traded futures contract offered by the New
York Board of Trade since 1973. The U.S. Dollar Index is computed using a trade-
weighted geometric average of the forward futures contracts of the six currencies
listed in Table 23.1.

IMM currency futures traders monitor the U.S. Dollar Index to gauge the dollar’s
overall performance in world currency markets. If the U.S. Dollar Index is trading
lower, then it is very likely that a major currency that is a component of the Index is trading higher.

INTERNATIONAL CURRENCY UNIT

Stock and commodity traders have numerous composite indices which can be used as
barometers in the selection of which securities to trade. Outside of the U.S. Dollar Index, spot currency traders have none. For that purpose, we created the hypothetical
currency, the International Currency Unit, and nicknamed it the Mundo for short. We
will give it a fictitious ISO (International Standards Organization) designation of
“ICU.” The Mundo will be used to define the arithmetic average of a selection of spot
currency pairs.

MUNDO CALCULATION

In this study of U.S. major currency pairs, we will restrict our selection of Mundo components to EURUSD, GBPUSD, USDCHF, and USDJPY.

The first step is to ensure that the USD is the quote currency in each pair, which
means the arithmetic reciprocal must be substituted for the USDCHF and USDJPY
pairs.

The second step is to convert all exchange rates to integral pip amounts. This
means multiplying 10,000 times the exchange rates for the EURUSD, GBPUSD, and
CHFUSD pairs. Multiply the JPYUSD by 100,000.
The final step is to sum the four pairs and divide by four. To convert the pips back toan exchange rate, divide by 10,000.
Because the Mundo is an aggregate currency, it is natural to think that anomalies
in the individual component currency pairs would be smoothed over for the most
part. Yet a closer examination of the Mundo chart shows that anomalies appear to be
accentuated.

MUNDO DIFFERENTIAL CHART

The Mundo Differential Chart is a new addition to the technical analysis of spot cur-
rency pairs. Its purpose is to determine the degree of divergence that one USD major
currency pair deviates from the Mundo currency comprised of the EURUSD, GBPUSD,
CHFUSD, and JPYUSD pairs. (See Figures 23.2 through 23.5.)
In the upper portion of Figure 23.2 are two curves, one solid and one dotted. The
solid line represents the daily closes in the EURUSD currency pair after the first
close in the time series has been subtracted from all the subsequent closes. The same
is true for the dotted line except that it represents the Mundo currency. This scalingoperation coerces both time series to start at the same point on the left side of thechart.

USAGE

The differential chart is experimental and still requires thorough testing. One observation is that when the scaled major currency pair exceeds an arbitrary number of pipsabove the scaled Mundo currency, an upward trend is indicated. The converse appears true for a downward trend also.
Leader/lagger relationships (also called dominance and dependence) may also be
detected by the use of the Mundo differential chart. (See Figure 23.6.)
The authors are currently involved in writing online software that will test the deviation of a single currency pair from the Mundo as a potential market entry indicator.

The difficulty is that, while arbitrage opportunities are frequently present, they are usually very short-lived.

Lastly, the authors wish to state that the readers should not restrict themselves to
trades that involve only the major currencies. There are numerous trading opportunities with the minor currency pairs also (such as the Canadian Dollar, the Australian Dollar, the New Zealand Dollar, the Swedish Krona, the Hong Kong Dollar, the Singapore Dollar, and several others). In fact, many of these exhibit greater volatility than the major currency pairs. The disadvantage, though, is their diminished liquidity. So it is expedient to schedule trading sessions during periods of peak activity when dealing with the minor currency pairs.

Forex Trading system and precious metals

Universal fascination with gold is an obvious understatement. All Forex and futures
traders are very intrigued about the correlation between precious metal prices and currency prices.

The ISO (International Standards Organization) designation for gold is XAU, where
“X” is the identifier for financial vehicles other than currencies and “AU” is short for aurum, Latin for gold. Spot gold prices are represented in the same manner as Forex currency pairs: base currency on the left and quote currency on the right. XAU is always the base currency in the pair when quoting gold prices. Examples are XAUUSD,XAUEUR, XAUGBP, and XAUCHF.

The streaming spot prices represent what gold customers are willing to pay at the
current moment in time for gold coins, bullion, ingots, bars, wafers, and so on.
Historical data on compact disks for spot gold prices is available through Disk
Trading, Ltd., and the quotes are supplied in the identical format as currency pairs.
Thus upticks and downticks are supplied with time intervals of one minute and
higher.

Major U.S. and British Spot Gold Dealers

Gold Information Network
www.goldinfo.net
Kitco
www.kitco.com
American Precious Metals Exchange
www.ampex.com
Gold Masters
www.goldmasters.com
Gold Prices
www.goldprices.com
London Metal Exchange
www.metalprices.com
Bullion Direct
www.bulliondirect.com

SILVER STATISTICS

Analogous to the gold study above, we will again use the coefficient of variation as an indicator to determine how closely major currencies follow the prevailing price of silver.
It is interesting to note that after the coefficients of variation for both gold and silver were sorted with the highest correlation at the top, the major currencies are in the same order. However, none of the coefficients exhibited enough deviation or uniqueness to devise any hard and fast rules that traders can employ presently. We intend to probe this side venue of currency trading in more detail.

CAVEAT

Both trading in spot precious metals and currency trading have their intrinsic risk/reward factors. Readers should be aware of one interesting historical note on the volatility of silver prices.

In 1973 the Hunt family of Texas began taking delivery on silver futures contracts as
a hedge against inflation when silver was in the $1.95 per ounce range. By 1979, the Hunt brothers (Nelson Bunker and William Herbert), with the assistance of some wealthy Arabs, amassed over 200 million ounces of silver, accounting for nearly half of the world’s deliverable supply.

In early 1980, silver peaked at $54 per ounce, then plummeted on March 17 from
$21.62 to $10.80 in a single day. A combination of changed trading rules on the New
York Metals Market (COMEX) and the intervention of the Federal Reserve brought the
entire fiasco to a close and in 1988 the Hunt brothers were convicted of conspiring to
manipulate the market when their liabilities had grown to $2.5 billion against assets of $1.5 billion.

Amazingly, there is an upside to this rather scary tale. Numerous economists pro-
claim that market prices are merely the result of random walk theory and that technical analysis is simply human folly.

Given the history of silver prices from 1789 to 1973 as a mathematical
database, the likelihood of hitting a price of $54 in the subsequent seven years is not impossible using random walk theory, merely astronomically small. The moral is simple: Never initiate a currency trade without a stop loss limit order. Also, it is not wise to trade securities under SEC investigation regardless of how lucrative they may appear to be.

Forex Trading System for major currencies and futures

A futures contract is an agreement between two parties: A short position is taken by the party who agrees to deliver a commodity, and a long position is taken by the party who agrees to receive a commodity on a pre-arranged date. For example, a grain farmer would be the holder of the short position (agreeing to sell the grain), while the bakery would be the holder of the long position (agreeing to buy the grain).

In every futures contract, everything is precisely specified: the quantity and quality
(or grade) of the underlying commodity, the specific price per unit, and the date and
method of delivery. The price of a futures contract is represented by the agreed-upon
price of the underlying commodity or financial instrument that will be delivered in the future. For example, in the above scenario, the size of the contract is 5,000 bushels of soft red #2 wheat at a price of 317 cents per bushel, and the delivery date may be the third Wednesday in September of the current year.

The Forex market is essentially a cash or spot market in which over 90 percent of
the trades are liquidated within 48 hours. Currency trades held longer than this are normally routed through an authorized commodity futures exchange such as the Interna-
tional Monetary Market (IMM). It was founded in 1972 and is a division of the Chicago
Mercantile Exchange (CME) that specializes in currency futures, interest-rate futures,and stock index futures, as well as options on futures. Clearing houses (the futures exchange) and introducing brokers are subject to more stringent regulations from the SEC, CFTC, and NFA agencies than the Forex spot market (see www.cme.com and
www.cbot.com for more details).

FUTURES VOLUME AND OPEN INTEREST

Volume is the number of futures contracts traded within a given time period. Open in-
terest is the number of open futures contracts at any given time. Even though the volume and open interest of Forex spot currencies are presently not accessible, it is still possible to compare them with currency futures just as a point of perspective. Table 21.1 summarizes the trading activity of selected futures contracts in currencies, precious metals, and some financial instruments. The volume and open interest readings are intended only to provide a brief synopsis of each market’s liquidity and volatility based on the average of 30 trading days.

Table 21.2 lists the identical contracts but for the date June 4, 2004.

Note that all currency contracts (except the Canadian Dollar) exhibited a signifi-
cant increase in volume and most showed an increase in open interest over the five-
month time frame.

Forex Trading System- Cross rate charts

OVERVIEW

A cross rate is any currency pair in which neither the base currency nor the quote currency is the U.S. Dollar. For example, a long position in the British Pound with a simultaneous short in the Swiss Franc is a cross rate. Obviously. this definition is relative.

When trading Forex markets in Tokyo, the EURUSD currency pair is considered a
cross rate.

Cross rate futures provide a way for banks, corporations, money managers, and
individuals with the tools to manage the risks associated with currency rate fluctua-
tion and to take advantage of profit opportunities stemming from changes in cur-
rency rates. Currency cross rate futures are physically delivered at expiration.
Exercised options contracts are settled by the delivery of futures contracts.

Visit http://www.cme.com/trading/prd/fx/crossrate2625.html for additional information.

In the analysis below, we will restrict ourselves to those cross rates involving the
major currencies EUR, GBP, CHF, and JPY.

Forex Trading System- The History of Japanese Yen

WHY TRADE THE YEN?

The Japanese economy is one of the strongest in the world. Only the United States has a higher Gross Domestic Product. Japan’s main export goods are cars, electronic devices, and computers. The most important single trade partner is the United States, which imports more than one-quarter of all Japanese exports. Other major export countries are Taiwan, Hong Kong, South Korea, China, and Singapore.

Japan has a large surplus in its export/import balance. The most important import
goods are raw materials such as oil, foodstuffs, and wood. Major suppliers are the
United States, China, Indonesia, South Korea, and Australia. Manufacturing, construc-
tion, distribution, real estate, services, and communication are Japan’s major industries today. Agriculture makes up only about 2 percent of the GNP. The most important agricultural product is rice. Resources of raw materials are very limited and the mining industry rather small.

HISTORICAL PERSPECTIVE

The history of Japan is lost in legend, and reliable records date back only to about A.D. 400. Korean invaders probably introduced bronze and iron implements around the first century. Portuguese sailors made the first European contact with Japan in 1542. Commercial trading with the West developed gradually but only on a very limited scale. The Yen was established as the official unit of currency in 1871 by order of the Meiji government. The Bank of Japan, established in 1882, issued its first Yen bank notes in 1885.

In 1945, in accordance with the emergency measures intended to suppress the post-
war hyperinflation, the Japanese people were obligated to deposit their money by a certain date in monetary institutions for a specific period of time. Banknotes then in
circulation were made invalid. Withdrawal of the frozen deposits in the form of the new banknotes was then allowed to a limited extent. But not enough new banknotes were
printed for withdrawal. To cope with this, existing banknotes with adhesive stickers
were regarded as new banknotes and circulated until the end of October in that year as a makeshift arrangement.

Japan’s economy crashed as a result of defeat by the Allies, causing a 49.6 billion
Yen loss due to wartime damages. The total reached 1.38 trillion Yen by the end of 1947 (equal to 20 percent of Japan’s pre-war domestic assets). National income dropped to 6.5 million Yen.

In 1946 the Economic Stabilization Board was established, which put almost all sec-
tors of the national economy (commodities, prices, transport, banking, etc.) under the systematic control of the board. In October the Reconstruction Finance Bank was established, which furnished enormous volumes of funds to industries vital to economic recovery, such as the coal, steel, and chemical fertilizer industries.

In 1949 Joseph Dodge, the economic advisor to the General Headquarters of the Al-
lied Occupation Forces, mapped out the Dodge Line Policy to promote a self-sustaining
economy. This plan established a single exchange rate for the Yen and attempted to stabilize the currency as well as close the gap between domestic and overseas prices in general. It also curtailed government spending with a tight-money policy. By this time, the exchange rate had risen to 360 Yen to the U.S. dollar.

During the Korean War (1950–1953), special procurement contracts by the Ameri-
can government for goods and services generated $315 million for Japan. During this
time period, Japan attempted to reduce dependence on imports by increasing modern-
ization of processing in the four major industries (steel, coal, etc.), importing new technologies, and improving on old ones (synthetic fibers and petrochemicals). Japan’s foreign exchange reserves quadrupled from $260 million in 1949 to $1.06 billion in 1951.

In 1953 Japanese exports were 50 percent greater than before the Korean War. Domestic
prices rose in response to the increase in export and import prices.

Due to a drop in exports from 1963 to 1965, Japan experienced another reces-
sion. The government issued long-term public bonds. Foreign exchange reserves re-
mained stable at about $2 billion. From 1965 to 1970, the Japanese economy began to
prosper. Average growth rate of the economy remained stable at 11.8 percent for
these five years. Today, Japan has the second highest GNP in the world behind the
United States.

In 1971 Japan’s foreign exchange reserves reached $15.2 billion. Modernization
of industrial equipment over the past 10 years resulted in better prices and more efficient production of goods. The Bretton Woods system of fixed exchange rates for
currency worldwide collapsed as a result of the devaluation of the U.S. dollar. President Nixon enacted an emergency policy that applied a 10 percent surcharge to
imports to the United States and also suspended the conversion of the U.S. dollar
into gold.

The Smithsonian floating exchange rates for worldwide currencies were imple-
mented in 1973. The Japanese Yen was revalued against the U.S. dollar at a lower rate,causing an increase in imports into Japan due to cheaper import prices. In the sameyear war broke out in the Middle East, the export of crude oil was temporarily suspended, and oil prices increased worldwide. Japan was one of the many nations that underwent severe recession due to the oil crisis and collapse of the fixed exchange rate system. In 1979 a second oil crisis broke out, and plunged Japan from a positive $13.9 billion to a $7 billion deficit by 1980.

The rise of the Japanese Yen from 1971 to the present is one of the most dramatic
economic phenomena in recent years. This fact alone makes it a prime Forex trading
candidate. Additionally, the trading volume of the Yen at the Chicago Mercantile Ex-
change is exceeded only by the Euro currency. Further historical information on the Yen can be found at http://www.imes.boj.or.jp.

BANKNOTES AND COINS

The Japanese currency is the Yen, which literally means “circle” since the previous
coinage was oblong. One Yen corresponds to 100 sen. However, sen are not used in
everyday life anymore. Coins come in 1 Yen, 5 Yen, 10 Yen, 50 Yen, 100 Yen and 500 Yen.

Bank note denominations are 1000 Yen, 2000 Yen, 5000 Yen, and 10000 Yen.

Forex Trading System- History of Swiss Franc

WHY TRADE THE SWISS FRANC?

With its long tradition of political and military neutrality, Switzerland holds a position of elevated respect in the arena of international banking and finance. Countries undergoing social and political uncertainty frequently convert liquid assets to the Swiss Franc in hopes of achieving a modicum of economic stability and security.

The International Standards Organization (ISO) symbol for the Swiss Franc is CHF
which is an abbreviation for Confoederatio Helvetica (Latin for the Helvetian Confederation). This nomenclature avoids giving preference to any of the four official languages of Switzerland: German, French, Italian, and Romansh.

HISTORICAL PERSPECTIVE

The roots of modern Swiss sovereignty began in the 13th century. In 1291, the cantons
of Uri, Schwyz, and Unterwalden conspired against the ruling Habsburgs. Their union is recorded in the Federal Charter, a document probably written after the fact. At the battles of Morgarten in 1315 and Sempach in 1386, the Swiss defeated the Habsburg armyand secured a de facto independence.

By 1353, the three original cantons, joined by the cantons of Glarus and Zug and the
city states of Lucerne, Zurich, and Berne, formed the “Old Federation” of eight states that persisted during much of the 15th century.

In 1518 Huldrych Zwingli was elected priest of the Great Minster church in
Zurich. Zwingli’s Reformation of 1523 was supported by the magistrate and popula-
tion of Zürich and led to significant changes in civil life and state matters. The
reformation spread from Zürich to five other cantons of Switzerland, while the re-
maining five sternly held onto the Roman Catholic faith, leading to intercantonal
wars in 1529 and 1531.

The Thirty Years War (1618–1648), a religious conflict between Protestants and
Catholics, was fought principally on the territory of current day Germany, but in-
volved most of the major continental powers. During this period, Switzerland re-
mained a relative oasis of peace and prosperity in war-torn Europe, mostly because
all the major powers in Europe were depending on Swiss mercenaries, and they
would not let Switzerland fall into the hands of one of their rivals. This is probably the first example of Swiss neutrality being enforced by outsiders. At the Treaty of Westphalia in 1648, Switzerland attained legal independence from the Holy Roman Empire.

During the French Revolutionary Wars, Napoleon’s armies moved eastward through
Switzerland in their battles against Austria. In 1798 Switzerland was completely overrun by the French and became the Helvetic Republic. The Congress of Vienna of 1815 fully reestablished Swiss independence, and the European powers agreed to permanently recognize Swiss neutrality.

During both World War I and World War II, Switzerland managed to maintain a po-
sition of armed neutrality and was not involved militarily. Switzerland reacted to Nazi Germany’s invasion of Poland by a mobilization of some 430,000 troops. On May 11, 1940, the day following Hitler’s attack on Belgium, general mobilization of the full army was ordered, which for the first time included some 15,000 women. Switzerland observed a restrictive immigration policy during the war, but nevertheless some 26,000 Jews and other refugees were granted asylum. Nazi Germany drew up plans to invade Switzerland, most notably “Operation Tannenbaum,” but the invasion was never carried out.

In 1963, Switzerland joined the Council of Europe. Women were granted the right to
vote only in 1971, and an equal rights amendment was ratified in 1981. In 1979, parts of the canton of Berne attained independence, forming the new canton of Jura.
Switzerland’s role in many United Nations and international organizations helped to
mitigate the country’s concern for neutrality. In 2002, Switzerland was officially ratified as a member of the United Nations—the only country joining after agreement by a popular vote.

Switzerland is not a member state of the EU, but has been (together with Liechten-
stein) surrounded by EU territory since Austria joined the EU in 1995.
In 2005, Switzerland agreed by popular vote to join the Schengen Treaty (an
agreement among European states that allows for common immigration policies
and a border system) and the Dublin Convention (a European Union law to stream-
line the application process for refugees seeking political asylum under the Geneva
Convention).

The Swiss Franc has historically been considered a safe haven currency with virtu-
ally zero inflation and a legal requirement that a minimum 40 percent is backed by gold reserves. However, this link to gold, which dates from the 1920s, was terminated on May 1, 2000, following an amendment to the Swiss Constitution. The Swiss Franc has suffered devaluation only once, on September 27, 1936, during the Great Depression, when the currency was devalued by 30 percent following the devaluations of the British Pound, U.S. Dollar and French Franc.

BANKNOTES AND COINS

Since 1907, when the first series of Swiss banknotes was printed, eight series have been printed, six of which have been released for use by the general public. The current (8th) series of banknotes was designed by Jörg Zintzmeyer around the theme of the arts and was released starting in 1995.

The first Swiss coins were released in 1850. Before this date, the different Swiss
cantons had their own money, with different names and values. (See Table 11.1.)
In addition to these general circulation coins, numerous series of commemora-
tive coins have been issued, as well as gold coins including the well-known Vreneli.
These coins generally remain legal tender, but are not used as such because their
material or collector’s value usually exceeds their face value. (See Figures 11.3
through 11.5.)

For additional details, visit http://en.wikipedia.org.

Forex Trading System- History of pound

WHY TRADE THE BRITISH POUND?

Aside from being one of the most actively traded currency pairs, the British Pound
holds a position of being the king of currencies in the international arena. Its stability and status as legal tender globally during the period of the British Empire contribute to its appeal.

HISTORICAL PERSPECTIVE

As a unit of currency, the term pound originated from the value of a troy pound of high purity silver known as sterling silver. The sterling was originally a name for a silver penny of 1/240 pound. Originally a silver penny had the purchasing power of slightly less than a modern pound.

The pound sterling, established in 1560 by Elizabeth I, brought order to the financial
chaos of Tudor England that had been caused by the “Great Debasement” of the
coinage, which brought on a debilitating inflation during the years 1543–1551. By 1551, the silver content of a penny had dropped to one part in three. The coinage had become a mere fiduciary currency (as modern coins are), and the exchange rate on the European continent deteriorated accordingly. All the coins in circulation were called in for reminting at the higher standard, and paid for at discounted rates.
The pound sterling maintained its intrinsic value uniquely among European curren-
cies, even after the United Kingdom officially adopted the gold standard, until after
World War I; it weathered financial crises in 1621, in 1694–1696, and again in 1774 and 1797. Not even the violent disorders of the Civil War devalued the pound sterling in European money markets. England’s easy credit, security of contracts, and rise to financial superiority during the 18th century all contributed to the fact that the pound was never devalued over the centuries. The pound sterling has been the money of account of the Bank of England from its inception in 1694.

THE GOLD STANDARD

Sterling unofficially moved to the gold standard from silver due to an overvaluation of gold in England that drew gold from abroad and caused a steady export of silver coin, in spite of a reevaluation of gold in 1717 by Sir Isaac Newton, Master of the Royal Mint.

The de facto gold standard continued until its official adoption following the end of the Napoleonic Wars in 1816. This lasted until the United Kingdom abandoned the standard after World War I in 1919. During this period, the pound was generally valued at around U.S. $4.90.

In an attempt to resume stability, a variation on the gold standard was reintroduced
in 1926, under which the currency was pegged to the gold price at pre-war levels, al-
though people were only able to exchange their currency for gold bullion, rather than
for coins. This was abandoned on September 21, 1931, during the Great Depression, and
the pound was devalued by 20 percent.

In common with all other world currencies, the pound no longer has any link to
precious metals. The U.S. dollar was the last to leave gold, in 1971. The pound was
made fully convertible in 1946 as a condition for receiving a U.S. loan of $3.75 billion in the aftermath of World War II. At this time the pound sterling was used as the currency of the British Empire. As the Empire became the Commonwealth of Nations, dominions introduced their own currencies (such as the Australian pound).

Visit http://en.wikipedia.org/ for further details.

BANKNOTES AND COINS

As of July 2005, the Bank of England circulates the following banknotes, known as
Series E:

•5-pound note depicting Elizabeth Fry, showing a meeting of people possibly dis-
cussing prisoners’ rights.
•10-pound note depicting Charles Darwin, a hummingbird, and the HMS Beagle. (See
Figure 7.2.)
•20-pound note depicting Sir Edward Elgar, with a view of the west face of Worces-
ter Cathedral.
•50-pound note depicting Sir John Houblon, with a view of his house in Threadnee-
dle Street.

Forex Trading System- Daily Composite Charts

DAILY COMPOSITE CHARTS

Refer to Chapter 2, Tools of the Trade, for a detailed description of both daily and
weekly composite charts

The time frame in the following charts (Figures 6.1 through 6.9) spans 1/1/2005
through 4/14/2006. Daily composite activity charts are calculated by averaging the sum of the upticks and downticks over that period using one-minute time intervals. Their purpose is to assist traders in determining when to schedule online trading sessions based upon traders’ predilection to the nebulous risk/reward factor and the volatility of the targeted currency pair.

The vertical numeric scale on the right of each chart is activity expressed in total
number of ticks (upticks plus downticks) during each time interval. The bottom band
(the darkest) represents the activity for the current one-minute interval. The central band plus the lower band represents 3-minute activity. The sum of the all three bands represents the 5-minute activity.

A close inspection of the composite charts above reveals that each daily chart is
unique. This can be primarily attributed to intervention and to the fact that various regulatory agencies schedule their news releases on different days of the week, and at any time between 8:30 A.M.ET and 4:00 P.M.ET (usually). Without invention, these charts would most likely exhibit a smoother, less “spikey” behavior.

CAVEAT

Traders should be aware that starting around 3:30 P.M.Eastern Time, many currency
brokers begin gradually increasing their transaction costs. One NY broker raises the
EURUSD transaction cost from its standard 3 pips to 5 pips. Shortly after 4:00 P.M., this is again incremented to 7 pips then 10 pips by 4:30 P.M.Unless traders intend to stay in an open position over the weekend and risk rollover charges, they should liquidate all trades prior to 3:00 P.M. Friday Eastern Time. It is possible, for whatever reason, to trade over the weekend, but the high transaction costs and lack of volatility usually defeat the prospect of any profitability.

Additionally, traders should also be aware of another phenomenon which, though it
occurs very infrequently, can have a very damaging effect on placing orders. The transaction cost may spike wildly without warning and for no apparent reason.

Currency brokers protect themselves whenever the electronic order book becomes lopsided. Thisbook is a list of the incoming trades at the lowest level. Normally, buy orders must be offset with corresponding sell orders of the same quantity, thus maintaining a state of equilibrium (in futures contracts, this equilibrium is rigidly enforced; a long always has a corresponding short). If the number of incoming buy orders far exceeds the number of incoming sell orders (or vice versa), the broker may increase the bid-ask spread to ensure liquidity and to avoid brokerage house losses.

Forex Trading System- Annual Charts

OHLC AND ACTIVITY CHARTS

In this chapter, we examine historical charts for the years 2000 through 2005 using daily interval data. In the lower portion of each chart, activity is expressed in terms of ticks of the currency pair.

Forex Trading system- History of the Euro Currency

WHY TRADE THE EURO CURRENCY?

The EURUSD is the most actively traded of all pairs available on the Foreign Exchange
markets globally. This fact alone ensures both volatility (that is, prices will fluctuate with sufficient standard deviation to make trading profitable) and liquidity (the ability to enter and exit the market quickly at a specified price).

HISTORICAL PERSPECTIVE

On January 1, 1999, 11 of the countries in the European Economic and Monetary Union
(EMU) decided to give up their own currencies and adopt the new Euro (EUR) cur-
rency: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the
Netherlands, Portugal, and Spain. Greece followed on January 1, 2001. The Vatican City also participated in the changeover. This changeover is now complete.

It is worth noting that any place that previously used one or more of the currencies
listed below has now also adopted the Euro. This applies to the Principality of Andorra, the Principality of Monaco, and the Republic of San Marino. This of course applies automatically to any territories, departments, possessions, or collectivities of Euro-zone countries, such as the Azores, Balearic Islands, the Canary Islands, Europa Island, French Guiana, Guadeloupe, Juan de Nova, the Madeira Islands, Martinique, Mayotte, Reunion, Saint-Martin, Saint Pierre, and Miquelon, to name just a few.

Euro bank notes and coins began circulating in the above countries on January 1,
2002. At that time, all transactions in those countries were valued in Euro, and the “old” notes and coins of these countries were gradually withdrawn from circulation.

ISO stands for the International Standards Organization. Most outgoing pre-Euro
currencies will still be physically convertible at special locations for a period of several years. For details, refer to the official Euro site (www.euro.gov.uk).
Also note that the Euro is not just the same thing as the former European Currency
Unit (or ECU), which used to be listed as XEU. The ECU was a theoretical basket of
currencies rather than a currency in and of itself, and no ECU bank notes or coins ever existed. At any rate, the ECU has been replaced by the Euro, which is a bona fidecurrency.

A note about spelling and capitalization: the official spelling of the EUR currency
unit in the English language is “euro,” with a lower case “e.” However, the overwhelmingly prevailing industry practice is to spell it “Euro,” with a capital “E.” Since other currency names are capitalized in general use, doing so helps differentiate the noun “Euro,” meaning EUR currency, from the more general adjective “euro,” meaning anything even remotely having to do with Europe.

BANKNOTES AND COINS

On January 1, 2002, the euro coins came into circulation. The eight denominations of
coins vary in size, color, and thickness according to their values, which are 1, 2, 5, 10, 20, and 50 cent, or EUR 1 and EUR 2. One euro is divided into 100 cents.
One side of each coin features one of three designs common to all 12 euro area
countries; these designs show different maps of Europe surrounded by the 12 stars of
the European Union.



Sophisticated bi-metal technology has been incorporated into the EUR 1 and EUR 2 coins which, together with lettering around the edge of the EUR 2 coin,
prevents counterfeiting.

Also on January 1, 2002, the euro banknotes were put into circulation with the fol-
lowing stipulations: There are seven new banknotes; they have the same design
throughout Europe; each banknote has a different color and different size; the EUR 5 is the smallest banknote and the EUR 500 the biggest. The banknotes that circulate in denominations of EUR 5, 10, 20, 50, 100, 200, and 500 have pictures of windows, arches, gateways, and bridges on them as well as a map of Europe and the European flag.

14.89 billion euro banknotes have been produced; 10 billion were needed to replace
the national banknotes in circulation and nearly 5 billion are to be held in reserve.

EURO CURRENCY VERSUS EURO DOLLAR

The Euro currency contract is a futures contract of the Euro, the currency in circulation in EMU member nations. The contract size is 125,000 Euros, the minimum fluctuation is $ 0.0001, one point equals $12.50, and contract duration is six months with delivery months in March, June, September, and December.

The Euro dollar futures contract is a time deposit having a principal value of
$1,000,000 with a 3-month maturity and is categorized at the exchange as an interest
rate rather than a currency. It is based upon the number of U.S. dollars deposited in European banks. Trading contracts occur in each calendar month and each point equals $25.00.

Forex Trading System- Tools of forex trading

OVERVIEW

In The Forex Chartist Companion(Wiley, 2006), we introduced several innovative
charting techniques and some new technical analysis tools. In this chapter we review
the ones used in this analysis of the major currency pairs.

It is because of the highly chart-intensive nature of the book that we are com-
pelled to provide very precise definitions of our chart time components to avoid any
confusion.

The time frameof a chart is the overall duration that the chart spans. On the left
side of the chart is the starting date and time and on the right side is the ending date and time. Date and time are represented in the conventional MM/DD/YY HH:MM format. The 24-hour (military) time format is used throughout.

The time intervalof a chart is the equally spaced time unit into which the time
frame is divided. In the case of a vertical OHLC bar chart, the time interval is the width along the x-axis of a single OHLC bar, that is, the amount of time elapsed between the opening quote of the OHLC bar and the closing quote of the same vertical OHLC bar.

ACTIVITY

The concept of activity is employed as a means to evaluate the intrinsic characteristics of a specific currency pair and acts as a surrogate tool for trading volume, a statistic not readily available for spot currencies due to the decentralized nature of Forex markets.

Theoretically, activity represents the number of price changes within a given inter-
val of time. Unfortunately, the activity number does not show the size of each order.


MIDRANGE

Another classical statistic based on the highest high and the lowest low is called the midrange and is the midpoint between the two extremes.

RELATIVE RANGE

Whereas the absolute range described earlier is an excellent tool for use in the analysis
of the internal characteristics within a single individual security, relative range is used to compare the characteristics of two or more similar securities.

The denominator is a critical central point (the midrange in this instance) that con-
verts an individualized statistic into a generalized statistic that is ideal for comparing different sets of similar data. Where absolute range is expressed in terms of pips of the quote currency in the currency pair, relative range is expressed as a percentage and acts as a dimensionless index number. It is this characteristic that permits comparisons between different currency pairs.

A relative range chart differs only slightly from the absolute range chart described
earlier in this chapter: The vertical bars in the lower half of the chart are slightly smoothed, and the lower right scale is expressed in percents instead of pips.

Relative range is a measure of relative volatility and can be used to assist the trader in determining which currency pairs to monitor based on the trader’s predilection for the ubiquitous risk/reward factor. Trading pairs with high relative ranges increases the risk factor while also increasing the likelihood of greater profits.

A high relative range does not mean that a currency pair is more actively traded
than other pairs. Instead, it implies that over time the underlying security prices will travel greater distances from a critical statistical point (in this case, the midrange point).

ABSOLUTE MOMENTUM

Standard momentum (one close minus a previous close separated by lagtime units)
generates a stream of data consisting of both positive and negative numbers whose
mean approaches zero in large samples. To rectify this intrinsic mathematical property, it was necessary to use the absolute value of the momentum data streams. That is, all negative numbers are converted to positive numbers.

Thus, when using absolute momentum, we are not concerned about the direction
of the processed data since all absolute momentum values are positive. We are, how-
ever, very interested in the magnitude of the processed data. Extreme values in an
absolute momentum oscillator inform us at what time of day breakouts are most
likely to occur, although we do not know which direction they will take. This is,
nonetheless, valuable information to traders, particularly for those who subscribe to
trend-following techniques.

STANDARD DEVIATION

Of the several methods of calculating the dispersion of a data set from a central point, we prefer to employ the moving standard deviation as the measurement of volatility.

Statistically, standard deviation is defined

where


x = the sample elements (prices)
n = the sample size (number of prices)
Variance= the sample variance (sum of the deviations squared)

Generally the standard deviation increases as a clear price trend begins emerging in
either direction and decreases when lateral congestion originates. A sharp decline in the standard deviation indicates that a price reversal has begun, after which the standard deviation will again increase regardless of the direction of the trend.

COEFFICIENT OF VARIATION

Just as the standard deviation is a measure of absolute dispersion within a single currency pair, the coefficient of variation is a measure of relative dispersion. The standard deviation is always expressed in terms of pips in the quote currency,
such as dollars, francs, pounds, yen, and so on. The coefficient of variation is expressed as a percentage (or dimensionless index number), which makes it an ideal tool for comparing two or more similar data sets.

Traders should not confuse the coefficient of variation with another statistic called
the coefficient of correlation, which measures how closely the estimated values match
the raw data in a specified regression model, such as a linear, parabolic, sinusoidal, or logistic regression. The coefficient of variation is analogous to relative range, described earlier.

COMPOSITE CHARTS

Another important analytic tool that we introduced in The Forex Chartist Companion
is the composite chart, of which we presented two general types: the Time of Day Chart and the Day of Week Chart (defined by their time span, one day or one week respectively).

Composite charts are constructed by averaging one specific statistical category (ac-
tivity, range, or momentum) over a selected time frame. For example, the daily composite chart in Figure 2.9 illustrates the average range on all Wednesdays between 1/1/2005 and 4/14/2006.

In a similar manner, the weekly composite chart can be constructed by concatenat-
ing the daily charts. In Figure 2.10, the average weekly activity between 1/1/2005 and 4/14/2006 is examined.

Composite charts are designed to assist traders in scheduling their primary trading
sessions. In accordance with our time definitions described at the beginning of this
chapter, the time frame in this chart is Sunday 00:00 through Friday 23:59, or six days. The time interval is measured in one- and two-hour increments.

Forex Trading System- Understanding Forex Data

OVERVIEW

Every Forex trade involves the simultaneous buying of one currency and the selling of
another currency. These two currencies are always referred to as the currency pair.
The base currency is the first currency in the pair and the second currency in the pair is called the quote currency. The exchange ratedefines how much the base currency is worth in terms of the quote currency.

A common practice in the trade is to describe currency pairs as major currencies,
minor currencies or cross rates. Cross rates are those currency pairs in which neither currency is the U.S. Dollar (USD). In major and minor currencies either the base currency or the quote currency is the USD.

Minor currencies are defined as those currency pairs with low trading activity, while
the major currencies are those currency pairs with the highest trading volume. Different currency brokers list different pairs as being major or minor. On the average, major currencies carry a slightly lower transaction cost due to their high liquidity. We arbitrarily define the major pairs as the U.S. Dollar versus the Euro currency, the British Pound, the Swiss Franc, and the Japanese Yen.

A pip is the smallest unit of price that any currency pair can fluctuate. Nearly all
currency pairs consist of five significant digits, and most pairs have the decimal point immediately after the leftmost digit; for example, EURUSD is displayed as 1.2329. In this instance, a single pip equals the smallest change in the fourth digit to the right of the decimal point, that is, 0.0001. Therefore, if the quote currency in any pair is the USD, then one pip equals 1/100 of a U.S. cent.

Just as a pip is the smallest price movement along the y-axis, a tick is the smallest
unit of time (x-axis) that occurs between two trades. When trading the most active currency pairs during peak trading periods, multiple ticks may and will occur within the span of a single second. In fact, over 300 ticks per second are not unusual in the EURUSD during high-activity periods. When trading minor currencies during low-
volatility periods, the trader should be aware that a single tick may not occur but
every two or three hours.

STREAMING DATA

In order to compile an analytical study of this depth, it was necessary to acquire
massive amounts of raw historical quotes. To this extent, we wish to express our ap-
preciation to Disk Trading, Ltd. (www.disktrading.com) for its extensive and well-
organized archive of historical currency prices (both spot and futures) dating back to the early 1970s.

Forex data can be packaged either as streaming data or as interval data. Streaming
data consists of every single price change as it occurs regardless of the time elapsed between ticks. This creates voluminous amounts of data. For example, all the tick quotes for the EURUSD currency pair from January 1, 2005, to December 31, 2005, provide the statistical sample for numerous analyses in this book with a sample size of 7,974,098 prices.

Streaming data uses the following comma-delimited field conventions for tick data:

Date,Time,Close
01/01/2002,0116,0.8896
01/01/2002,0116,0.8895
01/01/2002,0116,0.8897
01/01/2002,0116,0.8893
01/01/2002,0126,0.8902

GETTING STARTED

FIGURE 1.1Pip-Tick Relationship

Data is shipped on compact disks and DVDs since the sheer volume of data is too
large to download at current modem speeds. CSV (Comma separated values) files must
be unzipped and then read as flat ASCII files.

INTERVAL DATA

Interval data, in contrast, is compiled from the streaming data by coercing the data into the standard open, high, low, and close (OHLC) format for equal-interval time periods.

Disk Trading, Ltd., packages this type of data as 1-minute, 5-minute, 10-minute, 30-
minute, hourly, and daily data.

Interval data is stored in the following convention (5-minute interval example):

Date,Time,O,H,L,C,U,D
4/20/1998,0920,1.0982,1.0982,1.0982,1.0982,2,0
4/20/1998,0925,1.0980,1.0983,1.0980,1.0983,3,1
4/20/1998,0930,1.0985,1.0990,1.0982,1.0989,8,3
4/20/1998,0935,1.0987,1.0993,1.0987,1.0988,2,3
4/20/1998,0940,1.0987,1.0989,1.0983,1.0985,4,3

Dates are always expressed using the standard convention MM/DD/YYYY, while
the time field uses a four-digit integer to represent the 24-hour convention (i.e., 2030 =
8:30 P.M.).

Due to the lack of centralization, Forex currency data does not have volume and
open interest fields as in commodity futures quotes. The last two fields above (“U” and
“D”) are upticks and downticks. These two fields will be used to calculate two indica-
tors specific to currency trading, the Activity Oscillator and the Direction Oscillator.

Activity is calculated as the sum of the upticks and downticks over a specified period.

Direction is the difference between upticks and downticks over a specified period.

List of books on forex trading system

BOOKS

Aby, Carroll D., Jr. Point and Figure Charting. Greenville, SC:Traders Press, 1996.
Archer, Michael, and James Bickford. Getting Started in Currency Trading. Hoboken,
NJ: John Wiley & Sons, 2005.
Arms, Richard W., Jr. Volume Cycles in the Stock Market.Revised Edition, Salt Lake
City, UT: Equis International, Inc., 1994.
Bickford, James. Chart Plotting Techniques For Technical Analysts. Boulder, CO:
Syzygy, 2002.
Bigalow, Stephen. Profitable Candlestick Trading. New York: John Wiley & Sons,
2002.
Bulkowski, Thomas. Encyclopedia of Chart Patterns. Hoboken, NJ: John Wiley & Sons,
2005.
De Villiers, Victor and Owen Taylor. Point and Figure Method of Anticipating Stock
Market Price Movements. New York, NY: Traders Library, 1934.
Dobson, Edward L. The Trading Rule That Can Make You Rich.Greenville, SC: Traders
Press, 1978.
Dorsey, Thomas. Point & Figure Charting. New York: John Wiley & Sons, 1995.
DraKoln, Noble. Forex for Small Speculators. Long Beach, CA: Enlightened Financial
Press, 2004.
Henderson, Callum. Currency Strategy. New York: John Wiley & Sons, 2002.
Horner, Raghee. Forex Trading for Maximum Profit. Hoboken, NJ: John Wiley & Sons,
2005.
Klopfenstein, Gary. Trading Currency Cross Rates. New York: John Wiley & Sons, 1993.
Lien, Kathy. Day Trading the Currency Market. Hoboken, NJ: John Wiley & Sons, 2004.
Louw, G. N. Begin Forex. FXTrader, 2003.
Luca, Cornelius. Technical Analysis Applications in the Global Currency Markets. Up-
per Saddle River, NJ: Prentice Hall, 2000.
Luca, Cornelius. Trading in the Global Currency Markets.Upper Saddle River, NJ:
Prentice Hall, 2000.
Murphy, John. Intermarket Financial Analysis. New York: John Wiley & Sons, 2000.
Murphy, John. Technical Analysis of the Financial Markets.Upper Saddle River, NJ:
Prentice Hall, 1999.
Reuters Limited. An Introduction to Foreign Exchange & Money Markets.London:
Reuters Financial Training, 1999.
Rosenstreich, Peter. Forex Revolution. Upper Saddle River, NJ: Prentice Hall, 2004.
Schlossberg, Boris. Technical Analysis of the Currency Market. Hoboken, NJ: John
Wiley & Sons, 2006.
Shamah, Shani. A Foreign Exchange Primer. Hoboken, NJ: John Wiley & Sons, 2003.
Thousands of books have been written on the subject of technical analysis. Here are a
few with possible topical interest to this volume:
Lindsay, Charles. Trident: A Trading Strategy. Thousand Oaks, CA: Trident, 1976.
McGee, John. Technical Analysis of Stock Trends. New York, NY: American Manage-
ment Association, 2001.
Nison, Steven. Beyond Candlesticks: More Japanese Charting Techniques Revealed.
New York: John Wiley & Sons, 1994.
Nison, Steven. Japanese Candlestick Charting Techniques. Upper Saddle River, NJ:
Prentice Hall, 1991; rev. ed. 2001.
Nofri, Eugene, and Jeanette Nofri-Steinberg. Success in Commodities: The Congestion
Phase System. Elizabeth, NJ: Pageant-Poseidon Press, 1975.
Pugh, Burton. The Great Wheat Secret.Miami, FL: Lambert-Gann, 1933.
Ross, Joe. Trading by the Minute. Cedar Park, TX: Ross Trading, 1991.
Zieg, Kermit C., Jr. Point and Figure: Commodity and Stock Trading Techniques.
Greenville, SC: Traders Press, 1997.
The world’s largest supplier for mail-order trading books is Traders Press at www.traders
press.com.

Forex Trading System- Visual basic source code for forex market swing

FILE: modSwing.bas

The module uses the global variables:

Q() As QUOTE_TYPE
S() As SWING_TYPE
NumQuotes As Long
NumSwings As Long
The calling format is:
NumQuotes = GetData()
NumSwings = CalculateSwingData(3)
Option Explicit

Public Function CalculateSwingData(RevAmt%) As Long
Dim i&, j&, Direction&
On Error GoTo Err_CalculateSwingData
' Initiatialize first swing pair
S(1).Price = Q(1).C
S(1).ArIdx = 1
' Initialize first direction
For i = 2 To NumQuotes
If Q(i).H >= Q(1).H Then
Direction = UP
S(2).Price = Q(i).H
S(2).ArIdx = i
Exit For
ElseIf Q(i).L < Q(1).L Then
Direction = DOWN
S(2).Price = Q(i).L
S(2).ArIdx = i
Exit For
End If
Next i
j = i
' Calculate remaining swing pairs iteratively
For i = j + 1 To NumQuotes
If Direction = UP Then
If Q(i).H > S(j).Price Then
S(j).Price = Q(i).H
S(j).ArIdx = i
ElseIf S(j).Price - Q(i).L >= RevAmt Then
Direction = DOWN
j = j + 1
S(j).Price = Q(i).L
S(j).ArIdx = i
End If
ElseIf Direction = DOWN Then
If Q(i).L < S(j).Price Then
S(j).Price = Q(i).L
S(j).ArIdx = i
ElseIf Q(i).H - S(j).Price >= RevAmt Then
Direction = UP
j = j + 1
S(j).Price = Q(i).H
S(j).ArIdx = i
End If
End If
Plotin giola dFtuar eFCr hdslRTm
339
If j = MAX_SWINGS Then
Exit For
End If
Next i
If S(j).ArIdx < NumQuotes Then
j = j + 1
S(j).Price = Q(NumQuotes).C
S(j).ArIdx = NumQuotes
End If
CalculateSwingData = j
Exit Function
Err_CalculateSwingData:
MsgBox Err.Description
End Function

Forex Trading System- Visual Basic source code for forex traders

Option Explicit

Global Const MAX_QUOTES = 8000
Global Const MAX_CLOSES = MAX_QUOTES * 4
Global Const UP = 1
Global Const DOWN = -1
Global Const vbLightGray = &HC0C0C0
Global Const vbGray = &H808080
Global Const vbLightYellow = &HC0FFFF

Type QUOTE_TYPE
Date As String
Time As String
O As Double
H As Double
L As Double
C As Double
U As Double
D As Double
End Type
331
Global NumQuotes As Long
Global NumCloses As Long
Global NumColumns As Long
Global Pair$, StartDate$, EndDate$
Global BoxSize As Double, RevAmt As Double
Global Q(MAX_QUOTES) As QUOTE_TYPE
Global C(MAX_QUOTES) As Double
Global Column(MAX_CLOSES) As Integer

Public Function CalculateColumns(C#(), NumCloses&, BoxSize#, RevAmt#) As Integer
Dim i&, col&, start#, last#, direction%

On Error GoTo Err_CalculateColumns

' initialize the global column array

For i = 1 To NumCloses
Column(i) = 0
Next i
last = C(1)

' calculate first value of column array

For i = 2 To NumCloses
If C(i) - last >= RevAmt * BoxSize Then
Do
If last + BoxSize > C(i) Then
Exit Do
End If
last = last + BoxSize
Column(1) = Column(1) + 1
Loop
direction = UP
start = i + 1
Exit For
ElseIf last - C(i) >= RevAmt * BoxSize Then
Do
If last - BoxSize < C(i) Then
Exit Do
End If
last = last - BoxSize
Column(1) = Column(1) - 1
Loop
332
INNTRODU C
direction = DOWN
start = i + 1
Exit For
Else
' Do nothing if Q(i).C = Q(1).C
End If
Next i

' loop through remainder of closes filling the column array

col = 1
For i = start To NumCloses
If direction = UP Then
If C(i) - last >= BoxSize Then
Do
If last + BoxSize > C(i) Then
Exit Do
End If
last = last + BoxSize
Column(col) = Column(col) + 1
Loop
ElseIf last - C(i) >= RevAmt * BoxSize Then
col = col + 1
Do
If last - BoxSize < C(i) Then
Exit Do
End If
last = last - BoxSize
Column(col) = Column(col) - 1
Loop
direction = DOWN
End If
ElseIf direction = DOWN Then
If last - C(i) >= BoxSize Then
Do
If last - BoxSize < C(i) Then
Exit Do
End If
last = last - BoxSize
Column(col) = Column(col) - 1
Loop
ElseIf C(i) - last >= RevAmt * BoxSize Then
col = col + 1
Visual Basic Source Code (Point and Figure)
333
Do
If last + BoxSize > C(i) Then
Exit Do
End If
last = last + BoxSize
Column(col) = Column(col) + 1
Loop
direction = UP
End If
End If
Next i
CalculateColumns = col
Exit Function
Err_CalculateColumns:
MsgBox Err.Description
End Function

Public Sub PlotPafChart(obj As Object)
Dim Xinc# ' width of each graph paper square in twips
Dim Yinc# ' height of each graph paper square in twips
Dim Xmrg# ' left margin of plotting zone
Dim Ymrg# ' top margin of plotting zone
Dim PipFactor# ' converts prices to integers, ie, 10000 for EURUSD
Dim Fmt$ ' format string for PipFactor
Dim dnum# ' floating point loop index
Dim st$ ' local discard string
Dim i&, j& ' integer loop indexes
Dim max# ' maximum high
Dim start# ' first close in raw data
Dim last# ' last plotted X or Y
Dim x1#, x2# ' x-axis coordinates
Dim y1#, y2# ' y-axis coordinates
Dim HdrMrg# ' header margin

On Error GoTo Err_PlotPafChart

' Initialize variables ===============================

Xinc = 150
Yinc = Xinc
Xmrg = 5.5 * Xinc
Ymrg = 10 * Yinc
PipFactor = 100 '10000
334
INNTRODU C
' Plot background graph paper ========================

obj.Cls
For dnum = 0 To obj.Height Step Xinc
obj.Line (0, dnum)-(obj.Width, dnum), vbGray
Next dnum
For dnum = 0 To obj.Width Step Yinc
obj.Line (dnum, 0)-(dnum, obj.Height), vbGray
Next dnum

' Print two-line header ==============================

HdrMrg = 0.21
obj.Line (HdrMrg * obj.Width, 80)-((1# - HdrMrg) * obj.Width, 650), vbLightYellow, BF
For i = 0 To 12
obj.Line (0.21 * obj.Width + i, 100 - i)-(0.79 * obj.Width - i, 650 + i), vbBlack, B
Next i

obj.FontName = ''Times New Roman''
obj.ForeColor = vbBlack
obj.FontSize = 10
obj.FontBold = True
st = ''USDJPY December 2004''
obj.CurrentX = (obj.Width - obj.TextWidth(st)) / 2
obj.CurrentY = 150
obj.Print st

obj.FontSize = 9
st = ''P&F Chart Box Size = '' + CStr(BoxSize) + '' Rev Amt = ''
st = st + CStr(RevAmt) + '' Boxes''
obj.CurrentX = (obj.Width - obj.TextWidth(st)) / 2
obj.Print st

' Find maximum close ====================================

max = 0
For i = 1 To NumCloses
If C(i) > max Then max = C(i)
Next i
' Adjust max to be a multiple of boxsize units from C(1)
' This ensures Xs and Os land in center of squares

last = C(1)
Do
Visual Basic Source Code (Point and Figure)
335
last = last + BoxSize
Loop While last < max
max = last
Debug.Print max

' Print vertical scale ================

x1 = 1
y1 = Yinc * (Ymrg / Yinc - 3)
x2 = Xmrg
y2 = obj.Height - 2 * Yinc
obj.Line (x1, y1)-(x2, y2), vbWhite, BF
obj.FontSize = 8
obj.FontBold = True
i = -1
Do
i = i + 1
dnum = max - i * BoxSize
st = Format(dnum - 0.0001, ''##0.00'')
obj.CurrentX = (Xmrg - obj.TextWidth(st)) / 2
obj.CurrentY = Ymrg + (i - 3) * Yinc + 10
If obj.CurrentY > obj.Height - 3 * Yinc Then Exit Do
obj.Print st
Loop While obj.CurrentY <= 0.98 * obj.Height

' Plot Xs and Os columns =================

last = -4 + (max - C(1)) / BoxSize
For i = 1 To NumColumns
x1 = Xmrg + (i * Xinc)
If Column(i) > 0 Then
For j = 1 To Column(i)
y1 = Ymrg + (last - j + 0.45) * Yinc
PrintX obj, x1, y1, 0.3 * Xinc
Next j
Else
For j = -1 To Column(i) Step -1
y1 = Ymrg + (last - j + 0.45) * Yinc
PrintO obj, x1, y1, 0.3 * Xinc
Next j
End If
last = last - Column(i)
Next i
336
INNTRODU C
Exit Sub
Err_PlotPafChart:
MsgBox Err.Description
Resume
End Sub

Public Sub PrintX(obj As Object, cx#, cy#, side#)
Dim i%
cy = cy + 5
For i = 0 To 15
obj.Line (cx - 0.7 * side + i, cy - side)-(cx + 0.7 * side + i, cy + side), vbBlack
obj.Line (cx + 0.7 * side - i, cy - side)-(cx - 0.7 * side - i, cy + side), vbBlack
Next i
End Sub

Public Sub PrintO(obj As Object, cx#, cy#, radius#)
Dim i%
cy = cy + 5
For i = 0 To 15
obj.Circle (cx + i, cy), radius, vbBlack, , , 1.85
Next i
End Sub

Forex Trading System- Global Banking Hours

Despite all the fundamental and technical influences on the foreign exchange mar-
ket, one major constant in determining periods of high volatility is the hours of opera-
tion for the central banks of each major currency country.
Figure D.1 emphasizes the importance of the effect of time of day on forex mar-
ket activity and volatility based on hours of operation around the globe. Because
banking hours vary from country to country, we have arbitrarily set hours of opera-
tion from 9:00 A.M.to 5:00 P.M.for consistency. The top row is expressed as central
european time (Greenwich mean time + 1 hour), which aligns with the Central Bank
of Europe in Frankfurt, the most prestigious central bank in the European Monetary
Union.
The table allows traders to view overlapping time periods when central banks
for different currencies are operating and thus guarantee a certain degree of mutual
activity.
For example, when banks open in New York City at 9:00 A.M.EST, the Frankfurt
bank has already been operating for six hours. So there is a two-hour overlap of trading
in the EURUSD currency pair on both sides of the Atlantic Ocean (9:00 A.M. to 11:00 A.M.
EST). This can be readily recognized in the time of day activity chart for the EURUSD
pair (Figure 2.4 in Chapter 2).

Dedicated currency traders may have to adjust their sleeping schedules to take
advantage of increased activity and volatility when trading non-USD cross-rate cur-
rency pairs.

Forex Trading System- World Currencies

This is a list of global currencies and the three-character currency codes that we
have found are generally used to represent them. Often, but not always, this code
is the same as the ISO 4217 standard. (The ISO, or International Organization for
Standardization, is a worldwide federation of national standards.)
In most cases, the currency code is composed of the country’s two-character Inter-
net country code plus an extra character to denote the currency unit. For example, the
code for Canadian dollars is simply Canada’s two-character Internet country code (CA)
plus a one-character currency designator (D).
We have endeavored to list the codes that, in our experience, are actually in general
industry use to represent the currencies. Currency names are given in the plural form.
This list does not contain obsolete euro-zone currencies.

WORLD CURRENCIES
Symbol
Region
Currency Name
AED
United Arab Emirates
Dirhams
AFA
Afghanistan
Afghanis
ALL
Albania
Leke
AMD
Armenia
Drams
ANG
Netherlands Antilles
Guilders
AOA
Angola
Kwanza
ARS
Argentina
Pesos
AUD
Australia
Dollars
AWG
Aruba
Guilders
(continues)
259
Symbol
Region
Currency Name
AZM
Azerbaijan
Manats
BAM
Bosnia and Herzegovina
Convertible marka
BBD
Barbados
Dollars
BDT
Bangladesh
Taka
BGN
Bulgaria
Leva
BHD
Bahrain
Dinars
BIF
Burundi
Francs
BMD
Bermuda
Dollars
BND
Brunei Darussalam
Dollars
BOB
Bolivia
Bolivianos
BRL
Brazil
Brazil real
BSD
Bahamas
Dollars
BTN
Bhutan
Ngultrum
BWP
Botswana
Pulas
BYR
Belarus
Rubles
BZD
Belize
Dollars
CAD
Canada
Dollars
CDF
Congo/Kinshasa
Congolese francs
CHF
Switzerland
Francs
CLP
Chile
Pesos
CNY
China
Renminbi
COP
Colombia
Pesos
CRC
Costa Rica
Colones
CUP
Cuba
Pesos
CVE
Cape Verde
Escudos
CYP
Cyprus
Pounds
CZK
Czech Republic
Koruny
DJF
Djibouti
Francs
DKK
Denmark
Kroner
DOP
Dominican Republic
Pesos
DZD
Algeria
Algeria dinars
EEK
Estonia
Krooni
EGP
Egypt
Pounds
ERN
Eritrea
Nakfa
ETB
Ethiopia
Birr
EUR
Euro member countries
Euro
FJD
Fiji
Dollars
FKP
Falkland Islands
Pounds
GBP
United Kingdom
Pounds
GEL
Georgia
Lari
GGP
Guernsey
Pounds
260
APPENDIX A
GHC
Ghana
Cedis
GIP
Gibraltar
Pounds
GMD
Gambia
Dalasi
GNF
Guinea
Francs
GTQ
Guatemala
Quetzales
GYD
Guyana
Dollars
HKD
Hong Kong
Dollars
HNL
Honduras
Lempiras
HRK
Croatia
Kuna
HTG
Haiti
Gourdes
HUF
Hungary
Forint
IDR
Indonesia
Rupiahs
ILS
Israel
New shekels
IMP
Isle of Man
Pounds
INR
India
Rupees
IQD
Iraq
Dinars
IRR
Iran
Rials
ISK
Iceland
Kronur
JEP
Jersey
Pounds
JMD
Jamaica
Dollars
JOD
Jordan
Dinars
JPY
Japan
Yen
KES
Kenya
Shillings
KGS
Kyrgyzstan
Soms
KHR
Cambodia
Riels
KMF
Comoros
Francs
KPW
Korea (North)
Won
KRW
Korea (South)
Won
KWD
Kuwait
Dinars
KYD
Cayman Islands
Dollars
KZT
Kazakstan
Tenge
LAK
Laos
Kips
LBP
Lebanon
Pounds
LKR
Sri Lanka
Rupees
LRD
Liberia
Dollars
LSL
Lesotho
Maloti
LTL
Lithuania
Litai
LVL
Latvia
Lati
LYD
Libya
Dinars
MAD
Morocco
Dirhams
MDL
Moldova
Lei
MGA
Madagascar
Ariary
(continues)
Pater nFttquciqs
261
Symbol
Region
Currency Name
MKD
Macedonia
Denars
MMK
Myanmar (Burma)
Kyats
MNT
Mongolia
Tugriks
MOP
Macau
Patacas
MRO
Mauritania
Ouguiyas
MTL
Malta
Liri
MUR
Mauritius
Rupees
MVR
Maldives
Rufiyaa
MWK
Malawi
Kwachas
MXN
Mexico
Pesos
MYR
Malaysia
Ringgits
MZM
Mozambique
Meticais
NAD
Namibia
Dollars
NGN
Nigeria
Nairas
NIO
Nicaragua
Gold cordobas
NOK
Norway
Krone
NPR
Nepal
Nepal rupees
NZD
New Zealand
Dollars
OMR
Oman
Rials
PAB
Panama
Balboa
PEN
Peru
Nuevos soles
PGK
Papua New Guinea
Kina
PHP
Philippines
Pesos
PKR
Pakistan
Rupees
PLN
Poland
Zlotych
PYG
Paraguay
Guarani
QAR
Qatar
Rials
ROL
Romania
Lei
RUR
Russia
Rubles
RWF
Rwanda
Rwanda francs
SAR
Saudi Arabia
Riyals
SBD
Solomon Islands
Dollars
SCR
Seychelles
Rupees
SDD
Sudan
Dinars
SEK
Sweden
Kronor
SGD
Singapore
Dollars
SHP
Saint Helena
Pounds
SIT
Slovenia
Tolars
SKK
Slovakia
Koruny
SLL
Sierra Leone
Leones
SOS
Somalia
Shillings
262
APPENDIX A
SPL
Seborga
Luigini
SRG
Suriname
Guilders
STD
São Tomé, Principe
Dobras
SVC
El Salvador
Colones
SYP
Syria
Pounds
SZL
Swaziland
Emalangeni
THB
Thailand
Baht
TJS
Tajikistan
Somoni
TMM
Turkmenistan
Manats
TND
Tunisia
Dinars
TOP
Tonga
Pa’anga
TRL
Turkey
Liras
TTD
Trinidad, Tobago
Dollars
TVD
Tuvalu
Tuvalu dollars
TWD
Taiwan
New dollars
TZS
Tanzania
Shillings
UAH
Ukraine
Hryvnia
UGX
Uganda
Shillings
USD
United States of America
Dollars
UYU
Uruguay
Pesos
UZS
Uzbekistan
Sums
VEB
Venezuela
Bolivares
VND
Vietnam
Dong
VUV
Vanuatu
Vatu
WST
Samoa
Tala
YER
Yemen
Rials
YUM
Yugoslavia
New dinars
ZAR
South Africa
Rand
ZMK
Zambia
Kwacha
ZWD
Zimbabwe
Zimbabwe dollars

Forex Trading System- Charting Study

OVERVIEW

The textbook Goodman wave from recent EUR/USD trading shown in Figure 38.1 gives
us an opportunity to introduce a number of Goodman topics and ideas via a brief tour of
the entire system.
NOTATION

The end points of a matrix (“M”) are denoted by 1-2-3-4; going in to smaller matrices,
i-ii-iii-iv; going out to a larger matrix, A-B-C-D. All matrix notation uses parentheses:
M(1-2-3-4).
A wave is denoted by 1-2-3-4-5-6 (points of the wave); going in to smaller waves, i-ii-
iii-iv-v-vi; going out to larger matrices, A-B-C-D-E-F-G. All waves are denoted as “G.” The
notation uses brackets G[1-2-3-4-5-6].
A matrix always has three components; of course, a component may also itself be a
matrix. A Goodman wave has five components at least for the purposes of notation.
A matrix or wave segment or component is thus M(1-2) or G[3-4-5-6].
MATRIX

A matrix is a simple 1-2-3 swing (three components or segments). It may or may not
have smaller matrices as some of its components. A matrix is either simple (no compo-
nents) or complex (if it has components): M(1-2-3-4). (See Figure 38.2.)

A Goodman wave is the propagation or generation of a complex matrix in a specific
manner and of a specific form: G[1-2-3-4-5-6].
Charlie’s concept of how matrices propagate is different from Elliott’s. Once you
start looking for them, finding them, and analyzing them you will quickly realize how
much more they conform to the real structure of the markets and—more importantly—
how much more easily they may be traded. The propagation concept more accurately
reflects the dynamic of markets than does a static wave concept.
Goodman waves are relatively easy to spot after they are built, or as part of a larger
wave. But what we are most interested in—from the point of view of trading—is the
propagation of a Goodman wave.
PROPAGATION

Any Goodman wave obviously begins with a segment S(1-2). The question becomes—
and this is why the concept of propagation is important: Does the wave develop as a flat
segment followed by a complex matrix—or vice versa?
According to GSCS theory, this segment or matrix now becomes the first compo-
nent of a Goodman wave and is thereafter treated as a single segment or component for
purposes of analysis.
We now look for a 50 percent secondary component retracement of the entire com-
plex matrix or segment. On this chart study this is segment S(4-5). This component
could easily be mistaken for a simple wave in a five-wave Elliott wave pattern, but it is
not. In Goodman it is the key return or propagation segment.
Finally, we look for a component or matrix in the primary direction with a magni-
tude equal to the first component.
In Figure 38.3, note the return or propagation wave (the lighter wave).

The four primary Goodman waves occur every day, over and over again, in all mar-
kets—forex, futures, and securities—and at all price levels. The wave is the foundation
and basis of trading GSCS. The opportunities to trade it are only limited by your time to
seek them out in the markets that most interest you.
Forget trading stations with five monitors; forget specialist short sales; forget complex
volume and open interest calculations; forget Gann charts with 50 lines on them all leading
to nowhere and Fibonacci charts with numbers carried out to 14 significant places.

Elliott mistakenly identified this as a five-component wave. This is not accurate or
precise. What is occurring is that a three-component matrix is propagating in accor-
dance with the 50 percent rule. It is not strictly a five-component wave but rather a ma-
trix in generation or propagation. This propagation is critical and fundamental to GSCS.
SIMPLE/COMPLEX

Note: From a matrix point of view, two of the four Goodman waves appear to be a sim-
ple/complex matrix followed by a complex/simple matrix. It is important to think only
in terms of the four Goodman wave types shown in Figure 38.3. By thinking in terms of
propagation you will better anticipate the unfolding of the market through time.
For now just drill into memory the four Goodman wave types.
Keep in mind that—at least theoretically—Goodman waves propagate inward and
outward, meaning that every wave is composed of smaller waves and every wave is a
component of a larger wave. The same is true of matrices.

FAT/THIN

Note in the complex matrix of Figure 38.4 the first matrix is fat and the second is thin;
this is another important alternating structure that assists in templating and trading.
By fat I mean there is a lot of back-and-fro motion (volatility) as prices move up or
down (directional movement). By thin I mean there is little such motion.
The rhythm of the market is much determined by the fatness and thinness of price
action. Rhythm can also give us important clues to templating. In GSCS templating is
the nexus of theory and practice. Templating is the process of laying out the possible
propagations of a wave and narrowing them down as events and prices unfold.
Fatness may simply represent price noise that may be filtered out of analysis. But it
may occasionally represent significant internal matrices and demand deeper analysis.
GOODMAN AND COMPUTERS

The question arises: Is GSCS programmable? The answer is: probably. Software has
been written to capture the basic elements of Goodman. A complete program would be
a substantial undertaking and at least for me would go very much against the grain of
what Charlie had in mind.
A small program to spot intersections, perhaps in TradeStation or StrategyBuilder
format, would not be too difficult.
For further information about GSCS, contact Michael Duane Archer at Duane@
FxPraxis.com.

Forex Trading System- Goodman versus Elliot

OVERVIEW

When I tutor traders on Goodman, I break up the study into ordinal and cardinal.
We study Goodman wave theory (GWT) without respect to measurements first, and
only then overlay a study of the Goodman measurement theory (GMT). These both in-
volve Goodman ordinal rules and Goodman cardinal rules.
Here is a nice formation to look for in GWT. It has some high probabilities, espe-
cially with the use of filters and GMT (the latter beyond the scope of this short primer).
Charlie called it the “Return.”
Elliott identified the basic market wave as having five components (See Figure 37.1.)
This is incorrect. The basic market wave has three components. (See Figure 37.2.)

This propagation rule can be extremely useful in and of itself in anticipating the or-
dinal template of the market as it unfolds, but further details are beyond the scope of
this short overview. There are 16 basic propagation schemes or templates.
THE RETURN

Charlie identified what he called a “return”—defined here as the price location (+/–) in a
wave propagation where the secondary wave of the primary wave approaches the sec-
ondary wave of the complex component. (See Figure 37.4.)
This feature has some interesting ramifications for anticipating the basic market
template. But for the purposes of this overview, I want to draw your attention to a single
idea as a possible short-term trading tactic.

To use this in isolation as a short-term trading tool you will need a timing method—
I recommend a three-box reversal point and figure chart. Also helpful would be moni-
toring the Goodman templates at one higher and one lower matrix. The return can also
be useful in identifying the market template itself.
Typically (but not always) if the return falls short of the point of the BC wave, the
market will build a bit before reversing. If the return is past the point of the BC wave,
the market will often spike through the return point and then reverse.
When this is overlaid with the Goodman cardinal rules, it becomes a very powerful
tool in the broader scope of Goodman studies.

Forex Trading System- Cardinal Principles

OVERVIEW

Now we can begin to informally define six of the seven concepts in The Rule that
Mr. Goodman used to construct the Goodman Swing Count System (GCSC). What
had been neglected by previous theorists, users, writers, and purveyors of the rule
was this:
The 50 percent point is indeed an equilibrium point. As such, the equilibrium must
give way, but either side (buyers or sellers) in either a downtrend or an uptrend may
prevail at any given matrix or price level.
PRICE SURGE

Goodman realized both the possibilities for a reversal (as in the case of the completed
measured move) and a price surge. A price surge would be equivalent to the sellers (in
an uptrend) and the buyers (in a downtrend) winning the tug-of-war within a matrix. In
price action this means prices would fall or rise to at least the beginning point of the ini-
tial swing.
In other words, the measured move is not a done deal—the 50 percent retrace-
ment in Figure 36.1 could also become a V or an inverted V. The 50 percent retrace-
ment is not necessarily a reversal point but should be considered as a point of
interest where prices may be more likely than randomlyto decide whether to con-
tinue or reverse.
It may not sound like much, but it is a major discovery.

Clearly price surges are implicit in The Rule. But they are not visible on a chart un-
less you are looking for them and unless you are considering the 50 percent retracement
as a point of interest and not necessarily a reversal. In fact, most practitioners perceive
a price surge as a failure of The Rule!
MULTILEVEL MATRICES

What was even more important, Goodman discovered the implications of The
Rule occurring simultaneously at all price levels. I remember exactly the day and
place when Charlie showed me this one—it hit me as truly a grand revelation on the
markets!
Here you are: The initial (primary) trend and secondary (reaction trend) as well as
reversals (measured moves) and surges are relative to price matrix context. What is one
thing in one price matrix may well be its opposite in a higher (or lower) matrix. (See
Figure 36.2.)

It is true that Elliott wave theory contains the same concept. But with GCSC you
can tell before (in many instances) which it is. In Elliott you can tell only after. GCSC is
a predictive system, whereas Elliott wave theory, grand and elegant as it is, is primarily
a descriptive system.
All price matrices are in theory part of a larger price matrix.
All price matrices are composed of smaller price matrices.
Of course there is the practical limitation of the smallest possible fluctuation.
Besides reversals and surges, GCSC matrix concepts include domination and
generation.
Clearly, prices do not always seem to find any kind of equilibrium at the 50
percent retracement price area. Or so it may seem. This leads to the third grand
discovery:
To the extent a price swing overshoots or undershoots its ideal 50 percent
retracement, that price value will be made up on the next price swing within the
matrix.
Now this is the trading rule that can make you rich!

COMPENSATION

For example, if prices fall only 40 percent of the initial trend and reverse, the mea-
sured move will actually be either 90 percent or 110 percent of the measured move
point and value of the primary (initial) swing in the matrix. The 10 percent differ-
ence—GCSC holds—must be made up eventually. This is the concept of compensa-
tion. See Figure 36.3.
CARRYOVER

Furthermore, if the difference is not fully made up in the final price swing of a matrix,
the cumulative “miss” value will carry over through each subsequent price matrix until
it does. This is the concept of carryover. (See Figure 36.4.) A carryover table is used to
add and subtract cumulative carryover values until they cancel.

CANCELLATION

When no carryover remains, the price matrix is said to have cleared or cancelled.
This is the GCSC concept of cancellation. Cancellation is critical to finding GCSC
support and resistance points. These price areas or points indicate a higher degree of
forecasting probability than would occur with a single matrix measurement. (See
Figure 36.5.)
The exact method for these important concepts is more fully described in the fol-
lowing chapter. We can now get an early glimpse of what the strange brackets in
Charlie’s charts were all about. (See Figure 36.6 for an example.) The brackets indi-
cate the measured area on a chart where prices have a higher degree of moving con-
clusively. The more bracketed areas surrounding a price, the higher the probability of
forecasting.
The five points are: the beginning of the swing, the 50 percent measurement of the
swing, the end of the swing, the measured move if the swing is a primary wave, and the
end of the measured move if the swing is a secondary wave.

INTERSECTIONS

Charlie had even more ideas:
The importance of a hot spot in relation to its likelihood of being an important point
of support or resistance, reversal, or continuation, increases when two or more price
matrices cancel at the same price or same price area. This is the key concept of inter-
section. There is no analogous concept in Elliott, the most common competitor to
GSCS. Intersection makes GSCS much more objective and testable than other swing
systems. (See Figure 36.7.)
This chapter has covered micro formations. Charlie also had compiled a dozen or so
extremely valuable macro formations—combinations of micros. I encourage the reader
to examine some charts and find simple areas of the intersection of two (or three) ma-
trices. You will see at once that these points are golden to the trader. If I had after 30
years of studying the markets only one idea to impart, it would be to show you an exam-
ple of a GSCS intersection in two or three matrices.
Remember, carryover is to the same or next larger price matrix. The above are ex-
amples of independent intersections. That is, each price level carryover calculation is
kept separate from the others and tallied at the end of each matrix. Charlie had also de-

FIVE POINTS OF A GOODMAN WAVE

Here is another perspective to help you analyze a chart and understand GSCS. Given
any component or matrix, there are five points worth watching. Remember, these points
are constantly changing as the market develops.
The five points are: the 50 percent return, the top/bottom, the bottom/top, the mea-
sured move assuming the matrix or component is in the primary direction, and the mea-
sured move assuming the matrix or component is in the secondary direction. (See
Figure 36.8.)
Sometimes it is easier to watch the points instead of totally focusing on the chart as
it develops.

DOUBLE AND TRIPLE INTERSECTIONS

The two key cardinal formations in GSCS are the double intersection and the triple in-
tersection. These represent (respectively) the intersection of two and three matrix
measurements.
The strong support and resistance at these areas may be used to enter the market in
the direction of the dominant wave. (See Figure 36.9.)

Forex Trading System- Ordinal Principles

ORDINAL VERSUS CARDINAL

Within the context of this book, ordinal refers to measurement without specific values;
cardinal refers to measurement with specific values.
THE MEASURED MOVE

The cornerstone of the Goodman Swing Count System (GSCS) is the old “50 Percent
Retracement and Measured Move” rule (“The Rule”). (See Figure 35.1.) This rule, fa-
miliar to most traders, is almost as old as the organized markets themselves. It has
been traced to the times when insiders manipulated railroad stocks in the nineteenth
century.

The first systematic description of The Rule was given in Burton Pugh’s The
Great Wheat Secret, originally published in 1933. In 1976, Charles L. Lindsay’s Tri-
dentwas published. This book did much—some say too much!—to quantify and
mathematically describe The Rule. Nevertheless, it is must reading for anyone inter-
ested in this area of market methodology. Edward L. Dobson wrote The Trading Rule
That Can Make You Rich in 1978. This is a good work with some nice examples. But
none of these, in my humble opinion, even scratches the surface relative to Goodman’s
work.

CONGESTION PHASE

In 1975 a well-known Chicago grain floor trader, Eugene Nofri, published Success in
Commodities: The Congestion Phase System. This small but power-packed volume
detailed a short-term trading method using simple but effective congestion phases.
(See Figure 35.2.) While not precisely a work on The Rule, it touched on some of
Charlie’s ideas from a different angle.
I mention Nofri’s work also because Charlie was especially taken by its simplic-
ity and because it can work well in conjunction with the GCSC. The idea of melding
the GCSC with a congestion phase approach ought to produce a method of finding
those high-percentage ducks that the Belgian dentist loves so much. Charlie also felt
that Earl Hadady’s work on contrary opinion was a natural fit, especially since the
GCSC support and resistance points seldom lie where anyone else thinks they
should.
Still, in the end, it was left for Charles B. Goodman, the great grain trader from
Eads, Colorado, to extract all the logical consequences from The Rule and transform it
into a robust, almost geometrically precise system.

EQUILIBRIUM OF BUYERS AND SELLERS

The logic of The Rule is quite simple. At a 50 percent retracement, both buyers and sell-
ers of the previous trend (up or down) are ceteris paribus in balance. Half of each holds
profits and half of each holds losses. (See Figure 35.3.)
The equilibrium is a tenuous one, indeed. The distribution of buyers and sellers over
the initial price trend or swing is obviously not perfectly even: Some buyers hold more
contracts than other buyers. They also have different propensities for taking profits or
losses. Nor does it account for the buyers and sellers who have entered the market be-
fore the initial swing or during the reaction swing. Not all of the buyers and sellers from
the original swing may be in the market any longer.
Remarkably, GCSC eventually takes all of this into account—especially the buyers
and sellers at other price swing levels, called matrices.
Nevertheless, the 50 percent retracement point isoften a powerful and very real
point of equilibrium and certainly a known and defined hot spot of which one should be
aware. Remember that both the futures markets and the currency markets are very
close to a zero-sum game. It is only commissions, pips, and slippage that keep them
from being zero-sum. At the 50 percent point it doesn’t take much to shift the balance of
power for that particular swing matrix.

The Rule also states that the final (third) swing of the move—again in the direction
of the initial swing—will equal the value of the initial swing. The logic of this idea, called
the measured move, is seen in Figure 35.4.
Examples of The Rule occur at allprice levels or matrices, and many are being
worked simultaneously in any given ongoing market. This is a critical point. In modern
terminology it would be said that price movements are recursive. Simply stated, this
means that without labeling you could not really tell the difference between a 10-minute
chart and a daily or weekly chart—they all exhibit the same behavior and operate under
the same principles of parameter and matrix. The bar graphs in Figure 35.5 were taken
from actual market data. It is functionally impossible to tell the time units apart with re-
spect to the chart action.

Forex Trading System- History

CHARLES B. GOODMAN

The principles of the Goodman Swing Count System (GSCS) were informally set forth
in a series of annotated commodity charts from the late 1940s to the early 1970s. These
trading studies, simply titled “My System,” were the work of Charles B. Goodman and
were never published.
I (Michael Archer) met Charles Goodman at the Denver, Colorado, offices of Peavey
and Company (later, Gelderman) in the fall of 1971. It was the occasion of my maiden
voyage in the great sea of commodity trading (later, futures). In 1971 silver prices were
finally forging ahead to the $2.00/ounce level. A 10-cent limit move in soybeans elicited a
full afternoon of postmortem analysis by traders and brokers alike.
The Peavey office, managed by the late and great Pete Rednor, employed eight
brokers (later, account representatives). The broker for both Mr. Goodman and me
was the colorful—and patient—Ken Malo. Brokers, resident professional traders—
including Mr. Goodman and the Feldman brothers, Stu and Reef—and a regular con-
tingent of retail customers drew inspiration from a Trans-Lux ticker that wormed its
way across a long, narrow library table in the back of the office. Most impressive was
a large clacker board quote system covering almost the entire front office wall. This
electromechanical quotation behemoth made loud clacking sounds (thus its name)
each time an individual price flipped over to reveal an updated quote. Green and red
lights flashed, denoting daily new highs and lows. Pete, apart from being an excellent
office manager, was also a fine showman who used the various stimuli to encourage
trading activity.
229
THE RIGHT BRACKETS

Almost everyone made frequent reference to Charlie’s hugebar charts posted on 21/2-
by-4-foot sheets of graph paper, mounted on heavy particle board and displayed on
large easels. No one ever really knew what the numerous right brackets (])of varying
lengths scattered throughout each chart meant. But there was always a great deal of
speculation! The present work finally reveals the meaning of those mysterious trading
hieroglyphics.
The quiet chatter of the tickertape, the loud clacking of the quote board, the con-
stant ringing of the telephones. The news ticker that buzzed oncefor standing reports,
twice for opinions, and three times for hot news. The squawk boxes and Pete Rednor’s
authoritative voice booming, “Merc! Merc!” What a spectacular scene it was! No wonder
that this author, then a 21-year-old trading newbie, would soon make commodity futures
and currency trading his life’s work.
But nothing made a greater impression on me than the work of Charles B. Good-
man. He instilled first some very simple ideas: “Avoid volatile markets when at all pos-
sible.” “Trade only high-percentage short-term ‘ducks.’” “Sit on your hands, Dad, sit
on your hands.” It didn’t take long for me to adopt the ultraconservative “Belgian den-
tist” style of trading, that is, “Avoiding losing trades is more important than finding
winning trades.”
The Belgian dentist approach carried with me when I developed my artificial intelli-
gence (AI) trading system in the 1980s—Jonathan’s Wave. Even though it generated 48
percent annual returns with a zero expectation of a 50 percent drawdown (according to
Managed Account Reports), it drove the brokers berserk because it could easily go a full
month without making a single trade!
I am certain that Charlie’s trading advice allowed me to survive the financial bap-
tism by fire that destroys most commodity and currency trading newbies in a matter of
months, if not weeks.
Mr. Goodman was to be my one and only trading mentor. Over the decade that fol-
lowed he entrusted to me many, if not most, of his trading secrets. To the best of my
knowledge he shared this information on his work with no one else in such detail.
LATER DEVELOPMENTS

Charlie and I spent hundreds of hours together analyzing the trade studies from My Sys-
tem. We also analyzed hundreds of other commodity, currency, and securities charts.
Charlie was happy with My System being organized in his mind. But as a new-generation
technical analyst, I was anxious to see it formalized on paper and eventually in source
code on a computer. To be honest, this created a small amount of friction between the
two of us—Charlie was dead set against formalized systems and believed strongly in the
psychological and money management elements of trading.
230
GOODMAN SWING COUNT SYSTEM
Notwithstanding, by 1979 I was finally ready and able to formally state the princi-
ples of My System. Because of its equal concern for price measurements (parameters)
and price levels interacting together (matrices), I originally renamed Charlie’s My Sys-
tem “ParaMatrix.” My first investment management company in the mid-1970s was Para-
Matrix Investment Management, and I acted as both an investment advisor registered
with the Securities and Exchange Commission (SEC) and a Commodity Trading Advisor
registered with the Commodity Futures Trading Commission (CFTC).
Contrary to ongoing speculation, only two copies of my original 1979 Principles of
ParaMatrixever existed. I possess both of them. Charlie’s original My System trade
studies were mistakenly destroyed shortly after his death in 1984. What remains of them
are fewer than 200 or so examples I had copied into Principles of ParaMatrix.
The present work (Part 5), “Goodman Swing Count System,” is a reorganized reis-
sue of Principles of ParaMatrixwith updated charts and a simplified nomenclature
that I am sure Charlie would have appreciated; “Keep it simple, Dad!” he would always
advise. In a later work I hope to expand on Charlie’s ideas by filling in some less formed
ideas such as his market notation, or calculus as he referred to it, and a method for
charting that I have dubbed Goodman charting. He also worked out a time-based, cycli-
cal count system.
My own direction in futures and currencies turned in the 1980s to artificial intelli-
gence (Jonathan’s Wave) and in the 1990s and today to artificial life and cellular au-
tomata (the Trend Machine). In spite of, or perhaps because of, these complicated
cutting-edge computer efforts, I continue to view the Goodman Swing Count System
(GSCS) in a very positive light. To this day, the first thing I do when I see any chart is a
quick Goodman analysis!
The GSCS is a natural system for pursuing the conservative Belgian dentist ap-
proach to trading, even without the aid of a computer. Part 5, in fact, could be used to
make Goodman analysis without a computer at all!
Goodman Swing Count System trade opportunities are as frequent today as (per-
haps more frequent than) they were 40 or 50 years ago. I believe that the system’s foun-
dations have stood the test of time well. Patterns today are no different than they were
decades ago, nor are the twin human emotions—fear and greed—that create them.
GSCS is an excellent method for finding support and resistance areas that no other
method spots, and for locating potentialturning points in any market. One of its best
suits is that it can easily integrate into other trading techniques and methodologies.
I would never recommend using or advise anyone to use a 100 percent mechanical
trading system, GSCS or any other!
Is it really a system? Depending upon your perspective, GSCS is between 70 per-
cent and 90 percent mechanical. The program available from CommTools, Inc.
(www.commtools.com) represents the kernel idea of mechanizing perhaps 80 percent
of the system. I now believe attempting to completely code Charlie’s work would be
inadvisable.
Mr. Goodman passed away in 1984. It was always his desire to share with others, al-
though as is usually the case with true genius—few wanted to listen. These days we are
History
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ever more bombarded with ever more cryptic and computer-dependent software pro-
grams and black boxes. Perhaps now is the time for the simple yet theoretically well-
grounded ideas of GSCS to become popular.
The publication of this brief overview, I hope and pray, would meet with Charlie’s
wishes. His work in extracting an objective and almost geometrically precise (à la Bene-
dict de Spinoza) trading system out of a simple trading rule (the 50 percent rule) is most
remarkable. It has certainly earned him the right to be included in the elite group of
early scientific traders along with George D. Taylor, Ralph N. Elliott, William D. Gann,
and Burton Pugh.
Conforming to the spirit of the original My System, I have attempted to keep theo-
retical discussions and formulations to a necessary minimum. Trade studies at the end
of Part 5 of this book must still be considered the crux of GSCS, even though I am
pleased with the formalization of most relevant principles described in the following
sections. The trader weary of theoretical discussions and intrigue will find all the con-
cepts and principles delineated in the trade study examples. Nevertheless, those who in-
vest time in the theory of GSCS will undoubtedly discover an area for further
exploration where many new and fresh ideas are waiting to be mined.
In Mr. Goodman’s worldly absence, the responsibility for this work and its contents
is solely mine, for better or for worse.