How to Make a Living Trading Foreign Exchange

COURTNEY D. SMITH is Chairman of the Investment Mentoring Institute, an organization devoted to building great investors. He is also President and CIO of Courtney Smith & Co., Inc., which manages money for institutions, family offices, and high-net-worth individuals. Mr. Smith is the owner and Editor in Chief of Commodity Trading Consumer Research (CTCR)—the premier tracking service for the futures industry—and author of six books, including Option Strategies (Wiley). He has made more than 1,000 TV appearances on shows such as Wall Street Journal Report, Moneyline, and other programs on CNBC, Fox News, Bloomberg, and CNN.

Preface xi CHAPTER 1 The Basics of Foreign Exchange Trading 1 Sell a Yard of Cable 2 Dont Want to Trade! 4 Transaction Costs 7 It Never Stops 8 My Biggest Losing Trade 8 The Bottom Line 11 CHAPTER 2 Trend Analysis 13 What Is a Trend? 14 How to Profitably Trade Bull and Bear Markets 18 How to Trade the Trend 21 Megaphones and Pennants 25 Average Directional Index 27 The Bishop 28 The Bottom Line 30 CHAPTER 3 Channel Breakouts 31 The Beginnings of Channel Breakouts 31 What Is a Channel Breakout? 32 Better Channel Breakouts 35 The Pros and Cons of Channel Breakouts 39 The Bishop 40 ADX Filter 43 The Principle of Instant Gratification 46 Rejection Rule 46 The Last Bar Technique 51 Tactics 52 Taking Profits 52 The Bottom Line 53 CHAPTER 4 The Conqueror 55 The Beginnings of the Conqueror 55 What Is True Range? 56 Enhancing the Conquistador 57 Adjusting the Stop 63 The Bottom Line 65 CHAPTER 5 Stochastics 67 What Are Stochastics? 67 How to Use Stochastics as an Overbought and Oversold Indicator 69 Trading Signals from Crossovers 71 Profitability of Stochastics 74 Warnings 75 The Best Way to Make Money Using Stochastics 76 Go with the Trend 81 How I Use Stochastics 81 Interview with George Lane 82 The Bottom Line 89 CHAPTER 6 Pattern Recognition 91 Inside Days 91 Double Whammy 94 Multiunit Tactic 95 Reversal Days 97 Riding the Rejection Rule 101 The Bottom Line 103 CHAPTER 7 Risk Management 105 Stopping Bad Risk Management 105 How to Make Sure We Are Never Wiped Out 108 Good Risk Management: Fixed Fractional 108 How Many Contracts Should I Put On? 109 Highly Correlated Positions 109 Kelly Formula 110 Trade Your Equity Curve 114 Take a Time Out 115 Turning Poor Systems into Good Systems 115 How Big a Position Should I Take? 116 The Bottom Line: Diversify through Time 117 CHAPTER 8 Slingshot 119 The Importance of Minimizing Losses 120 Beware of Taking Profits Too Early 121 Psychological Profits 122 Confirmations 123 Maximum Excursion Analysis 124 Using the Slingshot for Profits 125 The Mini-Slingshot 128 The Bottom Line 130 CHAPTER 9 The Psychology of Successful Trading 131 Why Do You Trade? 132 The Pressures of Trading 136 Why Do You Lose? 137 Addressing a Lack of Knowledge 138 Addressing a Lack of Capital 140 Addressing a Lack of Self-Discipline 141 An Example of Overcoming the Bizarre Twists and Turns of the Mind 143 Treat Trading as Education 144 Stress-Free Trading 147 Be the Casino 148 Developing Your Trading Plan 149 Filling Out the Plan 150 The Importance of a Postmortem 153 The Bottom Line 155 CHAPTER 10 Putting It All Together 157 Diversifying to Reduce Risk 157 Use a Mental Checklist 158 How to Trade Only One Method 159 The Bottom Line 160 Epilogue: Key Insights for Maximizing Your Trading Profits 161 Appendix: Suggested Reading 177 Acknowledgments 179 About the Author 181 Index 183