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Forex Trader Mentor


Newsletter  # 9


14th October 2005


Hi Everybody


Yes, it has been a while since the last newsletter. I hope that you have had a good summer (those in the Northern Hemisphere) and some successful trading. It has been a great summer here in Scandinavia and I have taking a long break to enjoy it.


In the meantime, I have been concentrating on writing a practical guide to forex trading. I am trying to keep it short and to the point, but it seems to have a life of its own. I hope to have it finished soon.


I have to report that there is not much 'new' in this issue, but it has come to my attention in conversations with several clients, that brokers seem to have a big effect on trader's chances of success. Is this true, or is it purely psychological. Do 'bad workmen blame their tools'?


Therefore, I invite my readers to participate in a survey which poses the question : 'Brokers - do they have any influence on your chances of trading success?'.

In Europe, we have a budget airline called 'Ryanair'. This 'upstart' has revolutionized European air travel. The CEO, Michael O'Leary was being interviewed in a departure lounge by TV, when he noticed a man ranting and raving to some Ryanair staff about delays to his flight. Mr. O'Leary intervened, and being easily recognized by the Irish passenger, bore the full brunt of the onslaught. Michael asked the disgruntled passenger how often he had travelled to England to see his daughter in the previous year or so with Ryanair. The man replied that he had made the trip 4 times. How many times in the previous 5 years had he made the trip? Once, was the reply. There, you can see how we have enabled you to see your daughter, so putting up with a delay is a small price to pay!

This is how I feel forex brokers treat their clients. They are making the forex market accessible to many who were not able to do so previously. Therefore, clients should expect off-hand treatment, bad execution, unreliable platforms and bad service.

Perhaps times are changing and there will be consolidation. The regulators seem to have an eye on the situations and I suspect that the large banks who stand behind the brokers as market makers are thinking about getting a slice of the cake. If that is so, then standards will have to be raised because their will be stricter compliance and accountability. Good for the investor? Perhaps, but everything has its price.

Please go to the Forex Trader Mentor Broker Survey

It is anonymous, and I will publish the findings in a future newsletter.

Link to Bookstor


Go Forex Forum


Forums serve several purposes, some good, some bad. Getting your trading ideas from a forum is not a good idea in my opinion, but getting information about aspects of trading is. Therefore, I have agreed to be one of the 'gurus' on a new forum on the goforex.net site. www.goforex.net/forum


There are other distinguished experts on the forum:


Neal Hughes has taught Fibonacci trading methods for many years to private clients and small groups.

He enjoys teaching and assisting his students to become successful traders. Over the years Neal has traded a variety of markets (Stocks, Options, Metals, Futures) both in the U.S. and internationally. He learned his Fibonacci techniques primarily from Mr. Joe DiNapoli and gives much credit to Joe. For years Neal trained DiNapoli clients on behalf of Joe DiNapoli at private seminars.

Neal is well versed in all aspects of technical analysis. He is also an accomplished programmer and has written many market related software applications and custom indicators.

He bases his techniques on sound technical principles, he is not a gambler and prefers to search for quality trades than to attempt to capture every market move. He credits much of his success to his ability to maintain a disciplined attitude towards trading while employing his methods. Although his techniques are very strongly influenced by Fibonacci analysis, other indicators play an important role too.

Other accomplishments include being an Accountant, Business owner, and once a registered Stock Broker. He has also authored and co-authored many technical analysis newsletters and market related articles and has been interviewed by leading trading related publications. Neal has published several training videos, and currently provides a daily stock trading newsletter.


Dirk du Toit hails from sunny South Africa where he heads up DayForex Capital Management, which specialises in the forex investment market. DayForex focuses on the trading of forex investments on behalf of clients and mentoring of self-directed forex traders.

After qualifying with an M.A. degree from the University of Pretoria, Dirk joined the financial services industry as a financial advisor in 1991. Since 1998 Dirk traded for his own account in the global financial markets as a means of making a living. His areas of focus were bonds traded on margin, equities and since the advent of retail forex, currencies.

Since the beginning of 2001 he has focused mainly on sharing his trading acumen with prospective self-directed traders interested in the forex market, while preparing the groundwork for DayForex Capital Management – these days a discretionary forex services provider fully authorised by the South African financial authorities.

Dirk is the Chairman of the Forex Investment Association in South Africa and an Associate of the Financial Planning Institute, and holds the International Capital Markets Qualification from the Securities Institute in London.

Dirk wrote two e-books on foreign exchange: An Introduction to the Foreign Exchange Market, and Bird Watching in Lion Country – Retail Forex Trading Explained.

Says Dirk on participation in this unique forum as resident expert:

With a personal successful experience as self-trader (“been there, done it”) and several years of online coaching of hopeful self-traders and budding forex entrepreneurs I know what it is and what it takes to guide both beginners and struggling traders (hence the nickname “Doctor Forex”) through the Lion Country called Forex Trading. I believe “If you start FX wrong – you’re gone, if you start right – you might”. If you charge straight into the lion’s den you are going to be eaten alive – nothing will remain. Beginners, either with little experience in other markets or complete novices simply don’t know what to believe or not, what to do or not regarding FX trading. With proper guidance (there are many roads to Rome) your chance to succeed escalates exponentially.

Steve says:


Dirk du Toit's book, Bird Watching in Lion Country is a masterpiece. Here is a fellow mentor who sees the market much in the same light as I do. As I have experienced, many would-be forex traders find the truth hard to swallow; namely that it takes hard work and dedication to become a successful forex trader. The 236-page tome is underpriced for the home truths you will find within. Dirk goes systematically through the basics of what constitutes a trading system and goes on to talk about that vital factor 'The Edge'. I use this term too, albeit lifted from Mark Douglas, but there is no better word to describe it. Interestingly, we are given the facts about the forex market after this and finally we come back to using the 'Edge' in forex trading, where Dirk describes his 4 x 1 Strategy.

Dirk is a competitor, but this book is so eloquently written that I feel compelled to recommend the book because he has raised the stakes in producing practical, usable material for forex traders.
Criticisms? Dirk has only worked in the retail market and therefore does not have the deep insight of the Interbank market. Luckily for me, the book does not go as deeply into money management as I do. Vive le différence! Having said that, we get an excellent guide to what is required by following the progress of Joe, one of Dirk's clients.
I am looking very much forward to reviewing the workbook that will compliment Bird Watching in Lion Country when it is released
Abe Cofnas is founder of Learn4X. The firm is one of the first in the world to provide on-line training on how to trade forex. Mr. Cofnas has provided a worldwide audience with analysis and insight on what moves the forex market. He was selected as the first Forex Trader columnist for FUTURES MAGAZINE, writing a monthly column covering forex for the last 4 years. He has also provided unique content for their website.

Based on years of training, Abe finished and has published a book called "Understanding Forex: Trading to Win"
, which provides a getting started workbook on forex trading. It is now also available in PDF format. A unique approach of Mr. Cofnas is integrating fundamental and technical analysis.

Learn4x also provides around the world one-to-one mentoring in a Virtual classroom where students can see and draw on charts.

Mr. Cofnas holds a Masters Degree in Political Science, and a second Masters Degree in Public Policy Analysis from the University of California at Berkeley.

Says Abe on participation in this unique forum as resident expert:

The difference between an experienced trader and a new trader is that an experienced trader knows what he doesn't know, and a new trader doesn't know what he needs to know. The path to success in forex trading is to develop an ability to identify winning trading patterns. That's my goal.
Duane Archer has been involved in commodity and currency trading for over 30 years as a private trader, registered commodity trading advisor, branch manager, writer, lecturer, researcher and software publisher. In the early 1970’s he researched hundreds of technical trading indicators and systems using a then ‘state-of-the-art Data General Nova computer at the University of Colorado’s Department of Physics. “Today,” he notes, “That computer, valued at over $70,000, would be no match for a bare-bones PC costing less than $500!” He owns an extensive collection of books and ‘system’ manuals; including many rare items dating from the 1940s and 1950s.

Duane is CEO of FxPraxis and also owns a web conferencing company, PresentPlus. His primary interest is in non-linear trading systems where, he believes, a trader’s philosophers stone waits to be found. But he also does extensive research on linear methods and has co-authored a series of eight technical analysis treatises for currency traders. His "Getting Started in Currency Trading" book was published earlier this year by John Wiley and Sons. Currently he is working on The Goodman Codex and, his opus, The Trend Machine a system based on cellular automata.

Says Duane on participation in this unique forum as resident expert:

I’m excited about the idea of exploring technical analysis with the followers of Go Forex. Just when I think I’ve ‘seen it all’ someone comes up with a new idea begging for further study. Typically, I divide technical analysis into Linear and Non-Linear approaches and further divide Linear into Charting methods and Indicators. When looking at a new method or indicator I always ask myself, ‘What does this really do; what does it really measure - and how does it relate to the ‘true’ composition and nature of the markets?



Now, you may question my sanity here; why am I promoting my competitors? It is because I firmly believe that anyone who takes up forex trading should only do so with the right training and mentoring. Mentoring comes in different guises: Dirk, for instance is more 'hands on' than I am, giving traders daily pointers to the market. My philosophy on the other hand, is giving traders the best preparation by among other things, concentrating on money management. Therefore it is a matter of preference and to a degree, chemistry.


In addition, I endorse a product or a service until something better comes along. Bird Watching in Lion Country is certainly the best book on forex trading I have seen to date.


On the Go Forex forum, you have free access to industry experts, so please visit the forum, today!



TradeCraft corner - The Calmar Ratio


New tools are being added to the functionality of TradeCraft and one such tool is the Calmar Ratio. As you have read in previous newsletters, TradeCraft is a money management tool that has two purposes: One is to provide the trader with a suite of tools that gives him or her vital performance information. The other is to provide me, the Mentor information as to how you, as a trader, are getting on; are you sticking to your plan? Are you following your rules? Are you performing to your risk/reward strategy? Are you getting those consistent profits?


TradeCraft provides the link between the individual trader and the professional money manager. These money managers are obliged to provide investors with detailed performance records, if they are ever going to attract funds. They also have to convince their investors that they can handle risk.


You, as an individual trader, do not have this possibility to be your own risk manager, trader and investor at the same time. Even with the pro traders, it is recommended that risk management is separated from trading. Therefore, my role is one of the risk and money manager, and the auditor of the performance records - to you.


There are many measures of performance which do not seem at all relevant to your average trader. However, the average trader is also the one who is losing money! The smart traders know how to monitor and interpret the numbers and use them to keep tem 'in the zone'.


Maybe you have heard, or read about some of these performance indicators, such as Sharpe Ratios, Sterling ratios, and haven't a clue what they are or how to use them. I can tell you that most Interbank forex traders don't know either!


Let us take just one, the 'Calmar ratio' that has been incorporated into TradeCraft. What is it.


It is a return/reward measurement that divides the Average Annual Compounded Rate of Return by the Maximum Drawdown. Got it? No? Well, it calculates the historical dollar return for each dollar risked over a given period of time. The normal period is 3 years, but TradeCraft recalculates on a daily basis, so you can really see the effect. Your maximum drawdown (which is also calculated in TradeCraft), is the biggest consecutive series of losses that you have suffered in your trading. This is a key statistic of interest to investors, because the attitude is ' I don't care how much you earn for me, just don't put my capital at risk'. Why else do you think investors are happy with a small positive return in a year such as this one? They don't want to see large drawdowns.


As an individual trader, you don't want to see a big drawdown either. We assume that you have tested your system and it does not go 10  losing trades in a row. If it does, your Risk Reward ratio is wrong, the system is rubbish, or your risk per trade is too large. The average annual compounded rate is also calculated on a daily basis in TradeCraft, so the final number shows you how much you are risking for every dollar you earn.


The higher the Calmar Ratio, the better your trading risk-adjusted performance is. The number, in real-time, or better still plotted over a period of times speaks volumes about your trading. You will learn this, when you have been using TradeCraft for a time and you will be able to use it yourself to forewarn you of any deterioration in your trading performance before you start bleeding cash.


bookstore link



You may have noticed brokers offering yet tighter spreads. This is because the market makers that stand behind the brokers are turning up the competition. Citibank has been particularly aggressive and is quoting 1 pip on almost any currency pair, so I have heard. They say they have quadrupled turnover. The name of the game it seems, is to try and corner a chunk of the market.

I understand the strategy: I worked intensively with a simulation model that made massive profits from random trades on a 2-point spread based on live market rates. Yes, the models was very 'long' or 'short' at times, but no matter where the market went, if you got enough turnover, you would make money. So, Citibank have realised this and they are going for the turnover.

What might happen as a result, and this is significant, is market players will tend to do their business around a central 'average' price. Much like the old  currency 'fixings', which was the normal way to conduct forex business until 40 years ago. This means that markets will be held in a tight range during the 'normal' business hours, only to get volatile when the bulk of the business has been done. Maybe this is already apparent.

In any case, you have to realise that the forex market is constantly evolving and that needs to be taken into account, especially when implementing a system that worked perfectly in back testing.


It had to happen!

According to BBC News, 13th October 2005:

Refco freezes debt-scandal unit
Refco's problems have come two months after its stock market listing
Refco, the brokerage whose former boss has been charged with fraud, has frozen accounts at a scandal-hit subsidiary at the heart of the allegations.

Shares in the firm were suspended in New York after they plunged 27%.

Refco - which only listed on the stock exchange in August - has lost three quarters of its market value this week.

Former chief executive Phillip Bennett is accused of padding Refco's finances by hiding millions of dollars of debts it was owed by the troubled subsidiary.

On Wednesday, Mr Bennett was accused of hiding the fact that Refco Capital Markets - an unregulated subsidiary he controlled - owed more than $550m (£285m) to its parent, Refco.

US Attorney Michael Garcia alleges that Mr Bennett wanted to make Refco look stronger ahead of August's $583m stock market listing.

Safety measures

On Thursday, the firm said that Refco Capital Markets did not have enough capital to keep operating and explained it would freeze accounts and block withdrawals for 15 days to prevent the subsidiary from collapsing.

Refco Capital Markets is a bond, share and currency broker, which also lends securities and acts as a prime broker.

"This company is in serious jeopardy," said Kevin Starke, an analyst at Weeden & Co.

Refco is one of the world's largest commodities and futures brokerages.

Mr Bennett first joined the group in 1991 and was appointed chief executive in 1998. He also was chairman.

The US Attorney's Office for the Southern District of New York charged Mr Bennett with securities fraud on Wednesday. If found guilty, he could face up to 20 years in jail.




Good luck!


Steve Pickering




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