The most popular currency to trade is the Euro

The most popular currency to trade is the Euro. This is not to be confused with the Eurodollar contract that trades on the CME, symbol ED. Eurodollars are U.S. dollars on deposit in commercial banks outside of the United States. Eurodollars are an interest rate products thai portfolio managers can use to hedge short term interest rate risk with all kinds of complicated strategies. This is the most liquid contract in the world but it doesn't move, and 1 don't trade il. To clarify, I'm talking about the euro/dollar currency cross, which is the actual currency I get in my hands when I go to Europe and exchange my U.S. dollars for Euros. On the CMET this is called Euro FX. symbol EC. In the forex markets, it is called the euro dollar cross, symbol EURUSD.

To review, on the CME and in the forex markets, the euro moves in increments of I/100 of a cent. On the CME, this move is called a lick, and is worth $12.50 per contract, making a full one-cent move worth $1,250 per contract. In the forex markets, this move is called a pip (price interest point) and is worth $10, making a full one-cent move worth $1,000,00 per contract. There is also a mini-forex contract available in which each pip is worth $ I, and a full one-cent move here would be worth $100. It is important to keep in mind, however, that there are many other trading opportunities out there in the currency world besides the euro. Often times the other currency pairs move and trend better for the simple fact that there are not a lot of retail traders jumping in and out of these other markets. Trades in the Euro make up only about 10 percent of my currency trading.

There are arguments on both sides concerning which market is better for currencies futures or the cash forex markets. With the futures, the spreads are a little tighter, and the commission is the same as trading regular futures contracts, but there are no guaranteed fills, and slippage can be a real issue. With forex, the spreads are a little wider, fills are guaranteed in all but extreme market conditions, and there aren't any commissions to pay. This works out as follows: If a trader buys one contract on the CME, they will pay roughly $8 in commission plus the $ 12.50 spread for a total outlay of $20.50. In forex a trader will pay a 3 pip spread at $30 and no commission. The difference between the two in this case is $9,50. However, I've found that 1-2 tick slippage in the futures markets is quite common. Add 1 tick slippage and that $20.50 is now $33, three dollars more than the forex trade. In the end, the costs are about equal. 1 am a redundancy freak, so I trade both. If for some reason I have a problem with the futures contract, then I can hedge my position in the forex market In general, however, 1 like to keep my stock index futures trades separate from my currency trades. By having separate accounts, 1 can easily measure my performance in trading these various markets. Therefore, most of my currency trades are in the forex markets, in a separate account from my stock index futures trades. In addition, the biggest argument in favor of the forex markets is the fact that there is much belter liquidity in the other currency pairs, such as the EURJPY, GBPJPY, and so on. All of these currencies trade very technically, and the more charts that a trader has available to watch, the more opportunities that will set up, For an individual who has never traded currencies in the forex markets and is interested in doing so, the best idea is to open up a demo or mini-forex account to get the proverbial feet wet. For more information on how to do this and set up an account, as well as more information and other plays specifically designed for the forex markets, www.razorforex.com is a good resource.

Okay, back to the box play. I'm looking for a period of horizontal consolidation with at least two tests of the highs and two tests of the lows. Once 1 get these two tests, then I'm looking to buy a breakout of the box, or sell a breakdown of the box. My target on these trades is the width of the box. These plays can be done on all time frames. An individual who is primarily a day trader can execute this setup utilizing 1-, 2-. 3-. 5- and even 15-minutes charts. An individual who also likes to swing trade can look for these setups on the 60-minutet 120-minute, 240-minute, and daily charts. I trade these as both swing and intraday plays, with each limeframe independent of the other time frames. This means I could have a 60- minute box play going on with one set of parameters, and a 5-minuie box play going on with a totally different set of parameters. Also, since the forex markets actively trade 24 hours, these box plays can be set up at any time. It is important to remember that ihere are multiple major openings each day. Tokyo, London, Australia, New Yorkand other marketsall open around 8:00 a.m. in their local time. There isn't a bell or anything that rings. Traders waltz into their offices, and when they get to their desks, they start placing orders for their clients. Because of I his, these consolidation patterns tend to break quickly, and once they do, ihey tend to trend really well.

! like to try to get some sleep each night, but on those nights when I get shafted by the wait staff (i.e., I order decaf coffee after dinner but they give me caiTeinated, so I end up lying in bed staring at the ceiling). I can at least get up and check if a box play is forming overnight. Although I will look for box plays throughout the trading day, I also like to scan through ihe charts before 1 go to bed. If there are any box plays setting up, I will place my orders, hit the sack, and see how my trades worked out in the morning. This works out greatmy friends joke with me because I can't sleep very well unless I have a position on.

TRADING RULES FOR BUYS (SELLS ARE REVERSED)

Box plays are momentum plays. 1 will buy a breakout and short a breakdown.

1. I like to set up a simple bar chart on the timeframe I want to play. 1 will search

through various timeframes to see where box plays are currently setting up. For

this example I use a 15-minute chart.

2. As the market action progresses, I take a horizontal line and start marking highs

and lows. I usually have to adjust this horizontal line a few times as the market

action develops. Once 1 get two tests of one of the lines, ( have a potential box

play developing.

3. At this point I am watching to see if! get another test on the opposite side of the box.

Let's assume in this example that I do, and now I have two tests of the highs and two

tests of the lows. The width of the box is 20 ticks. Now, a trader isn't going to know

that a box is in place until the prices hold the fourth test and move back into the cen

ter of the box. Once prices have moved back up into the box by about 25 percent, my

box is complete. For example, if the width of the box is 20 ticks, then 1 would want

to see prices move back into the box by at least 5 pips after the fourth price test.

4- Now that I have my box. I place two orders, I place a buy stop order one tick above the high end of the box. I place a sell stop order one tick below the low of the box. Whichever way the market breaks, 1 am sitting there with my order waiting to get filled.

5. My buy stop is hit. For my stop, I just leave my sell stop in place, as this now

becomes my stop loss order on this trade. This represents a risk-to-reward ratio of

a little over 1:1.

6. I stay in my play until my stop or my target is hit. 1 do not trail stops.

1, This is a 15-minute chart of the euro currency futures contract that trades on the

CME (see Fig. 14.1). On October 5, 2004, there is a high point marked at 1.2319.

I draw a horizontal Hue over this level to see if this will hold and become the top

of a new box.,

2, A few hours later the markets make a low and bounce, and this is where I draw

the horizontal line for the bottom of the channel. Now that 1 have my first highs

and lows, I need secondary tests of both these levels in order to have a box.

3, About five hours later a test of the upper end of the range occurs.

4, And about two hours after that another downward test occurs. 1 now have a box,

and 1 can set up my orders. I place a buy stop order one tick above the high of the

box. The high of the box is 1.2319, so I place my order at 1.2320. The lower end

of ihe box is at 1.2306, so I place a sell stop order at 1.2305. It is important to

note that each box does not set up in a picture perfect way. In this chart, there is

a wayward tick at point 4 that pushes through the horizontal line. I'm more con

cerned about the two levels that were tested, which is why I keep the line of the

first lest at point 2. The basic rule of thumb for boxes is this: If you have to sit

back and wonder if there is really a box on the chart, then there isn't a box on the

chart. Once boxes form, they are very obvious. It is not critical if you include the

wayward ticks in your box if they are only a few ticks away. This is a trade in

which a few ticks usually won*t make or break the trade.

5, At point 5 my sell stop is hit, and I'm now short at 1.2305. My target is the width

of the box. Since the width of the box is 13 ticks, 1 subtract .0013 from 1.2305,

and 1 get 1.2292.1 place a limit buy at this level to cover my position. I leave my

original buy stop in at 1.2320 as this will be my stop. Note that even though I am

getting in the trade a little outside the box, I still use the exact width of the box

as my target.

6, My target is hit at 1.2292, and I'm out for a gain of 13 ticks, or a gain of $162.50

per contract.

1. This is an example of another box play on the CME euro currency futures contract,

though this is on a 60-minute chart (see Fig. 14.2). This box takes a period of two

days to develop, over September 27 and 28, 2004. At point 1 a high is established

at 1.2305, and I draw a horizontal line. Two bars later the market pushes higher to

1.2310, and 1 move my horizontal line up to this level (see Fig. 14.3).

2. The market sells off for six hours and bottoms out. 1 draw a line at this point,

1.2276, and I have a potential bottom of my box. I now need another test of the highs and test of the lows.

3.The euro rallies for four hours and tests the upper end of the box. It makes a high

of 1.2305 before turning back and heading lower.

4. Five hours later there is another test of the lows, at 1.2276, and we now have a box, Let's look at Figure 14.3 to see where I placed my orders.

Euro FXDecember 2004 Contract, September 27, 2004 (Continued)

1.As prices continued to fluctuate, I have moved my horizontal line up to L2310,

which is the new top of the box. Could 1 have left this at 1.2305? Yes. Remember,

when it comes to wayward ticks that are a few ticks away, it generally does not

have any impact on the trade. 1 place a buy stop order one tick above this level ai

1.2311 at point 5.1 also place a sell stop order one tick below the low of the box,

at 1.2275.1 note that this box is 34 ticks wide, so my target will be 34 ticks,

whether I'm taken into the market long or short. Later, it turns out my buy stop

is hit. I place a limit sell order for my target 34 ticks above my entry, which is 1.2345. My stop is my original sell stop order at 1.2275.

2.My target is hit. and I'm out for 34 ticks, a gain of $425 per contract. If you aren't

using OCO (order cancels order) orders, be sure to remember to cancel your open sell

stup order a( 1.2275. If you dun'I, you will be leaving a live order in the market, and

if this level is hit, you will get filled with an unwanted trade. Leaving in an open

order in the markets is like leaving your food out overnight when camping near bears.

Sure, nothing may happen, but there is also a decent chance for disaster to strike.

1. This is a 15-minute chart of the euro currency on the forex market (see Fig, The reason it says EURUSD is that this is the indication that this is the Euro as it is trading in relation to the U.S. dollar, as opposed to the euro as it is trading against the pound, yen, or some other currency. By now this drill should be familiar. We get two tests of the highs and two tests of the lows, and we get our box via the levels marked 1, 2, 3 and 4 in Figure 14.4.1 adjust my lines so that the high of the box and the low of the box are represented, and I place my orders. I have a buy stop in at 1.2402 and a sell stop at 1.2375.

2* This box stays in place for a long time. It's a relatively tight box at 24 pips.

Typically, the longer the box is in place, the more energy it is building up, and the more forceful the move will be when it eventually breaks.

3, At 7:30 a.m. Eastern it breaks the box and hits the buy stop labeled point 5. I'm filled, and the target hits shortly thereafter, for a gain of 24 pips, or $240 per contract. This particular move keeps right on going. Some traders I work with will take half their position off once the initial target is hit, and then trail the other half. This all comes back to formulating a business plan that best fits a trader's personalitysomething 1 talk about in great detail at the end of the book.

For me, the box play is a high-probability play in and of itself, and I stick with the original stops I have laid out in this chapter. However, I will scale out of multiple-lot positions as they are going my way, and I'll show an example of that at the end of this chapter.

Forex MarketsEURUSD, May through June, 2004

1. This is a daily chart of the euro on the forex markets (see Fig. 14.5). This is an

example of a swing trade and a bigger example of the power of the box. On

May 20 and May 21, 2004, we form the lows at 1.1620.

2. On May 27 the market loses steam from its vault higher and sells off, forming the

highs of the box 312 pips later (a little over 3 cents).

3. On June 4 and June 5 the market retests the lows of the box.

4* And on June 16 there is a retest of the highs of the box. Once this happens, I place my orders. I use a buy stop at 1.1933 and a sell stop at 1.1619.

5. My sell slop is hit at 1.1619 at point 5. Since the width of the box is 312 pips, 1

calculate my target accordingly, and I place a buy limit order al 1.1307. My stop is

my original buy slop order at 1.1933.

6. The market moves down nicely and then shoots back higher. Anyone using a trail

ing stop for this trade would have been stopped out for a small gain. The reason I

keep my stop wider, and the reason I do not trail it, is that I know this h a high-

probability play, and I want to give this setup room to move in order to give it a

chance to work our. My target is hit nearly two weeks later for a gain of 312 pips.

just over three large in trader speak, or $3,120 per contract. Nexi,

Forex MarketsEURUSD, August 3, 2004

1. On August 3, 2004, the euro forms a box on the 15-minute charts (see Fig. 14.6).

The first high is marked here at point 1.

2. A few hours later we get a potential low for the box, and I draw a horizontal line

at the lows here.

3. The market bounces, and we get a retest of the highs.

4. Then the euro sells off nicely, and we get a retest of the lows. Since this low

pushed a little lower than the low at point 2,1 go ahead and move my horizontal

line down to reflect this low. Once I have these lines set up, 1 place my orders. I

use a buy stop at 1.2062 (one pip above the highs) and a sell stop at 1.2042 (one

pip below the lows).

5. My sell stop is hit at 1.2042. Since the width of the box is 18 pips, I calculate my

target, and I place a limit buy order at 1.2024. My stop is my original buy stop

order at 1.2062.

6. My target is hit. and I'm out for a gain of 18 pips, or $180 per contract. I don't

have to remember to cancel my open buy stop because my execution software

does it forme automatically.

Forex MarketsEURUSD, August 19r 2004

1. On this 15-minute chart of the EURUSD we get a first lest of the highs at 1.2347 (see Fig. 14.7). Once the market sells off from this level, I draw a horizontal line

across the high.

2. The market sells off and pushes as low as 1.2323.I start off drawing a line at this

level. Later I move this line back up to 1.2331 because the rest of the price sup

port tests are much closer to this level than the wayward tick.

3. Here we get another test near the highs.

4. And we get another test near the lows. Once the four price tests are complete, f

place a buy stop order at 1.2348 and a sell stop order at 1.2330. Although this box

isn't perfect, there is no doubt that we have a nice horizontal channel in place.

5. My buy stop order is hit. Since the width of the box is 16 pips, I place a sell limit

order for my target at 1.2364. My sell stop remains in place as my stop on this play.

6. My target is hit, and I'm out for 16 pips, a gain of $160 per contract. As you can

see, I could have also used the low of the wayward tick in my calculations, and

this would have been a more profitable trade. The bottom line is that when it

comes down to a few ticks, it is not a big deal where you place your horizontal

line, as long as it is crystal clear that a box is in place. This applies to nearly all

setups. If you have a setup, and you miss the trade because you were trying to get

the perfect entry, then you are the chump that just got played by the market. Good

setups take time to develop and shouldn't be squandered away. Generally, traders

who miss their perfect entry usually end up chasing the markets as prices run

away from them. Afraid of missing the move, they frantically jump on board.

Unfortunately this action shifts them into the group of traders who just bought the

top or sold the bottom. What was a great setup suddenly turns into a losing trade.

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200509-24

I like this trade because it is simple and effective, and it goes clearly against the masses who chase this move off

200509-23

I'm not looking for any specific candlestick patterns such as Dojis, Hammers Shooting Stars, and so forth

200509-22

Many day traders I talk to ask about the wisdom in swing trading

200509-21

It supersedes all my other intraday trading rules and setups

200509-20

It is important to position size correctly for swing trades

200509-19

Scalper buys and sells are especially useful for traders who like to try to buy bottoms or short tops

200509-18

Things I like about these swing trades is that they tend to take care of themselves