1. INTRODUCTION: trading is an art, not science; market is non-stationary (game with constantly changing rules); experience counts; risk-adjusted returns » outsized returns; currency trading ~ playing the piano: mechanics are simple (just press a few keys) but mastery takes a lifetime; no secrets in trading, only knowledge, skill, experience and psychology (which is the hardest part - to control yourself); anyone can learn the rules, but very few can stick to them; bad decisions can lead to good outcomes & vice versa

   I. FX 101

2. HISTORY: currency trading in biblical times (Mt 21:12-13); gold standard: individuals prohibited from owning gold; 1971: end of gold standard (Nixon); fiat currency system: floating currencies backed only by faith in the issuing country (not by gold); major currency rates determined by market but G7/G20 can intervene in FX markets in coordinated way by buying/selling in case of extreme volatility or perceived misalignment;

3. BASICS: exchange rate: numerator & denominator; quote in American terms (USD always as denominator eg EURUSD), European terms (USD as nominator, eg USDJPY); standard convention: based on currency priority (EUR -> GBP -> AUD -> NZD -> USD -> CAD -> CHF -> JPY), higher-ranked currency always on top (numerator): eg if EURUSD trading at 1.13 -> you need 1.13 USD to buy 1 EUR; if you are bullish EUR (you think market will go up) and bearish USD (you think market will go down), you go long EURUSD; you are always long/short the first (top, numerator) currency; focus on most liquid currency pairs (low transaction costs, tight spreads, good liquidity): EURUSD, AUDUSD, GBPUSD, USDJPY, EURGBP, USDCAD; gold (XAU): illiquid currency; bitcoin: not a currency but an asset (too volatile & too inefficient to be used as means of exchange); EURUSD, USDJPY, GBPUSD: most volume but CNH steadily increasing; market segments: 1) retail (individuals, smaller amounts, wider spreads) 2) wholesale (companies, larger amounts, narrower spreads); pip: smallest increment, in most cases 0.0001 (for JPY pairs 0.01); spread: difference between where a dealer (broker) will buy and sell a currency pair; “figure”: round number between bid and ask price; “bucks”: millions; “yards”: billions; every time you cross a spread, you are paying money to the market -> FX trading is negative-sum, not a zero-sum game; two primary electronic communication networks (ECNs): Electronic Brokerage Services (EBS) & Reuters; arbitrage: trading to earn risk-free profit; order types: risk price (pay the offer = buy, hit the bid = sell, market makers bear liquidity & market risk), limit order (aka take profit, leaving bid/offer, no guarantee to get filled, best when you are in no hurry), if done order (creates another trade once executed), loop order (creates new limit orders over and over), stop loss order (exit position to limit loss, becomes market order when level is triggered -> rate not guaranteed, standard slippage: 1-3 pips); OCO order (one cancels the other, eg if take profit order executed, stop loss is cancelled), market orders (“at best”), no worse than price (only wholesale, between “risk price” and “at best”, if actual execution much better than worst price, bank shares improvement with customer), two-way price (bank shows both bid and offer, costumer decides which side to take, “yours” = I sell, “mine” = I buy), TWAP/VWAP (time/volume-weighted average price, algorithmic orders, TWAP ideal when market not moving), iceberg order (type of limit order, only wholesale, shows small amount to market, keeps refreshing until larger amount fulfilled, popular in less liquid currencies, overused), dark pools (only wholesale, no assigned price, waits for match from opposite direction); profit & loss: real-time mark-to-market P&L: shown even if you haven’t realized it, necessary for money management; reported in denominator currency; P&L = position size * price change; long positions profit when price of numerator currency goes up, short positions profit when price goes down; roll/rollover/carry: interest you pay/receive for holding spot positions overnight (meaningless when trading short-term)

4. MARKET STRUCTURE: banks, corporations & hedgers, hedge funds (discretionary/macro funds, Commodity Trading Advisors - CTAs, real money, high frequency trading - HFT), central banks, retail traders (esp Japanese housewives -> Mrs Watanabe); each currency has its own personality (developed vs emerging markets): the Majors, European, Commodity (currencies of commodity-exporting nations), Skandies, Emerging Markets (EMFX), high vs low yield (tendency: own high-yield, sell low-yield currencies, low-yield currencies tend to be safe havens eg EUR, CHF, JPY <-> EM currencies, AUD, NZD high yields but tend to sell off in stressed market -> risky currencies, high-yield currencies tend to grow slowly & drop quickly), managed currencies (not completely free-floating, new traders should avoid them); dollar smile: USD appreciates when US economy is doing very well or very poorly & depreciates in between -> buy dollars when US is booming or is in recession, sell dollars otherwise; volatility & liquidity: volatility: standard deviation of past price moves expressed as annual percentage; should be taken into account when position sizing; (VAR: value at risk, standard risk management model that estimates future risks based on historical volatility -> can underestimate risk when volatility is low); liquidity: amount of expected slippage (good news: FX most liquid), high volume -> high liquidity, weak inverse relationship between volatility and liquidity -> stick to G10 FX (most liquid); volatility & liquidity changes over time, depends on times of day -> most active when LDN/NY overlap (11AM-4PM London) -> aim to trade during these hours & do something else when volumes are low (to avoid overtrading); watch for crazy moves on last day of month; avoid trading during Twilight Zone (5-6pm NY) -> less liquidity; sell dollar against basket of currencies to avoid idiosyncratic risk; jump/gap risk: price move when no trading

   II. TRADING

5. FUNDAMENTAL ANALYSIS: “In the short run the market is a voting machine. In the long run it is a weighing machine.” (Graham Dodd); market oscillates around long-run equilibrium (fair value); fundamentals analysis: study of macroeconomic factors that drive markets, they are important, only technical analysis is not enough; common methodology: purchasing power parity (PPP) demonstrated by “Big Mac Index”; IMF review; global drivers of FX: 1) global growth (exporters: China, Korea, Brazil) 2) commodity prices (commodity exporters: Brazil, Canada, Australia) 3) risk aversion (low-yielding safe havens: JPY, CHF, USD) 4) geopolitics (instability: RUB, PLN, TRY); domestic drivers: 1) monetary policy (interest rates, balance sheet size, growth, inflation, central bank preference for weak/strong currency - read every official release of every central back whose currency you are trading!, beware of historical bias - eg tight monetary policy in Germany vs low rates by Fed in US, hawkish/dovish: more likely to hike/lower rates -> currency expected to appreciate/depreciate against other currencies, “buy the rumor/sell the fact”), 2) capital flows (eg M&A, used for ex post explanation, not for prediction) 3) trade balance (little short-term impact); market trades off the delta (change) not the absolute level (it is already priced in); interest rates: central bank controls the front via overnight rate but had less control on longer end; bottom line: higher rates attract capital, lower rates trigger outflows of capital (works well in developed markets but less often in EM); inverted yield curve tends to precede recession; bullish/bearish for currency: 1) high/low rates 2) rising/falling rates 3) steep/flat or inverted yield curve 4) steepening/flattening yield curve; growth: GDP, Industrial Production, Retail Sales, Housing, currency ~ country’s stock -> growth drives stock higher; inflation: no simple relationship between inflation and FX, depends on central bank’s reaction; in developed countries central banks usually raise interest rates when inflation is growing; impact is confusing in emerging markets -> do not trade EM currency after inflation data releases; central bank: can intervene directly by buying/selling own currency (eg Swiss National Bank set EURCHF floor at 1.2); or signal desire for stronger/weaker currency; preference matters only if central bank is credible (willing to change interest rates/intervene if needed); do not bet against central bank’s preference for its currency (exception: George Soros); US economic data: absolute numbers don’t matter, what matters is how the numbers compare to expectations (relative to standard deviation); shorter time period is more important (month-to-month vs year-to-year); no farm payrolls (5/5 monthly): number of jobs created, unemployment rate, average hourly earnings; initial claims (3/5 weekly): number of jobless claims filed, good indicator of unemployment rate; focus more on what is happening instead of whether or not it makes sense; GDP (5/5 quarterly): advance (most important), preliminary, final; Core PCE (2/5 same time as GDP): personal consumption expenditures (excluding food & energy), measure of inflation; Consumer Confidence (3.5/5 monthly): high consumer confidence -> high spending -> high GDP, market trends to buy stocks & USDJPY when CC is high, sell when low; CC and the stock market tends to move in sync; ISM Manufacturing/Non-Manufacturing (=services) Index (4/5 monthly): new orders, prices, enjoyment; CPI (3/5 monthly): consumer price index, change of prices, when CPI is low, forecasting is easy, when CPI is volatile, harder to forecast; University of Michigan Confidence (2/5 monthly): Conference Board more important & highly correlated with UM; Durable Goods Orders (3/5 monthly): very volatile, focus on month-over-month change; building permits/housing index/home sales (2-4/5 monthly): depends on whether housing is meaningful driver for economy; Industrial Production (3/5 monthly): no services; retail sales (3.5/5 monthly); Chicago PMI, Philly Fed, Empire State (3/5 monthly): released to subscribers at 9.42AM then to general public at 9.45AM -> jump expected;

6. TECHNICAL ANALYSIS 1: study of chart patterns in order to forecast future price movements; no conclusive evidence whether it works or not; should be used as a tactical and risk-management tool but not as a trade selection tool; most successful traders are macro or hybrid, not technical; but portfolio managers who use technical analysis outperform those who do not; highly subject to confirmation bias (you see what you want to see); branches: 1) traditional (trends, breakouts, cycles, momentum etc) 2) candlestick (Japanese method 3) Elliot Wave analysis (highly complex, can be pseudoscientific, highly subject to confirmation bias, author doesn’t know any successful FX trader who actively uses it); indicators: simpler is always better; support and resistance: price tends to bounce off the same level more than once; reasons: 1) large limit orders (price level will act as support until order is fulfilled) 2) self-fulfilling prophecy (many traders use support and resistance to set entry/stop loss level) 3) options (strikes & barriers create hedging needs) 4) rounding number bias (traders tend to leave orders at round numbers -> buyers should leave order just above round number, sellers should leave order just below round number); avoid herd mentality; moving average: simple vs exponential, 200-hour SMA is best in most currency pairs; use crossover of two moving averages to trigger buy/sell signal, moving averages give good signals in trending market but useless in rangebound markets; momentum, overbought, oversold: MACD, RSI, Parabolic SAR, Deviation, underlying math is similar; candlestick charts: doji: tiny body (open ~ close), long wicks, sign of market indecision; hammer: long wick with narrow body, show larger reversals; ichimoku: shows trend, gives entry/exit points; Market Profile: quick look on intraday price actions, you can create manually, can help identify equilibrium zones (areas with many letters -> lot of trading); Fibonacci numbers: usually identified afterwards; don’t worry if you miss a trade; being wrong is part of the business; focus on process, not outcomes; take profit should be based on the market, not on arbitrary ratio (risk/reward); use price analysis to get into a trade but not to get out (you cannot properly analyze the price action of a currency when you have a trade on); be patient; never worry about missing a trade, there will always be another one; identify regime (range vs trend); don’t just follow a trend because the chart looks like - the trade has to make sense too;

7. TECHNICAL ANALYSIS 2: seven deadly setups: 1) slingshot reversal (false break & reverse); 2) shooting stars & hammers: “You can always find another technical level to justify a bad trade (especially if you use Fibonacci levels)!”; 3) extreme deviation from a moving average; 4) volume spike at a price extreme (volume: potential source of edge, not many ppl are looking at it); 5) broken triangles (same idea as slingshot reversal); 6) double & triple top; 7) Sunday gaps (most reliable but most difficult to trade, almost always fully reverse within 48 hours); 8) combo setups (multiple technical indicators all saying the same, the more reasons you have for a trade, the more likely it will make money, opposite: crosswind trades: don’t ignore the other side either!

8. CORRELATION & INTERMARKET RELATIONSHIPS: does it make sense (logically)? if not, it might be spurious (even if r2 is high); if yes, is it likely to continue into the future?; are there any underlying variables?; “Correlation is not causation but it sure is a hint.” (Edward Tufte); you don’t need causation to trade as long as they move together; most reliable correlations: 1) FX vs other currencies 2) FX vs interest rates 3) FX vs commodities (gold oil, copper) 4) FX vs equity indices 5) FX vs single name equity & ETF; look for currencies that have diverged from their driver variables; avoid crosswinds: stay away from trades where different variables point to different directions; find trades where everything points the same way; set your stop loss when you get in and stick to it even if it’s very tempting to change it; look for moments when FX market is out of line or half asleep and other variables are suggestions it should wake up soon;

9. BEHAVIORAL FINANCE: 1) positioning (actual positions) and sentiment (how people view the market -> moves faster than positioning); 2) cognitive bias (confirmation bias: you believe what you want to believe, overconfidence bias: can lead to blind spots, extrapolation bias: what happens now will happen in the future, asymmetric loss aversion: ppl feel loss more than gain, emotions: greed and fear, anchoring: hard to move away from initial position, round number bias: ppl like round numbers; favorite/longshot bias: ppl overvalue longshots and undervalue favorites, herding bias: safer to be wrong with everyone else than to be right on your own), 3) anecdotal evidence (magazine cover: indicates end of trend, building skyscraper: indicates overconfidence & imminent financial crisis, cheer hedge: favorable position almost always turn against you -> if someone is cheering a winning position, go the other way; WTF indicator: when many ppl are asking WTF? about a move it probably has further to run, IPOs: indicate late stages of bull market

10. TRADING THE NEWS: current price: sum of all known information in the world; price guided by invisible hand; “Every individual… neither intends to promote the public interest, nor knows how much he is promoting it … he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.” (Adam Smith, Theory of Moral sentiments); some news already “priced in” (won’t change price); buy the rumor/sell the fact (only works if event is highly anticipated & result as expected);

    III. RISK MANAGEMENT

11. FREE CAPITAL: how much money can you afford to lose?; clear set of goals (eg P&L target); chunk yearly goals into monthly segments; avoid tail risk; avoid pegged currencies (if floor disappears it’s tail risk); keep journal

12. POSITION SIZING: primary factors: 1) free capital 2) confidence in trade 3) volatility of currency pair 4) stop loss; if you see a five star trade be aggressive (6% of free capital - not total); trade looser when up and tighter when down; smaller positions in volatile currencies; five star trade: 1) change in fundamentals not fully reflected in price 2) cross-market signals 3) positioning 4) technicals 5) gut feel 6) catalyst (not always present); keep trading methodology simple -> risk management is simple; Kelly Criterion: systematic & mathematical approach to position sizing (better suited for gambling not for trading) -> probability of winning unknown -> use half-Kelly instead; position size = $ at risk / loss per unit if stop triggers; common errors: 1) positions are too big 2) too small 3) always the same; use technical analysis to determine stop loss & add 20% of a day’s range; stop loss = current price + (1.2 x average day range); move stop loss up to lock in profit; don’t use a fixed risk/reward ratio; you should consider probability too; don’t keep changing stop loss; expect slippage; you can control the process but not the outcome; God will not push the market in your favor no matter how hard you pray;

    IV. UNDERSTAND YOURSELF

13. SUCCESSFUL TRADER: big risk appetite & disciplined personality; think independently; know your edge; stick to one time horizon & one product; write down a plan; happy to be flat; wait until you have great cards and then go for it; self-aware; loves trading; “Passion for trading is a key success factor. If you are trading just for the money, you can’t win, because even it you make a ton of cash, you still lose as you miss out on whatever career should have been your true passion.”; keep learning; ideal: head & gut are in sync, if they are in conflict, do nothing;

14. WEAKNESSES: poor risk management; bad discipline; negative risk/reward; trading for bad reason (eg. entertainment, addiction); feel smarter than everyone else; fear of missing out; subconscious motivations: I don’t deserve the money I’ve made -> I’m going to give it back; trading is a very difficult skill to learn, those who succeed deserve to be compensated; hitting P&L target early during the year; waiting for the perfect trade; invincibility/overconfidence (beware of winner’s tilt as well as loser’s tilt); don’t spend the thinking about the past (there will always be another trade); don’t stick to a view; “Why am I trading?”

15. EXPERIENCE: avoid overtrading; stay flat during vacation; beware of slumps (can cause negative feedback loop); if you have a good day, feel good about it (but don’t celebrate until you take profit); every loss is a lesson, every gain is a blessing; don’t break the rules; spend time with family; turn off your phone at night; live a healthy life (proper eating, exercise)

APPENDIX: 25 rules of FX trading

1. Don’t blow up. Avoid risk of ruin above all else.
2. Adapt or die.
3. Do the work. Read the speeches. Analyze, read, and study.
4. If you look hard enough, you can always a find a tech level to justify a bad trade!
5. “It’s a big level” is not a good enough reason to put on a trade.
6. No mo’ FOMO. Never worry about missing it. There will always be another trade.
7. Flat is the strongest position. When in doubt, get out.
8. It doesn’t always have to make sense.
9. Never fade unexpected central bank moves. Jump on them!
10. Making money is hard. Keeping it is harder.
11. Successful traders make more money on up days than they lose on down days.
12. Anything can happen.
13. Keep a trading journal. Thoughts are abstract and fuzzy. Writing is concrete and solid.
14. There is a time and a place to go big.
15. Good traders vary bet size.
16. It always looks bid at the highs. It always looks heavy at the lows.
17. You control the process but you do not control the outcome.
18. Each trade is a drop of water. The market is an ocean.
19. Know your edge.
20. Know your time horizon.
21. Good traders have a plan. They may not always stick to the plan but they always have one.
22. Tight/aggressive wins.
23. Be flexible. Don’t get married to a view.
24. Do not let random, low-conviction trades kill you.
25. Have fun. If you don’t enjoy it, what’s the point?