Wednesday, November 21, 2012

Paz, The Forex Trading Manual

Javier H. Paz, the founder of ForexDataSource.com, has written an introduction to the forex market for the retail trader. The Forex Trading Manual: The Rules-Based Approach to Making Money Trading Currencies (McGraw-Hill, 2013) takes the reader from the most rudimentary forex concepts to basic risk management principles, from technical and fundamental analysis to mental conditioning, from a trading strategy to a trading plan. In brief, it is a comprehensive primer.

Is it a good primer? On balance, yes, although it paints too rosy a picture of the predictability of trading revenues. Trading simply doesn’t give you the same size paycheck week in and week out. Telling a novice that he can become quite wealthy by simply averaging 20 pips a day, showing a table where averaging only 50 pips a week with a 1% account risk returns 22% in twelve weeks and a table with the same weekly average with a 2% account risk that turns $5,000 into $132,744 in two years sets him up for unrealistic expectations.

Paz introduces the reader to a trading strategy that he created out of some very familiar parts, the VT (for VaraTrade) Pivot Roadmap. He uses floor pivot support lines (S1, S2, S3), pivot resistance lines (R1, R2, R3) and six pivot midpoint lines. He then overlays his charts with volatility bands showing how high and how low the currency pair (in his sample case, EURUSD) could go at a specific time of day and white space in between for normal volatility. (This indicator is available for a six-month free trial to those who buy the book.) Armed with these charts, the reader is then given some basic rules for trading the strategy successfully.

This strategy, by the way, is based on the start of the trading day at GMT 00:00 and, according to the author, works well in the normally low volatility Asian session.

Paz looked at seven years’ worth of daily prices (2003-2010) and found, among other things, that EURUSD will cross the pivot line 80% of the time and that price will stay below the pivot point 10% of the time and above it 10% of the time. And, driving his 20 pips a day goal, the average pip distance between the price at the start of trading and the new pivot line is 21 pips.

The Forex Trading Manual offers the beginning trader a lot of useful information as well as a reasonable plan of action for trading in a paper account. The novice can’t ask for much more.

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