By Avi Frister

http://www.forex-trading-machine.com

Copyright 2008 © The Forex Navigator System. All rights reserved

 RISK DISCLOSURE STATEMENT / DISCLAIMER AGREEMENT

The contents of this eBook are for informational purposes only. No part of
this publication is a solicitation nor an offer to buy or sell any financial
market.
Examples are provided for illustration purposes and should not be construed
as investment advice or strategy.

No representation is made that any account or trader will or is likely to

achieve profits or loses similar to those discussed in this eBook.

The information found in this eBook is not intended for distribution to, or
use by any person or entity in any jurisdiction or country where such
distribution or use would be contrary to law or regulation or which would
subject us to any registration requirement within such jurisdiction or
country.

CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE

RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL
PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT
ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN
EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED
FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS
LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE
ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE
BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT
ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES
SIMILAR TO THOSE SHOWN.
INTRODUCTION

As many of my students know my belief is that the most profitable

forex systems (and for that matter any other type of systems be it
for stocks, futures, options etc) are the ones that:

A.- Are not complicated to trade and

B.- Exploit the specific characteristics of the financial vehicle they

trade

I can still remember when I started my journey as a trader over 10

years ago. I was convinced that in order for a system to be
profitable it has to be complicated and it had to work across all
markets. What nonsense ☺

If you are one of my long time subscribers you know what my

thoughts are regarding successful trading:

You must have a good and simple system. The system should be
profitable in the long run and must be easy to implement. It should
be of a mechanical nature, allowing little or no discretion or
judgment from the trader's part. Especially if you are a starting
trader, it is important that you follow mechanical hard-and-fast
rules: if A=B than do C and D. The reason for this is simple.
There are a lot of emotions that come into play when trading. If
you have a set of rules to follow than you know exactly what to do
and no matter what your feelings are telling you, you can ignore
them and simply follow the precise rules dictated by your system.
Over 80 % of my trading systems are 100% mechanical, no
judgment or discretion required. Not that there are no profitable
discretionary systems, but I personally like mechanical ones.

You must have a good set of money management rules.

Throughout my trading career I have come to learn that success in
trading is not only about having a good trading system (of course
that is VERY important) but also about having a good set of
money management rules and principles. Trading without
following these precise money management rules is a sure way to
fail.

For those of you that are new to the business of trading let me
explain what I mean by money management. The term refers to the
principles and discipline you use in order to control your risk
exposure when entering a trade. How much of your total capital
you will risk on any individual trade, where will you place you
stop loss, where will you place your profit objective, the ratio
between your profit objective and your stop loss etc.

You must be able to control your emotions. This is a very

important rule a trader must learn to master. While trading, you are
constantly presented with feelings such as fear, greed, and
excessive excitement (for example, as a result of a winning streak).
The reason many traders experience these type of feelings is
simple, they don’t have a good trading plan. They don’t have a
good and clear set of rules to follow. They will trade based on
emotions rather than on signals issued by a robust and profitable
system. They will not respect stop losses, profit objectives or any
other important parameter essential for profitable trading.

I strongly believe in emotion-free trading. It is essential for success

and that is how you will be the best of the best, by following a
precise set of rules that are easy to implement and require
absolutely no discretion.

Leverage and Compounding

One of the true secrets of successful wealth building through forex

trading is leverage and compounding on your profits. With the help
of leverage you can buy much more currency than what your
actual account size allows you on a 1 to 1 basis. When you use
leverage, your FX broker allows you to increase your purchasing
power by as much as 4,000%! As an example, for every USD $1 in
your FX account many brokers will allow you to purchase USD $
400. This is very powerful and can be very profitable. However,
you must have an excellent strategy to manage this leverage issue
well so you can take advantage of its maximum potential but at the
same time manage your money well for minimum risk exposure.

So, leverage simply allows you have a much greater purchasing

power and increase your profits per trade accordingly.
Compounding allows you to formulate a strategy with the
objective of building wealth from your profits. So, instead of
taking money out of the account every time profit accumulates,
those profits are used for future trades. Let's look at an example of
how leverage and compounding can dramatically grow a small
account size over time:

The following is a projection of three scenarios over a three year

period each. The first starting with a USD $3000 account, the
second starting with a USD $7,000 account and the third starting
with a USD $15,000 account. All three calculations are based on a
2% weekly net increase in account size. No profits are taken out of
the account, they are re-invested in next weeks trades.
So, in other words, we will see how these three accounts would
grow over a periods of three years based on the above criteria.

Example 1:

Starting Account Size – USD $3,000

Weekly increase in account size: 2%.

Account growth after 1 year: $ 8,401
Account growth after 2 years: $ 23,526
Account growth after 3 years: $ 65,879

Example 2:

Starting Account Size – USD $7,000

Weekly increase in account size: 2%.

Account growth after 1 year: $ 19,602
Account growth after 2 years: $ 54,893
Account growth after 3 years: $ 153,718

Example 3:

Starting Account Size – USD $15,000

Weekly increase in account size: 2%.
Account growth after 1 year: $ 42,005
Account growth after 2 years: $ 117,628
Account growth after 3 years: $ 329,396

Can you now see the power of compounding over time? I repeat,
this is one of the greatest tools a trader has for building wealth. An
account of USD $3,000 could grow to $ 65,879 in three years
using correct money management rules and a good trading
system(s). Same goes for an account of $ 7,000 (to $153,718) and
an account of $ 15,000 (to $ 329,396).

Use a good money management system, a robust trading system,

be disciplined and you could be amongst the 5% of traders who
live the dream of creating true exponential wealth in the FX
market.

Price Driven vs Indicator Based Trading

It is not secret I base most of my trading on price alone. Most of

the systems I create are based on using only the price of the
financial vehicle I trade. I truly believe that price tells us all we
need to know. However, this is not to say that indicator based
trading is useless. Let's rephrase that: not all indicator based
trading is useless.

I have created and traded 3rd party indicator based systems quite
successfully over the years. But, and this is a big but, you have to
be very careful which indicators you use and how you use them.
One thing I have learned the hard way is that if you trade using
indicators the conventional way your chances of success are not
very high.

The key to trading with indicators is simple: do what most people

don’t do! Be unconventional. When everyone goes long, you go
short. When everyone exists a trade you keep riding yours. In other
words, think outside the box. I believe that success in trading like
in everything else in life is greatly due to a "thinking outside the
box" state of mind.

The very simple fact about trading with indicators is that 90% of
traders using them follow them religiously. That is why they tend
to not work. If you can come up with a system where you can
outsmart those 90% of traders, you have a good chance of success.

The Forex Navigator System is based exactly on this type of

reasoning. It uses two common indicators in a non-common
way!

This system uses a combination of RSI and Bollinger bands, both

of which you have probably heard of so I will not elaborate on.
These indicators are available in all charting/trading platforms so
you will not have a problem finding them.

The Forex Navigator System is a market specific day trading

strategy. This means that I have decided that it works best on a
certain currency pair and with certain unique filters that derive
from this pair's behavior. The currency pair is GBP/JPY because:

A. It has good intraday range

B. It has good liquidity
C. Its liquidity and volatility is reliable
D. It moves without a lot of "noise".
These four criteria are what make a currency pair an ideal
candidate for day trading.
 The Rules

Currency to be traded: GBP/JPY

Chart timeframe: 5 minutes
RSI setting: 14
Bollinger Bands setting: 20,2,SMA

Step 1

We start viewing the 5 min GBP/JPY at exactly 00:00. We wait for

the RSI indicator to either reach a reading of 70 or a reading of 30.
The first reading that is reached will dictate if the trade is going to
be a long trade or a short trade. If RSI reaches first a reading of 70
the trade will be short. If RSI first reaches 30, the trade will be
long.

Step 2

For short trade: we wait for market to penetrate lower part of

Bollinger band by 3 pips and initiate trade at that same exact price.

For long trade: we wait for market to penetrate upper part of

Bollinger band by 3 pips an initiate trade at that same exact price.

Step 3

We immediately place out stop loss at 20 pips from entry.

Step 4
We place out take profit order at 50 pips from entry price.

Trade Management

Since we are risking only 20 pips and going for a profit objective
of 50 pips we can allow ourselves to re-enter trade if stopped out.
At the end of the day, the GBP/JPY is quite volatile and hence that
must be taken into consideration when trading it.

I will explain the trade management for long position, for short
positions in is exactly the opposite.

So, if parameters are met as outlined above and we are in a long

position but get stopped out we wait for market to now either
penetrate the upper part of the Bollinger Band by 3 pips or we wait
for the market to penetrate the lower part of the Bollinger band by
3 pips. Once trade is triggered again, be it long or short, we follow
steps 3 and 4. If we get stopped out at this point we do not enter
market again for the day.

Why?

Because we might be in a sideways market and one of the worst

things a trader can do is chance a short term intraday swing on a
sideway market day☺

Ok. Let's dive into some trade examples so that you can understand
much better the system.

I will go over all trades between the 11th and 15th of February, i.e.
all of last week.
 5 Day Trade Examples
NOTE: ALL TIMES ARE EST TIME

11th of February 2008 Trade

We will quickly go over this first trade example so you can see
how the trade worked out from start to finish on the same chart. On
the next trade example I will be more specific in my explanation.

A: 00:00, start time.

B: RSI reaches 30 first. This means we will be looking for a long
trade.
C: We where looking for market to penetrate upper part of
Bollinger band by 3 pips and it did at 207.53. Long trade is
triggered.
D: Stop loss is immediately placed 20 pips from entry at 207.33.
E: Profit target of 50 pips is reached at 208.03
Trade outcome for 11th of February 2008: +50 pips

12th of February 2008 Trade

Ok, at point A we see the time from where we start to look for the
trade setup. This is always going to be 00:00. Point B on the chart
shows us the RSI reading at exactly 00:00, in this case it is 54.26.

Now, we have to wait for the RSI to either reach 70 OR 30 and

follow the systems rules. Let’s look at how this trade developed.
So, we can see that at point A the RSI reaches 70. This means that
we will be looking for a short trade. If it was the opposite and the
RSI would have reached 30 first we would have been looking for a
long trade.
At this point the RSI does not concern us anymore and what
matters now is the market price and the Bollinger band. We are
now waiting for the market to penetrate the lower part of the
Bollinger band by 3 pips, and it does so at point B. We enter a
short trade at 208.72 and immediately place our stop loss 20 pips
from entry or 208.92 (point C). After stop loss is placed we either
wait for the market to reach our profit objective of 50 pips or we
enter a take profit order with our forex broker. At point D we can
see the market easily reached out profit objective and the trade
turned out to be a 50 pip winner.

Trade outcome for 12th of February 2008: +50 pips

13th of February 2008 Trade

Trade development:

A: 00:00, start time.

B: RSI reaches 30 first. This means we will be looking for a long
trade.
C: We where looking for market to penetrate upper part of
Bollinger band by 3 pips and it did at 209.89. Long trade is
triggered.
D: Stop loss immediately placed 20 pips from entry at 209.69.
Market reached our stop loss and trade got stopped out for a loss of
20 pips.

E: As per the system rules we re-enter trade at 210.08 (3 pip

penetration of Bollinger band). In this occasion it was a long trade
but could have been a short trade as well if the opportunity would
have appeared first.
F: Stop loss immediately placed at 209.88.
G: Profit target of 50 pips is reached at 210.58.

Trade outcome for 13th of February 2008: +30 pips

14th of February 2008 Trade

A: 00:00, start time.
B: RSI reaches 70 first. This means we will be looking for a short
trade.

C: As expected the market penetrated the lower part of Bollinger

band by 3 pips at 212.36. Short trade is triggered.
D: Stop loss immediately placed 20 pips from entry at 212.56.
Market reached our stop loss and trade got stopped out for a loss of
20 pips.
E: As per the system rules we re-enter trade at 212.91 (3 pip
penetration of Bollinger band). In this occasion it was a long trade
but could have been again a short trade as well if the opportunity
would have appeared first.
F: Stop loss immediately placed at 212.71.
G: Profit target of 50 pips is reached at 213.41.

Trade outcome for 14th of February 2008: +30 pips

15th of February 2008 Trade

A: 00:00, start time.
B: RSI reaches 70 first. This means we will be looking for a short
trade.
C: As expected the market penetrated the lower part of Bollinger
band by 3 pips at 212.46. Short trade is triggered.
D: Stop loss immediately placed 20 pips from entry at 212.66.
E: Profit target of 50 pips is reached at 211.96.

Trade outcome for 15th of February 2008: +50 pips

Total pips achieved between the 11th and 15th of February: +210

Some Final Comments

The true success of a trader does not come from finding the perfect
system. It simply does not exist. I know that especially new traders
constantly look for that; the 90% success rate system! It doesn’t
exist. Over the long run every system has it's drawdowns, times
where market conditions change a bit and the system stop working
temporarily. Most traders abandon the system at this point since
they can't stand seeing a string of losers. And that my friend, is
what separates successful traders from not successful ones.
Successful traders know that every system they trade will have a
drawdown and they are ready for it. They are ready for it because
they employ correct money management rules. They know that
success in trading is an outcome mainly of correct money
management and emotion control.

Last week (Feb 11th – Feb 15th 2008) Forex Navigator did not have
a losing day. Can anyone in the world guarantee us that next week
will be the same? Or the week after that? Absolutely not! There
will be good weeks and bad weeks.
Remember:

Success rate is not a constant in this business, money management

is!
Keep your bets small and balanced, make sure that if you are hit
you are not knocked out cold. Make sure to always be ready
emotionally and financially for the next round.

I wish you all the best in your trading!

Avi Frister
http://www.forex-trading-machine.com