Tools

Your first step is to decide the trading tools or techniques you will use. The number of technical analysis tools is legend. There are dozens of charting techniques, indicators by the hundreds, and a myriad of methods, systems, techniques, and black boxes. It would be neither practical nor possible to assign all of them to the codex tool box.

In my opinion (after 30 years in the markets), systems and black boxes don't work consistently over different market environments and for long peri­ods of time. If you find one that does, call me. Making money in the markets requires real work and constant diligence.

The most important factors in selecting codex tools are transparency and simplicity. If you cannot understand how a tool works and what it really does,don't use it. Making evolutionary adjustments to your codex requires you to be able to understand the tools you use for trading.

The trading technique backbone of the FxCodex method is charting. Most charts are simple, transparent, and visual. You can see what they mean. Indicators are often opaque; what are they really measuring? If you don't know what a tool does, how can you make adjustments when things go bad?

If you carefully examine many of the indicators available—typically a type of moving average or oscillator—you will discover the following: (1) The indicators are curve-fit to a specific market environment, and (2) they are really only variations of the slope-intercept formula you learned in eighth-grade alge­bra. They measure the slope of the price changes in a market. You can see that better and faster by simply eyeballing a chart.

Which charting technique should you use for your codex? Bar charts? Point and figure charts? Candlesticks? Swing charts? In fact, any will work just fine! Whatever charting tool you are most comfortable with, use it. I use bar charts primarily for finding trade candidates and then switch to swing charts for market entry and exit. This book gives examples using all of them.

Of course, you must interpret whatever charts you select. Traditional traders use such methods as support and resistance levels. They can be effective, but too many people are using them for the market to cooperate, in my opinion. How can all these traders be successful? In fact, we know they are not and can­not be. Don't be afraid to be in the minority; only a minority of traders is ever successful.

Charles B. Goodman was a commodities grain trader from Eads, Col­orado. He became my mentor shortly after I began trading in 1973. Charlie entrusted to me many of his trading methods, the most significant of which I have introduced in this book as the Goodman Swing Count System, the Goodman Cycle Count System, and Market Environments. Perhaps even more useful was his astute money management approach to trading, which I have also shared with the reader.

The Goodman Swing Count System (GSCS) has stood me well for my entire trading career spanning more than 30 years. It's an excellent way to get a quick fix on any market and for determining entry and exit points. It's a good method for beginners or near beginners. You may use it effectively right away to trade and then plumb its more advanced features as your comfort level and trading experience increase. Such things as support and resistance will usually not be in the same places as they are using traditional chart inter­pretation concepts.

I rely on GSCS heavily in this book. It is the cornerstone of the FxCodex method. Remember, the FxCodex method is used primarily to show you how to develop and apply your own personal trading codex. What works for me may not work for you. The important idea is to develop a comprehensive and consistent codex for trading.

I have never been a fan of technical indicators. It is difficult to see what they actually do, or measure. Most of them require a curve-fit to some specific market environment, and when the environment changes, the indicator flops. Moving averages work well in trending markets but fall apart in trading mar­kets. Oscillators work great in trading markets but fail in trending markets. Nonetheless I've included two that are simpler, that provide information not easily visible with any chart, and that can be adjusted to different codex trading builds.

Market filters, typically statistical, are easy to implement and they pro­vide great value for all traders. Strategy may find you the pot of gold, but it is often tactics that allow you to bring it home. Filters assist you in deciding what markets to avoid and on what markets to focus your valuable and limited time. Most of the market filters detailed in this book derive from the FOREX Companion series of books, written by this author and James Bickford.