INTRODUCTION

The Foreign Exchange Market is commonly referred to as the "Forex" or "FX" market, and is the largest and most liquid financial market in the world, with a daily turnover of nearly US $2 trillion. By comparison, the New York Stock Exchange average daily dollar volume is around US $56 billion. A true 24-hour market, Forex Trading begins in Sydney and in turn opens around the globe as the business day continues, first to Tokyo, then London and New York. Unique among financial markets, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - day or night - in real time. Simply put, Forex is the world currency market. The value of each country's economy is reflected in its currency, so trading FX is like trading the value of countries rather than companies or commodities. It's not new. Currency speculation has been widespread since WWII among the world's banks.

HOW WE TRADE

The key to our system is the correlations between the pairs we trade. Correlation is a number that represents how similar the movements of the USD/CHF are to the movements of the EUR/USD. The closer the number is to 1.00, the stronger the correlation and the more similar the movements. A minus sign in front of the number means that the movements of the currency pair have historically been in the opposite direction of the EUR/USD. We trade combinations of pairs which, historically speaking, move in opposite directions to allow the gains on one to offset (at least to extent), the losses on the other. We trade only two pairs, the EUR/USD and the USD/CHF. Historically speaking, these pairs have had a very high (negative) correlation between -0.90 and -98. Again, historically speaking, the movements of these pairs are the most likely to mirror each other. In other words, when the EUR/USD moves up or down the USD/CHF will move the opposite direction 90% to 98%of the time.

The "anomalies" in the correlation of the pairs have historically run in cycles. We have found by research and experience that the correlation between the pairs will run one direction for a while and then turn and go the other direction for a while. If you were to open up a demo and buy an equal amount of both the EUR/USD and the USD/CHF currency pairs you will notice after time that your equity will go one way (in this example we'll say it increased above your balance for a gain.) After a time you'll notice that the equity will have fallen below your balance for a loss. If you watch the trades even longer, you'll notice that once again your equity has risen above your balance only to fall below it once again. These cycles are the nature of correlating pairs.

The cycles could take as little as several days or as long as several months. By timing these cycles we can buy the pairs when we are relatively sure the correlation anomalies are going up and sell the pairs when we are relatively sure the correlation is going down.

We have acquired and developed several indicators to tell us when these cycles are about to change direction.

By using these indicators we can eliminate much of the draw down and greatly increase our ability to profit on our trades.

We have placed our own funds in each Managed Account as a client of our own Managed Accounts. The figures in the table above are based on our original deposit in each managed account and the amount of Realized P/L shown in our FX Manager Client Account.