The Arizona Rules - Rob Booker

The Arizona Rules
Copyright © 2007 Rob Booker. All rights reserved. No part of this
publication may be sold, distributed in any form at any price (even free),
or changed without the author’s consent.
Page 1 of 26

Guiding Principles
We developed this system so that we could increase the number of profitable divergence
and NY Box trades that we take, and decrease the number of losing trades for each
system. We found:
1. Trending markets are great for breakout / NY Box trading.
2. Ranging markets are great for divergence (reversal) trending.
Robert Miner, whose specific credentials are not important right now (look him up for all
kinds of interesting and complex trading stuff), once wrote:
Because Elliott’s Wave Principle and its application is not 100% objective like
time and price projections, it has been derided by many as useless and little more
than guess-work. This is particularly the tack taken by system junkies and
systems promoters who live under the illusion that market activity and a
successful business of trading or investing may be reduced to a mathematical
algorithm that will provide them with keys to profits with no strain on the brain. 1
I make no claim to have invented a system or methodology to compete with or compare
to the Elliott Wave Principle. Instead, I am going to introduce you to a perspective that I
have found to be personally helpful in my own trading, and equally or more beneficial to
those whom I have taught it. That said, I would like you to consider Miner’s excellent
observation as you read through and begin to apply the Arizona Rules.
This means that you will gain much more from these rules if you allow yourself to use
them as flexible rules, rather than a strict set of inviolable orders. I could say this 1,000
times in a row and I would still have not said it enough. Remember: the Arizona Rules
are guidelines to help you make sense of a chaotic market. There are no magic systems,
no perfect set of mathematical formulas.
Using the Arizona Rules is very much like comparing your left hand to your friends’ left
hands – each hand will be slightly different, but they will be shaped similarly. When you
were a child, learning to recognize a human hand at a glance did not require you to
memorize a set of rules about exact lengths of fingers – instead, you simply needed to
remember a basic shape. And then you could make your own distinctions.
When applying the Arizona Rules to the currency markets, you are going to compare one
“hand” – the one I describe here – to the current situation in the market. There will be
differences, but you should be able to, at a glance, discern common features and make
much better and profitable trading decisions for yourself over time.
1 Robert Miner, “Elliott Wave Trading in the Real World,” copyright 1997 by Robert Miner.
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Why “Arizona Rules”?
In October 2006, all of us at Piptopia had been testing new
rules for divergence, and the new system didn’t have a
name. I was writing down my goals for the day on
October 29, and I wrote “Test 100 Arizona Rules trades.”
I think I called them the Arizona Rules because the first
live training where I would go deep into the rules would be
held in Arizona:
http://www.robbooker.com/arizona.php
What I’ve done is used moving averages to divide the
market up into phases. Each of these phases has a name
that in some way relates back to the state of Arizona.
Each phase carries with it opportunities. It’s important that you know that what you’re
reading right now are the basic rules and the most elementary of phases. The rules are
not perfect. You should know by now that we encourage you to do your own
backtesting, your own filtering, your own study of all of this so that you can improve
upon it.
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¡Warning!
I am going to do interactive updates, chart schools, and podcasts and I am going to refer
to the Arizona Rules often. It is critically important that you learn the phases so that you
understand what the crap I am talking about.
I am also going to present, in chart school and in interactive updates, examples of trades
that break previous rules – I am going to take divergence trades that don’t look too much
like divergence. I am going to take NY Box trades early, with wider stops and limits.
Get ready for me to present some ideas that change the way we’ve done things before.
And remember most of all, we’re just trying to recognize phases of the market at a
glance. If we can’t identify the market’s phase at a glance, consider for a moment that
the market might simply be doing something that the Arizona Rules do not contemplate
or help to describe.
Page 4 of 26

Prerequisite Knowledge
Do not proceed with this eBook unless you have already mastered the principles and
rules of the Divergence and the New York Session box systems. If you do proceed
without that training, your mind will shatter into a thousand Lego pieces and we will have
to rebuild you, and when we do, your right and left brains might be reversed, so suddenly
you will be able to color with numbers, eat sounds, and craft a new set of curtains for
your home, using only positive thoughts and moonbeams.
Really. We watched this happen to Ben, at the office.
Additional Resources
The xtick template is here:
http://www.robbooker.com/books/azrules_white.cht
http://www.robbooker.com/books/azrules_black.cht
There is a new interactive update about the system here:
http://www.robbooker.com/woodchuck/training/arizona/1.htm
Page 5 of 26

Chart Setup
1. If you use xtick for charting, you will need the Stochastic Divergence + SMA
template. You can get it here:
http://www.robbooker.com/books/azrules_white.cht
If you don’t use xtick, or you want to know what you’re looking at on that chart
template, please move to the next step.
2. You need the Slow Stochastic Oscillator, set to 9,3,3. You can alternatively use
the Stochastic 30,10,10.
3. You need the MACD with Histogram, set to 12,26,9. You can alternatively use
the MACD 30,65,23.
4. You need an 800 Simple Moving Average. Color this black or dotted black. If
your charting program does not offer the 800, you need to look at the 200 SMA
on a time frame 4 times greater than the one you’re looking at. (the 200 SMA on
the 4hr chart is the same thing as the 800 on the 1hr). Or you can switch charting
platforms.
5. You need a 200 Simple Moving Average. Color this blue.
6. You need a 62 Exponential Moving Average. Color this red. Woohooo, I love
the 62!
7. Eventually you will need to be able to plot the 89 EMA as well. But we’ll get to
that later.
8. You need to understand how to draw trendlines.
On the next page we’ll look at what a chart might look like after you set it all up. I’ve
used the 60 minute chart because I’ve tested it more than anything else and it works very
well.
Page 6 of 26

Chart Setup, continued.
Figure 1. The 1hr GBP/USD with the moving averages etc. setup. If this chart does
not make sense to you,with all the colored candles and stuff, then you need to go back
to the divergence lessons.
Page 7 of 26

Divergence Trading Basics
These rules will supplement any other rules that you’ve ever learned about trading
divergence. Some of these rules seem to conflict with one another, but please keep in
mind that we are going to explain everything using interactive updates and chart school
updates over the next month, and in examples below. Here are the rules:
1. You only trade divergence (long or short) when the market is ranging.
2. A ranging market exists when:
a. The 62 EMA is in between the 200 SMA and the 800 SMA.
b. The candles have just hit the 800 SMA.
3. A ranging market exists UNTIL:
a. The 62 and 200 are clearly separated away from each other, and have both
crossed beyond the 800 SMA. This leads us to a trending market.
4. A trending market exists when the 62 has crossed the 200 which has crossed the
800.
5. It’s okay to draw divergence across the MACD trigger lines or the histogram.
NOTE: When trading divergence, you may want to use the following alternate
settings for the Stochastic and MACD:
MACD: 30, 65, 23.
Stochastic: 30, 10, 10.
These settings produce better divergence trades.
Page 8 of 26

Market Phases
In the following pages, I am going to describe the entire range of movement of a currency
pair, using “phases” named after Arizona cities and things. Each phase can have its own
trades.
1. The Tucson Phase refers to a ranging market, prime for divergence trading.
2. The Flagstaff Phase refers to the last divergence trade before a trending market.
3. The Phoenix Phase refers to a trending market, prime for breakout (NY Box
trading), and has its own trades called the Gilbert, the Sunbird, and the Mesa.
4. The Yuma Phase refers to no-man’s land when the market is screwed up and
doesn’t know if it wants to range or trend. It is a good idea to stay out of the
market in this phase, but divergence trades can work (and you might consider
testing divergence trades in this phase).
These are not the only ways to look at the market. But as we’ve built this system, we’ve
found that these four phases do a very good job of describing the market’s personality. If
you learn the phases well, it becomes much easier to glance at a chart and know what
kind of trades will be most profitable.
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Phase #1: The “Tucson” Phase
If a candle hits the 800 SMA, we are in the Tucson Phase, no matter what. Period. No
matter what else we see on the chart, we are in the Tucson Phase if a candle hits the 800.
Did I just say that twice? In the Tucson Phase, we can trade any type of divergence that
we see. Long or short, it does not matter – we can take it. You use the standard
divergence rules you learned from the Stochastic Divergence system, with this one
alteration:
Your profit target on a Tucson Trade can be a moving average
– any of them – instead of the colored candles.
Figure 2. A candle (circled in blue) hit the 800 SMA. This means that divergence
trades are switched on, that we can take them, that we are excited about them and that
we jump up and down when this phase begins. I love divergence!
NOTE: When trading divergence, you may want to use the following alternate
settings for the Stochastic and MACD:
MACD: 30, 65, 23.
Stochastic: 30, 10, 10.
These settings produce better divergence trades.
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Phase #2: The “Flagstaff” Phase, Part 1 (the Sell Trade)
In the chart below, the 62 has just crossed above the 800. The 200 has not done so yet
(on the far left of the chart). And boom! We get a divergence trade that tells us to go
short. It’s only divergent on the trigger lines, but not the histogram. Who cares? That
does not matter. We take the trade and we hold on, because according to the Flagstaff
Phase, we are going to get a lot of profit. We want to try to hold on until the pair hits the
800 SMA. This phase is simply a Tucson-like trade, but the candles are so far away from
the 800 when the trade fires off, that I wanted to call the phase something different.
Remember, a Flagstaff Trade is just a divergence trade, and I
don’t call it a Tucson Phase because the candles are now so far
away from the 800 SMA.
Figure 3. This is the second type of divergence trade that you can take. The next figure
will show you an example of divergence on the opposite side.
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Phase #2, continued: The “Flagstaff” Phase, Part 2 (the Buy Trade)
Figure 4. This is an example of buying on a divergence that happens below 800. The
first trade is a loser because the pair falls LOWER into oversold territory again. The
second trade is a huge winner, and we don’t close it until it hits the 800.
In the example from Figure 4, it’s important to note that there are two trades taken – and
we are willing to give it more than just one try. You might have three trades in a
Flagstaff Phase – the first two losers and the last one a (big) winner.
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Stops, Part One: Stopping out of Tucson and Flagstaff Divergence Trades
The stop loss on these trades is fairly easy to set. We simply place the stop 10-20 pips
below the lowest or highest market that the pair made, before the divergence trade
opened. Here is an example:
Figure 5. The stop is placed just below the lowest candle wick in the divergence setup.
Do you see how I placed the stop loss just about 20 pips underneath the lowest point that
the pair reached, as it set up the divergence trade? Well, that keeps the stop loss tight.
You lose fewer pips. You make more pips. That’s good.
Let’s not crazy about being “frugal” with our stops by setting the stop 1 pip underneath
the divergence setup. That can be a surefire way to lose money on your divergence
trades.
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Phase #3: The “Phoenix” Phase, Part I (the Bear Trend)
When the market is trending, I call it the Phoenix Phase. This is where you stay out of
the divergence trades that would tell you to buy. How do we know it’s trending
downward? The 800 is above the 200, which is above the 62. The trend begins
IMMEDIATELY when the moving averages have all crossed each other.
If you think you see divergence in a trending market, then just
don’t take the trade! Let it go!
Figure 6. This is a trending market because the 62 is below the 200 which is below the
800. We do not trade divergence setups here. These are the divergence traditionally
lose. By avoiding these trades, you can delete at least 50% of your divergence losers
from your testing.
Page 14 of 26

Phase #3: The “Phoenix” Phase, Part II (the Bull Trend)
When the market is trending, I call it the Phoenix Phase. This is where you stay out of
the divergence trades that would tell you to sell. How do we know it’s trending upward?
The 800 is below the 200, which is below the 62. See the chart below.
If you think you see divergence in a trending market, then just
don’t take the trade! Let it go!
Figure 6.5 This is a trending market because the red 62 is above the blue 200 which is
above the dashed 800. We do not trade divergence setups here. These are the
divergence traditionally lose. By avoiding these trades, you can delete at least 50% of
your divergence losers from your testing.
But what kind of trades can you take in a trending market?
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Phase #3: The “Phoenix” Phase, Trade Type #1 (“Gilbert”)
When the market is trending, then we trade in the direction of the trend. The first method
for doing this is what I call the “Gilbert” Trade (Gilbert is a suburb in the Phoenix,
Arizona area). The Gilbert Rules state that every time the pair, in a trending market, hits
the 62 EMA, then you take a trade.
The Gilbert Trade might remind you of the 5/13/62 EMA
system.
Figure 7. Trading with the trend is super profitable. The 62 EMA can act
as a dynamic level of support or resistance in a trend.
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Phase #3: The “Phoenix” Phase, Trade Type #2 (“The Snowbird”)
You already know the New York Box. You probably know that lots of people who live
in cold weather in the Northeast, move to the warmer Southwest in the wintertime.
Those people are called “Snowbirds.” Well, for this trade type, we’re going to
incorporate a bit of the NY box trade (from the Northeast) into our Southwest system.
While in a 1 hour timeframe Phoenix Phase, take all the NY box trades that
break out in the direction of the overall trend. Do not take the trades in the
opposite direction, under any circumstances.
Figure 8. Each blue box you see is a NY box. During the section of time shown on this
15 minute chart, the GBP/USD was in a 1 hour Phoenix Phase.
In Figure 8, can you count how many times did it break out of the bottom of the box?
Well, never! It never broke out of the bottom of the box. It did take one sell reversal
trade, which we would not have taken because we’re in an uptrend.
In fact, every buy trade, with only one exception, was worth at least 100 pips. Your
testing will show you the right profit target. Stops are still set to 30 pips but you might
alter that as well and do some testing.
This filter dramatically increases the profits from NY Box trades. You might consider
never trading the NY Box unless you’re in a 1 hour Phoenix Phase.
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Phase #3: The “Phoenix” Phase, Trade Type #3 (“Mesa”)
The Mesa Rules tell us to look for a flattening, ‘table’-like formation during a Phoenix
Phase, and then buy on a break beyond the table formation, in the direction of the trend.
You just keep buying each time the pair flattens out, and then breaks above
the high of that flat, flag, table-like formation.
Figure 9. “Mesa” means “table” in Spanish. When you take the Mesa Trade, you’re
buying above the table in an uptrend, or below the table in a downtrend.
In the example above, we could also buy at the #2 mark – because this would be another
opportunity to buy above the highest point that it has reached so far. But I just pointed
out #1 because it was easier to show one example on the charts.
The reason we don’t take the Mesa trade before the first example that I point out – is
because the pair was not officially in a Phoenix phase. Remember, to be in the Phoenix
Phase, we’ve got to see the 62 above the 200, above the 800. That’s what the red circle
in Figure 9 shows.
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Phase #3: The “Phoenix” Phase, Trade Type #4 (“Scottsdale”)
The Scottsdale Rules tell us to look for a crossover of the Stochastic Oscillator. The
Stochastic can be oversold or not; it does not matter right now.
The point is to buy when the Stochastic Oscillator is crossing in the direction
of the trend.
Figure 10. “Scottsdale” trades simply take advantage of the fact that a Stochastic
crossover can mean we’re continuing with the trend.
The Scottsdale trades are simple and straightforward. They can get you in a bit earlier
than Mesa trades – thus keeping your stop loss closer, your profit target farther away.
You should test to see whether you are better at Scottsdale trades when you wait for
the pair to go overbought or oversold first – to see if this produces better trades for
you.
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Phase #3: The “Phoenix” Phase, Trade Type #4 (“Scottsdale”), CONTINUED
Here are some other thoughts about Scottsdale trades:
1. Scottsdale trades are my favorite Phoenix Phase trade. These trades keep the stop
loss tight, and the profit target is farther away.
2. When trading Scottsdale trades, you might consider using the 9,3,3 Stochastic, or
the 30,10,10 Stochastic, or even some other Stochastic setting that you feel works
best. I suggest using the 9,3,3 at the beginning of a Phoenix Phase (the first 100
candles, when the trend is strong, and fresh, and there is lots of momentum and
strength), and then switching over to the 30,10,10 afterwards.
3. If, in a trend, the 9,3,3 and the 30,10,10 both go OB/OS, at the same time, this
can be a very strong indicator of a good Scottsdale trade coming up. This is rare.
Remember to test on your own to find what works best for you.
There are lots and lots of examples of the Scottsdale trades that I take in the
chart school blog.
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Page 21 of 26

Phase #3: The “Phoenix” Phase, Trade Type #4 (“Scottsdale”), continued
Here is a checklist for trading the Scottsdale trades:
1. Are we in a trend?
a. The 62 is above the 200 which is above the 800; or
b. The 62 is below the 200 which is below the 800.
2. Where are we in the trend?
a. Within the first 100 candles of the trend, it’s okay to take Scottsdale trades
from the 9,3,3, or the 30,10,10.
b. After about 100 candles, focus just on the 30,10,10.
3. Did the fast line on the Stochastic cross below 80 or 20 and stay there after a
candle closed? This will cause the candles to turn color in xtick. This means that
even though we are trending, the candles moved so far in the opposite direction
(against the trend) that the candles went overbought or oversold. At this time, the
currency pair is “on sale,” meaning we have a chance to trade with the trend at a
favorable price.
a. In an uptrend, we are looking for the Stochastic to go below 20 (oversold).
b. In a downtrend, we are looking for the Stochastic to go above 80
(overbought).
4. Did a candle close with the Stochastic out of overbought or oversold (below 80 or
above 20)? Is this candle obviously bullish or bearish (showing us strength in the
direction of the trend). If yes, then trade.
5. Stop loss goes beyond the most extreme point during the Scottsdale setup.
6. Profit target goes at a recent high or low in the trend – or at any time in the past.
7. Don’t take trades with crappy risk to reward ratios.
Remember the Morris Maurice Evans Rules of Dating / Trading:
If someone has 85% of what you are looking for in a mate, then marry them.
Page 22 of 26

Stops in the Phoenix Phase
The 62 Exponential Moving Average is the preferred stop loss level in the Phoenix
Phase. Meaning, if you take a Gilbert, or Sunbird (NY Box), or Mesa trade, you might
consider keeping it open all the way until the pair falls below the 62 EMA. And now
we’re going to introduce the 89 EMA as well.
The 89 EMA + the 62 EMA can act as a barrier, or a wall, protecting our
trade during the Phoenix trend.
Figure 11. Once the pair rises above and closes above the 62 EMA in the Phoenix
downtrend, we can choose to exit the trade. If it goes above the 89, we really, really,
really want to be out of the trade.
This means that the stop loss is dynamic. In the example above, we could have sold the
pair during the downtrend based on a break below the New York Box (The Sunbird), and
then held onto the trade, then the next time it fell below the next New York Box, we
could sell again, and again, until the pair crossed above the 62 EMA or the 89 EMA.
Is this the best stop loss? No. There are most certainly other methods for stopping out
of the trade. But this is one that tested very well.
I don’t generally plot the 89 on my charts these days – it just seems to add so many
moving averages that things get clouded. So I only add it while I am in a trade, and I
think I need it to help me plan my stop loss.
Page 23 of 26

Phase #4: The “Yuma” Phase, No Man’s Land
A ranging market is when the candles have recently hit the 800 SMA, and the 62 is
between the 200 and the 800. But what about the market when the 62 is between the 200
and the 800, but the candles have not hit the 800 yet?
That’s Yuma Country. It’s no man’s land and you don’t trade on the time frame you’re
watching. And no box trades, either.
This is a time when the pair has not yet decided if it’s trending or if it’s
ranging – it could do either at any point. It makes box trades and
divergence trades more difficult.
Figure 12. The 800 SMA is so far below on this chart that you can’t see it. We aren’t
going to consider divergence trades until the pair drops to hit that level. We might miss
some good trades, but more often than not, we’ll miss the bad ones.
You might try doing some testing of divergence in the Yuma Phase, to see if that can
work for you. I recommend using these settings for the MACD and Stochastic:
MACD: 30, 65, 23
Stochastic: 30,10,10
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Phase #4: The “Yuma” Phase, cont.” --The Yuma Trade
In Figure 12, we’re looking at a Yuma Market on the 1 hour chart. This is no-trade-land.
But guess what’s happening on the 15 min chart at the same time? It’s in a perfect
Tucson Phase, and we can take all the divergence trades that we like.
If the currency pair is hitting the 200 SMA on the 1 hour chart, that means
it’s hitting the 800 SMA on the 15 minute chart.
Can you now see why I’ve chosen to include the 800 SMA in the system?
Figure 13. Even though on the 1 hour chart, we’re in a Yuma pattern, we’re all set to
trade divergence on the 15 minute chart.
To take a Yuma trade means that you have dropped to a lower time frame and started
taking divergence trades. Must you drop down to a lower time frame and trade? No!
You don’t have to trade at all, and you can simply wait for the 1hr (or whatever time
frame you watch) to get out of the Yuma Phase and set up a trade.
Do you notice that the MACD histogram was divergent, but not the lines? When we’re
near the 800, divergence might occur with the lines or the MACD. It’s okay either way.
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Conclusion
This system is far from complete. But is totally awesome because I feel like saying that.
In order to trade this system, or even test it, you MUST
understand the principles of divergence, and of the New York
box, and you must have a good understanding of Arizona
geography (not seriously).
You must also relax and understand that the trades won’t be
perfect, and that there will times when telling the difference
between a ranging and trending market is difficult for you.
When in doubt, stay out!
It’s now time for you to do some backtesting. Backtesting is the key to
making this work for you. If you have trouble with your backtesting,
please make sure that you keep in touch with us.
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