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CONTENTS
In This Issue . . . . . . . . . . . . . . . . . . . . .6
Contributors . . . . . . . . . . . . . . . . . . . . .8
Letters . . . . . . . . . . . . . . . . . . . . . . . . .10
By Earl Johnson
Chinese revaluation:
Better never than late? . . . . . . . . . . . .22
A reality check on the likelihood and
impact of Chinese currency revaluation.
By Barbara Rockefeller
Currency Futures
By Currency Trader Staff
Merc posts record Euro FX volume . . .44
Index of Advertisers
Publisher,
Earl Johnson was a Harris Bank currency econo-
Ad sales East Coast and Midwest:
Bob Dorman
mist for 30 years, and served briefly as a Federal Reserve
bdorman@currencytradermag.com watcher for BridgeNews. He is now a freelance market
forecaster and can be reached at ejohnson@hotmail.com.
Ad sales
West Coast and Southwest only:
Dave Floyd is a professional FX and stock trader
Allison Ellis
aellis@currencytradermag.com who has been trading his own account since 1994. He
currently offers an FX Advisory Service and FX Managed
Classified ad sales: Mark Seger Accounts through his firm, Aspen Trading Group
mseger@currencytradermag.com (www.aspentrading.com).
Correction
In the April 2005 issue, Currency Trader mistakenly ran a story CFTC alleges FX
fraud about a February 2004 incident involving Gibraltar Monetary Corp
(which was associated with forex dealer Forex Capital Markets, FXCM) as if it
occurred in February 2005. There have been no regulatory or legal findings against
FXCM related to this incident in the 15 months since the initial complaint against
Gibraltar, and FXCM is bringing a motion to dismiss the case because the CFTC
has not pursued it.
FXCM points out it was one of the first forex dealers to become regulated in 2001
and that it has been a vocal advocate of increasing the financial requirements of
Forex Dealer Members to ensure traders deal with only solid institutions. FXCMs
regulatory record can be viewed at www.nfa.futures.org/basicnet/-
Details.aspx?entityid=0308179&rn=Y. The firms Web site is www.fxcm.com.
Currency Trader regrets the error.
Forex conferences?
Im looking for FX seminars in NYC in the coming months. mend? What about brokers, etc? Your reply would be great-
Do you know of any in the coming one to four months? ly appreciated.
The only FX conference were aware of right now is the one in Las Overwhelmed
Vegas in November:
One bit of advice: Let the market be your first mentor. Do as much
FOREX Trading Expo research on your own as you can analyze the markets, develop
Nov. 19 - 20, 2005 your own trading ideas, test them, and so on. When youve gath-
Mandalay Bay Resort & Casino ered enough knowledge, it will be easier to find helpful mentoring
Las Vegas, Nevada or training. You might want to track or follow the performance of
www.intershow.com online advisors or potential mentors to determine if they have any
real value. We dont review trading classes or workshops. But if
The other conferences this group puts on every year in New you read an article or book you find compelling, contact the
York (February) and Chicago (July) have added a great deal of author and ask questions.
forex content, though.
You can test drive many analysis programs and trading plat-
forms by downloading free trial versions to your computer. Also,
check brokerages to determine whether or not theyre registered as
futures clearing merchants (FCMs) with the Commodity Futures
Its so cold I just saw a penguin Trading Commission (CFTC) and National Futures Association
check into a motel (NFA). Although spot forex is not part of the listed futures mar-
ket (and theres debate over who, if anyone, regulates forex), many
Ive just been introduced to Currency Trader magazine and spot forex firms have voluntarily registered with these regulatory
Im frozen in amazement! Ive been studying forex trading bodies because of the credibility it confers. Find out how long
for a year, and your magazine contains all of the informa- theyve been in business, how large their capital reserves are, and
tion I spent all year accumulating. whether they charge a flat commission or make their money off the
bid-ask spread. And dont trade until youre ready the market
M. Adams will still be there when you are.
As a subscriber, you have access to all back issues. The first issue
Getting started (October 2004) had an extended introductory article on forex, and
subsequent issues have had various features for beginners in the
This my first look at your magazine. I am looking for a men- Currency Basics section.
tor or training for forex. Do you have any suggestions? How
should I get started? What software do you recom-
F
or years, the currency only three on behalf of more than However, the original text of the
industry had a reputation as 20,000 customers and prosecuted more CFMA was purposely written to avoid
the Wild West of trading, than 265 companies. Those cases have giving the CFTC too much jurisdiction
and much of it was resulted in more than $240 million in in certain over-the-counter transactions.
deserved. Fly-by-night operators made fines and restitution. While hes not against new legislation
fraudulent business transaction by day, According to Chuck Carey, chairman that would help the CFTC in situations
then skipped town by night before any- of the Chicago Board of Trade, the such as the Zelener case, he cautions
body could catch them. courts ruling in the Zelener case goes that any new laws would need to avoid
Since 2000, when the Commodities beyond the forex market. going too far.
Futures Modernization Act (CFMA) gave The contracts at issue case were Any legislation must be carefully
the Commodity Futures Trading nothing more than speculation in for- tailored, Damgard says. We are con-
Commission (CFTC) more power in con- eign exchange, Carey says. The effect cerned that the temptation would be to
trolling fraud, the forex industry has been of the decision, however, cannot be lim- draft legislation that is broad in scope in
cleaned up. ited to foreign exchange speculation. It order to address all OTC transactions in
However, fraud still exists, and a provides a roadmap for unscrupulous all commodities where a retail partici-
recent court ruling has several industry persons to engage in over-the-counter pant is a counterparty. That could inad-
participants wondering how much contracts involving agricultural and vertently interfere with legitimate risk-
power the CFTC actually has and ask- other commodities, with no govern- management transactions entered into
ing Congress for help in increasing it. ment supervision whatsoever, and by commercial parties.
In CFTC vs. Zelener, a federal court entirely free of the anti-fraud jurisdic- The National Futures Association
ruled that spot forex transactions that tion of the CFTC. (NFA) also agrees that new legislation
called for delivery of a commodity Terry Duffy, chairman of the Chicago must be carefully worded, and it has a
within two days were cash contracts Mercantile Exchange, says the defen- suggestion Congress should specifi-
and therefore not under the jurisdiction dants in the Zelener case took advantage cally address the loophole mentioned by
of the CFTC, even though the contracts of a loophole in the rules. The loophole Duffy that allowed the Zelener defen-
were often rolled over like a typical allowed them to place a disclaimer on dants to avoid CFTC scrutiny. That,
futures contract and were bought on their Web site notifying counterparties says, NFA president Daniel Roth, would
margin. This, obviously, opens a poten- that the dealer is not absolutely obligated also help address another issue of great
tial can of worms when it comes to spot, to enter into an opposite, offsetting trans- concern to the forex industry.
or cash, forex trades. action, or that under some circumstances A number of firms that do not
The CFMA clarified that the CFTC an opposite transaction will not offset engage in any other regulated business
has jurisdiction over retail foreign cur- existing positions. have nonetheless registered as FCMs to
rency futures and option contracts, This, Duffy says, made the contracts qualify to be an otherwise regulated
whether transacted on exchanges or outside the realm of the CFTC, and it entity for the sole purpose of acting as
over-the-counter, as long as they are not points out the need for both the futures counterparties in (OTC) transactions,
otherwise regulated by another agency, industry and Congress to consider Roth says.
says Sharon Brown Hruska, CFTC chair- changing the rules. According to Roth, on June 23, 14
woman. However, as demonstrated in The sharp operators and bucket firms were registered by the NFA as
the recent adverse Zelener decision, the shops have already figured out that the Forex Dealer Members, accounting for
CFTC continues to face challenges to its rationale of the Zelener opinion can about $170 million in retail customer
jurisdiction based on how retail forex apply to commodities other than FX, funds. As of March, there were 28 firms
transactions are characterized. Duffy says. How soon will it be before with more than $520 million under
It has been the subject of much dis- the CFTCs jurisdiction and its retail account. And, the growth has not come
cussion within the industry as to how to consumer protections are reduced to without its problems.
respond to the Zelener decision irrelevance? Though relatively few in number,
whether we need additional authority or John Damgard, president of the forex dealers have accounted for 50 per-
clarity in our jurisdiction, or whether we Futures Industry Association, says the cent of our emergency enforcement
simply need to prove our cases better. CFTC has been essentially fighting a actions and more than 20 percent of our
However, Brown Hruska points out lone battle against foreign currency arbitration docket, Roth says.
that since the CFMA was passed in 2000, fraud, with a little help from the Several retail brokers contacted for
the CFTC has filed 70 cases losing Department of Justice. this story declined to comment.
Swiss miss
The Swiss National Bank moved to the sidelines and left interest rates steady at its March meeting.
Whats behind Switzerlands poor economic outlook, why have recent growth forecasts been down-
graded, and what will this mean for the Swiss franc?
BY CURRENCY TRADER STAFF
T he U.S. dollar/Swiss
franc (USD/CHF) has
improved modestly since
the beginning of 2005,
but analysts primarily consider that
strength a dollar story, not a Swiss story.
Overall, the Swiss economy has
currency pair rallied again, only to
stall around 1.2200 in mid-April. Most
analysts expect a renewed weaker
trend in the U.S. dollar to pressure the
dollar/Swiss rate moderately lower in
the weeks and months ahead.
Germany.
The Swiss economy is very export
driven, says Henrik Gullberg, an ana-
lyst at 4cast Inc. The poor economic
development in the Euro zone econo-
my, and in particular Germany, is
holding Switzerland back.
churned out weak economic perform- Weak exports and business With 2005 gross domestic product
ance in recent quarters, and the outlook prospects (GDP) forecasts for the Euro zone limp-
has not brightened a great deal, which A big part of the problem is sluggish ing around the 1.6 percent area (down
should weigh on the currency outlook economic data continues to emerge from earlier estimates of a 1.9 percent
in the months ahead. from Switzerland, with weak exports growth) the outlook continues to dete-
In January and February, the Swiss the primary culprit. About 60 percent riorate for the Swiss export market.
franc rallied from 1.1200 to the 1.2260 of total Swiss exports head for Europe, Switzerland has suffered from par-
area (Figure 1). After selling off, the with roughly 20 percent going to ticularly dismal economic perform-
ance in recent months,
adds Melanie Averall, asso-
FIGURE 1 U.S. DOLLAR/SWISS FRANC, DAILY ciate economist at
Despite a bounce earlier in 2005, the Swiss franc faces several fundamental economic hur- Economy.com. The Swiss
dles, including prolonged low interest rates and weak Swiss exports. economy contracted 0.1 per-
cent in the fourth quarter of
U.S. dollar/Swiss franc (USD/CHF), daily 2004, down from a modest
1.28
0.4 percent expansion in the
previous quarter.
1.26 Averall points to weak
business investment as
another factor, which will
1.24
likely keep the Swiss econo-
my in a downward trajecto-
1.22 ry in the months ahead.
Swiss GDP growth fore-
casts for 2005 are in the 1.4 to
1.20 1.5 percent range. Analysts
say an upturn in the econo-
1.18 my is dependent on recov-
ery and faster growth in the
Euro zone as a whole.
1.16 The widely watched KOF,
released by the Swiss insti-
1.14 tute for Business Cycle
Research, is the leading
Swiss economic indicator
Aug. Sept. Oct. Nov. Dec. 2005 Feb. March April
for business expectations
Source: TradeStation and sentiment.
BY EARL JOHNSON
T he $11-trillion American
economy accounts for
nearly 30 percent of
global economic output
and the U.S. dollar has dom-
inated global commerce and
finance throughout the sec-
cies, and these currency conversions
take place at prevailing exchange
rates. Obviously, global trade and
finance cant grow unless there is an
cial officials from 45 countries met at
the resort town of Bretton Woods, N.H.
to establish a global financial system
that would promote expanded world
trade and finance.
The Bretton Woods confer-
ence created a multilateral
ond half of the 20th century. institution known as the
The greenback is involved in International Monetary
more than 80 percent of for- Fund that would oversee a
eign exchange transactions, monetary system based on
and dollars account for more fixed exchange rates with
than 60 percent of central global currencies pegged to
bank reserve holdings. the dollar, which was tied to
The dollars position has the price of gold. The Bretton
hardly been unassailable, Woods system of fixed
though. Financial headlines exchange rates fostered glob-
warning of a potential dollar al economic prosperity in the
crisis because of escalating early post-WWII decades,
balance of payment deficits but the unduly rigid system
have become commonplace collapsed in the early 70s,
over the past six months. In and a more flexible exchange
February, however, the dol- rate system took its place.
lar was undermined by a The current global mone-
new looming threat cen- tary system is most accurate-
tral bank reserve diversifica- ly described as a managed
tion. Is it a real problem? floating rate system,
efficient, established system for because currency values are allowed to
The managed floating exchanging national currencies. change freely, but central banks period-
rate system Historically, nations have experi- ically intervene to correct disorderly
Global commerce among nations can mented with financial systems based market conditions and prevent exces-
only be conducted by converting on fixed exchange rates as well as flex- sive rate fluctuations.
national currencies into other curren- ible rate systems. In July 1944, finan- To facilitate such intervention activ-
endum in France on a new constitution gradually add Euros to their reserves, sustained dollar upturn seems unlike-
for the European Union. Public opin- but it is unlikely central banks will ly as long as U.S. trade deficits contin-
ion polls suggest French voters might aggressively build up their holdings of ue to widen. Traders and investors
reject the new constitution, which Euros unless European politicians are have temporarily shifted their atten-
clearly would undermine the Euro and willing to undertake unpopular struc- tion to the supportive benefits of U.S.
possibly jeopardize the future political tural reforms designed to improve the rate increases, but in the medium-
stability of the EU. growth performances of the major term, dollar selling pressures will like-
Diversification is the traditional European economies. ly resume, especially if Fed policy
response to financial risks associated The American dollar no longer shifts from a restrictive to a neutral
with any portfolio of assets, so it enjoys the widespread confidence and posture as the pace of U.S. economic
would not be surprising if global mon- appeal it possessed in the immediate expansion slackens. As in 2004, the
dollar will likely slump in the closing
months of 2005, dropping 3 to 5 per-
The Euro seems destined to play a greater role cent on a trade-weighted basis.
in the global financial system, but recent economic Reports of death premature
For the foreseeable future, the U.S. dol-
and political problems within the Eurozone suggest lar will remain the worlds most attrac-
tive investment currency. U.S. financial
markets will continue to attract foreign
it may be some time before the Euro gains capital since they are the largest and
most liquid markets in the world. Over
widespread acceptance and wins the confidence the past several years, U.S. economic
growth has been much stronger than
of the global community growth in Japan or the major European
economies. Rising U.S. interest rates
etary authorities diversify their exist- postwar period but that doesnt mean provide foreign investors with higher
ing reserve holdings to compensate for that global traders, investors, or cen- returns than can be obtained else-
the risks associated with a three-year tral bankers are ready to dethrone the where.
dollar downtrend. The critical ques- greenback as the pre-eminent interna- The U.S. dollar should remain the
tions for future dollar stability are the tional currency. global monetary standard for many
scope of diversification programs and The Euro seems destined to play a years, reflecting the dominant strength
how quickly they are implemented. greater role in the global financial sys- of the innovative, U.S. economy as
Given questionable growth prospects tem, but recent economic and political well as well-regulated, smooth-func-
in Europe and Japan and the lack of problems within the Eurozone suggest tioning financial markets that are sig-
attractive non-dollar investments, it may be some time before the Euro nificantly more efficient than capital
reserve diversification by global mon- gains widespread acceptance and wins markets prevailing in Europe or Asia.
etary authorities will likely proceed at the confidence of the global communi- Net foreign purchases of U.S. securi-
a gradual pace, and annual shrinkage ty. Recent dollar weakness is undoubt- ties in January were the second largest
in the percentage of dollar assets in edly a concern to central bankers but monthly total in history. From
central bank reserves should decline the greenback is not necessarily expe- November 2004 to January 2005, net
by only one or two percent over the riencing a major crisis of confidence at monthly foreign capital inflows aver-
next several years. Central banks will the present time especially given aged $77 billion, easily enough to
not sell their existing dollar assets but the largely unanticipated strength of cover monthly trade deficits averaging
will purchase additional Treasuries at the dollar so far this year. about $60 billion. Obviously the global
a slower pace. Bearish dollar sentiment recently investment community retains a solid
Within the next five years, it would dissipated as the greenback edged appetite for dollar-denominated
not be surprising to see the percentage upward against the Euro and the yen, assets, which suggests dollar-crisis
of dollars held by monetary authori- prompting some currency analysts to fears are exaggerated.
ties decline by 4 or 5 percent to slight- speculate the dollar is bottoming out
ly less than 60 percent of total reserves. after a three-year downslide and may For information on the author see p. 8.
Prudent monetary authorities may be poised to trend upward. However, a Questions or comments? Click here.
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Chinese revaluation:
Better never than late?
China has been under enormous pressure spearheaded by the U.S.
to let its currency float freely. But perhaps we should be careful of what we wish for.
BY BARBARA ROCKEFELLER
T he foreign exchange
market is in a tizzy over
whether China will
revalue its currency, the
renminbi, sometime soon meaning,
before the end of this year, or maybe
even during the first week of May,
permanent seat on the U.N. security
council staged mass protests of
Japans refusal to take responsibility
for war crimes and vandalized
Chinese currency
they do.
In a nutshell, the Chinese would be
ill advised to revalue their currency by
a meaningful amount, now or later, let
alone move from a fixed rate to a truly
floating one. Doing so doesnt serve
their immediate self-interests,
which is a holiday week in China and revaluation is a political although it is a truism of economics
Japan. that an artificially fixed currency rate
The current situation is a rich stew
of economic, financial, and political
event, not a financial results in misallocation of resources
and various inefficiencies.
factors, with a dash of history and a
dollop of gamesmanship thrown
or economic one. In fact, recent words from Federal
Reserve Chairman Alan Greenspan are
in. U.S. and European politicians are Japanese businesses and embassies. what set off the latest round of specu-
screaming for measures to punish How likely is a renminbi revalua- lation about the timing of a revalua-
China for excessive exports. For a few tion? In the end, the revaluation deci- tion. In late April, Greenspan said the
weeks in April, Chinese citizens sion is a Chinese one, and we may not fixed renminbi is detrimental to China
prompted in part by Japans bid for a be able to incorporate all the factors because it causes imbalances in
tical level, command interest rates do rate, China would need true floating excluding the renminbi, starting in
not reflect true supply and demand for deposit rates that reflect supply and May 2005. This is supposed to give the
funds. If you are a money-market trad- demand. However, China is unwilling Chinese practice in trading freely float-
er with a global reach, you are indiffer- to institute floating interest rates ing currencies, like dollar/yen,
ent between depositing your funds in because its banking sector is over- Euro/dollar, and so on.
Country A (the home country) at 5 per- whelmed with bad loans to state enter- This is disingenuous, too, because
cent, or Country B at a 10 percent with prises (possibly as much as 50 percent throughout history the Chinese have
a 5 percent discount on the forward of their total asset base, according to been accomplished traders. Its hardly
exchange rate back to Country As cur- the ratings agencies), not to mention likely that they need any practice,
rency. The covered interest arbitrage bank-management incompetence and although perhaps it might come in
is perfect the trader has no mone- corruption. handy to know the current back office
tary advantage in swapping his and bookkeeping practices, including
funds to Country B. the arithmetic of covered interest arbi-
But if Country B offers 10.5-percent trage, or swaps.
interest and the same 5-percent dis- To have a true floating According to the March 2005 Bank
count on the forward exchange rate, for International Settlements
the trader will obviously prefer
Country B. Similarly, if Country B
exchange rate, China Quarterly Review (Trading Asian
Currencies, by Corrinne Ho, Guonan
offers 10 percent but only a 4.5 percent
discount on the forward exchange rate
would need true floating Ma, and Robert N. McCauley;
www.bis.org/publ/qtrpdf/r_qt0503e.
to get back into the home country cur- pdf), average daily trading volume in
rency, he gets a 0.5-percent advantage
deposit rates that reflect the renminbi in April 2004 was $992
in placing the money there. million. Trading in the non-deliver-
In practice, the 0.5-percent advan- supply and demand. able forwards was $811 million, while
tage never exists. If it did, it would be FX swaps accounted for a measly $9
arbitraged away in minutes. Forward However, China is million. (Swap refers to the deposit
exchange rates always reflect, almost plus forward rate in each country that
to the penny, the interest-rate differen- unwilling to institute equilibrates the total return in both
tial between the two countries compet- countries.)
ing for deposits.
When the forward foreign exchange
floating interest rates So how, exactly, would China be
able to move to a fully floating
rate is off by a bit, like the 0.5 percent
in the preceding example, cash will
because its banking exchange rate? It literally cannot. From
this we can deduce a floating rate in
flow into the country with the higher nowhere in Chinas future, and the
interest rate or deficient forward
sector is overwhelmed most we can expect is a change in the
rate. This is exactly what is happening managed float by some small
in China, albeit in a limited way. The with bad loans to state amount say, 5 to 10 percent.
official forward rate is limited to about Where do analysts get this number?
4- to 7-percent discount off the pegged enterprises. Well, it comes from common sense
rate. It is not a true market-set forward small changes work best in command
rate (although it has many partici- economies, as we learned from big
pants) because not all parties have true changes that backfired so tragically in
access to the deposit market. In the China raised the official one-year Russia and from the non-deliver-
absence of access to the deposit mar- lending rate by 0.27 percent to 5.58 able renminbi forward rates. This is
ket, the forward rate is artificial. In percent on Oct. 29, 2004, and it was bad reasoning, however, because the
fact, the renminbi forward rate is heralded as embracing market mecha- renminbi forward discount bears no
non-deliverable, in the sense that nisms. However, this was the first rate relationship to financial reality and is
when the forward contract matures, change in a decade, and one rate itself a command-economy number.
you do not take actual delivery of the change per decade is hardly an During the height of the revaluation
currency in your checking account. embrace. talk in April, the one-year non-deliver-
Instead, you get the difference in dol- Also, in early 2005, China able renminbi-dollar forward rate
lars between the spot price and the for- announced a small number of foreign widened by 550 points to 4,600 the
ward price. banks and brokers would be allowed largest spread since January, implying
To have a true floating exchange to trade the major currency pairs, a rate of 7.818 Rmb to the dollar in 12
Canadian dollar
Falling commodity prices wont work in the Canadian dollars favor vs. the U.S. buck, but interest rate
differentials and other fundamentals make it more attractive relative to the Aussie dollar.
BY DAVE FLOYD
USD/CAD. After nearly taking out highs not seen since dollar/Canadian dollar (USD/CAD) and the CRB Energy
1979, the recent technical breakdown in the Reuters-CRB Index is quite striking (Figure 1), and provides the founda-
Futures Index (CRB) spells trouble for commodity-based tion for a long USD/CAD position for longer-term traders
currencies such as the Canadian dollar (CAD), Australian if the CRB Index remains under pressure.
dollar (AUD), and New Zealand dollar (NZD). On the U.S. dollar side, the tug-of-war between the posi-
Industrial production in Japan is decelerating, which is tive cyclical forces and negative structural backdrop for the
U.S. dollar continues. Cyclical forces,
FIGURE 1 USD/CAD VS. ENERGY such as stronger growth in the U.S.
If oil prices continue to fall, the Canadian dollar should suffer, justifying a long and Federal Reserve tightening, will
position in the USD/CAD rate. push the dollar higher in the interme-
diate term, but the technical pattern
U.S. dollar/Canadian dollar vs. CRB Energy Index (USD/CAD/CRB) emerging is complex and will likely
1.65 550 continue to frustrate both dollar bears
USD/CAD
1.55
and bulls (Figure 2).
450 Medium-term players are still hold-
USD/CAD
84.0
83.0
82.0
U.S., continues to show signs With a 3-year bear trend-line now acting as
of economic expansion. support and stochastics approaching oversold, 81.0
Canada runs a current expect a near-term technical bounce
account surplus, while Stochastic 100
Australia has one of the worst 50
current account deficits in the
Group of Ten (G10). 0
8 15 22 29 6 13 20 27 3 10 18 24 31 7 14 22 28 7 14 21 28 4 11 18
New manufacturing orders Dec. 2005 Feb. March April
and unfilled orders have been Source: eSignal
very strong. Canadian manu-
facturing shipments are high-
ly correlated with retail sales FIGURE 3 AUD/CAD
in the U.S., which are rising at Fundamental factors point to a potential decline in the AUD/CAD rate, and a few
the present time. technical signposts are lined up to coincide with a down move.
The Bank of Canada (BOC)
Australian dollar/Canadian dollar
could begin to raise interest .980
(AUD/CAD), daily
rates sooner and at a faster
pace than most traders and .970
money managers are expect- .960
ing. However, the BOC is
.950
notoriously difficult to fore-
cast in terms of their mone- .940
tary policies.
.930
David Dodge, a Governor A break of .9545 and, more importantly,
of the BOC, has said a 200- to .9425-50 will allow for the target of .9200 9.20
to be achieved in the weeks to come
300-point interest rate
Stochastic 100
increase is possible because
50
even at that level the country
would still have debt service 0
6 13 20 27 3 10 17 24 31 7 14 21 28 7 14 21 28 4 11 18
ratios well below the 20-year 2005 Feb. March April
national average.
Source: eSignal
The divergence developing
between these two
economies/countries is clear. A contraction in their rate dif- that point there will be more confidence that the market-
ferential and weaker commodity prices will impact place shares in this view of the currency pair.
Australia more than Canada.
Technically, however, traders might need to wait a bit For information on the author see p. 8.
longer before deciding to commit capital. It would be bene-
ficial to see a break of weekly support around .9425-.9450; at Questions or comments? Click here.
To put the trend and volatility characteristics of the Euro FX futures into perspective,
try comparing it to other actively traded markets.
M
140 1,250
any people talk
about the tendency EC TY ES
135
Euro price, 10-year T-note price
1,200
for the currencies to
trend, which should 130
5/1/04
6/1/04
7/1/04
8/1/04
9/1/04
10/1/04
11/1/04
12/1/04
1/1/05
2/1/05
3/1/05
4/1/05
note futures (ZN), respectively. The
analysis period spanned April 1, 2004
to March 31, 2005.
Figure 1 shows the three markets on FIGURE 2 PERCENTAGE PRICE CHANGES
a closing basis; the price of the Euro Charting the three markets in terms of their daily percentage changes makes
has been multiplied by 100 to put it on their relative performance more apparent. The Euro and the E-mini S&P 500
the same scale as the T-note on the left ended the period with positive returns, while the T-note lost ground.
axis, while the E-Mini S&P price
appears on the right axis. Figure 2 115%
shows the markets in terms of their EC TY ES
daily percentage changes, which 110%
makes it easier to compare their rela-
tive performance.
Figures 1 and 2 show the Euro and 105%
the E-Mini S&P 500 finished the
twelve-month analysis higher than 100%
they began, while the 10-year T-note
had dropped slightly. The chart also
95%
shows what appears to be a strong
relationship between the Euro and the
E-Mini S&P, and less noticeable con- 90%
4/1/04
5/1/04
6/1/04
7/1/04
8/1/04
9/1/04
10/1/04
11/1/04
12/1/04
1/1/05
2/1/05
3/1/05
4/1/05
Five-day correlation between EC vs. ES high, which implies the Euro and the
p1.00 E-Mini S&P 500 track each other very
closely. (This does not mean there is a
0.75
cause-and-effect relationship between
0.50 the two markets; only that the two
0.25 have similar behavior.) Overall, both
0.00
markets gained ground over the
review period, which might be the rea-
-0.25
son for the high correlation coefficient.
-0.50 However, a statistic that considers the
-0.75 entire review periods data is not help-
ful in this case. Whats needed is a
-1.00
shorter-term view.
4/1/04
5/1/04
6/1/04
7/1/04
8/1/04
9/1/04
10/1/04
11/1/04
12/1/04
1/1/05
2/1/05
3/1/05
4/1/05
Figure 3 is a rolling five-day calcula-
tion of the Euro/E-Mini S&P correla-
tion coefficient. The readings spread
over a wide range. There are many
occurrences of correlation coefficient
FIGURE 4 ROLLING FIVE-DAY CORRELATIONS: EURO VS. T-NOTE readings near 1, but there also are a
Like the Euro/S&P relationship, the rolling five-day Euro/T-note correlations also number of readings near -1, which
showed a wide range of readings between +1 and 1. means the two markets were moving
in opposite directions. Many other
Five-day correlation between EC vs. TY
readings fall somewhere between.
1.00
Figure 4 is a rolling five-day calcula-
0.75 tion of the Euro/T-note correlation
0.50 coefficient. Again, there are many
0.25
readings near +1, but also plenty
around -1 and in between.
0.00
To better understand these correla-
-0.25 tion coefficient readings, Figure 5
-0.50 shows how often the different read-
ings from Figures 3 and 4 occurred.
-0.75
The X-axis shows the range of coeffi-
-1.00 cient readings from -1 to +1 in 0.10
4/1/04
5/1/04
6/1/04
7/1/04
8/1/04
9/1/04
10/1/04
11/1/04
12/1/04
1/1/05
2/1/05
3/1/05
4/1/05
C
hicago Mercantile Ex-
50 change (CME) launched
45 ES TY
the Euro FX futures con-
tract on Jan. 4, 1999 and began
40
offering the contract through its
35 electronic trading system (Globex)
30 in 2001. The Euro futures contract
25 calls for the delivery of 125,000
Euros and is traded in U.S. dollars.
20
The E-Mini S&P 500 trades on
15 the CMEs Globex system and is
10 priced at 50 times the S&P 500
stock index value. The 10-year T-
5
note contracts trade on the E-
0 CBOT, the Chicago Board of
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
Trades electronic trading system.
The contract calls for the delivery of
one 10-year T-note with a face
FIGURE 6 SHORT-TERM SNAPSHOT value of $100,000 at maturity.
In these seven days in August 2004, the Euro and the T-note moved together, Interest has expanded in all three
while the E-Mini S&P 500 moved in the opposite direction. The bars below the markets, with trading in the Euro
price chart, which are the five-day correlation coefficients for the Euro/E-Mini showing the greatest percentage
S&P 500 and the Euro/T-note, reflect these relationships. growth. The average daily volume
for the Euro contract for April 2004
125 was 63,173 contracts. The average
EC TY ES daily volume for March 2005 was
1,150 126,039 contracts. By comparison,
the average daily volume for the E-
120
Mini S&P in April 2004 was 713,
936 contracts, vs. 839,889 con-
1,100 tracts in March 2005. The average
daily volume in April 2004 for the
10-year T-note contract was
115 686,500, vs. 833,773 contracts in
1,50 March 2005.
110
1,000
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
5/1/04
6/1/04
7/1/04
8/1/04
9/1/04
10/1/04
11/1/04
12/1/04
1/1/05
2/1/05
3/1/05
4/1/05
lations in the same only 48 and 40
times, respectively.
The downtrend the 10-year T-note
was in during the review period is
reflected in Figure 8 by the higher FIGURE 10 DAILY RANGE: E-MINI
number of negative correlation coeffi-
Like the Euro, the E-Mini S&P 500s daily range has expanded since late 2004.
cients. If a market is trending down,
then it will display an inverse relation- E-Mini S&P
ship to time. 30
Comparing volatility 25
Since the stock market peak in March
2000, by various measures intraday 20
volatility has decreased in equities.
Lets look at the daily ranges for the 15
three markets and use regression
analysis to determine if and how intra- 10
day volatility has been changing.
Figure 9 shows the daily ranges for 5
the Euro over the review period. It is
difficult to see any trend in the size of 0
4/1/04
5/1/04
6/1/04
7/1/04
8/1/04
9/1/04
10/1/04
11/1/04
12/1/04
1/1/05
2/1/05
3/1/05
4/1/05
5/1/04
6/1/04
7/1/04
8/1/04
9/1/04
10/1/04
11/1/14
12/1/04
1/1/05
2/1/05
3/1/05
4/1/05
Mini S&P 500 if a lag is introduced.)
Finally, intraday volatility is climbing
in both the Euro and the E-Mini S&P
500. Traders should consider this to
manage both the risk and targets for periods. Understanding the trend and other trading opportunities to light.
their trades. volatility characteristics over, say, 20-day
Obviously, this analysis can be per- periods will broaden your understand- For information on the author see p. 8.
formed on other time frames and time ing of the market and possibly bring Questions or comments? Click here.
Related reading
Other articles by Thom Hartle:
Familiarity breeds profitability, Getting in on follow-through days,
Active Trader, September 2002. Active Trader, January 2004.
Hartle analyzes price patterns to determine the odds that In a follow-up to the previous articles discussion of the
different kinds of price moves will occur. odd of next-day follow-through in the S&P futures, the
author looks at the realities of basing entries on this price
Short-term T-bond trading, behavior.
Active Trader, October 2002.
Low leverage and high liquidity make T-bond futures an Relative volume analysis,
attractive market for short-term traders. This strategy Active Trader, July 2003.
uses a multiple-timeframe approach: Two indicators Traders commonly use total volume to take the pulse of
applied to daily bars work together to determine the price moves, but when it comes to determining whether
trend; two others, Bollinger Bands and the moving aver- the bulls or bears are in charge of the market, up and
age convergence-divergence (MACD) indicator, identify down volume speaks volumes.
entry and exit signals on an intraday basis.
Up-down volume and next-day follow-through,
Following through in the S&Ps, Active Trader, December 2004.
Active Trader, December 2003. What kind of trading is likely to occur today? Yesterdays
Strong closes and large ranges are often interpreted as balance of up volume and down volume and whether
signs of potential follow-through. This study unveils the market establishes the high or low of the day first
another way to find out what todays market action says provides guidance in the Nasdaq 100.
about tomorrows by analyzing the NYSE up-down vol-
ume statistics at the close of the day to see if there is any You can purchase and download past Active Trader arti-
consistent follow-through price action in the E-Mini S&P cles at www.activetradermag.com/purchase_articles.htm.
500 futures the next day.
Subscribe now!
www.optionstradermag.com
CURRENCY STRATEGIES
T he relative strength
index (RSI) is best
known for identifying
short-term overbought
and oversold levels, but it has some
uses that go beyond the textbook
explanations of this indicators role.
ing prices over a given period (say, 10
days) and compares the sum of the
day-to-day gains to the sum of the
day-to-day losses (see Indicator Basics
for more detail).
Whenever an indicator calculates
the difference between or divides two
ence that may exist from time periods
longer than the indicators look-back
period.
This detrending process creates an
indicator that fluctuates above and
below a horizontal midpoint or equi-
librium line (such as zero or one) that
The RSIs calculation is similar to prices over time, it mathematically represents the price trend; the indica-
that of other oscillators. The indicator detrends the data that is, it tor may also be bounded by absolute
measures the difference between clos- removes or minimizes the trend influ- upper and lower limits (e.g., zero and
100, or -100 and +100).
The RSIs default look-back period
FIGURE 1 14-BAR RSI AND 28-BAR EMA is 14 bars. Figure 1 is a 60-minute chart
The standard 14-bar RSI is the equivalent (bounded by zero and 100) of price of the Euro/U.S. dollar currency pair
relative to a 28-period EMA. (EUR/USD) with a 14-bar RSI and a
28-bar exponential moving average
Euro/U.S. dollar (EUR/USD), 60-minute (EMA). Notice that whenever the RSI
1.3240 crosses its midpoint of 50 (points A, B,
C, and D) price also crosses the 28-bar
B EMA. The 14-bar RSI is, in fact, the
D 1.3220
equivalent of the market price relative
to a 28-period EMA bounded by zero
A 1.3200 and 100. This implies a function of the
C
RSI that is often overlooked in text-
1.3180 book explanations of the indicators
standard uses.
RSI
75 General principles
B D 60 The standard interpretation of the RSI
50 is that it identifies overbought condi-
A C 40 tions whenever it is above 70 (or 80)
25 and oversold conditions when it is
Volume below 30 (or 20). High RSI values often
accompany market tops and low RSI
3/7/05 readings coincide with market bot-
toms. However, the problem is a trend
Source: eSignal is actually a persistent overbought or
When the market is in an uptrend, any time the RSI turns higher, upside
oversold state. momentum is turning up and price should rise.
For example, an uptrend, which
would be characterized by persistent Euro (EUR), 15-minute
closes above the 28-period EMA, will
be accompanied by RSI readings 1.3400
above 50, and the RSI will never drop
below 20 and signal an oversold con-
dition. The strength of the trend shifts 1.3350
the RSI readings upward, well above
the textbook definition for oversold.
Similarly, when a market is in a down-
1.3300
trend, price will be below its 28-period
EMA and the RSI will be below 50, RSI 100
and possibly below 20. The prevailing
weak market trend lowers the RSI 60
50
readings. 40
The range of RSI readings provides
a clue about the condition of the mar- 0
ket. In a very stable trading-range Volume
period the RSI would be expected to
22:00 23:00 0:00 1:00 2:00 3:00 4:00 5:00 6:00 7:00 8:00 9:00
oscillate fairly equally between its 3/16/05
upper and lower boundaries. On the Source: eSignal
other hand, the indicators readings
will be pushed higher or lower FIGURE 3 RSI TRENDLINE PENETRATION
depending on the prevailing trend.
If the RSI has peaked above 60 (signaling an uptrend) but the market falters
Because an uptrend is a persistently
and the RSI makes a second, lower peak, draw a trendline along the two RSI
overbought state, the range of RSI
peaks. When the RSI closes above the trendline, the up momentum is reassert-
readings will be shifted upward in ing itself.
such a way that you should consider
1.3460
40 as oversold. During a downtrend, Euro (EUR), 15-minute
the range of RSI readings are pushed
down so that 60 should be considered 1.3440
overbought.
If market action has caused the RSI 1.3420
to flash a reading of 30 (indicating a
weak market), and later the market 1.3400
rallies and the RSI rises above 50, it
means price has crossed above the 28-
1.3380
bar EMA. Some traders would consid-
er a crossover above a moving aver- 75
RSI
age to be an indication of a change to 60
an uptrend. However, moving aver- 50
age crossover techniques are subject
40
to many small whipsaws losses, as
price will often just edge through the 25
moving average, then reverse. The Volume
concept described above takes into
16:00 17:00 18:00 19:00 20:00 21:00 22:00 23:00 0:00 1:00 2:00 3:00
account this tendency.
3/10/05
As a general rule, then, if RSI read-
Source: eSignal
continued on p. 38
The final entry technique consists of finding entry points when the RSI turns up ings shift upward, look to take buy
while its between 50 and 40 (oversold). Use the same trendline penetration signals. If the RSI has a downward
technique described in the second approach. bias, you should be bearish. This is
counter to the way the indicator is
1.3280
Euro (EUR), 15-minute typically used that overbought or
oversold conditions should be faded.
1.3260 The fact is, trends tend to last longer
than people expect, so it pays to have
1.3240 a mindset to exploit the trend, not
trade against it.
1.3220
Trading techniques
Here are some simple patterns to look
1.3200 for. To start, if the14-bar RSI readings
RSI 75 are above 60, an uptrend is assumed to
be in effect as long as the RSI does not
60
drop below 40. To take advantage of the
50
uptrend, you can apply three strategies.
40 The first is more of a scalping strat-
egy because the follow-through can be
25 very short-term and the risk of a loss
Volume
is highest. If the market is in an
14:00 15:00 16:00 17:00 18:00 19:00 20:00 21:00 22:00 23:00 0:00 1:00 2:00 uptrend, any time the RSI turns high-
3/8/05 er, upside momentum is turning up
Source: eSignal
and price should rise (Figure 2).
Because there are times when the first
FIGURE 5 SELL SIGNALS RSI upturn does not result in price fol-
low-through, traders can wait for the
Sell signals reverse the guidelines for buys. Here, the first and second entry second RSI upturn.
techniques are shown: a short-term sell signal triggered by an RSI downturn This leads to the second technique:
(the scalp technique) and the sell signaled by a penetration of a trendline con- Using a trendline to signal the market
necting two rising RSI troughs.
is about to resume the uptrend. For
Euro (EUR), 15-minute 1.3480 example, say the RSI has peaked
above 60, signaling an uptrend, but
1.3460
the market falters and the RSI has
traced out a second, lower peak. Draw
1.3440
a trendline along the two RSI peaks.
When the RSI closes above the trend-
1.3420
line, the up momentum is reasserting
itself (Figure 3).
1.3200
The final technique is to look for
entry points when the RSI turns up
RSI 75
while its between 50 and 40, which
represents an oversold condition. Use
60 the same trendline penetration tech-
50 nique to signal the trade: The RSI
40
turning up from this oversold condi-
Trendline break
tion during an uptrend would signal
25 the momentum is turning up. From
Volume
here, the market has the greatest
14:00 15:00 16:00 17:00 18:00 19:00 20:00 21:00 22:00 23:00 0:00 1:00 potential (Figure 4).
3/14/05
For sell signals, reverse the guide-
Source: eSignal
lines for buys: When the RSI moves
Trading ranges
Trading ranges can be identified by
the RSI readings becoming range RSI
50
bound between 40 and 60. However,
its a good idea to consider the trading
range to have a bias based on the most
recent high or low RSI reading. For
Volume
example, if the RSI peaked above 60,
indicating an upward trend, and is 7:00 8:00 9:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00 19:00
now crisscrossing between 40 and 60,
Source: eSignal
the range should be considered to
have a bullish bias (Figure 7). If the
recent extreme RSI reading was below FIGURE 7 TRADING RANGE
40 and was now locked in a range
between 40 and 60, consider the con- Although a market can be defined as range-bound when the RSI remains
between 40 and 60, its a good idea to consider the trading range to have a
gestion phase to have a bearish bias.
bias based on the most recent high or low RSI reading. For example, if the
RSI peaked above 60, indicating an upward trend, and is now crisscrossing
Getting specific between 40 and 60, the range should be considered to have a bullish bias.
Professional traders take vague state-
ments about the status of the market Euro (EUR), 15-minute
and translate them into precise defini-
tions that can be the basis for a trading 1.3360
strategy.
Go beyond fuzzy descriptions such
as uptrend, downtrend, trading 1.3340
range, or overbought and oversold.
Use mathematical rules to precisely
define the condition of the market and
1.3320
then develop strategies based on those
conditions. RSI Congestion signaled
Bullish trend
Analyzing the RSI and understand-
ing how it defines and interacts with
trends reveals additional uses for the 50
indicator. Because the RSI is bounded
in a fixed range, you can experiment Bullish trading range
with specific indicator levels and test
Volume
the outcome of different market sce-
narios. 13:00 14:00 15:00 16:00 17:00 18:00 19:00 20:00 21:00 22:00 23: 0:00 1:00
3/9/05
Source: eSignal
Questions or comments? Click here.
2,200,000
Trade rules: 2,000,000
1,800,000
1. Go long tomorrow at the open if
1,600,000
price closes above upper VK Band. 1,400,000
1,200,000
2. Go short tomorrow at the open if 1,000,000
price closes below the lower VK Band. 800,000
600,000
400,000
3. Sell (exit long) if price closes below 200,000
the lower VK Band. 0
4/24/95 4/19/96 5/22/97 6/24/98 7/27/99 8/25/00 9/26/01 10/29/02 11/28/03
4. Buy to cover (exit short) if price Equity Cash Linear Reg Long Short
closes above the upper VK Band.
Profit factor: 2.72 Avg. hold time (days): 125.55 Monthly 1.21 0.73 22.46 -12.14 54.70 6 7
Payoff ratio: 5.91 Avg. winner (%): 11.96 Quarterly 3.65 0.73 29.40 -14.37 61.54 8 3
Recovery factor: 3.13 Avg. hold time (winners): 316.25 Yearly 14.26 0.78 46.14 -7.87 70.00 3 1
Drawdown Avg. loser (%): -2.02
Max. DD (%): -32.82 Avg. hold time (losers): 30.2 LEGEND: Avg. return The average percentage for the period Sharpe ratio
Average return divided by standard deviation of returns (annualized) Best return
Longest flat days: 497 Avg. consec. win/loss: 5/16 Best return for the period Worst return Worst return for the period
Percentage profitable periods The percentage of periods that were profitable
Max. consec. profitable The largest number of consecutive profitable periods
LEGEND: Net profit Profit at end of test period, less commission Exposure Max. consec. unprofitable The largest number of consecutive unprofitable periods
The area of the equity curve exposed to long or short positions, as opposed to cash
Profit factor Gross profit divided by gross loss Payoff ratio Average prof-
it of winning trades divided by average loss of losing trades Recovery factor Currency System Analysis strategies are tested on a portfolio basis
Net profit divided by max. drawdown Max. DD (%) Largest percentage (unless otherwise noted) using Wealth-Lab Inc.s testing platform.
decline in equity Longest flat days Longest period, in days, the system is If you have a system youd like to see tested, please send the
between two equity highs No. trades Number of trades generated by the sys- trading and money-management rules to editorial@currencytradermag.com.
tem Win/loss (%) the percentage of trades that were profitable Avg. trade
The average profit/loss for all trades Avg. winner The average profit for Disclaimer: Currency System Analysis is intended for educational purposes only
winning trades Avg. loser The average loss for losing trades Avg. hold to provide a perspective on different market concepts. It is not meant to recom-
time The average holding period for all trades Avg. hold time (winners) mend or promote any trading system or approach. Traders are advised to do their
The average holding time for winning trades Avg. hold time (losers) The own research and testing to determine the validity of a trading idea. Past perform-
average holding time for losing trades Avg. consec. win/loss The maximum ance does not guarantee future results; historical testing may not reflect a sys-
number of consecutive winning and losing trades tems behavior in real-time trading.
were three long flat periods i.e., when it FIGURE 4 PROFIT DISTRIBUTION
took longer than 300 days for the system
to achieve new equity highs. Also typical of a trend-following system is the high number of small
losing trades. The system reaps its profits on the much smaller num-
The VK Band system is a typical trend
ber of large winners.
following system that rides profitable
trends as long as possible. This is illustrat- 60 56
ed by comparing the average holding peri- 55
od of profitable trades (316 days) to the
50
average holding period of losing trades
(30 days). The systems character is also 45
displayed by the profit distribution chart
Number of trades
40
(see Figure 4), which shows a high num- 35
ber of small losing trades and a low num-
30
ber of big winning trades.
Finally, the systems 33.33-percent win- 25
ning percentage is textbook trend-following 20
performance. The system exits losers auto-
15
matically with a 2-percent loss, and is thus 6
able to achieve big profits with its few win- 10
4 4 4
2 2
ners. The maximum adverse excursion 5 1 1 1 0 0 0 1 1 0 1 0
(MAE) chart in Figure 5 shows the 2-percent 0
0.00%
2.50%
5.00%
7.50%
10.00%
12.50%
15.00%
17.50%
20.00%
22.50%
25.00%
27.50%
30.00%
32.50%
35.00%
37.50%
40.00%
42.50%
stop-loss at work the 52 trades that ended
at -2 percent are a result of this stop. (The
single trade loss larger than -2 percent was
the result of a gap.) Also, winning trades sel- FIGURE 5 MAXIMUM ADVERSE EXCURSION (MAE)
dom entered deep in negative territory.
Thats not to say everything about the sys- The 2-percent stop-loss rules capped losses on all unprofitable
tem is peaches and cream. The maximum trades (except one) at 2 percent.
favorable excursion (MFE) analysis shows 52 All trades
many trades (51 at the 5-percent level and 5 60 Winning trades
Number of trades
-2.20%
-2.00%
-1.80%
-1.60%
-1.40%
-1.20%
-1.00%
-0.80%
-0.60%
-0.40%
-0.20%
0.00%
Bottom line: Although this systems rules
seem quite simple, it produced solid profits
and the losing trades never ate up much of FIGURE 6 MAXIMUM FAVORABLE EXCURSION (MFE)
the starting capital. On the other hand, the
One aspect of the system that could be improved is its tendency
system generates only one winner per three
to give back substantial open profits.
trades, which means a streak of losing trades
with a commensurately high drawdown is 52
All trades
quite likely. The systems tendency to give 60 51
Number of trades
Losing trades
back open profits is perhaps a topic for fur- 50
ther analysis. If you can find a technique that
40
prevents this without diminishing the big
winning trades, the system could be 30
9 8
improved substantially. 20 5
0 5 3 2 1 0 2 0 2
10 0 0 0 0 0 0 0 0 0 0
Michael Schneider of Wealth-Lab
0
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55%
Questions or comments? Click here.
2 3 4 5 6
U.S.: ISM U.S.: ECB: Governing Great Britain: U.S.: Employment
Japan: FOMC meeting council meeting Monetary Policy Japan: Monetary base
Account balances Committee Germany: Orders received and
Australia: Great Britain: meeting manufacturing turnover
Index of Monetary Policy Australia: Official reserve assets;
commodity prices Committee Statement on monetary policy
meeting
9 10 11 12 13 14
U.S.: Wholesale Germany: Foreign U.S.: U.S.: Retail sales Canada:
inventories trade Trade balance Manufacturing
survey
Germany:
Production index Italy: Balance of
payments
Great Britain: PPI
16 17 18 19 20 21
Japan: Balance of U.S.: PPI U.S.: CPI U.S.: Leading Canada: CPI;
payments; Japan: Monetary indicators Retail trade
Corporate goods Great Britain: survey ECB: Governing Germany:
price index CPI Canada: council meeting Bankruptcies
Wholesale trade Germany: Great Britain:
Great Britain: Employment; PPI Capital issuance
Employment
23 24 25 26 27 28
Canada: National U.S.: Durable U.S.: GDP
accounts goods Japan: Corporate
service price index
Germany: PPI Germany: CPI Canada:
Employment
30 31 Legend
Canada: Balance of Canada: GDP
international pay-
ments Australia: CPI: Consumer Price Index Committee
International ECB: European Central Bank ISM: Institute for Supply
Italy: International reserves and GDP: Gross Domestic Product Management
reserves and foreign foreign currency FOMC: Federal Open Market PPI: Producer Price Index
currency liquidity liquidity
The information on this page is subject to change. Currency Trader is not responsible for the accuracy of calendar dates beyond press time.
CURRENCY FUTURES SNAPSHOT The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of each markets
as of 4/25/05 liquidity, direction, and levels of momentum and volatility. See the legend for explanations of the different fields.
LEGEND: The % Rank fields for each time window (10-day current reading is larger than all the past readings, while
Sym: Ticker symbol. moves, 20-day moves, etc.) show the percentile rank of a reading of 0% means the current reading is lower
Vol: 30-day average daily volume, in thousands. the most recent move to a certain number of the previ- than the previous readings. These figures provide per-
ous moves of the same size and in the same direction. spective for determining how relatively large or small the
OI: Open interest, in thousands.
For example, the % Rank for 10-day move shows how most recent price move is compared to past price
10-day move: The percentage price move from the the most recent 10-day move compares to the past moves.
close 10 days ago to todays close. twenty 10-day moves; for the 20-day move, the % Volatility ratio/rank: The ratio is the short-term volatility
20-day move: The percentage price move from the Rank field shows how the most recent 20-day move (10-day standard deviation of prices) divided by the
close 20 days ago to todays close. compares to the past sixty 20-day moves; for the 60- long-term volatility (100-day standard deviation of
60-day move: The percentage price move from the day move, the % Rank field shows how the most prices). The rank is the percentile rank of the volatility
close 60 days ago to todays close. recent 60-day move compares to the past one-hundred- ratio over the past 60 days.
twenty 60-day moves. A reading of 100% means the
This information is for educational purposes only. Currency Trader provides this data in good faith, but cannot guarantee its accuracy or timeliness. Currency Trader assumes
no responsibility for the use of this information. Currency Trader does not recommend buying or selling any market, nor does it solicit orders to buy or sell any market. There is
a high level of risk in trading, especially for traders who use leverage. The reader assumes all responsibility for his or her actions in the market.
T he New York Board of Trade geared to those who are new to FX and open to all interested partici-
has hired an investment trading. After a keynote speaker, two pants.
bank to help assess its strate-
gic options, with the most likely one
being a transition to a cooperative
structure, the exchanges top execu-
tive said April 12.
The commodity and financial
futures exchange, which now operates
as a not-for-profit organization, has
retained New York investment bank
Brown Brothers Harriman & Co.
If adopted, the NYBOT would be
the first exchange to take on a co-op
structure, which would allow it to
dole out payments to equity members
based on how much revenue they
generate for the exchange.
Co-op disbursements would be tax
deductible for the exchange and
shield exchange members from the
double taxation dividends bring,
NYBOT Chief Executive Harry Falk
said in a press release. For now, the co-
op idea is being given greater weight
than other options, such as a merger
or an initial public offering of com-
mon stock, according to NYBOT exec-
utives.
Talk circulated in the past year of a
possible merger of the NYBOT and
the New York Mercantile Exchange,
which share a building in downtown
New York, but the NYBOT has down-
played that notion.
Indicator insight:
Relative Strength Index
T
he relative strength index not be confused with the concept of to the average down closes (those bars
(RSI) is a momentum oscil- relative strength, which is a compari- that closed lower than the previous
lator designed to identify son of the price action of one instru- close) over a certain period. The ratio
short-term momentum ment to another most commonly, an is then normalized to have a range of
extremes (so-called overbought and individual stock to its group, sector, or values between 0 and 100 using the
oversold points). J. Welles Wilder, the overall market. Other well-known following formula:
developer of the RSI, provides step-by- indicators similar to the RSI include
step instructions for calculating and stochastics, momentum and rate of RSI = 100 (100/[1+(U/D)])
interpreting the indicator in his book, change, and the Commodity Channel
New Concepts in Technical Trading Index (CCI). where
Systems (Trend Research, 1978). Wilder U is the average of the up closes
described the indicator in terms of daily Calculation over a given period;
price bars, but the RSI can be used on The basic RSI calculation is a ratio of
any time frame. the average up closes (those bars that D is the average of the down closes
The relative strength index should closed higher than the previous close) over a given period.
ACCOUNT BALANCE
Rank Country 2004 Ratio* 2003 2005+ Rank Country 2004 Ratio* 2003 2005+
1 Hong Kong 16.404 10 16.697 16.598 9 UK -43.338 -2 -33.39 -43.098
2 Taiwan 21.3 6.9 29.202 19.378 10 Spain -33.066 -3.4 -23.549 -36.462
3 Germany 118.525 4.4 52.933 129.726 11 New Zealand -4.102 -4.4 -3.267 -4.151
4 Japan 159.402 3.4 136.238 148.931 12 Australia -32.036 -5.3 -30.212 -30.248
5 Canada 28.195 2.9 17.00 25.243 13 U.S. -631.268 -5.4 -530.669 -641.678
6 Denmark 4.289 1.8 6.327 4.543 Totals in billions of U.S. dollars
+
*Ratio: Account balance in percent of GDP; Estimate
7 France -12.761 -0.6 5.474 -13.246
Source: International Monetary Fund, World Economic Outlook
8 Italy -18.074 -1.1 -21.942 -13.315 Database, October 2004
Brazils February unemployment rate climbed to 10.6 Australias unemployment rate remained stable at 5.1
percent, a rise of 0.4 percent from the previous month, but percent in March, falling .5 percent below the March 2004
1.4 percent lower than February 2004. rate.
Brazils benchmark interest rate, already stratospheric The January-March jobless rate for Hong Kong
at 19.25 percent, could go even higher if high oil prices and remained at 6.1 percent from the previous period
other inflation fears persist. Despite eight consecutive rate (December to February), according to preliminary data.
hikes, the Brazilian government threatened another half- The figure represented the countrys lowest level since the
point increase at the next Monetary Policy Committee meet- period of September to November 2001. The near-term
ing in May. outlook will continue to hinge on the overall economic
growth giving rise to additional jobs for the labor force,
The March unemployment rate in Canada was 6.9 per- including in particular graduates entering the labor market
cent, a drop of 0.1 percent from February and a fall of 0.6 during the summer months, said a government
percent compared to March 2004. While more adult men spokesperson in a press release. Total employment soared
found work, fewer youth were employed, and the accom- to an all-time high of 3,354,000 in the first quarter of 2005.
modation and food services industries lost many jobs. The department posted a record high of 8,254 job place-
ments in March.
The chief economist at the Bank of Ireland predicted a South African unemployment fell 1.7 percent from 27.9
rise in UK interest rates at the June meeting. In the B of Is percent in March 2004 to 26.2 percent in September 2004.
monthly bulletin, Dr. Dan McLaughlin projects a gradual This decrease came partially from increases in construction
rise in inflation over the next two years until it exceeds the and trade employment. According to the Labor Force
2-percent target in early 2007. This can be seen as justifica- Survey, "Black women continue to be the most affected by
tion for further monetary tightening. unemployment, more than seven times white males.
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A
107.0
A IBM (IBM), five-minute
106.8 least squares approach
Linear regression fits a straight line
endpoint 106.6 through the series of
prices over a lookback
106.4
period so the difference between each
106.2 of the individual prices and the
straight line is the smallest (least).
106.0 This is a best fit line of the data (also
referred to as a regression line).
105.8
Squares refers to finding the mini-
105.6 mum squared difference between
prices and the straight line. The differ-
105.4 ences are squared because some price
8/14 10:15 10:40 11:05 11:30 11:55 12:20 12:45 1:10 1:35 2:00 2:25 2:50 3:15 3:40 8/15 points are above the line (positive)
and some are below it (negative).
107.0 Plotting the final value, or endpoint,
B IBM (IBM), five-minute
of the least squares lines for each bar
106.8 calculated over a certain lookback
Second-order polynomial period tracks price more closely than
106.6
(parabolic line) a moving average (see Figure 1A).
106.4 The formula for a least squares line
is simple. A straight line has a begin-
106.2 ning point and rises at a fixed rate. For
example, if IBM starts at $100 and
106.0
moves up for 10 more days, closing at
105.8 $105, a straight line fit to the data
would start at $100 and rise at 50 cents
105.6 per day, arriving at $105 the final day.
105.4
The formula for a straight line is:
8/14 10:15 10:40 11:05 11:30 11:55 12:20 12:45 1:10 1:35 2:00 2:25 2:50 3:15 3:40 8/15
a0+a1*t
107.0
C IBM (IBM), five-minute where
106.8 a0 is the initial value of the line;
Fourth-order a1 is the slope of the line;
polynomial 106.6 t is time.
106.4
For our example, a 0 is $100, a1 is 50
106.2
cents, and t is 10 (days). The formula
has two terms: coefficients (a0+a1) and
106.0 variables (t). Mathematicians call this
formula a polynomial, which means it
105.8 has more than one term. Because t is
not raised to a power, the polynomial
105.6
is referred to as a first-order polyno-
105.4 mial.
8/14 10:15 10:40 11:05 11:30 11:55 12:20 12:45 1:10 1:35 2:00 2:25 2:50 3:15 3:40 8/15 Although the least squares line may
Source: TradeStation Pro by TradeStation Group be an improvement over the moving
T
he simple moving average where equivalent length.
(SMA) is the standard SC is a smoothing constant
moving average calcula- between 0 and 1, and For example, a smoothing constant
tion that gives every price EMA(yesterday) is the previous of .095 creates an exponential moving
point in the average equal emphasis, days EMA value. average equivalent to a 20-day SMA
or weight. For example, a five-day (2/(20 + 1) = .095). The larger n is, the
SMAis the sum of the most recent five You can approximate a particular smaller the constant, and the smaller
closing prices divided by five. SMA length for an EMA by using the the constant, the less impact the most
Weighted moving averages give following formula to calculate the recent price action will have on the
extra emphasis to more recent price equivalent smoothing constant: EMA. In practice, most software pro-
action. The exponential moving aver- grams allow you to simply choose
age (EMA) weights prices using the SC = 2/(n + 1) how many days you want in your
following formula: moving average and select either sim-
where ple, weighted or exponential calcula-
EMA= SC * Price + (1 - SC) * n = the number of days in a simple tions.
EMA(yesterday) moving average of approximately
V
ariance measures how {(2-9)2 + (9-9) 2 + (16-9)2 }/3 = Also, if a distribution of trading
spread out a group of val- (49 + 0 + 49)/3 = 32.67 results is said to be normally distrib-
ues are in other words, uted (i.e., adhering to the standard
how much they vary. A common application of variance Gaussian bell curve, as shown in
Mathematically, variance is the average in trading is standard deviation, Figure A), a one-standard-deviation
squared deviation (or difference) of which is the square root of variance. calculation will hold approximately 68
each number in the group from the The standard deviation of 8, 9, and 10 percent of all results; a two-standard-
groups mean value, divided by the is: (.667) = .82; the standard deviation deviation calculation will hold approx-
number of elements in the group. For of 2, 9, and 16 is: (32.67) = 5.72. imately 95 percent of all results. For
example, for the numbers 8, 9 and 10, example, if the average of several sam-
the mean is 9 and the variance is: The more varied a markets price ples is 1.21 and the one standard devi-
changes are from day to day (or week to ation boundary comes out to 0.11, 68-
{(8-9)2 + (9-9)2 + (10-9)2}/3 = week, etc.), the higher their variance or percent percent of the values should
(1 + 0 + 1)/3 = .667 standard deviation, and more volatile fall somewhere between 1.10 (1.21
that market is; the more varied a sys- 0.11) and 1.32 (1.21 + 0.11).
Now look at the variance of a more tems returns, the higher their variance
widely distributed set of numbers, 2, 9, or standard deviation, and the riskier
16: the system will likely be to trade.
Initial stop: 1.3038, which is 24 pips above the most recent Trade executed according to plan? Yes.
swing high on April 12.
Lesson(s): Not much to say other than it was a quick
Initial target: Well actually cover part of the position at the death. We didnt even get a chance to liquidate even a small
February low (1.2730) to guard against the possibility of a portion of the position, as the post-entry low was 1.2767.
bounce off this support level. The market reversed the next day and closed above the high
We estimated a secondary target level by looking at two of the entry day not a good sign. The trend was no friend
simple aspects of the price action. First, the most recent in this case.
down swing was 678 pips; subtracting that amount from We considered reversing to a long position when the
the April 12 high of 1.3014 (in anticipation of another down market reversed the day after entry, but we didnt. The cur-
leg that approximates the most recent leg) gives a target of rency pair did follow through nearly 200 pips to the upside
1.2336. Second, this roughly corresponds to the high of the over the next few days, but then it sagged again, leaving the
mid- to late-2004 consolidation around 1.2400. Well use the intermediate-term market picture murky.
latter price level as the target.
TRADE SUMMARY
Date Rate Entry Initial Initial IRR Exit Date P/L LOP LOL Trade
stop target length
4/14/05 EUR/USD 1.2794 1.3038 1.2730 26 1.3038 4/14/05 -.0244 .0027 .0244 2 days
(1.9%)
Legend: IRR initial reward/risk ratio (initial target amount/initial stop amount); LOP largest open profit (maximum available profit
during lifetime of trade); LOL largest open loss (maximum potential loss during life of trade).