CurrencyTrader0610-ml12

Strategies, analysis, and news for FX traders

June 2010

Volume 7, No. 6

EURO/DOLLAR PARITY, COMMODITY CURRENCY SETUPS, AND MORE: What’s in store for the rest of the year? p. 6 SIGNALS FROM THE ASIAN forex session p. 18 THE EURO’S RECORD MOVE p. 16 RISK, FEEDBACK LOOPS, and self-fulfilling prophecies in FX p. 12

CHANGING GEARS

in the Aussie dollar p. 32

SOUTH OF THE BORDER: Colombian peso analysis p. 22

contents

Contributors....................................................... 4

Currency Futures Snapshot................. 25

Global Markets

International Markets............................. 26

Dollar bulls in the driver’s seat ....................6

Numbers from the global forex, stock, and

A look at the major currency stories at the mid-

interest-rate markets.

point of the year, and what the remainder of 2010 may bring.

Global Economic Calendar......................... 29

By Currency Trader Staff

Important dates for currency traders.

On the Money The world is not flat ..................................12

Events . ......................................................30 Conferences, seminars, and other events.

How low can the Euro go? By Barbara Rockefeller

Spot Check

New Products & Services........................... 30 Key Concepts.............................................31

Euro/U.S. dollar .........................................16 Where the Euro’s been, where it’s going:

Forex Journal............................................32

The numbers.

Reversing direction in the Aussie dollar.

By Currency Trader Staff

Trading Strategies Taking advantage of the Asian trading session ...............................18 Analyzing the often-overlooked Asian trading session points to a novel way of exploiting forex market inefficiencies. By Daniel Fernandez

Advanced Strategies Colombian peso, the richest kind . ........... 22 Colombia’s peso gets a helping hand from U.S. interest-rate policy.

Looking for an advertiser?  Click on the company name for a direct link to the ad in this month’s issue. eSignal FXCM Traders Expo Your FX Trading Room

By Howard L. Simons

Questions or comments?

Submit editorial queries or comments to [email protected].



June 2010 • CURRENCY TRADER

contributors

q Howard Simons is president of Rosewood Trading Inc. and a strategist for Bianco Research. A publication of Active Trader ®

For all subscriber services:

He writes and speaks frequently on a wide range of economic and financial market issues.

www.currencytradermag.com q Barbara Rockefeller (www.rts-forex.com) is an international economist with a focus on foreign exchange. She has worked as a forecaster, trader, and consultant at Citibank Editor-in-chief: Mark Etzkorn [email protected] Managing editor: Molly Goad [email protected] Contributing editor: Howard Simons Contributing writers: Barbara Rockefeller, Marc Chandler, Chris Peters Editorial assistant and webmaster: Kesha Green [email protected] President: Phil Dorman [email protected] Publisher, ad sales: Bob Dorman [email protected] Classified ad sales: Mark Seger [email protected]

and other financial institutions, and currently publishes two daily reports on foreign exchange. Rockefeller is the author of Technical Analysis for Dummies (For Dummies, 2004), 24/7 Trading Around the Clock, Around the World (John Wiley & Sons, 2000), The Global Trader (John Wiley & Sons, 2001), and How to Invest Internationally, published in Japan in 1999. A book tentatively titled How to Trade FX is in the works. Rockefeller is on the board of directors of a large European hedge fund. q Daniel Fernandez is an active trader with a strong interest in calculus, statistics, and economics who has been focusing on the analysis of forex trading strategies, particularly algorithmic trading and the mathematical evaluation of long-term system profitability. For the past two years he has published his research and opinions on his blog “Reviewing Everything Forex,” which also includes reviews of commercial and free trading systems and general interest articles on forex trading (http://fxreviews.blogspot.com). Fernandez is a graduate of the National University of Colombia, where he majored in chemistry, concentrating in computational chemistry. He can be reached at [email protected].

Volume 7, Issue 6. Currency Trader is published monthly by TechInfo, Inc., 161 N. Clark St., Suite 4915, Chicago, IL 60601. Copyright © 2010 TechInfo, Inc. All rights reserved. Information in this publication may not be stored or reproduced in any form without written permission from the publisher. The information in Currency Trader magazine is intended for educational purposes only. It is not meant to recommend, promote or in any way imply the effectiveness of any trading system, strategy or approach. Traders are advised to do their own research and testing to determine the validity of a trading idea. Trading and investing carry a high level of risk. Past performance does not guarantee future results.



June 2010 • CURRENCY TRADER

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x14269

Global Markets

Dollar bulls in the driver’s seat As mid-year approaches, the dollar is soaring, the Euro is testing multiyear lows and commodity currencies may be poised for a rebound. By Currency Trader Staff

What a difference a year can make. Last year the bears pummeled the U.S. dollar as the easing financial crisis let the air out of the “flight-to-quality” trade and reinflated concerns about U.S. structural and fiscal problems, not to mention sluggish growth prospects. However, the first five months of 2010 have been a completely different story. Amid dramatic losses in equity markets and the unfolding European sovereign-debt crisis,

global money managers have flocked back to the U.S. dollar. Among the major industrialized currencies, the buck has been the place to be. The biggest currency story of late, of course, has been the Euro’s dramatic decline. The Euro/U.S. dollar pair (EUR/USD), which had recouped the majority of its 2008 losses by the end of 2009, tumbled from above 1.5100 in December to 1.2142 in late May — a nearly 20-percent decline that took the Euro to its lowFigure 1: EURO WOES est level vs. the dollar in more than Battered first by the European debt crisis and then by a rush into the U.S. dollar, four years (Figure 1). The sell-off’s the Euro dropped to its lowest levels vs. the dollar since 2006. April-May leg was especially precipitous, with the pair dropping more than 11-percent from the April 12 high to the May 19 low. The Euro dropped to 1.2110 on June 1. The Euro’s loss was, of course, the dollar’s gain. “The reason the dollar went up is because people didn’t want to own the Euro,” says Philip Roth, chief technical market analyst at Miller Tabak & Co. The U.S. dollar index (DXY) has recaptured the vast majority of its 2009 sell-off by the end of May (Figure 2). Although the Euro is the single largest component of the dollar index, the dollar has posted large gains vs. a wide range of currencies over the past several months. From Dec. 31, 2009 through the May high closes, the dollar surged nearly 15 Source: TradeStation percent against the Euro, 17 percent



June 2010 • CURRENCY TRADER

FIGURE 2: DOLLAR BENEFICIARY

By late May the U.S. dollar index had regained almost all its 2009 losses.

against the Danish krone, 13 percent vs. the Norwegian krone, 12 percent vs. the Swedish krona, and 11 percent vs. the British pound (Table 1). The list goes on. During same time period, the greenback rallied 12 percent against the Swiss franc, 9 percent against the Australian dollar, 8 percent vs. the New Zealand dollar, 6.30 percent vs. the Brazilian real, and 4.14 percent vs. the South Korean won. The Japanese yen was the one major currency that managed to hold its ground vs. the dollar in the first five months of 2010. Through the highest close as of May 25, the yen had gained 3.59 percent against the dollar (Figure 3). However, most of that was seen not as safe-haven buying but rather a repatriation of the carry trade. (The Mexican peso also gained incrementally vs. the dollar.) “We’ve seen risk aversion based in part on the global equity sell-off, which prompted carry trade players to square up,” says Michael Woolfolk, managing director at BNY Mellon. For example, traders who had been long the Aussie/yen cross rate would have sold the Australian dollar and bought the Japanese yen to square up that position. The Aussie/yen cross has collapsed over the past month, plunging from 88.00 to 72.00 in the span of four weeks (Figure 4). Ultimately, the May equity breakdown accelerated trends that had already been in place.

The equity connection

Source: TradeStation

TABLE 1: ON THE YEAR VS. THE DOLLAR Pair

Symbol

Dec. 31

May 27

% +/-

Euro/$

EUR/USD

1.4323

1.2202

14.81%

$/Danish krone

USD/DKK

5.1943

6.0966

17.37%

$/Norweg. krone

USD/NOK

5.7839

6.508

12.52%

Pound/$

GBP/USD

1.6164

1.4333

11.33%

$/Swedish krone

USD/SEK

7.147

7.9757

11.60%

Aussie/$

AUD/USD

0.8973

0.817

8.95%

Kiwi/$

NZD/USD

0.7231

0.6648

8.06%

$/franc

USD/CHF

1.0355

1.1624

12.25%

$/yen

USD/JPY

93.01

89.67

-3.59%

$/Canada

USD/CAD

1.0529

1.07

1.62%

$/Brazil real

USD/BRL

1.74

1.8368

5.56%

$/Mexican peso

USD/MXN

13.0825

12.883

-1.52%

The U.S. dollar has soared vs. most currencies in the first five months of 2010.

Volatility surged in spring as fresh CURRENCY TRADER • June 2010



Global Markets

FIGURE 3: JAPANESE YEN

The Japanese yen was the one major currency that managed to hold its ground vs. the dollar in 2010, although it is still trading near historically low levels.

Source: TradeStation

FIGURE 4: SQUARING UP THE CARRY TRADES

The Aussie/yen pair crumbled in May as risk aversion notched higher and carry trade players bailed out of short-yen positions.

Source: TradeStation 

(bad) news about the European sovereign-debt crisis kept rolling in, putting pressure on the Euro and pumping up the dollar. Then equity markets began to turn down. From late April through late May, the S&P 500 had lost roughly 15 percent of its value. “We are going through a significant shock,” says Sebastien Galy, currency strategist at BNP Paribas. The calamity prompted a new round of U.S. dollar flight-to-quality and safe-haven buying — just as had occurred in 2008 and early 2009. “The dollar is still the safe-haven and reserve currency of the world — that has been clearly reinforced,” says Julia Coronado, senior economist at BNP Paribas. “The dollar is a combination safehaven and also a bet on the future in the form of stability and credibility,” Galy says. The global equity market downturn has encouraged asset liquidation. In the Eurozone, the Euro Stoxx index was down 13.6 percent year-to-date as of May 25. The FTSE 100 had fallen 8.7 percent, and even China’s Shanghai Composite index was down 20 percent. “Part of the move [lower] in the Euro/dollar is a function of the stock market,” BNP’s Galy says. “People feel uncomfortable with assets in the Eurozone and now have to get out. The pressure and [bullish] demand for the dollar is so one-sided.” While the February lows in the Dow Jones Industrial Average and the S&P 500 were holding up as of late May, those levels — around 9835 in the Dow and around 1044 in the June 2010 • CURRENCY TRADER

In the short-term, currency players are eyeing the Euro’s January 1999 “launch rate” of 1.1800. S&P 500 — are the key chart levels to monitor, according to Miller Tabak’s Roth. Of the 83-percent gain in the S&P 500 from the March 2009 low to the April 2010 high, Roth notes, “the 2009-2010 advance is going to be corrected for many months.” The 15-percent pullback from the April 2010 high may have just been the start, according to Roth. Roth warns if the S&P 500 takes out 1040, he sees additional losses toward the 950-900 zone. Such a sell-off could take place perhaps in the fall of 2010 or maybe in 2011, he

CURRENCY TRADER • June 2010

says. More importantly, however, further declines in stocks would likely be dollar-supportive, analysts say.

A continuing dichotomy Questions looming for the remainder of the year are whether the bull trend in the U.S. dollar can continue, and what other currencies can be expected to outperform in the second half. “We still like the dollar,” notes Vassili Serebriakov, currency strategist at Wells Fargo. “We’ve been bullish on it for quite a while. Perhaps there is some scope for the losses in the Euro to slow down, but generally, the dollar should do well against the pound, yen, and Swiss franc.” Analysts seem to agree that in the second half of the year the U.S. dollar should outperform other major currencies, but will likely underperform key emerging currencies, including those in India, Korea, and Brazil. “The dollar should do well against the majors, but weaker against emerging currencies — especially Asian currencies, such as the Indian rupee and Korean won,”



Global markets

FIGURE 5: LAUNCH RATE, THEN PARITY?

Two looming downside targets for the Euro are its 1999 launch rate around 1.18 and parity (1.00) with the U.S. dollar.

Serebriakov says. “The U.S. [economic] recovery is looking better than most industrialized countries right now — it is good relative to Europe,” BNP Paribas’ Coronado says. “But that’s not the case when you make the comparison to emerging markets. Asia, Brazil, and India are showing solid recoveries that look quite good.” However, she adds this somewhat is to be expected. “We are an older economy, which don’t generally grow as fast as emerging markets.”

Euro woes

Source: TradeStation

FIGURE 6: CANADIAN DOLLAR

As is the case with other “commodity currencies,” many analysts see gains for the Canadian dollar in the coming months, and a potential drop in the USD/CAD rate below 1.00.

Source: TradeStation

10

With the EUR/USD trading around $1.220 at the beginning of June, currency analysts say the downtrend is likely to continue. “The Euro should continue to flounder and falter,” says Brian Dolan, chief currency strategist at Forex.com. “Into the end of the year, the Euro is likely to see further readjustment.” He targets $1.15 as a year-end objective, and adds “that risks are to the downside.” In the short-term, BNY Mellon’s Woolfolk notes currency players are eyeing the Euro’s January 1999 “launch rate” of 1.1800. “There will be pullbacks and profit-taking, but that is a reasonable objective, near term,” Woolfolk says. Galy says his firm’s fourth quarter 2010 target for the year is $1.08. “The Fed will tighten in mid-2011, but the Eurozone will not tighten in 2011,” he explains. “[Interest-rate] differentials will widen.” There’s another, perhaps longerterm, milestone looming below the 1.1800 level, though. “We are headed to parity (1.00) over the next two to three years,” Woolfolk says. Wells Fargo’s Serebriakov agrees. “We certainly see the Euro, perhaps one to two years from now, closer to June 2010 • CURRENCY TRADER

parity with the U.S. dollar. But that is not the forecast for this year.”

Commodity currencies Another theme currency analysts see playing out in the second half of the year is the potential for commodity currencies, such as the Canadian dollar (CAD), Australian dollar (AUD), and New Zealand dollar (NZD), to perform well. Both the New Zealand and Australian currencies pulled back dramatically in May. “We are in the midst of a position flush-out as investors reduce [risk] exposure,” says Todd Elmer, Citi currency strategist. “But this will be a buying opportunity for currencies like the Canadian dollar and the Australian dollar.” Elmer expects the Canadian and Aussie dollars to outperform in the months ahead “once risk appetite stabilizes,” citing “more vigorous recoveries, greater sensitivity to a pickup in global growth, and better fiscal positions” than other industrialized countries. Brian Kim, currency strategist at UBS, sounded a similar note. “In the second half, we think the commodity currencies will do well,” he says. “Several of those countries, such as Canada and New Zealand, will be among the next wave of policy rate hikes, which should give some strength to those currencies.” “I think the global recovery is still intact, which is likely to benefit commodity currencies,” adds Forex.com’s Dolan. In addition to commodity exports, bullish interest-rate differentials will buttress the commodity currencies in the second half. As of late May, Australia was leading the major central banks with a 4.50-percent lending rate. “The RBA (Royal Bank of Australia) has been at the forefront of central banks willing to dial back monetary stimulus, as it has raised its key lending rate 150 basis points (1.5 percent) since this past October,” wrote Wells Fargo economists at in their May Global Chartbook. “With inflation currently in the upper half of the bank’s target range, we think the RBA will likely take a breather at its June meeting before considering another rate hike.”

The Bank of Canada (BOC) initiated a rate-hike cycle on June 1 by raising its overnight rate .25 percent to .50 percent. Subsequent BOC meetings are scheduled for July 20, September 8, October 19, and December 7. New Zealand’s central bank lending rate stands at 2.5 percent. The Reserve Bank of New Zealand is scheduled to meet on June 9. Analysts expect the RBNZ to embark on a tightening cycle in the second half of this year, which should support the currency. Some analysts also say the May wash-out may have created good buying spots. “The market mayhem brought us down to big levels in the commodity currencies,” Dolan says. “The 77.00-82.00 area is attractive in the Aussie/ dollar.” He is targeting gains toward 92.00-95.00 in the Aussie/dollar pair by year-end (Figure 5). For the Canadian dollar, Dolan sees 1.07001.100 as a potential sell zone, with a target of .9900-.9700 by year end (Figure 6).

“The dollar should do well against the majors, but will be weaker against emerging currencies, especially Asian currencies, such as the Indian rupee and Korean won.”

CURRENCY TRADER • June 2010

Not a golden opportunity? For a completely different, longer-term perspective, Miller Tabak’s Roth note the U.S. dollar and the Euro have both declined a great deal vis-à-vis gold. “I don’t think either currency is very attractive longterm,” he says. “The fact that gold has made new highs in terms of the pound, the Euro, the Swiss franc and the dollar shows that a lot of investors don’t want to own any of these currencies.”

Caution advised Financial market conditions are jittery and volatile as we enter the summer months. “Right now a lot of people are going with the short-Euro trend,” UBS Kim says. “It’s tough to fight the trend. But you have to be cautious near term.” BNP Paribas Galy also warns currency traders to be “extremely prudent. Be very tactile, because trends don’t last very long. Don’t be highly leveraged.” ›

11

On the Money On The Money

The world is not flat Feedback effects and self-fulfilling prophecies set up interesting scenarios for the Euro and other markets. By Barbara Rockefeller

Oil is up because the dollar is down, or so say the flatearthers. Gold is up and equities are down because of sovereign risk in Europe. The world is flat and everything is connected or correlated to everything else, at least in the world of international finance. It’s convenient shorthand — just look at the price of oil and you know, or think you know, where the Euro/dollar pair is priced, or soon will be. Poppycock. Yes, it’s true the near-instantaneous availability of news and price information has changed the trading landscape, but it hasn’t changed the laws of supply and demand or the rules governing human behavior;

traders are still human beings, however technically wellequipped. The world is flat and everything is related to everything else only if you are very short-sighted.

The risk angle

We used to live in a two asset-class world. When stocks fell or became overly volatile, investors demanded bonds, driving the price up and the yield down. Traders could easily anticipate this risk-appetite/risk-aversion behavior. Sometimes what moved the markets could be surprising, but at least the logic was clear. Now other commodities are being treated the same way — as a proxy for risk appetite or risk aversion — and it upsets the analytical apple cart. Figure 1: FEAR AND THE AUSSIE DOLLAR Take the Australian dollar. When Sell-offs in the AUD/USD pair have been driven more than once by fear rather Chinese and other Asian demand for than fundamentals. commodities rose during the 2000s, Australia was the obvious beneficiary. In addition, Australia did not suffer much from the sub-prime fallout, so it did not need emergency pumppriming or draconian interest-rate cuts. Australia has a sophisticated and well-managed central bank that not only maintained higher interest rates than the rest of the developed world throughout the 2008-2009 crisis, but was the first G7 country to raise rates in 2009. The Reserve Bank of Australia (RBA) adopted inflation targeting in 1993 and has achieved credibility on that measure. A data box on the RBA Web site shows the cash rate (4.5 percent) and inflation rate (2.9 percent) as the top entries. The higher rates in Australia, of Source: Chart — Metastock; data — Reuters and eSignal course, were the underlying reason

12

June 2010 • CURRENCY TRADER

Figure 2: GOLD AND RISK

The price of gold is a function of sovereign risk fear, even when the name of the sovereign changes.

for the carry trade against many other lower-yielding currencies, especially the Japanese yen. The rise in risk aversion from the sub-prime crisis in 2008 and now the European sovereign risk crisis would naturally cause a pullback in the AUD against all the carry trade currencies. The actual pullbacks, however, appear excessive given the excellent fundamentals behind the AUD, especially the enormous interest-rate advantage. In Figure 1 the AUD/USD pair rose from a low of .4778 in April 2001 to a high of .9849 in July 2008, or a rise of more than 100 percent. But when the Lehman crisis started affecting all classes of financial instruments in September 2008, the AUD/USD rate fell to a low of .6009 by October, a 40percent drop in three months. Note that the drop exceeded the 62-percent Fibonacci retracement level, by the way, but failed to reach the 100-percent retracement level. In May 2010 something similar unfolded — a 10 percent drop from the November 2009 high at .9406 to .8088 as of May 21, 2010. So far this has been a 38-percent retracement. Should we expect another drop of more than 62 percent as we saw in 2008? That would take the AUD to 73.14. The point here is the AUD is being governed by risk aversion alone, with no weight given to the commodity outlook or the interest-rate differential, both of which confer tremendous real advantage. If the market is being driven by fear alone, we must say it is irrational. Fear is more “real” than true economic demand for commodities and higher yield. In a yield-starved world, this is irrational, indeed. If we need to be able to measure

CURRENCY TRADER • June 2010

Source: Chart — Metastock; data — Reuters and eSignal

Figure 3: THE EURO AND GOLD

During the week the Euro and gold both started correcting upward, no new development in the European sovereign-debt saga justified a rise in either market.

Source: Chart — Metastock; data — Reuters and eSignal

13

On the money

fear to forecast currencies, let’s take a look at gold. Gold is the quintessential proxy for risk aversion. From 2005 to the end of 2009, gold rose alongside the Euro — a positive correlation (Figure 2). This was universally interpreted as a sign gold was a substitute for the falling dollar and rising U.S. sovereign risk — the risk that Fed money creation would inevitably lead to inflation. But suddenly the Greek debt crisis catapulted Europe to the top of the sovereign-risk pile, and today there’s an inverse relationship between gold and the Euro instead of the inverse relationship between gold and the dollar. So far, so good; we can accept a switch in focus. But note again gold fundamentals, such as the cost of mining, supply, central bank sales, or demand for jewelry in India — are at best gnats. The price of gold is a function of sovereign risk fear, even if the name of the sovereign changes. The traditional supposed driver of gold, inflation, is nowhere to be seen. The Euro and gold should, therefore, be moving in lockstep — both symbolize sovereign risk. The Financial Times reported in May that Europeans are buying gold coins at an unprecedented pace — foundries are working around the clock and exports from the U.S. to Europe are high. Figure 3 affirms the price of gold denominated in Euros tracked the EUR/USD rate very closely since the beginning of the year, but it is an interactive relationship. If you examine the chart closely, you will see times when gold

was falling and it took a day or two for the Euro to catch up, or the Euro dragged gold the other way, as was the case on May 10. In other words, the relationship between gold and the Euro has taken on a life of its own, like Frankenstein. During the week the Euro and gold both started correcting upward, no new development in the European sovereign-debt saga justified a rise in either one. In fact, profit-taking in gold that started early in the week seems to have been one of the key triggers for the Euro to make a bottom, however temporary it turns out to be. Gold traders decided to take profits and it aided the Euro? Yes. This new development suggests the new “robotrading” poses a big risk to anyone trying to trade the FX market in a rational way. We are shocked, shocked, to find there is gambling going on here.

The Euro scenario

Feedback effects between gold and the Euro, or between equity indices and currencies, raise the risk for everyone. An excessively volatile move in one security can feed an overreaction in another, which then jumps to a third. Another example might be the Shanghai Composite Stock Index bear market arising from fear of Chinese tightening, which leads to commodity price drops, which leads to declines in resource stocks in Japan, which leads to a drop in the Nikkei, which leads to a stronger yen that is itself under siege from position-paring in carry trades triggered by the same drop in commodities. Because all these markets are huge, Figure 4: FIBBING THE EURO the result could be tsunami-level The EUR/USD has already broken two big support lines and is at the 50-percent waves of selling followed by a more retracement level. Parity (1.00) is highlighted red. If the previous intermediate modest creeping back as traders see low at 1.1672 breaks, parity may be an irresistible target. oversold conditions. It’s no wonder Germany instituted a ban on naked short sales of European bonds and the equities of important financial institutions, the U.S. is changing circuit breakers in equities, and there is talk of intervention in FX. We do not think speculation is a dirty word, but market linkage and automatic correlation trading are making speculation more dangerous than ever — and all divorced from the economic reality of supply and demand. If you were not a technical trader to begin with, you had better become one now. That would be for short-term trading, by which we mean a holding period of a day or less. For longerterm trading, the macro big picture Source: Chart — Metastock; data — Reuters and eSignal factors should still hold sway. For

14

June 2010 • CURRENCY TRADER

EMU countries to guarantee the debt of a member is an extraordinary move that violates both the spirit and the letter of the Maastricht Treaty — and demonstrates the depth of the commitment to the concept of the Eurozone. Most analysts think it will not work. Taking on new debt promotes growth only if the money is applied to a productive use, such as improving communications or transportation — not if it’s used to pay for social services. The restructuring and thus, by definition, partial default by Greece and perhaps some other countries is almost inevitable. Sentiment toward the Eurozone and the Euro has not been this negative since the early days in 1999 when the currency was first launched. Remember the Euro fell from 1.1719 on Day One to the all-time low 0.8229 in October 2000. Only two outcomes are possible: The EMU devises credible new institutions to enforce the original fiscal probity concepts, or Greece is expelled from the EMU. At the end of May 2010, we are only at Chapter 2 or 3 of a saga that will run to 20 or more chapters. The Euro may revive before we know the ending, and probably will rally several times before it’s over, but overall, we have no reason to suppose the trend now in place will end anytime soon, and that’s despite any other development in stocks, bonds or commodities. We venture this forecast because the people who determine the compositions of the really big portfolios are treasury committee members selecting the composition of national reserves, and sovereign wealth funds that allocate money to different currencies for long-run return and stability of returns. An FX trader may feel compelled to jump if gold or oil changes levels, but we assume serious asset managers at the national level are not so flighty. We concede this is a very big assumption, but we would bet that no reserve or sovereign wealth fund manager has been among those dumping Australian dollars. How far can the Euro go? We CURRENCY TRADER • June 2010

dislike Fibonacci retracement lines because there is no reason to suppose human behavior is dictated by a number sequence (why this one instead of any of the many other interesting number sequences?), except when the humans in question expect those numbers to materialize, forming a self-fulfilling prophecy. The downfall of the Euro may be the ideal chart for the Fibonacci sequence to play out. Figure 4 shows the EUR/USD has already broken two big support lines and is at the 50-percent retracement level. If it continues downward, as we expect, it may reach 1.1236, the 62-percent retracement level, or the previous intermediate low of 1.1672 from November 2005 (green), or the starting point, 0.8229 from October 2009. In between is the always interesting number of 1.00, or parity (red). If the previous intermediate low at 1.1672 breaks, parity is the irresistible, magnetic number. › For information on the author, see p. .

15

Spot check

Euro/U.S. dollar Minor signals may point to a bounce in the relatively near future, but the pair has a couple of big monkeys clinging to its back.

Review of Figure 1’s monthly chart shows the EUR/ USD pair punching through its 2008 and 2009 lows with the next obvious downside chart-based target the November-December 2005 lows around 1.1640-1.1660 (which, if reached, would fulfill the prediction of a retracement to the 1.1800 launch level). The 1.2000 zone the pair descended in May to was arguably a significant target, as this general level encompasses the pair’s initial high in late 1998, the mid-2003 high, and the 2004 and 2005-2006 consolidations. (Fibonacci fans will no doubt point out 1.2100 is approximately a 50-percent retracement of the rally from the October 200 all-time low to the July Figure 1: THE EURO’S BIG PICTURE 2008 all-time high.) The EUR/USD pair punched through its 2008 and 2009 lows in May 2010. The next downside chart target is the November-December 2005 lows around Most analysts are, not surprisingly, 1.1640-1.1660. foreseeing greater losses for the Euro over the next couple of years. Let’s look at where the Euro has been and see if it sheds any light on the probability of these various targets getting hit.

After dropping below its May low vs. the U.S. dollar on June 1 — to 1.2110, its lowest level since April 13, 2006 — the Euro has many forex watchers wondering how much lower it can go. Projections of a drop to the Euro’s January 1999 official “launch” price of 1.1800 and the 1.0000 parity level with the dollar have been thrown into the ring mostly because they are there — they are psychologically compelling “headline” numbers. (Few people have yet had the nerve to seriously argue the year-2000 low of .8227 is in danger of being tested any time soon.)

Extreme action

Source: TradeStation

16

One thing Figure 1 makes perfectly clear is the Euro’s roller coaster ride over the past two years has no precedent in the currency’s brief lifetime. From late 2000 to early 2008 the Euro was on a one-way bullish track, with the 2004-2005 aborted top/consolidation the only significant roadblock. The Euro nearly doubled in value against the dollar, gaining 95 percent low to high. Table 1 shows the EUR/USD pair tumbled a little more than 23 percent Month 2010 June 2010 • CURRENCY TRADER

Table 1: THE BIG MOVES July 2008 high Price 1.6039 Oct. 2008 low 1.2729 -26.00% May 2010 close 1.2305 -30.35%

Nov. 2009 high 1.5143

from its November 2009 high to the May 2010 close — a move that would have been unprec-23.06% edented if not for the pair’s 30-percent decline The EUR/USD’s early 2010 sell-off would have been exceptional had from its July 2008 all-time high to the October it not been for the even larger, faster collapse in July-October 2008. 2008 low. The slightly lower monthly low established on Until 2008, the Euro’s biggest decline vs. the Euro was June 1 was the seventh consecutive lower monthly low, the 30.28-percent drop from the January 1999 open to the something that has occurred less than a handful of times October 2000 low. Table 1 shows the 2008 high-to-low colover the past decade: in July 2001, when the EUR/USD lapse was on par with 1999-October sell-off — except that pair rallied to a higher monthly high and close, then conthe latter move took nearly two years to unfold while the solidated for several months before embarking on a strong former took only three months. The November 2009-May uptrend in 2002; in July 1999, when the pair again formed 2010 drop was smaller on a percentage basis, and has an outside month, consolidated for three months, then lasted a little longer than the 2008 move, but it is still the turned lower again. In May 2000 the pair marked its eight second-biggest drop on record for the EUR/USD pair since consecutive lower monthly low. It gained ground in June before turning lower to form the October 2000 all-time low. 2001. Table 2 shows how much the EUR/USD pair would May was the sixth consecutive month of lower highs, have to drop (measured from several notable highs and lows, and closes for EUR/USD, a feat the pair accomlows) to reach various milestones that have been menplished only one other time, in June 1999. Finally, the Euro tioned in the press. The January 1999 open (launch price) dropped more than 7 percent from the April low to the of 1.1800 isn’t too far below the May 2010 closing price May low, which it has done only one other time — from (-4.10 percent), but the 1.00 parity level would constitute September to October 2008. another decline of nearly 20 percent. A move to the all-time Although it might be tempting to note the bullish price low would require a 33-percent decline below the May action that has, at least temporarily, followed many of close, and would constitute a nearly 50-percent decline these events, there are simply too few of them to use as from the all-time high. models for future price behavior—the unavoidable probSuch moves are obviously not out of the question, lem when analyzing extreme market events. We are left although they are unlikely to occur overnight and without to invoke abstracts, such as the observation that extreme intervening upside action. moves tend to be at least partially reversed; but such continued on p. 21

observations, while true, make poor trading guidelines.

Table 2: HOW FAR THE EURO WOULD HAVE TO FALL July 2008 high Oct. 2008 low Price 1.6039 1.2729 1.1800 -26.43% -7.30% Launch Parity 1.0000 -37.65% -21.44% All-time low 0.8227 -48.71% -35.37%

Nov. 2009 high 1.5143 -22.08% -33.96% -45.67%

May 2010 close 1.2305 -4.10% -18.73% -33.14%

The January 1999 (launch) rate isn’t too far below the May 2010 closing price (-4.10 percent), but the 1.00 parity level would constitute a decline of nearly 20 percent.

CURRENCY TRADER • June 2010

17

TRADING strategies

Taking advantage of the Asian trading session Breaking down the range characteristics of the Asian forex session produces some surprisingly reliable trading statistics. By Daniel Fernandez Two of the most important questions in trading are whether exploitable inefficiencies develop in the markets, and if such inefficiencies persist as a market evolves. A particularly interesting case involves the possibilities associated with low-volatility periods during which currency prices trade in limited ranges. This article explores this issue in the context of the Asian trading session (11 p.m. to 7 a.m. GMT) from 2006 to 2010 in the Euro/U.S. dollar (EUR/ USD), Euro/British pound (EUR/GBP), and Euro/Swiss franc (EUR/CHF). These currency pairs were chosen because of their relative inactivity during the Asian session, none of them containing a currency native to this trading period. By evaluating certain characteristics of these currency pairs during the Asian session over a four-year period we can determine whether their character has changed over time, or if they behave in a predictable manner that could be exploited in trading.

Figure 1: OVERALL ASIAN SESSION RANGE

The average high-low ranges for each six-month period.

18

Analyzing the Asian session

The study was conducted using hourly data from Metaquotes from January 2006 to December 2009. (To ensure data quality, this data was compared to comparable data from Dukascopy and Oanda; no significant differences were detected.) Two key characteristics of a specific forex trading session are 1) its overall range (high – low for the session) and 2) the “absolute movement” within the trading session (the absolute value of the open – close for the session). Let’s divide the 2006 to 2010 price data into six-month sub-periods and calculate the overall range and absolute movement averages for the three currency pairs. Figure 1 shows the average range values (in pips, .0001) and Figure 2 shows the average absolute movement values. The results are not surprising. The highest values in both categories belong to the most liquid pair, EUR/USD, and the open-close differences are quite low for all the pairs, reflecting the low volatility of the Asian session. However, the results show the Asian session’s characteristics have changed substantially since 2006 in absolute pip terms: In Figure 2, for example, the lowest average absolute movement value for the EUR/USD was 14 pips, which increased to a maximum of 53 pips during the July-Dec. 2008 period, in line with an average overall range that increased from a minimum of 31 to 106 pips in Figure 1. The standard deviation and average figures in Table 1 show all three currency pairs have undergone significant changes during the Asian session over the years; exploiting any movement using absolute pip values would most likely not be possible over the longterm. June 2010 • CURRENCY TRADER

Table 1: ASIAN SESSION IN PIPS

However, the absolute movements and overall ranges increased and decreased in line with market volatility, with the second half of 2008 producing the highest average values for all the currency pairs. Let’s see what analyzing the range and absolute movement in the context of changing volatility does to the results.

Adjusting for volatility

Range avg.

Range StD

Absolute movement avg.

Absolute movement StD

EUR/USD

60

28

30

15

EUR/CHF EUR/GBP

38

17

17

9

28

14

12

8

The average range and absolute-movement figures for the three currency pairs expressed in pips.

Figure 2: ABSOLUTE (OPEN-CLOSE) MOVEMENT

The average absolute movement (the absolute value of the open minus the close) for each six-month period. The EUR/USD pair had the biggest overall ranges (Figure 1) and open to close moves.

Using the 14-period daily average true range (ATR) to measure volatility, each currency’s range and absolute movement figures were divided by their respective 14-day ATRs to express these figures as a percentage of the ATR. Then, the results were averaged in sixmonth periods as detailed above: 1. The average 14-period daily ATR is calculated at the beginning of each Asian trading session (i.e., each day). 2. The range and absolute movement values for each Asian session are calculated in pips. 3. The values from step 2 are divided by the 14-day ATR calculated at the beginning of each corresponding session. 4. All the ATR-adjusted values from step 3 are averaged for a given sixmonth period.

Figure 3: SESSION RANGE AS PERCENTAGE OF ATR

The average high-low ranges for each six-month period are shown here as percentages of the 14-day average true range.

The results of these calculations are shown in Figure 3 and 4 (range and absolute movement, respectively). What we see now is completely different from the absolute pip-value results in Figures 1 and 2. The highest average range as a percentage of ATR belongs to the EUR/CHF pair for most of the analysis period (Figure 3), while the highest average absolute movement did not belong exclusively to the EUR/USD, but CURRENCY TRADER • June 2010

19

On the money trading strategies

Figure 4: OPEN-CLOSE MOVEMENT AS PERCENTAGE OF ATR

The average absolute movement for each six-month period as a percentage of each currency pair’s 14-day average true range.

Table 2: ASIAN SESSION AS PERCENTAGE OF ATR Range avg.

Range StD

Absolute movement avg.

Absolute movement StD

momentarily passed to the EUR/CHF pair in the second half of 2006. However the most important finding is shown in Table 2: The standard deviations of these ATR-adjusted values are much lower than those in Table 1, giving us a much more reliable tool for predicting average Asian-session currency movement during a given period. Whereas the standard deviations in Table 1 were approximately 45 to 50 percent of the average ranges, in Table 2 they were only 6 to 7 percent. It’s also important that the averages and standard deviations for the range and absolute movement in Table 2 are almost identical for all three currency pairs, indicating that by taking volatility into account, we are better able to identify a fundamental aspect of market behavior.

Context is everything

This information can be used to design systems around the Asian 45 3 22 3 EUR/USD session that could trade market inefficiencies inherent to this time period. 48 3 21 3 EUR/CHF Even though the absolute pip values 45 3 19 2 EUR/GBP indicated significant variation in the The average range and absolute-movement figures for the three currency pairs Asian session’s characteristics over are expressed here as a percentage of the 14-day average true range. time, adjusting the currency pairs’ behavior taking volatility into account eliminated most Related reading of this variability and left us with values that have a Other articles: Daniel Fernandez articles: significant predictive component, which means they “Breakout timing” “Adaptive FX money management” are promising candidates for Currency Trader, July 2009 Currency Trader, November 2009. developing trading ideas that This article shows how a money-manAre particular times of the day, month, or exploit predictable ranges. agement system that adjusts trade size year better than others for trading certain For example, if the EUR/ strategies or currencies? These tests indibased on market volatility can transform USD reaches its highest ATRan unprofitable forex trading strategy into a cate some momentum signals might have adjusted range reading, you profitable approach. better odds of success depending on the may be able to enter a trade time of month they occur. that targets a close value “Using dynamic look-back based on the average absoperiods in FX systems” “Time-zone trading in the Euro” lute movement value. This Currency Trader, May 2010 Currency Trader, June 2007 type of trading idea will be A robust approach to making a trading Intraday trends in forex often begin when system dynamic improves profitability and the markets shift from one regional trading explored in a future article. › shrinks drawdowns.

20

center to another. Historical testing uncovers several promising price moves in the Euro currency futures.

For information on the author, see p. 4.

June 2010 • CURRENCY TRADER

Spot Check continued from p. 17

Figure 2: BEARISH MOMENTUM ON DECLINE?

As of June 1, the EUR/USD pair had mostly moved sideways for two weeks, with one push to the upside, and a push to a slightly lower low on June 1.

Overarching issue The fact that, as of June 1, the EUR/ USD pair had essentially consolidated for two weeks without falling to a dramatically lower low might be considered evidence of waning bearish momentum (Figure 2). The pattern itself had mixed performance over a relatively small (fewer than 20) samples over the past 10 years. As a final note, what looked to be a energetic intraday turnaround for the Euro and the stock market — both rallied sharply from negative territory in early trading to go positive on the day — fizzled by the end of the day (Figure 3), which points to an unavoidable truth about the Euro and the dollar these days: For better or worse, the EUR/USD pair is still very much in the grips of the reactionary stock-driven relationship established in the 2008-2009 financial crisis — that is, turmoil in the global equity markets drives money into the U.S. dollar as a safe-haven, which drives down the EUR/USD rate. Any doubt this relationship was fading disappeared in May — and was reinforced on June 1, for good measure. Barring a surprise development that will convince investors European debt issues have worked themselves out, a rally in equities stands to be the Euro’s best friend in the near future. ›

Source: TradeStation

Figure 3: EURO AND THE STOCK MARKET

The EUR/USD pair (top) mirrored the stock market’s (represented here by the E-Mini S&P 500 futures, bottom) ups and downs very closely on June 1.

Source: TradeStation

CURRENCY TRADER • June 2010

21

TRADING strategies Advanced strategies

Colombian peso, the richest kind Getting a handle on a currency in a country with a largely “off-the-books” economy is difficult, but in this case the driving force is Washington D.C. BY Howard L. Simons

Certain European nations, particularly France and Italy, have a long tradition of businesspeople keeping three sets of books: one for themselves, one for their partner, and one for the tax authorities. This culture of off-the-books accounting for tax purposes led to the now-forgotten “mattress trade” in the Euro between 2000 and 2002. The common currency came into existence at just over 1.17 dollars per Euro and slid down toward 0.82 by October 2000; it did not embark on a multi-year bull market until May 2002. The reason for the Euro’s early weakness was attributed by many to the selling of “legacy” currencies held as cash for dollars prior to those legacy coins and bills being taken

out of circulation at the start of 2002. French francs, Italian lira, Spanish pesetas, Portuguese escudos and the rest had to be pulled out from literal and figurative mattresses, converted into some other form of cash, and the dollar was the refuge of choice. Such is the power of an underground economy. Of course, that trade cuts both ways. Legend has it counterfeit C-notes, $100 bills with the new enlarged portrait of Benjamin Franklin and other anti-counterfeiting devices, were being offered for sale on the streets of Bangkok before they were issued for circulation in the U.S. A second observation in this regard was counterfeit $100 bills were the currency of choice in Russia during the tumultuous 1990s. By Gresham’s Law (bad money driving out good), the real $100 notes were FIGURE 1: PESO LARGELY INDEPENDENT OF INFLATION hoarded and the counterfeits were The official Colombian CPI has increased at an average annual rate of 9.58 passed into circulation. It is indeed all percent since January 1994, while the U.S. figure over the same period is 2.455. about the Benjamins. Although this implies the COP should have weakened against the USD over this period, it didn’t — thanks to the Fed’s low-interest-rate policy since 2003.

The velvet underground

If you play a word association game with “Colombia,” you might get more than a few giggles. Ever since the heyday of Pablo Escobar and his Medellin cartel, the country has been associated with the large, um, “pharmaceutical precursors” sector. The efforts by the Bogota government and the U.S. Drug Enforcement Administration to control this trade have led to an ongoing lowlevel war with the FARC guerillas who seem to take special joy in blowing up crude oil pipelines in Colombia’s Caño Limòn oilfields. The drug traffic raises the relative size of the illegitimate sectors of the Colombian economy to the legitimate ones by increasing the former and decreasing the latter. The 22

June 2010 • CURRENCY TRADER

Figure 2: INSURANCE ON THE PESO RISES AND FALLS with it

Colombian peso excess volatility for a USD holder has tended to rise and fall in the general direction of the currency and without the typical lead time evident in other currencies.

extent to which this is true can be illustrated by the heading for Colombian GDP data on Bloomberg: “GDP Excluding Drug Crops.” Truth be told, any economic data from countries such as Afghanistan, now alleged to provide more than 90 percent of the world’s opium poppy, should be taken with a modicum of skepticism. A World Bank official regarded as an expert on Third World debt was asked in 1976 by a graduate student in international economics how he arrived at certain figures. He pointed up to his office ceiling. Puzzled, the student pressed onwards. The reply came, “I was pointing at that light. When no actual data are available, I stare up at that light, think about what information I have and arrive at what the debt level should be.” Some early life experiences are more indelible than others.

Figure 3: PESO NOW MOVING WITH ABSOLUTE INTEREST RATE

After June 2000, the COP generally moved parallel to the interest-rate gap for another six years. That connection weakened and broke during the financial crisis, but resumed after the bear-market low and the introduction of quantitative easing in March 2009.

Scratch the commodity connection

We recently explored some currencies such as the South African rand or Chilean peso (see “Cry, the beloved currency” March 2010, and “Chilean peso makes exceptions to currency rules,” May 2010). Those were easy to do as the gold and copper markets, respectively, are transparent. While Colombia is a large exporter of coffee, cut flowers, emeralds and other gemstones, and (increasingly) crude oil, no one pretends it is the dominant export. We will not be able to establish a commodity link for the Colombian peso (COP) here. We can, however, infer certain factors of economic and financial success for the country. The official consumer price index (CPI) for Colombia has increased at an average annual rate of 9.58 percent since January 1994 (Figure 1); this compares to an average annual rate of consumer inflation in the U.S. of 2.455 percent over the same period (please refer to previous anecdote on the credibility of numbers). Given the role of relative inflation expectations in the interest-rate parity model, we should expect the COP to CURRENCY TRADER • June 2010

have weakened against the USD over this period. We would have been wrong. The Federal Reserve’s policy of low interest rates since 2003 put the COP in an uptrend between April 2003 and May 2008. That trend broke when the financial crisis of 2008 led to massive dollar buying and shedding of risky assets around the world, but it resumed after the Fed embarked upon quantitative easing in March 2009. Some might consider this picture a damn23

On the money advanced strategies

Figure 4: peso BECAME A CARRY TRADE AFTER MID-2006

The rate of return on the COP carry trade has moved parallel to the relative performance of Colombian equities to U.S. equities.

plicable. A simple spread between sixmonth deposit rates in both countries is revealing for one factor, and that is the huge interest-rate gap between the start of 1999 and the middle of 2000. Colombian short-term rates were in excess of 30 percent at that point. As the interest-rate gap narrowed, the COP weakened as those seeking yield went elsewhere. After June 2000, the general course of the COP moved parallel to the interestrate gap for another six years. The connection weakened and broke during the financial crisis, but resumed in force after the bear market low and arrival of quantitative easing in March 2009. ing indictment of the Federal Reserve’s money-solveseverything approach, and who are we to disagree?

Pricing the risk

We have seen across a wide range of currencies how “excess volatility,” or the ratio of implied volatility on three-month non-deliverable forwards to realized highlow-close volatility, minus 1.00, tends to lead movements in the currency by three months on average. This makes perfect sense as the measure indicates which party in the trade has the higher level of anxiety, and in which direction. The relationship is rather different for the COP, however. In this case the COP excess volatility for a USD holder has tended to rise and fall in the general direction of the currency and without the normal lead time (Figure 2). When the COP strengthens, put option buying rises and vice-versa. Even though the COP has put in some prolonged rallies since 2003, the market never embraces COP strength, only COP weakness.

Interest rates not important

Just as we saw for the Chilean peso two months ago, the relatively illiquid interest-rate arbitrage market for Colombian deposits make a normal interest rate analysis for the COP difficult. We cannot compare relative yield curves for the COP and the USD by constructing forward rate ratios (FRRs) for each; the key FRR for currencies between six and nine months, the rate at which we can lock in borrowing for three months beginning six months from now divided by the nine-month rate itself, is inap-

24

Relative asset returns

Those high interest rates should provide a tip-off to which way the USD carry to the COP has been moving over the years. Even if the COP spot rate weakens, the interestrate spread should be more than enough to compensate. This has been especially true since U.S. short-term rates were driven near zero. The rate of return on this carry trade has moved in parallel to the relative performance of Colombian equities to U.S. equities expressed in USD terms (Figure 4). Here the numbers are a little inspiring. In USD terms, Colombian equities have outperformed American stocks at an annualized rate of 26.1 percent since December 2008. The annualized return on the carry trade has been 15.9 percent, with the spot rate accounting for 11.1 percent of that. As it turns out, a brave investor who borrowed the USD and who either lent in the COP or bought Colombian equities at the time of the October 2008 low was rewarded handsomely. The action was undertaken without comment at the time and was assigned the label of “brave” or “foolish” only in retrospect. Can the dual success of the COP and returns on COPdenominated assets continue? The answer will come not from Colombia but rather from Washington, D.C. If the Federal Reserve persists in its manic monetary policies, the success could endure for a long time. Perhaps someone in Bogota or even in Medellin is staring at a picture of Ben Bernanke and wondering, “What’s he smoking?” › For information on the author, see p. 4.

June 2010 • CURRENCY TRADER

CURRENCY FUTURES SNAPSHOT as of 5/28/10 The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of each market’s liquidity, direction, and levels of momentum and volatility. See the legend for explanations of the different fields.

Contract

EUR/USD JPY/USD

GBP/USD AUD/USD CAD/USD CHF/USD

MXN/USD

Symbol Exchange Volume

10-day move/% rank

256.5

BP

CME

145.8

132.0

-0.48% / 10%

-5.14% / 75%

-4.41% / 35%

.14 / 10%

126.3

-1.83% / 42%

-3.26% / 50%

-2.06% / 75%

.51 / 62%

AD

CD SF

MP

DX

E-Mini EUR/USD

ZE

NE

CME CME CME CME ICE

CME

CME

156.8 140.9 110.9 62.2

139.0 126.1 46.4

36.8

108.1

11.4

21.0

30.6 7.4

40.6 5.6

1.56% / 27%

-4.31% / 44% -2.24% / 20% -1.99% / 31% 0.34% / 0%

-3.94% / 47%

-0.86% / 10%

3.44% / 67%

-8.26% / 65% -6.91% / 94%

Volume: 30-day average daily volume, in thousands.

The “% rank” fields for each time window (10day moves, 20-day moves, etc.) show the percentile rank of the most recent move to a certain number of the previous moves of the same size and in the same direction. For example, the % rank for the 10-day move shows how the most recent 10-day move compares to the past twenty 10-day moves; for the 20-day move, it shows how the most recent 20-day move compares to the past sixty 20-day moves; for the 60-day move, it shows how the most recent 60-day move compares to the past one-hundred-twenty 60-day moves. A reading of 100% means the current reading is larger than all the past readings, while a reading of 0% means the current reading is smaller than the previous readings.

Volatility ratio/% rank: The ratio is the short-term volatility (10-day standard deviation of prices) divided by the long-term volatility (100-day standard deviation of prices). The % rank is the percentile rank of the volatility ratio over the past 60 days.

.56 / 55%

-6.90% / 91%

.66 / 75%

-7.11% / 97%

.21 / 10%

-2.06% / 85%

.47 / 63%

-6.67% / 93%

-2.73% / 50%

.65 / 87%

5.18% / 81%

-7.05% / 83%

7.34% / 91%

.22 / 35%

-9.91% / 98%

Top 10 currency traders managing more than $10 million as of April 30, ranked by April 2010 return.

OI: 30-day open interest, in thousands.

60-day move: The percentage price move from the close 60 days ago to today’s close.

-0.46% / 12%

.23 / 55%

Managed money: Barclay Trading Group’s currency trader rankings for April 2010

LEGEND:

20-day move: The percentage price move from the close 20 days ago to today’s close.

.22 / 55%

-4.38% / 50%

Note: Average volume and open interest data includes both pit and side-by-side electronic contracts (where applicable).

10-day move: The percentage price move from the close 10 days ago to today’s close.

-9.54% / 95%

Volatility ratio/rank

443.1

CME

-7.39% / 87%

60-day move/% rank

CME

JY

-0.51% / 5%

20-day move/% rank

EC

U.S. dollar index NZD/USD

OI

Rank Trading advisor

April return

2010 YTD return

$ Under mgmt. (millions)

4.33%

30.5

1.

Goldman Sachs (Fund. Currency)

13.12%

34.17%

3.

MIGFX Inc (Retail)

5.66%

17.12%

2. 4. 5. 6. 7. 8. 9.

24FX Management Ltd

FX Concepts (Multi-Strategy)

Gables Capital Mgmt (Global FX) Friedberg Comm. Mgmt. (Curr.)

3.64%

2769.0

2.98%

19.23%

70.4

2.58%

2.93%

3.24%

2.80%

Auriel Currency 2X Fund

2.29%

Excalibur Absolute Return Fund

13.0

10.79%

Quantica Capl (Diversified FX)

10. FX Concepts (GCP)

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

12.80%

557.4

2.25%

0.07%

10.1

5.97%

26.0

0.50%

143.0

6.38%

45.5

3323.0

Top 10 currency traders managing less than $10 million and more than $1 million as of April 30, ranked by April 2010 return.

Excel Capital Mgmt. (FX) D2W Capital Mgmt (Radical Wealth) Rove Capital (Dresden) Overlay Asset Mgmt. (Emerging Mkts) Armytage AAM (Asian Currency) Greenwave Capital Mgmt (GDS Alpha) Wooster Asset Mgmt (Portage Fund) BEAM (FX Prop) Greenwave Capital Mgmt (GDS Beta) Marathon Capital (System FX)

9.64% 9.60% 2.62% 1.95% 1.76% 1.42% 1.25% 1.13% 0.85% 0.43%

93.31% 29.51% 6.31% 5.35% 0.53% 2.42% 0.28% 3.23% 1.08% 2.08%

2.4 1.6 2.2 8.0 4.0 8.0 6.9 1.7 8.0 10.0

Source: BarclayHedge (www.barclayhedge.com). Based on estimates of the composite of all accounts or the fully funded subset method. Does not reflect the performance of any single account.

PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. CURRENCY TRADER • June 2010

25

TRADING STRATEGIES INTERNATIONAL MARKETS

CURRENCIES (vs. U.S. DOLLAR)

Currency

Current price vs. U.S. dollar

1-month gain/loss

3-month gain/loss

6-month gain/loss

52-week high

52-week low

Previous rank

2

Chinese yuan

0.146395

-0.03%

-0.06%

-0.03%

0.14760

0.1458

14

3

Hong Kong dollar

0.128175

-0.50%

-0.48%

-0.66%

0.129

0.1281

15

4

Thai baht

0.03071

-1.24%

1.54%

1.87%

0.03157

0.02866

11

5

Taiwan dollar

0.03098

-2.26%

-0.55%

-0.27%

0.03201

0.03007

9

6

Singapore dollar

0.705305

-3.34%

-0.50%

-2.51%

0.7326

0.6817

2

7

Brazilian real

0.53263

-6.44%

-2.43%

-7.77%

0.5882

0.478

3

8

Indian rupee

0.021035

-6.51%

-2.50%

-2.57%

0.02263

0.01988

4

9

South African rand

0.12583

-6.74%

-1.63%

-6.85%

0.1389

0.1187

13

10

British pound

1.433635

-6.78%

-6.19%

-13.92%

1.7042

1.4235

1

11

Canadian dollar

0.928665

-7.22%

-1.54%

-2.23%

1.0068

0.8527

5

12

Russian ruble

0.03175

-7.43%

-4.57%

-8.61%

0.03497

0.03007

8

13

New Zealand dollar

0.66339

-7.47%

-3.72%

-8.98%

0.7635

0.609

7

14

Swiss franc

0.86021

-7.72%

-6.75%

-13.59%

1.0087

0.8549

16

15

Euro

1.226035

-8.38%

-9.19%

-18.42%

1.5144

1.216

12

16

Swedish krona

0.124845

-10.35%

-9.73%

-14.17%

0.148

0.1228

10

17

Australian dollar

0.81505

-12.12%

-8.08%

-12.00%

0.9405

0.7702

6

Rank* 1

Country

Japanese yen

0.01114

As of May 26 *based on one-month gain/loss

Rank Country 1 2 3 4 5 6

Singapore Norway Hong Kong SAR Sweden Germany Taiwan Province of China 7 Netherlands 8 Japan 9 Switzerland 10 Canada 11 Korea

26

2008

Ratio*

25.122 41.978 157.079 11.947 7.606 -5.776

6.239 4.787 3.214 2.388 0.507 -0.62

36.188 83.825 29.296 37.279 245.722

19.222 18.59 13.618 7.783 6.69

2007

4.70%

-0.58%

-1.94%

ACCOUNT BALANCE

47.311 54.678 25.529 39.054 253.756

32.975 67.589 210.967 43.531 14.53 5.876

0.01179

0.01011

17

2009+

Rank Country

42.572 41.652 141.656 43.102 -36.132 42.668

Totals in billions of U.S. dollars *Account balance as percent of GDP +Estimate Source: International Monetary Fund, World Economic Outlook Database, April 2010.

33.838 52.901 23.373 25.781 160.627

12 13 14 15 16 17 18 19

United Kingdom Belgium Czech Republic Italy Australia United States Ireland Spain

2008

-40.725 -12.855 -6.669 -78.874 -46.683 -706.068 -13.886 -153.665

Ratio* -1.517 -2.539 -3.086 -3.418 -4.406 -4.889 -5.189 -9.592

2007

-75.483 9.956 -5.483 -51.691 -57.552 -726.572 -13.876 -144.435

2009+

-28.838 -1.254 -1.942 -71.27 -40.941 -417.999 -6.705 -74.136

June 2010 • CURRENCY TRADER

Rank

Currency pair

NON-U.S. DOLLAR FOREX CROSS RATES

1 Yen / Real 2 Pound / Aussie $ 3 Euro / Aussie $ 4 Pound / Franc 5 Pound / Canada $ 6 Franc / Canada $ 7 Euro / Franc 8 Canada $ / Real 9 Euro / Canada $ 10 Euro / Pound 11 Euro / Real 12 Aussie $ / Franc 13 Aussie $ / New Zeal $ 14 Aussie $ / Canada $ 15 Aussie $ / Real 16 Pound / Franc 17 Canada $ / Yen 18 New Zeal $ / Yen 19 Franc / Yen 20 Euro / Yen 21 Aussie $ / Yen

Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Country

JPY/BRL GBP/AUD EUR/AUD GBP/CHF GBP/CAD CHF/CAD EUR/CHF CAD/BRL EUR/CAD EUR/GBP EUR/BRL AUD/CHF AUD/NZD AUD/CAD AUD/BRL GBP/JPY CAD/JPY NZD/JPY CHF/JPY EUR/JPY AUD/JPY Index

Canada S&P/TSX composite Mexico IPC India BSE 30 South Africa FTSE/JSE All Share Germany Xetra Dax Switzerland Swiss Market Singapore Straits Times Hong Kong Hang Seng Australia All ordinaries U.S. S&P 500 UK FTSE 100 Brazil Bovespa Japan Nikkei 225 France CAC 40 Italy FTSE MIB

Country United States Japan Eurozone England Canada Switzerland Australia New Zealand Brazil Korea Taiwan India South Africa Rank 1 2 3 4 5

Symbol

Country U.S. Germany Japan Australia UK

May 26

0.020915 1.75895 1.50423 1.66664 1.54376 0.92629 1.425295 1.74355 1.320215 0.85516 2.301855 0.947505 1.228555 0.87766 1.530245 128.7 83.37 59.56 77.225 110.07 73.18

1-month gain/loss 11.90% 6.08% 4.26% 1.00% 0.48% -0.54% -0.71% -0.83% -1.25% -1.70% -2.07% -4.77% -5.03% -5.29% -6.07% -10.94% -11.39% -11.63% -11.83% -12.46% -16.06%

3-month gain/loss 1.88% 2.05% -1.20% 0.59% -4.72% -5.29% -2.61% 0.91% -7.76% -3.19% -6.92% -1.42% -4.53% -6.64% -5.79% -5.67% -0.95% -3.14% -6.19% -8.64% -7.54%

6-month gain/loss

GLOBAL STOCK INDICES

May 26

11,543.90 31,328.49 16,387.84 27,047.51 5,758.02 6,167.50 2,696.02 19,196.45 4,330.40 1,067.95 5,038.10 60,190.00 9,522.66 3,408.59 18,778.41

1-month gain/loss -6.00% -7.23% -7.65% -7.72% -9.07% -9.35% -10.21% -11.07% -11.86% -11.89% -12.44% -12.61% -14.72% -14.73% -17.58%

3-month gain/loss -0.74% -0.97% -0.25% 1.06% 2.85% -8.10% -1.99% -6.85% -6.90% -3.31% -5.91% -9.49% -5.96% -8.09% -10.87%

6.30% -2.18% -7.29% -0.37% -11.95% -11.62% -5.58% 6.01% -16.55% -5.23% -11.54% 1.86% -3.33% -9.99% -4.58% -12.19% -0.26% -7.13% -11.85% -16.77% -10.22%

6-month gain/loss 0.94% 2.89% -2.77% 0.08% 2.56% -1.84% -2.40% -13.57% -8.40% -2.16% -3.00% -9.34% 1.49% -7.36% -14.34%

GLOBAL CENTRAL BANK LENDING RATES

Interest rate Fed funds rate Overnight call rate Refi rate Repo rate Overnight funding rate 3-month Swiss Libor Cash rate Cash rate Selic rate Overnight call rate Discount rate Repo rate Repurchase rate Rate 10-year T-note BUND Government Bond 10-year bonds Short sterling

CURRENCY TRADER • June 2010

Rate (%) 0-0.25 0.1 1 0.5 0.50 0.25 4.5 2.5 9.5 2 1.25 5.25 7

Last change 0.5 (Dec. 08) 0.2 (Dec. 08) 0.25 (May 09) 0.5 (March 09) 0.25 (June 10) 0.25 (March 09) 0.25 (May 10) 0.50 (April 09) 0.75 (April 10) 0.5 (Feb. 09) 0.25 (Feb. 09) 0.25 (April 10) 0.5 (Aug. 09)

GLOBAL BOND RATES

May 26 121.16 128.72 140.6 94.68 99.24

1-month 3.93% 3.76% 0.97% 0.55% -0.03%

3-month 3.11% 3.43% 0.50% 0.17% -0.10%

6-month 0.57% 4.19% 0.75% -0.03% -0.14%

52-week high 0.02227 2.0859 1.8005 1.8112 1.9173 1.0724 1.5383 1.8338 1.63 0.9411 2.8724 1.0079 1.3233 0.9895 1.6978 163.057 94.1955 69.5573 91.549 139.2 88.048

52-week high

12,321.80 34,223.90 18,047.90 29,565.10 6,341.52 6,990.70 3,037.97 23,099.60 5,048.60 1,219.80 5,833.70 71,989.00 11,408.20 4,088.18 24,559 Sept. 2009 0-0.25 0.1 1 0.5 0.25 0.25 3.5 2.5 8.75 2 1.25 4.75 7 High 122.08 129.55 140.98 94.87 99.52

52-week low

Previous

0.01838 1.6328 1.377 1.5778 1.4894 0.909 1.3989 1.6003 1.2748 0.8399 2.2286 0.8457 1.1931 0.8725 1.5256 127.065 79.6163 58.1679 76.36 108.8 46.508

52-week low

21 9 16 4 10 19 11 13 17 20 18 7 12 14 15 1 2 5 8 6 3

9,535.50 22,956.00 13,220.00 21,665.90 4,524.01 5,204.80 2,211.81 16,977.70 3,710.10 869.32 4,096.10 48,262.00 9,050.33 2,957.83 17,626

Previous 4 7 10 5 2 14 3 6 13 1 9 11 8 12 15

April 2009 0-0.25 0.1 1 0.5 0.25 0.25 3 2.5 10.25 2 1.25 4.75 7.5 Low 112.90 117.47 135.45 94.09 98.62

Previous 3 1 5 4 2

27

continued INTERNATIONAL MARKETS GDP*

AMERICAS Argentina Brazil

Canada

EUROPE France

Germany UK

AFRICA

Period

Release date

Q4

3/17

Q4 Q1 Q1 Q1 Q4

Change

Next release

4.8%

10.7%

6/18

AMERICAS

8/31

Brazil

3/11

2.0%

5/31

2.5%

5/12

0.4%

5/12

0.6%

3/30

4.3%

5.6% 0.7% 3.2%

1.2%

-1.7%

6/8

8/13 8/13 6/30

S. Africa

Q1

5/25

1.6%

1.4%

6/24

Australia

Q4

3/3

1.9%

1.3%

6/2

India

Q1

5/31

19.1%

12.2%

Singapore

Q1

5/21

4.1%

15.5%

NLT 8/27

Period

Release date

Change

1-year change

Next release

Argentina

April

5/12

0.8%

10.2%

6/11

Canada

April

5/21

0.3%

1.8%

6/22

France

April

5/12

UK

ASIA and S. PACIFIC Hong Kong Japan

Q1

Q1

5/14

-6.5%

5/20

1.2%

* Final estimates, at current prices, seasonally adjusted

CPI

AMERICAS Brazil

EUROPE Germany

April

0.6%

4.9%

8/16

2.7%

0.6%

3.7%

April

5/18

S. Africa

April

5/26

Australia

Q1

India

Singapore

8/31

6/9

6/11

1.0%

6/10

0.2%

4.8%

6/23

4/28

0.9%

2.9%

7/28

April

5/31

0.0%

13.3%

6/30

April

5/24

0.9%

3.2%

6/23

ASIA and S. PACIFIC

Japan

8/13

1.7%

-0.1%

Hong Kong

9.2%

0.3%

5/11

AFRICA

April

1/5

April April

5/20

5/28

Unemployment

1-year change

0.4%

0.0%

2.4%

-1.2%

6/15

6/22 6/25

Argentina Canada

EUROPE France

Germany UK

Period

Release date

Rate

Change

1-year change

Next release

Q1

5/21

8.3%

-0.1%

-0.1%

8/23

April

5/7

8.1%

-0.1%

0.0%

6/4

April Q4

April

Hong Kong India

Japan

Singapore

7.3%

3/4

9.6%

-0.3% 0.5%

-1.6% 1.8%

Jan.-March

5/12

-0.2%

-0.5%

6/30

April

5/13

5.3%

0.0%

-0.3%

6/16

April

5/28

5.1%

0.1%

0.1%

6/29

March

4/8

-0.2%

5/13

Feb.-April Q1

8.0%

5/18

4.4%

4/30

2.2%

5.3%

0.2%

0.0%

-0.1% 0.0%

0.9%

-0.9% -1.0%

Period

Release date

Change

1-year change

Next release

Argentina

April

1/5

0.1%

14.5%

6/11

Canada

April

5/31

0.3%

-0.4%

6/29

France

March

4/30

0.6%

2.0%

6/2

April

5/7

1.4%

5.7%

Brazil

EUROPE Germany UK

AFRICA

April

April

5/6

5/20

0.7%

1.5%

3.0%

5.5%

6/24

5/27

1.5%

5.5%

6/24

Australia

Q1

4/27

1.0%

-0.1%

7/26

India

April

5/15

1.2%

9.6%

6/10

Singapore

April

5/27

1.5%

Japan

Q1

April

3/12

5/17

1.8%

0.4%

-0.3%

-0.2%

11.6%

6/17

7/30

6/4

April

ASIA and S. PACIFIC

6/16

6/9

S. Africa

Hong Kong

6/3

7.1%

PPI

AMERICAS

6/24

6/1

ASIA and S. PACIFIC Australia

5/27

6/14 6/10

6/29

LEGEND: Change: Change from previous report release. NLT: No later than. Rate: Unemployment rate.

As of June 1 28

June 2010 • CURRENCY TRADER

Global economic calendar: June June 1 U.S.: May ISM manufacturing report

CPI: Consumer price index ECB: European Central Bank

Canada: Bank of Canada interest-

FDD (first delivery day): The first day on which delivery of a commodity in fulfillment of a futures contract can take place. FND (first notice day): Also known as first intent day, this is the first day on which a clearinghouse can give notice to a buyer of a futures contract that it intends to deliver a commodity in fulfillment of a futures contract. The clearinghouse also informs the seller. FOMC: Federal Open Market Committee GDP: Gross domestic product ISM: Institute for supply management LTD (last trading day): The final day trading can take place in a futures or options contract.

rate announcement France: April CPI

2 3 4 5 6 7 8 9

Germany: April employment report

Hong Kong: May CPI

Australia: Q1 GDP

South Africa: Q1 employment report

23 U.S.: FOMC interest-rate announceU.S.: May employment report

ment

Canada: May employment report

South Africa: May CPI

24 U.S.: May durable goods Brazil: May employment report Mexico: May Employment report; Brazil: Q1 GDP

June 15 CPI

U.S.: Fed beige book

South Africa: May PPI

PMI: Purchasing managers index

Brazil: May CPI and PPI

PPI: Producer price index

Mexico: May 31 CPI; May PPI

Economic release (U.S.) GDP CPI ECI PPI ISM Unemployment Personal income Durable goods Retail sales Trade balance Leading indicators

Release time (ET) 8:30 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 10:00 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 10:00 a.m.

18 Germany: May PPI 19 20 21 Hong Kong: Q1 GDP 22 Canada: May CPI

10 U.S.: April trade balance Australia: May employment report Germany: May CPI Japan: May PPI

25 U.S.: Q1 GDP (third) Japan: May CPI

26 27 28 U.S.: May personal income 29 Canada: May PPI

ECB: Governing council interest-rate announcement

Japan: May employment report

30 India: May CPI

UK: Bank of England interest-rate announcement

11 U.S.: May retail sales

UK: Q1 GDP

July 1 U.S.: June ISM manufacturing report

France: May PPI UK: May PPI

JUNE 2010 30 31 1

2

6 7

9 10 11 12

8

3

4

5

13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31­ 1

2

12 13 14 Hong Kong: Q1 PPI 15 Japan: Bank of Japan interest-rate announcement UK: May CPI

The information on this page is subject to change. Currency Trader is not responsible for the accuracy of calendar dates beyond press time.

France: May PPI

2 3 4 5 6 7 8

16 U.S.: May PPI and housing starts

UK: April employment report



FDD: June currency futures (CME)

U.S.: June employment report

Brazil: June CPI and PPI Australia: June employment report Mexico: June 30 CPI; June PPI

9

Canada: June employment report Germany: June CPI

17 U.S.: May CPI and leading indicators Hong Kong: March-May employment report

CURRENCY TRADER • June 2010

29

New Products DailyFX (www.dailyfx.com), FXCM’s free news and research Web site, launched a new, video-based DailyFX Trading Course, free to all live FXCM clients. The DailyFX Trading Course is designed to introduce popular trading tools and techniques. The bulk of the course consists of 60 video lessons, spanning 15 trading subjects, and over 10 hours of live instructor-led Webinars each week. In addition to the videos and Webinars, students can complete homework assignments and further their learning through course forum discussions. Moreover, the curriculum’s “go at your own pace” and “learn what you want” format provides students the flexibility and freedom to focus on the subjects they want for as long as they want. Unlike previous DailyFX course offerings, the new DailyFX Trading Course is not for sale. Instead it is free to all live FXCM clients. The course includes two Core Video Lessons, Instructor Take lessons (in which a DailyFX instructor explains how they specifically trade with the subject under discussion), Daily Instructor Webinars (live Webinars to complement the core video lessons), Homework (allowing students to reflect on the lessons covered and gauge how well they have absorbed course materials), and Forums, where students pose questions directly to course instructors as well as continue to engage in subjects covered in the week’s lessons. TD AMERITRADE (www.tdameritrade.com) has launched thinkOnDemand, a “paper-trading” tool using simulated cash and positions for retail traders and inves-

tors. The thinkOnDemand service provides users with tick-by-tick intraday prices that can be replayed at any time – hours, days and weeks after they have occurred – without leaving the live trading platform. In its simplest terms, thinkOnDemand is like a personal digital video recorder (DVR) for traders. Users of the thinkorswim from TD AMERITRADE trading platform can use thinkOnDemand to paper trade stocks, futures, forex and options. Because thinkOnDemand is completely integrated into the live trading platform, traders can also move back and forth between thinkOnDemand paper trading and live trading with a single click. Traders can select any date from the previous four months and replay, fast forward, and pause the archived market data, enter simulated trades, and see the hypothetical results. thinkOnDemand complements six software releases that have recently added new functionalities and resources to the thinkorswim from TD AMERITRADE trading platform, including: Gadget 360, which displays complex options data in an easy-to-interpret graphical form; extraordinary order control for the active trader; live-from-the-floor Market Cast squawk box, and custom position grouping; and access to even more charts, futures, options, and forex, as well as more analytics, alerts, and news. › Note: New Products is a forum for industry businesses to announce new products and upgrades. Listings are adapted from press releases and are not endorsements or recommendations from the Active Trader Magazine Group. E-mail press releases to [email protected]. Publication is not guaranteed.

Events Event: FIA/FOA International Derivatives Expo

Event: The MoneyShow San Francisco 2010

Date: June 8-9

Show focus: Green investing

Location: The Brewery, Chiswell Street, London

Date: Aug. 19-21

For more information: Go to www.idw.org.uk

Location: San Francisco Marriott For more information: Go to www.moneyshow.com and

Event: Los Angeles Traders Expo

click on Events > The World MoneyShows

Date: June 9-12 Location: Pasadena Convention Center, Los Angeles

Event: The Forex, Futures & ETFs Expo Las Vegas 2010

For more information: Go to

Date: Sept. 23-25

www.moneyshow.com/caot/?scode=013721

Location: Caesars Palace, Las Vegas For more information: Go to www.moneyshow.com

Event: Global Hedge Fund Forum 2010 Date: June 22

Event: Las Vegas Traders Expo

Location: Online

Date: Nov. 17-20

For more information: www.globalhedgeforum.com

Location: Caesars Palace, Las Vegas For more information: Go to www.moneyshow.com

30

June 2010 • CURRENCY TRADER

Key Concepts

Carry trades involve buying (or lending) a currency with a high interest rate and selling (or borrowing) a currency with a low interest rate. Traders looking to “earn carry” will buy a high-yielding currency while simultaneously selling a low-yielding currency. Fibonacci series: A number progression in which each successive number is the sum of the two immediately preceding it: 1, 2, 3, 5, 8, 13, 21, 34, 55, and so on. As the series progresses, the ratio of a number in the series divided by the immediately preceding number approaches 1.618, a number that is attributed significance by many traders because of its appearance in natural phenomena (the progression of a shell’s spiral, for example), as well as in art and architecture (including the dimensions of the Parthenon and the Great Pyramid). The inverse, 0.618 (0.62), has a similar significance. Some traders use fairly complex variations of Fibonacci numbers to generate price forecasts, but a basic approach is to use ratios derived from the series to calculate likely price targets. For example, if a stock broke out of a trading range and rallied from 25 to 55, potential retracement levels could be calculated by multiplying the distance of the move (30 points) by Fibonacci ratios –– say, 0.382, 0.50, and 0.618 –– and then subtracting the results from the high of the price move. In this case, retracement levels of 43.60 [55 - (30 * 0.38)], 40 [55 - (30 * 0.50)], and 36.40 [55 - (30 * 0.62)] would result. Similarly, after a trading range breakout and an up move of 10 points, a Fibonacci follower might project the size of the next leg up in terms of a Fibonacci ratio –– e.g., 1.382 times the first move, or 13.82 points in this case. The most commonly used ratios are 0.382, 0.50, 0.618, 0.786, 1.00, 1.382, and 1.618. Depending on circumstances, other ratios, such as 0.236 and 2.618, are used. While Fibonacci retracements are used to calculate the possible partial correction levels of a previous price move (i.e., a reversal of up to 100 percent of a previous price swing), Fibonacci extension levels are used to extrapolate moves in the same direction as a previous price swing — for example, projecting a target for a new upswing that represents a 161.8-percent gain from a certain price level based on the size of the previous upswing. True range True range (TR): A measure of price movement or volatility that accounts for the gaps that occur CURRENCY TRADER • June 2010

between price bars. This calculation provides a more accurate reflection of the size of a price move over a given period than the standard range calculation, which is simply the high of a price bar minus the low of a price bar. The true range calculation was developed by Welles Wilder and discussed in his book New Concepts in Technical Trading Systems (Trend Research, 1978). True range can be calculated on any time frame or price bar — five-minute, hourly, daily, weekly, etc. The following discussion uses daily price bars for simplicity. True range is the greatest (absolute) distance of the following: 1. Today’s high and today’s low. 2. Today’s high and yesterday’s close. 3. Today’s low and yesterday’s close. Average true range (ATR) is simply a moving average of the true range over a certain time period. For example, the five-day ATR would be the average of the true range calculations over the last five days. Variance and standard deviation: Variance measures how spread out a group of values are — in other words, how much they vary. Mathematically, variance is the average squared “deviation” (or difference) of each number in the group from the group’s mean value, divided by the number of elements in the group. For example, for the numbers 8, 9, and 10, the mean is 9 and the variance is: {(8-9)2 + (9-9)2 + (10-9)2}/3 = (1 + 0 + 1)/3 = 0.667 Now look at the variance of a more widely distributed set of numbers: 2, 9, and 16: {(2-9)2 + (9-9)2 + (16-9)2}/3 = (49 + 0 + 49)/3 = 32.67 The more varied the prices, the higher their variance — the more widely distributed they will be. The more varied a market’s price changes from day to day (or week to week, etc.), the more volatile that market is. A common application of variance in trading is standard deviation, which is the square root of variance. The standard deviation of 8, 9, and 10 is: sq. rt. 0.667 = .82; the standard deviation of 2, 9, and 16 is: sq. rt. 32.67 = 5.72. ›

31

FOREX trade journal Short trade runs course, long-side probabilities kick in. Trade Date: Monday, May 24, 2010. Entry: Long the Australian dollar/U.S. dollar (AUD/USD) at .8310. Reason for trade/setup: Reversing last month’s short trade based on the pattern from the article “Top pattern feeds bottom formation” (Currency Trader, March 2010), this paper trade was based on two factors: the conclusion of the weekly short pattern, which has historically reached its maximum profit three weeks after the signal (which occurred the week of April 16 in this case), and the dramatic May sell-off that drove the pair to new lows for the year. “Top pattern feeds bottom formation” showed the short pattern to be a setup for a much more significant long pattern whose profitability extended at least 11 weeks, on average. The pair was concluding its fifth week after the short signal on May 21. The AUD/USD pair sold off hard in May as equity markets collapsed and money flooded into the U.S. dollar. After slamming below the February low, the Aussie dollar dropped to its lowest level since July 2009 on May 21, but recovered to close toward the upper end of its range. With the market poised for a rebound, we went long the next day (May 24) as the pair was appearing to sustain its recovery. Initial stop: .8011 Initial target: .8560

Result Exit: .8349 Profit/loss: .0039 Outcome: The market’s high volatility required putting

Source: TradeStation

the stop farther away than we would have liked (below the May 21 low), and another sell-off on May 25 put the trade to the test: The Aussie dollar made a slightly lower low at .8066 before reversing to closing the day at the top of its range. The trade got some breathing room on May 27 when a major stock-market rally took some starch out of the U.S. dollar, the AUD/USD pair jumped more than 3 percent (to a little above .8500). We moved the stop to .8349 to remove the risk from the trade and waited for the market to reach the initial profit target. The pair pushed to .8550 on May 28, but closed lower at .8471 before pausing and, finally, breaking sharply on June 1 to .8280, hitting the stop. By mid-morning in the U.S. session the pair had rebounded back above .8400 We were too rigid with this trade. Adhering inflexibly to the target price instead of taking profits in its vicinity when the market started to weaken resulted in leaving what would have easily been a 2-percent gain (the trade was up nearly 3 percent at its highest level) on the table.› Note: Initial trade targets are typically based on things such as the historical performance of a price pattern or a trading system signal. However, because individual trades are dictated by immediate circumstances, price targets are flexible and are often used as points at which to liquidate a portion of a trade to reduce exposure. As a result, initial (pre-trade) reward-risk ratios are conjectural by nature.

Trade Summary Date

Currency pair

Entry price

5/24/10

AUD/USD

.8310

Initial stop

Initial target

IRR

Exit

Date

.8011

.8560

0.84

.8349

6/1/10

P/L point

%

.0039

0.47%

LOP

LOL

Trade length

.0240

-.0030

6 days

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).

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