Вы находитесь на странице: 1из 16

web site: www.sta-uk.

org The Journal of the STA


1
Members might be interested to know that the committee is
currently working on an initiative to develop a strategic alliance
with Robert Walters Associates, the recruitment consultants. It
is hoped that, through Robert Walters, the STA will be able to
establish a dedicated technical analysis recruitment service for
the benefit of members of the Society. At the time of going to
press some of the details are still being finalised but we hope
to be able to make a full announcement shortly.
The Societys website has now been up and running for two
years and we thought it would be a good idea to look at how
we might expand the site to make it more inter-active. If
anyone has any ideas or suggestions as to what they would
like to see included, please contact Gerry Celaya.
Anyone wishing to take the Societys Diploma should note
that the next examination will be held on October 4th and
the cost for taking it will be 235. For the first time this year
there will be a choice of two levels for our introductory
course on technical analysis. One course will last for four
weeks and the other for six weeks. The cost for these courses
will be 225 and 295 respectively. Both courses will begin
on 31st October. In recent years we have had a growing
number of enquiries about whether the Society would be
prepared to run a distance learning course on technical
analysis and we are now in the throes of preparing one. We
are grateful to all the people who have agreed to contribute
to this project. More details will be released later in the year.
As some of you will have seen in the IFTA Update, the IFTA
board is spearheading a drive to build a Body of Knowledge
reference work on technical analysis. The workload is being
divided up between the member societies. Adam Sorab is
co-ordinating the northern European input on the subject of
price. He would be very pleased to hear from members of the
STA who would like to be involved in this project.
On behalf of all the members who attended the summer
party, we would like to thank Reuters for hosting such an
excellent occasion. Glyn Bradney started the evening off
with a talk explaining how he tries to identify energy levels
within the markets. His ideas prompted a large number of
questions from the audience and those of you who were
not able to attend will be pleased to know that Glyn has
promised to do a comprehensive write-up of the subject in
the Journal.
Finally Luise Kliem is stepping down from the board and we
would like to take this opportunity of thanking her for all the
work that she has done. In particular, Luise has been an
extremely active member of the last minute speakers club,
often agreeing to step in and talk at the monthly meetings
with only a day or sos notice when the scheduled speaker
had had to cry off for some reason.
COPY DEADLINE FOR THE NEXT ISSUE
31 AUGUST 2000
PUBLICATION OF THE NEXT ISSUE
OCTOBER 2000
July 2000 ISSUE No. 38
MARKET TECHNICIAN
FOR YOUR DIARY
IN THIS ISSUE
Wednesday 13th September Introduction to Ichimoku Cloud Formations
Nicole Elliott and Yuichiro Harada, Industrial Bank of Japan.
October 5th 7th IFTA Conference
Wednesday 11th October STA AGM
N.B. The monthly meetings will take place at the Institute of Marine Engineers, 80 Coleman Street,
London EC2 at 6.00 p.m.
Exam Results 2
Book review 3
Exam Report 3
G. Celaya Charting the regional FX markets. 4
L. Kliem Equity markets: Outlook for
Wall Street and FTSE TMT and the
old economy. 9
M. Wignall Mutual offsetting systems
a problem for technical analysis? 11
N. Burnton Chronographics
SM
12
Z. Harland Trading a 2 year old the real-time
performance of a neurogenetic
T-bond futures trading system. 14
IFTA Conference 2000 16
WHO TO CONTACT ON YOUR COMMITTEE
CHAIRMAN
Adam Sorab, Credit Suisse First Boston, Five Cabot Square,
London E14 4QR. Tel: 020-7888 7240
TREASURER
Vic Woodhouse. Tel: 020-8810 4500
PROGRAMME ORGANISATION
Mark Tennyson dEyncourt. Tel: 020-8995 5998 (eves)
LIBRARY AND LIAISON
Michael Feeny. Tel: 020-7786 1322
The Barbican Library contains our collection. Michael buys
new books for it where appropriate, any suggestions for new
books should be made to him.
EDUCATION
John Cameron. Tel: 01981-510210
Clive Hale. Tel: 01628-471911
George MacLean. Tel: 020-7312 7000
IFTA
Anne Whitby. Tel: 020-7636 6533
MARKETING
Simon Warren. Tel: 020-7656 2212
Kevan Conlon. Tel: 020-7329 6333
Tom Nagle. Tel: 020-7337 3787
MEMBERSHIP
Simon Warren. Tel: 020-7656 2212
Gerry Celaya. Tel: 020-7730 5316
Barry Tarr. Tel: 020-7522 3626
REGIONAL CHAPTERS
Robert Newgrosh. Tel: 0161-428 1069
Murray Gunn. Tel: 0131-245 7885
SECRETARY
Mark Tennyson dEyncourt. Tel: 020-8995 5998 (eves)
STA JOURNAL
Editor, Deborah Owen, 108 Barnsbury Road, London N1 0ES
Please keep the articles coming in the success of the Journal
depends on its authors, and we would like to thank all those
who have supported us with their high standard of work. The
aim is to make the Journal a valuable showcase for members
research as well as to inform and entertain readers.
The Society is not responsible for any material published in
The Market Technician and publication of any material or
expression of opinions does not necessarily imply that the
Society agrees with them. The Society is not authorised to
conduct investment business and does not provide
investment advice or recommendations.
Articles are published without responsibility on the part of the
Society, the editor or authors for loss occasioned by any
person acting or refraining from action as a result of any view
expressed therein.
Results of Diploma Examination
APRIL 2000
DISTINCTION
Anthony Fletcher
James OConnor
Angelina Ng
PASS
Des Bailes
R. Crozier
Valerie Enguehard
David Franklin
Stephen Hatton
Michael Hugget
Julian Mahne
Martin Miller
Darren Read
Bert Reymenants
Soon Hock Gary Tan
Duncan Webb
2
MARKET TECHNICIAN Issue 38 July 2000
Networking Exam Results
ANY QUERIES
For any queries about joining the Society, attending
one of the STA courses on technical analysis or
taking the diploma examination, please contact:
STA Administration Services
(Katie Abberton)
P.O. Box 2,
Skipton BD23 6YH.
Tel: 07000 710207 Fax: 07000 710208
www.sta-uk.org
For information about advertising in the journal,
please contact:
Deborah Owen
108 Barnsbury Road,
London N1 OES.
Tel/Fax: 020-7278 7220
Issue 38 July 2000 MARKET TECHNICIAN
3
THE PREDICTORS:
How a Band of Maverick Physicists set out to
Beat Wall Street
By Thomas A. Bass (Penguin Press 18.99)
If you read James Gleicks wonderful Chaos, youll remember the
Dynamical Systems Collective, a group of hippie physicists sharing a
ratty student house in California in the 1970s who made a set of
discoveries crucial to the infant science of chaos theory. They found
ways to map the messy, turbulent processes of the everyday world
by considering them as flows of information. Once they started
looking, they found unexpected order everywhere: a dripping tap, a
rising column of cigarette smoke. Later, rechristened the
Eudaemonians, some of them tried to win at roulette by putting toe-
operated computers into their shoes. Weird science against the
polyester barons of Las Vegas! Thomas Bass wrote a book about it,
The Newtonian Casino.
In the early 1990s, after several respectable years in academia, two
members of the Collective, Norman Packard and Doyne Farmer,
matched wits again with the world of money. Farmer, at the Los
Alamos National Laboratory, had come up with a technique for
making non-linear predictions projecting the futures chaos from
the presents. At the Institute for Advanced Studies, Packard had
devised adaptive computer algorithms that proved spectacularly
good at recognising patterns in whatever he pointed them at, from
snowflakes to the spending habits of Italian municipal bureaucrats.
Together, these seemed like the keys required to make a profitable
intervention in the jetstream of capital that flows continuously
around the globe from exchange to exchange, formidably divorced
from the actual business of making, moving and selling things.
As Bass explains, in a beautiful analogy, the streaming trillions of
dollars really do behave like a fluid in a state of turbulent flow. The
intricate structure of gas turbulence was revealed when a photograph
was taken in a wind tunnel by the light of a high-voltage spark.
Anyone who had the means to fix an equivalent high-definition
picture of the fractal whirlpools that form in money could
theoretically divert some of it their way.
Packard and Farmer and a gaggle of younger colleagues set up in
Santa Fe in an office equipped with the most expensive Sun
workstations they could afford, and the cheapest possible garden
furniture to sit on, and started building a system to play the markets.
Bass writes well about the intellectual questions that developed as
they used physics to do economics.
Effective market theory, for example, holds that price fluctuations
are purely random when buyers and sellers have full access to market
information if true, it would have made the task impossible. But
this is not really a popular science book; it comes from the nexus in
our culture at the moment where money and technology make each
other exciting. Here, as in Wired magazine, technology soaks up
moneys status as pure potential, stuff that can satisfy every desire,
while money acquires technologys quickness, and above all, its
scalability, its power to expand suddenly by orders of magnitude, as
Internet systems can. It comes true like a granted wish, it inflates like
the airbag in a limousine.
Basss story is a business history, told with a nice sense of line, and an
elegant eye for oddities of the interface between the bankers in their
suits and the physicists working in their shorts, under Moon
Mountain and Sun Mountain, which grace Santa Fe like a spiritual
Wonderbra.
By 1995, the Prediction Companys models were making money. Lots
of it. Regularly. Experimental verification cant get any solider. You
can compare them to Marx, who also thought he had detected
hidden structure in the market-place. His predictions failed. The real-
world experiments of the last century show that all history is not, as
it happens, the history of class struggle. But Marxs structure did
allow for the possibility of people taking deliberate, rational,
concerted actions. The temporary laceworks of structure that the
Prediction Company spots, as they slide across the flanks of the
worlds financial waves, do not allow you to plan to make the world
different. They can only be used to make you individually rich. This
may well be a more innocent dream: it is also a smaller one, and to
settle for it is to lose something.
Differences in style soon separate the former members of a scientific
commune from the Swiss Bank Corporation, their backers.
The price of Farmer and Packards access to venture capital is that
they abandon every trace of hippie egalitarianism. It takes them just
two days to decide to do so. They learn to fire people (eventually,
every founding member except themselves) and to spout business
claptrap about team playing and empowerment. Its a long way from
Farmer saying I want to beat the system, not join it, yet another
demonstration that maverick, as used in this books subtitle, is an
American term meaning conformist. There is something terribly
sad about the way that they go on acting out their original tastes
when theyre millionaires, except on a much, much larger budget.
When you have reached a certain degree of personal wealth, surely
its unseemly to wear an Eat the Rich T-shirt?
Francis Spufford
This article originally appeared in the book review page of the
Evening Standard, 31.1.00.

Evening Standard
Examiners Report
Candidates faced a tougher examination than previously. Higher
marks were needed for both pass and distinction and a more
rigorous approach was taken to the framing of questions. Indeed in
the opening section the choice was reduced to two questions as
opposed to three in order to avoid an easy option. Once again
assistance was given in preparing questions on a specialist topic by
the Diploma course lecturer concerned.
There were 23 candidates of whom 3 gained distinctions, a further
12 passed and 8 failed. The average mark was 61.3% (compared to
61.3 last year, 60.8% in 1998 and 60.9% in 1997).
The percentage of candidates failing rose to 34.8%, which is
marginally worse than the 33% students are warned to expect and is
in line with other courses at academic establishments.
There was, however, an improvement in the general quality of work
presented and this may well stem from another change in this years
exam: time allowed has been extended from two and a half hours to
three. An omission from a full complement of answers is much rarer
and fuller answers are common.
Point and Figure is an option that most candidates choose and it is
an obvious strength of the South Bank Diploma course since most
are well conversant, if not yet expert, in the technique.
Candidates seemed well prepared and the quality of communication
has improved. Revision day was held nearly three weeks ahead of
the exam permitting more time for its influence to help guide
candidates.
Despite the increased failure percentage, the average mark remains
the same. It does mean that the general standard has improved.
Students have manifestly worked hard; the lecturers on the Diploma
course are to be congratulated; the examination author and
administrative team also deserve much credit.
Book Review
4
MARKET TECHNICIAN Issue 38 July 2000
Trading in the FX market has changed dramatically over the last few
years. While this is still a $1.3 trillion per day market, as outlined in
the article All change in the FX market published in the IFTA
magazine last year, the market has gone through a period of change.
The consolidation of the FX industry is partially due to the
introduction of the euro and the headline-making bank mergers,
both of which have led to margins being squeezed in traditional FX
markets. This makes banks more eager to deal in exotic markets
that they would have avoided in the past, as the margins in less
liquid currencies are still wider, hence making them more profitable
for dealers to work in. On the other side of the trade, the Asian
crisis of 1997/1998 highlighted the need for corporate and
institutional customers to be pro-active in their FX risk management
as the sharp swings can affect returns in a quite a large way. Charts
are very useful for spotting opportunities and helping to determine
the risk / reward ratio that is critical to any trade or investment,
especially in regional markets where strict adherence to the
underlying fundamentals or listening to the locals can be very,
very wrong! For example, it was inconceivable to many in Asia in
early 1998 that by cutting interest rates the local currency would
strengthen. The charts however identified potential reversal patterns
which showed that the market was re-evaluating the trend and that
cutting interest rates, despite what the local experts were saying, was
being well received by the market.
Some key things to keep in mind are: Charts and common sense
can help...
Basic charting techniques are best (patterns, moving averages)
Know the local market conventions and legalities
Yield enhancement versus real risk must be considered at all times
Dance like a butterfly, sting like a bee (the exit doors can get
rather small!)
CARRY TRADES AND YIELD ENHANCEMENT
Many investors and funds trade in regional currencies in order to
enhance the yield that is available to them. This is usually done on
a leveraged basis by borrowing funds in a low yielding currency and
investing the funds in a high yielding currency. The potential
carry gains are easy to calculate and the potential positive
movement in the FX rates can be very attractive. Keep in mind
though that the high yield on the currency is probably there for a
reason, and that can make the potential losses on adverse
movement in the FX rates extremely high. The question that must
be asked on every trade is Does the potential reward outweigh the
potential risk?.
Indicative yields for market amounts of $1 million USD or more on
deposit for 92 days are: EUR 3.00% US 5.69 % GBP 5.68% Yen
0.2% CHF 1.75% South African Rand 10.50% Turkish Lira 25%
Greek Drachma 8.25% Czech Koruna 5.13% Slovak 7.50% Polish
Zloty 17 % Norwegian Krone 5.25% Icelandic Krona 10%
Mexican Peso 16%
Carry trade = Lending yield borrowing yield or
Carry trade = high yield low yield which hopefully will outweigh
depreciation /devaluation risk!
Example
1 million USD worth of EUR/ISK for 30 days = $6,250
(yield spread x amount x number of days)/360
on a $20 million portfolio = funding at 2.5% lending at 10 % FX
stable = $125,000 profit per month with no gearing. If this was
done every month for 1 year there would be a $1,500,000 profit!
Given the market norm of 10 times gearing, the $20 million USD
portfolio would gear up to $200 million and the profit would be
$15,000,000 per year. To repeat the main point, the question is
whether or not the FX relationship is stable. If the spot rate moves in
an adverse manner the gearing can create a situation where the $20
million portfolio becomes a $5 million portfolio at the end of the
year.
The Yen is the funding currency of choice for many carry trades.
With interest rates near zero the yen is attractive but as the chart
below shows, it is a very whippy currency. The move from the
Y147.60 yen lows (USD high) of 1998 down to below 110 wiped out
many of the carry trades that were funded with the yen as the
adverse spot rate move really hit the market. Looking at the chart
shows that a head and shoulders pattern (the first of many) could be
in place with targets near Y80. This serves to keep Yen carry traders
on their toes.
The chart below shows the THB/USD a weekly chart with 13 and
50 week moving averages. The THB was until summer 1997 a
wonderful currency to trade. The central bank (Bank of Thailand)
ran the THB as a basket currency, with the basket made up mostly of
Yen and Deutschemarks. Given that THB deposits paid a lot more
than Yen and DEM deposits, borrowing the last two and lending in
THB was an easy way to put a carry trade on, with the stability
of the FX relationship more or less ensured as long as the basket was
intact. The summer of 1997 basically shattered that relationship as
the THB was attacked by speculators, the BoT smashed the
speculators by using the forward market and spot, driving spot
sharply higher against the USD before giving up, letting the THB
float (no more basket) and the Asian crisis was underway. The
lessons from the early part of the crisis are clear, always be aware
that the exit door in illiquid FX markets is smaller than the entry door.
When there is a panic big/offer spreads will widen out, options will
be expensive (if available) and the disappearance of market liquidity
means that you really need to have a good relationship with your
bank to trade these currencies for any hedging purposes. From a
charting perspective the blowout in 1997 was basically a series of
bull flags on the daily charts, with market sentiment following the
traditional fear / greed / fear / greed cycle. The USD peak was
marked by the market being in full panic mode, while the firming of
the THB against the USD in 1998 was marked by continued disbelief
in many that the worst was over. Charts showed a pretty V top
with a potentially massive head and shoulders pattern dominating
activity. Current activity is showing a potential crossover in the 13
and 50 week moving averages but for choice any USD upmove will
Charting the regional FX markets
By Gerry Celaya
This article is a summary of a talk given to the Society on 12th April, 2000
JPY=. Bid [Hi/Lo/Cl Bar] [(MA 50] Weekly
Issue 38 July 2000 MARKET TECHNICIAN
5
be limited to the 40.000 zone with the next major move still
expected to be in line with the major top pattern, towards 36/35.60
again and lower for the USD (25.000 in a few years?). As a side
note, even though the USD rally in 1997 suggests that the
speculators won the battle, George Soros is on the record as saying
that the BoT squeezed them and many others out of their positions
before the THB really devalued, suggesting that the major USD
buying through the 3rd and 4th quarters of 1997 was done by
corporates and hedgers.
The chart below shows the THB/YEN relationship. As seen, the pre-
summer 1997 relationship was relatively stable. Since then the cross
plummeted (weak THB, strong YEN, hurting any carry trade) and
has yet to show any convincing long term basing signals. For choice,
a flat trading range should continue to dominate.
The USD/SGD chart shows the Asia crisis effect pretty well with
Singapore in the middle of it all . The breakout of the flat channel in
1997 was followed by a solid panic of buying USD. The SGD
chart is different from the other Southeast Asian FX charts because
the fact that the Malaysian Ringitt, its cross straits neighbour, is
pegged,has served as a dampener on activity over the last 18
months. Technically, current activity shows pressure on USD
resistance and the risk of a break through 1.7360/7400 is high. For
choice, even though the turn above the declining trendline in early
2000 suggests that the USD will fly higher, the horizontal resistance
line at the 1.7360/1.7400 area should hold up. A break would be
bad for the SGD and leave 1.76/1.78 open.
The SGD/JPY chart shows the effect of the strong Yen since
September 1998 and while it could be basing at the 60 zone, this is
by no means confirmed. In fact, moving averages are still bearish
for the cross rate; watch 66 as a turning point for a reversal, 60 as
the zone to break in order to continue the trend lower.
The USD/HKD chart below shows the extremes that the Hong
Kong fx rate went to during the crisis. The spike in the HKD from
the 7.74 area to the 7.62 zone really happened, as the Hong Kong
Monetary Authority took on the speculative players. The real
action from then on was in the forward market, when rates
(normally close to USD rates) skyrocketed to 80% and even higher
at one stage. The spot rate, given the peg that the HKMA held to,
did not move that much, and has only moved to a weaker HKD
rate. This chart highlights our forecast for 7.800 in the coming 12
months.
The Indonesian Rupiah chart (overleaf) shows the large breakdown
in 1997 in the IDR, with a run from 2500 to 17000 seen in a little
over a year. Not only did the Asian crisis hit the IDR but local
events deteriorated further which gave the IDR the second spike
against the USD in the summer of 1998. Current activity supports
the USD with the 13 and 50 week moving averages pushing
higher for the USD with 9200 open and spikes to 10,000 possible
on the charts.
THB=. Bid [Hi/Lo/Cl Bar] [MA 13][MA 50] Weekly
SGDJPY=R. Bid [Hi/Lo/Cl Bar] [MA 13][MA 50] Weekly
AKD=. Bid [Hi/Lo/Cl Bar] [MA 13][MA 50] Weekly
THBJPY=R. Bid [Hi/Lo/Cl Bar] [MA 13][MA 50] Weekly
SGD=. Bid [Hi/Lo/Cl Bar] [MA 13][MA 50] Weekly
6
MARKET TECHNICIAN Issue 38 July 2000
The JPY/IDR cross (number of IDR per Yen) weekly chart below
shows a relatively flat trend over the last 16 months, with the cross in
the 13/50 week moving averages suggesting that the Yen could be
set to gain against the IDR over the coming weeks towards 8000.
The chart of the USD/KRW below shows how the Korean Won was
sold off from 850 towards 1920 /1980 over a few months. While
the 1997 crisis was seen as a Southeast Asia problem to begin
with, the exposure to Thai debt and short term USD exposure really
hit the KRW at the tail end of 1997. Technically the KRW formed a
large reversal in the 1st quarter of 1998 and has been slowly firming
since then. The 13/50 week moving averages show the KRW trying
to put together a move through 1100 for 1000; this should take
some time. When seen, though, 1060/20 will be open.
The YEN/KRW (Korean Won per Yen) chart shows a very flat trend
which is expected to continue to dominate trading over the coming
months. The 13/50 week moving averages are flat while the charts
show a sidways channel dominating. This does present a decent
carry trade given the KRW yields near USD levels (or above) and
the very low Yen rates.
The USD/MYR (Malaysian Ringitt) chart is a favourite for chartists
these days. The MYR had the same breakout pattern as the rest of
the SE Asian currencies in 1997 but the fixing at 3.8000 and the
introduction of controls prevented the MYR from firming with the
rest over the last 18 months. Market rumours continue to roil about
the fixed FX regime ending but as usual the market will need some
clear signals from the central bank to really get excited.
Looking at regional currencies closer to home, some key points need
to be made. The first and probably most important one is that many
of the eastern European countries will be joining the EU in the
coming 10 years and hence their currencies will be euro candidates.
While this is a significant amount of time, the FX market is notorious
for trading ahead of itself (or is it very efficient at discounting
information?). The second is that liquidity in the FX market is not
high in these currencies, especially outside of London hours. And
thirdly, while derivatives are available in some of these markets, the
liquidity issue is a key one and bid/offer spreads can take much of
the incentive out of dealing here.
The EUR/CZK chart below shows a head and shoulders top pattern
IDR=. Bid [Hi/Lo/Cl Bar] [MA 13][MA 50] Weekly JPYKRW=R. Bid [Hi/Lo/Cl Bar] [MA 13][MA 50] Weekly
MYR=. Bid [Hi/Lo/Cl Bar] [MA 13][MA 50] Weekly
EURCZK=. Bid [Hi/Lo/Cl Bar] [MA 20][MA60] Daily
JPYIDR=R. Bid [Hi/Lo/Cl Bar] [MA 13][MA 50] Weekly
KRW=. Bid [Hi/Lo/Cl Bar] [MA 13][MA 50] Weekly
Issue 38 July 2000 MARKET TECHNICIAN
that dominated trading in early 1999. While the central bank was
not happy with the CZK firming and many economists and local
market players were convinced that the CZK had to weaken, the
chart told a different story. The current push through trendline
resistance is central bank inspired (heavy intervention) but with the
risk zone at 37.20 and expected to be difficult to break, this
should be another CZK buying opportunity. Technically flat
trading in a large band is expected to dominate activity here for
the coming months with the risk being that the downtrend has
been broken.
The Slovakian koruna has rallied strongly over the last year against
the euro but is now losing some ground. For choice the 42.00 area
will be able to hold off the euro gains, but, if broken, then the turn
above the 60 day moving average would suggest that the SKK could
back up further. Looking out though and given the decent carry
over the euro, the SKK would be seen to be a buy for further flat
trading as the top of the range should be the old head and shoulders
neckline near 44.30/50 while 41.60 supports. A bout of SKK
strength through the latter would put 40.80/40.60 into the sights,
continuing the firming trend seen over the last year.
The chart below is of the Polish Zloty, now one of the most liquid
Eastern European FX rates. The last two years have seen this market
mature from where one would have to trade the Tbills to gain PLN
exposure, to a free floater as of yesterday! On the chart one can see
that the PLN took the flotation news pretty well and firmed back to
the 4.06 area against the USD. There is a floor at 4.000 though and
further choppy trading seems likely. The local market tends to focus
on the Nasdaq as a barometer of sentiment (foreign direct
investment into Poland is seen as one of the big reasons for any PLN
strength) which makes it worthwhile keeping an eye on that market.
The risk would be that this is a bull flag and sustained gains through
4.20/25 would worry for 4.40/4.50 and worse.
The South African Rand has been in a breakout since the early part
of the year, and even though I kept looking for a turning point or a
top, there has been little joy here yet. Hit by very negative sentiment
this one could be on course for 6.85 to break with technical targets
pointing to 7.00 and 7.50. The key has been the fact that the ZAR is
not paying for risk, interest rates have only edged higher since the
6.20 level broke and the market seems very reluctant to take the risk
on board without getting paid for it!
The Icelandic Krona is a basket currency which is tied mostly to the
euro and euro-linked currencies as well as to the GBP and USD
and other currencies*. This FX rate offers one of the more
interesting regional or exotic FX plays as Iceland, population
250,000 on a good day it seems, pays over 10% on the Krona
compared with rates below 4.0% on the euro. The chart below is
of the ISK/USD and for those who wish to bottom fish for a long
term EUR/USD recovery, the ISK is a different way to play this as
the positive yield differential over the USD gives one some cover.
Technically this is a broad range in play but 73.80/74 needs to
hold as resistance, since a turn in the trend will be signalled by a
breakthrough 73.00. The warning on liquidity definitely applies to
the ISK as the market is usually for 5 million USD or less, and
options are very difficult as the bid/offer spreads can reach truck
driving levels.
The chart overleaf shows EUR/ISK which is pretty much locked in a
bear trend. The key here is the 70 zone which is likely to be a
struggle, and I could see flat trading dominate in a 73/70 range,
yield differential makes playing the range from the buy ISK above
72.30, sell below 70.80 angle attractive.
7
EURCZK=. Close(Bid) [Line] [MA 60][MA20] Daily
PLN=. Bid [Hi/Lo/Cl Bar] [MA 20][MA60] Daily
ZAR=. Bid [Hi/Lo/Cl] [MA 13][MA50] Weekly
ISK=. Close(Bid) [Line] [MA 60][MA20] Daily
*The ISK (Icelandic Krona) trades as a currency basket with the majority of the
weighting placed on the European rates. The major short term risk on the currency is
still an overheating economy with rising inflation and inflation expectations, which
suggests that interest rates should remain on the high side. One month money is
near 10.00% and three month money is near 10.00% as well. The breakdown of the
basket is:
EUR 32.14% GBP 13.39% DKK 9.16% NOK 8.26% JPY 5.39%
USD 24.09% SEK 3.85% CAD 1.37% CHF 2.35%
MARKET TECHNICIAN Issue 38 July 2000
The Greek Drachma is now trading with eyes on the 340.70 entry
rate (March 2001) and is a trading buy for the yield. Basically,
most of the rate cuts are expected to take place closer to the EMU
entry date (like the Irish did in 1998) which should leave the
EUR/GRD to give carry opportunities up until then.
The Turkish Lira chart is a pretty easy one for trend followers to
predict! The controlled devaluation with 80% and much higher yields
did provide decent returns for some time, but those days are over.
With the new IMF backed inflation fighting regime, yields have
dropped to the 25%/40% zone in the 3 month money area and the
FX is expected to devalue nearly 20% on the year, breakeven if you
are lucky! Given our criteria of risk vs. reward (need to be paid for
the risk) the TRL is now a much more selective play (wait for yields
to back up on any political concerns and then jump in).
And finally, Latin America. The Mexican Peso is the most liquid of the
LATAM currencies and even trades as a reasonably deep contract on
the IMM. The close ties with the US makes this one attractive as a
hedging or speculative currency and the high rates often entice hot
money into it as well. The 1994/1995 Tequila crisis is seen pretty
clearly below as traders went home for the holidays in 1994 only to
find out that the MXN had taken a swan dive in their absence! The
general trend was for a weak MXN over the last few years with carry
trades mostly working out depending on the entry point (yields well
over 20% compensating for the risk). While the Asia crisis of
1997/1998 ran its course with little in the way of sustained pressure
on the MXN, the Russian/Brazil effect of August 1998 really hit the
MXN. Given the liquidity of the MXN compared to the Brazilean Real,
the USD shifted higher in a very aggressive manner and even touched
the 11.10/20 zone after Brazil devalued in early 1999. Since then the
market has seen the MXN firm sharply and a case for 9.20/9.85 as a
range trade can be made. While the recent push towards 9.20/9.15
could have threatened to see 8.70 and lower for the USD, the fact
that yields in the short term instruments dipped to 13% and lower
took away the risk premium. Holding to the view for the range
trading , then buying MXN below 9.20 is not that favoured and in
fact a turn back to 9.60/9.65 is needed before the MXN becomes a
buy again. A sustained USD rally through 9.85 would shift the risk
here and put 10.20/10.50 into the light, not really favoured.
The chart of the Brazilean Real below shows the devaluation, as once
again a market went from We will never devalue to Whoops!.
The toppy pattern after the devaluation could be a head and
shoulders in the USD/BRL with subsequent activity being very flat.
While moving averages are convergeing and there is a risk of a shift
back to 1.90, this one seems more likely to trade in a flat manner
between 1.86/1.76 for the coming months. The 17%+ yields help on
the carry trade for the BRL but keep in mind that activity is mostly
done through the non-deliverable forward market (NDF, with no
exchange of the local currency taking place, only USDs going back
and forth for the difference in FX between entry and exit levels).
Thus, in a crisis, the exit door in the BRL gets very, very small.
SUMMARY
In summary while the potential carry gains are easy to calculate
and the potential positive movement in the regional FX market can
be very attractive the critical factor to keep in mind is that the high
yield on the currency is probably there for a reason. This will
usually make the potential losses on adverse movement in the FX
rates extremely high as the exit door in these markets is invariably
much narrower than the entry door. The question that must be
asked on every trade is Does the potential reward outweigh the
potential risk?. Charts give a very useful indication as to what the
market is doing and can give valuable insights for forecasting
purposes. While data is at times not that clean, this is improving and
the charting of regional FX markets will continue to grow in
importance for hedging and speculative purposes.
8
EURGRO=. Bid [Hi/Lo/Cl Bar] [MA 60][MA20] Daily
TRL=. Bid [Hi/Lo/Cl Bar] [MA 60][MA20] Daily
MXN=. Bid [Hi/Lo/Cl Bar] Weekly
BRL=. Bid [Hi/Lo/Cl Bar][MA 60][MA20] Daily
EURISK=. Bid [Hi/Lo/Cl Bar] [MA 60][MA20] Daily
Issue 38 July 2000 MARKET TECHNICIAN
9
CONCLUSIONS:
1. The new economy TMT group of stocks has recently rallied
from deeply oversold positions. These initial reflex rebounds are
likely to be followed by some back testing. That should lead to
more extensive base-building, which, in turn, should lead into a
new and more sustainable advance later this year.
2. Undervalued old economy groups rallied during the March / May
TMT sell-off. But progress is likely to slow for a while as these
sectors do battle with significant overhead resistance levels.
3. Ultimately, its possible that the two sides manage a degree of
reconciliation. The higher quality TMT build new bases (although
they may well not surpass Q1 peaks for some considerable time)
whilst a number of cyclical / value plays regain their share of the
limelight. The issue is probably not so much new economy versus
old economy as, quite simply, a changing, evolving, economy.
4. Uncertainty and market volatility could remain a feature a little
longer. But, looking ahead to later this year, markets could be
preparing for their next advances. Medium and long term rate-of-
change momentum measures look in place for this, at least for
the U.S. and the UK. These cycle indicators seem to be buying
the soft landing scenario for the Anglo Saxon economies.
CHART 1:
The NASDAQs March May decline broadly speaking found
support in the 50% retracement region of the October 1998 /
March 2000 advance. Medium term momentum (e.g. 13 week
RoC) reached oversold extremes not even seen in October 1998, and
is starting to turn up.
Chart 1: NASDAQ, Fibonacci Retracements, 13 Week RoC
CHART 2:
But a number of technical positives are still missing, e.g. sentiment is
not yet really bombed out. And long term momentum, shown in
chart 2, suggests that at this stage rallies largely still provide trading
buys. A more secure base can be seen in the 2800 area, where a
61.8% retracement of an 18-month trend (see chart 1) more or less
coincides with the 50% level in relation to the entire 1995 2000
bull market. Chart support in this region is a bonus.
Chart 2: NASDAQ, Long Term Chart; Long Term Momentum
CHART 3:
Dow Industrials. The medium term momentum buy signal should
reinforce support levels. At the very least, it should limit downside,
particularly since the long term version has now fallen back to
below the zero line its first visit to that area since Q3 1998. That
kind of combination is not saying that the index starts to trend up
from this point forward, but it is likely to be setting the stage for a
major upturn a little later in the year. Price activity over the last 12
months looks to be shaping up into a diamond: this may be a
continuation pattern. Some people see a head and shoulders:
volume would argue against that.
Chart 3: Dow Industrials, Weekly Data Momentum; Volume
CHART 4:
FTSE looks broadly similar. Medium term momentum is bottoming;
the long term version is already giving a buy i.e. it is a little
ahead of the Dow. The 6400 / 6000 area has recently re-established
itself as support.
Chart 4: FTSE 100
CHART 5:
A founder member of the TMT group, the Software & Computer
Services sector. Sharp falls between March and May have found
support in the 50% retracement region (in relation to the Q3 1999
Q1 2000 relative uptrend). But base-building, leading to a sustainable
new uptrend, is still going to take some time.
Chart 5: Software & Computer Services Relative to the All Share
Equity Markets: Outlook for Wall Street and
FTSE, TMT and Old Economy
By Luise Kliem, MSTA
This article is a brief summary of the talk given to the Society on 10th May 2000
Source: Bridge Information Systems
Source: Bridge Information Systems
Source: Bridge Information Systems
Source: Bridge Information Systems
Source: Datastream
continues on page 11
10
MARKET TECHNICIAN Issue 38 July 2000
INTRODUCTION
Under the normal course of events an analyst examining the
historical record of the behaviour of an exchange traded futures
contract for any particular delivery month would reasonably assume
that the numerical data on prices, volume and open interest
represented the outcome of the trading activity for that contract.
Similarly, it would be assumed that the transformation of these data
into a graphical form would provide a meaningful visual
representation of that behaviour from which various relationships
might be deduced using different analytical techniques. However, it is
likely that this no longer is the case with certain futures contracts.
ENTER MOS
The reason is the existence of the Mutual Offset System or MOS
which is provided by the Chicago Mercantile Exchange (CME) in
conjunction with the Singapore International Monetary Exchange
(SIMEX) for clearing members on both exchanges. What is MOS? It
is a facility to allow new or liquidating trades to be executed on
SIMEX by CME members and then be transferred back to the CME.
The opposite is also catered for e.g. SIMEX firms can have trades
executed on the CME and then be transferred back to SIMEX. The
facility is currently available for three interest rate futures contracts
i.e. 3 month Eurodollar, Euroyen, Euroyen Libor, together with the
Japanese Government Bond. There is also a MOS arrangement ,
termed a Link , between SIMEX and the International Petroleum
Exchange (IPE), London for Brent Crude Oil futures. The
implications of such MOS for technical analysis is discussed here in
the context of the CME-SIMEX system.
MOS allows a participant to effectively borrow the liquidity in
SIMEX when the CME is closed and vice versa, and have the
convenience of only having to post margin for one exchange
i.e. their own local one. In addition, a participant whose local
exchange was, say, the CME, could establish a position in SIMEX
then have two choices open to them:
(1) have the position brought back to the CME at the price their
order got filled on SIMEX, to be processed through the CME
clearing house [as if the order had been filled in the CME pit],
thus being marked to the market against the CME market
settlement price.
(2) leaving the trade with SIMEX and having it processed through
the clearing house system there, thus being marked to the
market against the SIMEX settlement price.
Given such convenience, MOS must undoubtedly be a welcome
development from a hedgers viewpoint. However, a personal view is
that what is generally good news for the hedging community usually
spells bad news for the speculating community. MOS appears to be
no exception.
SOME INFERRED DYNAMICS
However, before spelling out the nature of the bad news it is
necessary to explore the consequences of participants taking
advantage of the MOS facility, in terms of the impact on the internal
dynamics of the auctions at the Chicago and Singapore ends of the
system. If, say, a Chicago based participant has an order executed on
SIMEX, which represents the initiation of a new position, then the
arrival of that order in the Singapore pit will impact on the ongoing
auction, by influencing a shift in the price, in some way depending
on the liquidity conditions prevailing at the time of its arrival in
relation to the size of the order. For the order to be filled, some other
participant, be it a floor broker or a local will have to take the other
side of the trade. Consequently the creation of the transaction will be
recorded in the exchanges time and sales register for that market.
Thus the price level and number of contracts involved will have been
captured and be available to be fed into the clearing house system
should the Chicago based participant decide to leave the position
in Singapore.
What happens if (s)he so elects? The answer is that a footprint of
that trade, in the form of a data point, will subsequently appear in
the tick price data record for that day. If the exchange is in the habit
of issuing volume at tick price then the volume associated with the
trade will also appear there. Secondly, if the position is held after the
Close it will be recognised as new commitment and factored into the
clearing house calculation of the open interest figure for that day. If it
was a relatively large order in relation to the typical orders of the day,
it could well end up helping to generate an increase in the open
interest figure, as it reflects the initiation of a new position(s). So far
what has been described is the normal i.e. non-MOS process,
which would occur irrespective of the geographical location of the
participant.
However, what if our Chicago participant elects to have the position
transferred back to Chicago? It will be marked to the market using
the CME settlement price. As such it will end up being factored into
the clearing house calculations that produce the open interest figure
for that day. The interesting question then arises. What happens to
the transactional volume figure associated with the trade? This has
already been captured by the SIMEX time and sales computers as
was the price tick(s) involved. As such they are a unique constituent
element(s) of the historical record of the auction microstructure at
SIMEX during that trading session in which our Chicago participant
took part. As such these data can hardly be transferred to CME
alongside the fill price(s) of the local trade(s) it would make a
mockery of the time and sales data for that days auction on the
CME, because the trade(s) never took place there! The answer is that
the transactional volume and price ticks remain with SIMEX, but the
trade makes no contribution to its clearing house calculations of the
new open interest figure for the day in question, for that SIMEX
contract.
THE BAD NEWS
How these data, relating to the trades transferred from the
exchange where the position was initiated to the exchange where
the participant wishes to have the trade marked to the market and
thus carried until it is either offset or delivery is made/taken, are
handled, is a key issue. This is because under the normal course of
events the price tick record, which goes to make up the summary
or short-hand statement of the familiar Open, High, Low, Close
price bar, together with the days transactional volume and the
change in open interest represents the outcome of the how of the
way that the various orders were processed in the pit, in terms of
their size and sequence of execution.
As such the record encapsulates the cause and effect relationship
between the three variables of price, volume and open interest.
Knowing this, it is normally quite realistic to undertake an analysis of
these data and have a legitimate expectation that whatever cause-
effect relationship might be discovered for that day [possibly in
conjunction with a number of previous days data] it is valid, and can
thus legitimately be allowed to influence an analyst or traders
subsequent view of the likely future behaviour of the market of
interest.
If, however, as appears to be the case with a market having a MOS
facility, where it seems impossible to maintain the integrity of the
legitimate tick price/volume/open interest relationship that reflects
MUTUAL OFFSETTING SYSTEMS
A PROBLEM FOR TECHNICAL ANALYSIS?
By Dr Michael Wignall MSTA
Issue 38 July 2000 MARKET TECHNICIAN
11
the auction process, the results of any analysis will likely be faulty.
This is because the cause-effect relationship between the three
variables will have been corrupted by the MOS trades which their
owners decided to transfer back to their local exchange.
IS WHAT YOU SEE THE WAY IT WAS?
Before the advent of MOS the answer to this question for the price
chart of any market of interest would simply have been Yes.
However, with the existence of MOS, the answer must now be
Maybe. It will depend on whether the contract under scrutiny
trades on more than one exchange and whether it has been blessed
[cursed?] with a MOS facility or some equivalent. If it has, then the
answer is Unlikely and the analyst and trading system developer
will be inviting trouble if they ignore the implications. Ultimately it
will come down to the volume of MOS transactions involving
inter-exchange transfers in relation to the volume of MOS
transactions not involving inter-exchange transfers and the volume
of non-MOS transactions for the contract of interest. The greater
the proportion of MOS transferred transactions in any one contract,
over time, the greater the likely distortion of the historical record of
the dynamic relationship between intra-day price changes,
transactional volume and inter-day open interest changes for the
contract in question.
SOME CONSEQUENCES
As pressures for 24 hour hedging facilities grow to recognise existing
24 hour global trade flows, it is likely that mutual offsetting will
become an increasingly common feature of contracts as commodity
exchanges around the world set up partnerships based on joint
interest. Why accept the costs of fighting for market share for a new
financial product, or retain a share for an existing product, when the
revenue from its usage in the form of exchange fees can literally be
shared between exchanges co-operating, rather than competing,
across time zones?
Assuming the interpretation of the implications of the mutual offset
process is correct, then the likely consequence is that conventional
technical indicators which factor volume and open interest into
price changes can be expected to demonstrate erratic behaviour in
some markets, but not so in others. Whereas in the MOS-free world
of the past such indicators would have been expected to give
relatively uniform results across any selection of markets, this
comfortable simplicity has likely passed away. In the case of futures,
for example, erratic behaviour can be expected from the operation
of the Herrick Payoff Index, and were MOS to be eventually
extended to cater for options on futures, then the Hines Index
would be so affected. Thus charts, whether they be hard copy or
screen-based might one day, when MOS markets become more
prevalent, display a disclaimer by the more perceptive and risk
conscious data vendors:
This market has a mutual offset facility with another exchange
which may consequently render unreliable any analytical methods
which factor volume and open interest into the price history.
Analysts making recommendations or traders basing decisions on
such methods do so entirely at their own risk.
CONCLUSIONS
In other words no assurance can any longer be implied that what is
being offered via a chart is how it actually was. Unfortunately a MOS
such as the CME-SIMEX, has the ability to destroy the hitherto
inseparable linkage between tick price, volume at tick price, daily
volume and changes in open interest. Perhaps the most prudent
approach would be for analysts and traders with a speculators
mindset to avoid futures markets which have MOS assuming they
take the trouble to discover which do.
Computer based trading system developers who typically view
markets simply as collections of time series data needing to be
manipulated, and who lack any real understanding, or even interest in
the how or the why the numbers came into existence in the form they
did, are particularly vulnerable to the trap offered by such markets.
Of course speculator participants who remain ignorant of the
problem will continue to unwittingly provide the liquidity that the
hedging community needs. As ever, hedgers bliss can be defined in
terms of speculators ignorance, and MOS represents just one more
potential facet of the latter attribute. Speculators wondering why the
actual future, being experienced through the constantly unfolding
present, does not materialize in the form that their definition of the
future would have them believe it should, may unknowingly be
trading a market with a Mutual Offset System. One in which
significant inter-exchange transfers are taking place.
REFERENCES
Chicago Mercantile Exchange, CME/SIMEX Mutual Offset System;
The Worlds Most Successful Trading Link, CME, n.d., Chicago, IL.,
http://www.cme.com/market/interest/ mos.html
Chicago Mercantile Exchange, Euroyen Futures At The CME, CME,
n.d., Chicago, IL., http://www.cme.com/ market/euroyen.html
Chicago Mercantile Exchange, CME Contract Specifications For
Interest Rate Futures And Options, CME, Jan. 06, 2000, Chicago,
IL., http://www.cme.com/clearing/spex/ csinterestrate.html
Chicago Mercantile Exchange, Interest Rate Marketing Dept. to
Wignall, Jan. 24, 2000, (e-mail)
Hines, Ray, Hines Index, Technical Analysis Of Stocks &
Commodities, Vol. 7, No. 4, (April) 1989.
Neil, Trevor, The Herrick Payoff Index: making use of futures
contracts open interest, Market Technician, Issue No. 25, (March)
1996.
Wignall to CME Currency & Interest Rate Marketing Dept., Jan. 24,
2000, (e-mail)
Authors postscript: SIMEX has since merged with the Singapore
Stock Exchange to form what is known simply as the Singapore
Exchange, or SAX. The MOS facility remains in being.

Copyright Michael Wignall 2000


The writer (who, contrary to conventional wisdom, is seeking to
develop the Holy Grail of computer based trading systems)
welcomes comments on this article, via the journals Letters section,
or tel. 01923 450681, or email wig.mail@telinco.co.uk
continued from page 9
CHART 6:
Old economy sector Restaurants, Pubs & Breweries. Spike
downtrend reversals by these groups have been a common
occurrence in the market this year. They look to be bottoming, but
they have a lot of overhead resistance areas to deal with, both in
absolute and relative terms.
Chart 6: Restaurants, Pubs & Breweries, Relative to the All Share
Reprinted by permission. Luise Kliem, Analyst, Merrill Lynch
Copyright

2000 Merrill Lynch, Pierce Fenner & Smith Incorporated


Source: Datastream
12
MARKET TECHNICIAN Issue 38 July 2000
INTRODUCTION
Financial markets like futures and commodity markets produce
enormous amounts of data for analysis. It is much quicker and easier
to analyse a graph than it is to analyse copious amounts of tabular
data. So it is not surprising that many people choose to display data
in a graphical format. How this data is actually represented on a
chart, and what information is highlighted, depends on the nature of
the plot type.
Different plot types make certain information more obvious than
others. Bar charts, line charts, point and figure charts, candlestick
charts and CBOT Market Profile are all different plot types.
ChronoGraphics
SM
is a new plot type and, as such, should be thought
of in the same terms.
However ChronoGraphics offers very easy access to more
information than that offered by other plot methods. It tells you:
what happened first in a period the high or the low?
how fast the move was between the high and the low was it
quick or slow?
when during the period the high or low happened- early or late?
What this means in terms of added analysis capabilities we shall
cover later. First, let us examine the way a ChronoGraphics bar is
drawn. The easiest way to do this is to examine the way that a
traditional bar is constructed and then to compare this with the way
that a ChronoGraphics bar is constructed.
Construction of Traditional bars and
ChronoGraphics bars
A traditional bar is constructed by finding the highest high traded
during the trading period under consideration and then the lowest
low. The difference between the two gives the periods trading range;
and it is represented by a single vertical bar, drawn from the low to
the high. The bar also includes a mark, showing the close (usually the
last trading price) of the period. When plotting a markets
performance over more than one time period, each bar is separated
from the neighbouring bars by a constant distance. The construction
of a weekly bar, which embraces five trading days, is shown in Figure
1.0 below.
Fig 1.0
With ChronoGraphics, however, the bar is drawn from the actual low
to the actual high. This reflects the time element. See Fig 1.1
opposite.
Fig 1.1
If the price action for the week had been different, but the high, low
and close had been the same, the traditional weekly bar would have
been as in Fig 1.2 opposite.
Fig 1.2
However using the ChronoGraphics methodology there would have
been a clear indication that the action during the period had been
very different, as in Fig 1.3.
Fig 1.3
So in Figure 1.1 we have a forward, or positive, sloping bar and in
Figure 1.3,we have a negative, or backward, sloping bar. The slope
of the bars shows us the exact sequence of events during the period.
It represents the directional characteristic of a bar. We can also tell
from the angle of this slope whether the move occurred quickly or if
it took most of the period.
We have two more bits of information to add to complete the
ChronoGraphics bar. These are the Open and the Close. On a
ChronoGraphics bar, the colour between the Open and the Close is
shown in a different colour from that which is otherwise used
between the High and the Low extremes. See Figure 2.
ChronoGraphics
SM
By Nick Burnton
Fig 1.0
Fig 1.1
Fig 1.2
Fig 1.3
5 Days
H
ig
h
L
o
w
X axis Time
Y

a
x
i
s


P
r
i
c
e
High
Close
Standard Weekly
Bar Chart
Low
5 Days
5 Days
5 Days
H
ig
h
H
igh
H
ig
h
L
o
w
L
o
w
L
o
w
X axis Time
X axis Time
X axis Time
Y

a
x
i
s


P
r
i
c
e
Y

a
x
i
s


P
r
i
c
e
Y

a
x
i
s


P
r
i
c
e
High
Close
Standard Weekly
Bar Chart
Low
High
Close
Standard Weekly
Bar Chart
Low
High
Close
Standard Weekly
Bar Chart
Low
ChronoGraphics
BAR
ChronoGraphics
BAR
Issue 38 July 2000 MARKET TECHNICIAN
13
Fig 2
By adding in this information we are now also able to define each
ChronoGraphics Bar in terms of its behavioural characteristics: This is
because the Close may be either above or below the Open.
If a Close is above the Open in a positive sloping ChronoGraphics bar
(Fig. 2.1 and Fig. 2.2), or if the Close is below the Open in a
negative sloping ChronoGraphics bar (Fig. 2.5 and Fig. 2.6), then
that bar is deemed to be normal.
If, however, the Close falls back below the Open in a positive sloping
bar (Fig.2.3 and Fig. 2.4), or if the Close rises back above the Open
in a negative sloping bar (Fig.2.7 and Fig. 2.8), then that bar is
deemed to be abnormal.
Note that for an abnormal bar, the colours of the ChronoGraphic bar
invert.
The importance of an abnormal ChronoGraphics bar (whether
positive or negative sloped) is that it is an item of additional
information, which has trading implications. Evidence suggests that
only about 10% of ChronoGraphics bars are abnormal.
ChronoGraphics bars can therefore be defined by their directional
and behavioural characteristics.
Applications of ChronoGraphics
The extra information that is supplied by ChronoGraphics bars can be
used in a number of different areas of Technical Analysis. Chapters of
a book could be devoted to some of these areas. However, here is a
very brief overview:
Multiple time frames
Multiple time frames have been difficult to incorporate on one chart
using traditional bars. Quite simply, they become too difficult to
read. ChronoGraphics allows the overlay of a number of periods,
with no confusion, and with clear and easy to read trend lines.
Trend lines
When using traditional bars, trend lines drawn using different time
frames tend to give different results. ChronoGraphics integrates
different time frames on one chart, and thereby gives consistency
of trend line signals. Also ChronoGraphics enables trend lines to be
drawn that, although relevant to trading decisions, would not have
been apparent using traditional methodology.
Chart patterns
With each bar now being defined in more detail, classic chart
patterns can be seen and analysed in more detail. Also
ChronoGraphics has its own unique patterns given by the various
angles, colours and lengths of the bars.
System testing
One of the drawbacks of traditional system testing is that the
algorithms in software assume that the price extreme closest to the
Open was the one that traded first. This is not always necessarily
true and can give false system performance results. ChronoGraphics
shows the chronology of High, Low, Open and Close.
Formulae
Generally speaking, current formulae used in TA are restricted in
their ability to adapt to market conditions due to the one-
dimensional time element. However with the added information
from the slope of the bar (in terms of direction and angle), as well
as the time element of the extremes, the potential for deriving
new and better formulae has increased significantly.
Strategy
ChronoGraphics can be used to focus attention on opportunities in
the market such as highlighting abnormal market conditions. This
can be combined with other forms of analysis to formulate a
strategy for trading.
CONCLUSION
ChronoGraphics bars are a new way of presenting price information.
They provide much more information per bar than was traditionally
the case. The slope of the bar provides information about the
direction and speed of the market movement, and the colours of the
bars provide information about the chronology in between the open
and the close. In principle ChronoGraphics integrates the information
from traditional bars and candlestick bars, and goes beyond both.
Probably the most exciting aspect of using ChronoGraphics is that
they provide new building blocks for research to be carried out.
ChronoGraphics will be available from Bridge Information Systems on
BridgeStation as part of their charting software packages of Athena
and AthenaExpert as from the middle of July. Chronographics will
also be available on Aspen Graphics for BridgeFeed. Bridge has a
Patent pending on ChronoGraphics.
Nick Burnton is the European Director of Technical Analysis at Bridge
Information Systems.

Copyright Nicholas Burnton 2000


Fig 2
Fig 2
Fig 2.1 Fig 2.2
Positive Normal
Fig 2.3 Fig 2.4
Positive Abnormal
Fig 2.5 Fig 2.6
Negative Normal
Fig 2.7 Fig 2.8
Negative Abnormal
Open Open
Low
High
Close
Close
Bytes & Pieces
The Global Exchange Database from
Grade Publishing
Finding a reliable source of data is never easy, so you may wish
to check out the Global Exchange database. As the name
suggests it covers all the worlds major exchanges and have an
extensive database of stock, commodity and derivative
instruments. The data is updated daily via the Web or can be
FTPd to your own network, with an extensive database, many
Technicians may find this an invaluable resource.
For details see Grade Publishing Ltd: Tel: 020 8672 6655
* * *
Need another Brain?
Artificial Intelligence can help!
The use of artificial intelligence modelling technologies continues
to become more accessible with the release of TradingSolutions
a technical modelling programme by NeuroDimensions.
TradingSolutions combines traditional indicators with neural
networks and genetic algorithms, with step by step wizards to
allow you to chart and model times series data. It also has the
ability to read standard format ASCII or Metastock data. This is
the most user friendly program of this type I have seen, with
guided instruction and a step by step tutorial.
Contact NeuroDimensions: Tel: 001 352 377 5144
14
MARKET TECHNICIAN Issue 38 July 2000
INTRODUCTION
In early 1999 I had a paper in the March issue of the Market
Technician entitled, Using Non-linear neurogenetic models with
profit related objective functions to trade the US T-Bond future. The
paper described a neural network based bond futures trading system,
the performance of which I later presented at a talk I gave to the STA
in February 2000.
The paper was originally written for an academic conference and, as
such, was not particularly trader friendly. Given that readers of the
MT tend to be practitioners rather than academics, in this article I
explain how I built the system from a traders perspective and, more
importantly, show how the system has performed over the last 2
years, during which it has been running in real-time.
It is an EOD system and is 100% mechanical with no over-rides.
The system is in fact fairly simple even though the methods used to
build it may appear complex if one has little experience in using
neural networks. It uses five inputs in all; two formed from Bond
futures prices and three from the S&P500 futures two of which
are merely lagged values of the one distinct S&P input see figure
1. A genetic training algorithm was used as this allows one greater
flexibility with regards to the choice of objective function (i.e., MSE,
Total Profit etc.) than the more commonly used gradient-based
algorithms.
METHODOLOGY
The steps taken to build the system were as follows:
1) Using historical closing data derived from the 30 year T-Bond and
S&P500 futures contracts, spanning from the 12th April 1983 to
the 10th Oct 1994 (approx. 3000 days of in-sample data),
design inputs/indicators which show correlation to future T-bond
futures price returns.
2) Using the derived indicators as inputs, test a number of neural
network architectures and optimisation functions. Choose the
architecture with the least free parameters and the most stable
and profitable performance over the full in-sample dataset.
Figure 1 shows the resulting optimal neural network
architecture.
3) Train 20 separate networks with the specified architecture to
convergence by maximising total log returns.
4) Use the outputs of the resulting networks in conjunction with a
majority trading rule to create daily buy and sell decisions.
5) Run networks on out of sample data from 10th Oct 1994 to the
30th June 1998 and examine performance (approx. 900 days out
of sample data).
No stops were used for the system after a number of tests showed
them to be detrimental to overall performance. My research has
shown that this is generally the case with trading systems designed
using this methodology a result somewhat at odds with the
commonly held notion that stops are de rigueur. It may be that
including stops in the initial optimisation process would yield different
results as opposed to adding them ex post facto. In actual trading the
idea is to have enough capital in the trading account to deal with
drawdowns and to use a peace of mind stop placed at a distance
such that it will only be hit in extreme trading conditions. A standard
monte carlo simulation was used to analyse drawdown
characteristics.
Figure 1. Neural Network architecture used for final system.
Figure 2. In-sample and out of sample equity curve.
Figure 2 shows the cumulative equity curve over the whole in and out
of sample periods. It can be seen from the chart that the performance
is relatively stable and exhibits a steadily upward sloping equity
curve. The figure for slippage and commission was derived from
experience trading with real prices and amounted to average slippage
per round turn (RT) of 1 tick ($31.25) and commission of $20 i.e., a
total of US $51.25 per RT. The slippage of 1 tick per RT is not
surprising given that when using the open(t+1) to open(t+2) to trade
there is no significant difference to the results. Table 1 shows a
performance summary from the same period (the results have been
amalgamated over both in and out of sample periods for the sake of
brevity all figures include slippage & commission).
Table1. In-sample and out of sample performance summary.
Trading a 2 year old the real-time performance
of a neurogenetic T-bond futures trading system.
By Zac Harland www.kruegerresearch.com
Total net profit $202,183 Ratio avg win/avg loss 1.24
Total no. of trades 710 Avg trade $284
% profitable 57% Max consec. winners 9
No. winning trades 410 Max consec. losers 7
No. losing trades 300 Avg bars in winners 6
Largest winning trade $9,698 Avg bars in losers 5
Largest losing trade -$4,238 Max drawdown -$10,389
Average winning trade $1,199 Profit factor 1.69
Average losing trade -$965 Sharpe Ratio 1.3
Issue 38 July 2000 MARKET TECHNICIAN
15
Real time Results
The system has been operating in real-time since the 30th June
1998. Its cumulative equity curve can be seen in figure 3, along with
some standard measures of performance in table 2. All figures
include slippage & commission as referred to above.
Figure 3. Real-time performance.
Table 2. Real-time performance summary.
It is evident from the real-time results that the system continues to
perform within expectations. In fact it has over performed with
regards to average trade figures and so one would expect some
reversion to the mean as time passes. Figure 4 shows the Underwater
Equity Curve of the system during the real-time period. Note that the
chart depicts the underwater equity that would have been
experienced if one was trading a single contract, assuming a $20,000
account. This is somewhat artificial if ones money management
policy dictates an increase in the number of contracts traded as
account equity rises and results in equity drawdowns, as a
percentage, decreasing unrealistically towards the right hand side of
the chart.
Figure 4. Underwater Equity Curve
DISCUSSION
A point worth raising is that there is nothing inherently complex
about the way in which the neural network was utilised. It would
have been perfectly possible, with the same inputs, to design a
trading system using traditional methods of technical analysis
however, it is more than likely that this would have resulted in less
than optimal performance. The justification for using a neural
network is that when used correctly they are one of the better
tools for extracting trading signals from inputs/indicators suffering
from low signal to noise ratios . They are certainly more efficacious
than the brute force optimisers found in many trading packages
traditionally brought to bear in trading system design.
The networks are not designed to be re-trained, as it is assumed
that the inputs themselves will adapt to current market conditions.
For an article elucidating the pros & cons of using a neural
network as opposed to traditional methods please visit my website
at www.kruegerresearch.com.
In the initial search for reliable inputs many of the more commonly
known indicators were tested but found wanting; they did not
exhibit sufficiently stable relationships with T-Bond returns to be
considered for the model. If noise inputs are used the neural
network will suffer from the garbage in, garbage out syndrome
and no amount of optimisation, connectionist or otherwise, will
create a workable trading model. Of course, it is not just sufficient
to find inputs that contain some measurable and usable signal in-
sample; the signal content must remain stationary in its
relationship to both historical and future T-Bond returns. Designing
inputs with these attributes is no trivial endeavour a fact anyone
who builds trading models will attest to. In fact input/indicator
constancy is arguably the most important issue concerning
mechanical trading system design, regardless of the methodology
used (of course money management is also very important,
though it is only applicable once ones model exhibits a statistical
edge).
To arrive at the inputs for this system I used a number of
correlation measures including mutual information and coherence
amongst others. It is not advisable to use linear correlation
measures as they will not detect non-linear regularities, if they
exist in the data. Moreover, if one is testing for linear correlations
it is prudent to use a non-parametric statistic as prices and price
returns tend not to conform to most standard statistical
assumptions i.e., normality, stationarity, homoskedasticity etc. See
Rzempoluck (1998) for further information software is included
for the calculation of linear correlation, mutual information and
coherence.
THE FUTURE
The most important consideration at this juncuture is whether or
not the system will continue to perform in the future. Since the
original system was built it has been updated with the objective of
rendering it more robust to potential future input degradation. To
do this, two additional systems were created, each constructed in
an identical manner but using different inputs. The outputs of all
three systems are combined using a majority rule again to provide
the final signal. The overall performance should be improved due
to low correlation between each individual systems trading signals.
The system is now running live on my website for those readers
interested in viewing the signals in real-time.
REFERENCES
Harland, Z. 1999. Using nonlinear neurogenetic models with profit
related objective functions to trade the US Tbond future. The
Market Technician. March 1999.
Rzempoluck, E.J. 1998. Neural network data analysis using
simulnet. Springer-Verlag. New York.
Total net profit $27,024 Ratio avg win/avg loss 1.64
Total no. of trades 80 Avg trade $337
% profitable 53% Max consec. winners 4
No. winning trades 42 Max consec. losers 5
No. losing trades 38 Avg bars in winners 6
Largest winning trade $6,667 Avg bars in losers 6
Largest losing trade -$3,238 Max drawdown -$6,006
Average winning trade $1,435 Profit factor 1.81
Average losing trade -$875 Sharpe Ratio 1.7
16
MARKET TECHNICIAN Issue 38 July 2000
PROGRAMME
THURSDAY, OCTOBER 5, 2000
9.00-13.00 Walkabout with John Brooks
13.00-14.30 Lunch
14.30-15.15 Wieland Staud
15.15-16.00 Rudolf Wittmer
16.00-16.30 Coffee break
16.30-17.30 (with spouses) Adrienne
L Toghraie: Come out on top
18.00 Buses leave for Kluster
Eberbach (Wine tasting,
Sightseeing, Dinner)
FRIDAY, OCTOBER 6, 2000
09.00-09.45 Hartmut Sieper:.
Three-Dimensional Technical
Analysis
09.45-10.45 Erich Florek: KISS Dilemma
Avoiding KISS-philosophy
Negatives and Evolving
Technical Analysis Beyond it.
10.45-11.30 Coffee break
11.30-12.30 Japan Hour
Takehide Matoba:
A new Money Management
Technique Combining and
Oscillator Indicator and
MACD
Kouchi Suzuki:
The application of the
Ichimoku Balance Table (no. 2)
MinoruEda:
The Japanese Traditional
Chart (Makino chart) and its
Modernistic Interpretation.
12.30-14.00 Lunch
14.00-14.45 Jorge Bolivar:
Quantitative Pattern
Recognition Forecasting
Methodology.
14.45-15.30 Patrick Young
15.30-16.00 Coffee break
16.00-16.45 Joachim Goldberg:
Everything Under Control?
Or Bet on the Wrong Horse?
16.45-17.30 Prof. Hank Pruden
Free evening
Dinner with Ouants / Press Event
SATURDAY, OCTOBER 7, 2000
09.00-09.10 Welcome address by Bruno
Estier, IFTA Chairman, and
Mike Esptein, Chair of the
TA/QU meeting.
09.0-10.00 David Damant
10.00-10.45 Emmanuel Acar:
Inferences of Stop-loss on
Return Distribution
Comparison of Various Asset
Classes.
10.45-11.30 Coffee break
11.30-12.30 Ian Notley/John Brooks
12.30-14.00 Lunch
14.00-14.45 Ralph Acampora
14.45-15.15 Prof. Paul Weher,
John F. Murray:
Is Technical Analysis in the FX
Market Profitable? A Genetic
Programming Approach.
15.15-15.45 Pierre Lequeux:
Profitability of Technical
Indicators at High Frequencies.
15.45-16.15 Coffee break
16.15-16.45 Prof. Andrew W. Lo:
Foundations of Technical
Analysis: Computational
Algorithms. Statistical
Inference and Empirical
Implementation.
16.45-17.15 Panel discussion:
Technical Analysis
A New Research Path for
Quantitative and Academics
Methods. Where Are We So
Far? Prof. Hank Pruden,
Prof Stephen Satchell, Prof.
Mark Taylor, Robert Schwob,
David Darmant.
18.00 Visit to the Guttenberg
museum (where the history
of information began).
SCHEDULED SPEAKERS
Ralph Acampora, CMT, Managing Director,
Global Equity Research, Prudential
Securities and founding member of IFTA.
Linda Bradford Raschke, Author of Street
Smarts expert in short-term trading
methodologies, etc.
David Damant, President of the EFFAS
Erich Florek, Manager and Director of
Technical Trading, Midas Trading House.
Joachim Goldberg, Global Head for
Technical Analysis and Behavioural
Finance, Deutsche Bank. Author of
Behavioral Finance, Finanz Buch Verlag.
Ian Notley and John Brooks, Yelton Fiscal
Inc., respectively Publisher and Director
of Sales for Institutional Information
service Notleys Notes, specialising on
long-term cycles in the international
financial and commodity markets.
Joerg Schreiweis, Chief of Equity Sales, DG
Bank. Advisory board member and
former Chairperson of the VTAD.
Hartmut Sieper, Consultant, Author of
numerous books and articles on
Technical Analysis and current board
member of the VTAD.
Wieland Staud, Managing Advisor for
Sinus Funds. Well-known German Elliott
Wave Analyst.
Adrienne Laris Toghraie, President of
Trading on Target.
Rudolf Wittmer, President of WHS GmbH,
which specialises in system development
and a leading expert in the field of
trading systems.
Patrick Young, Author of Capital Market
Revolution, Prentice Hall 1999. Founder
and Editor of the electronic magazine,
Applied Derivatives Trading.
Prof. Andrew W. Lo, MIT Sloan School of
Management (via video conference).
Prof. Paul Weller, John F. Murray,
University of Iowa.
Pierre Lequeux, ABN AMRO London
Research.
Prof. Hank Pruden, Golden Gate University.
Prof. Stephen Satcheli, Cambridge
University.
Prof. Mark Taylor, Oxford University.
Robert Schwob, Style Research.
HOTEL ACCOMMODATION
Mainz Hilton (The Conference Hotel)
Rheinstrasse 68
Tel: +49/6131/2450
Fax: +49/6131/245589
DM 280/night for double or single room,
plus DM 30 pp for breakfast.
When reserving please be sure to specify
that your reservation is in connection with
the IFTA 2000 Conference.
IFTA Conference 2000 The Challenges of
Information Overload in Todays Marketplace
October 5-7, 2000, Mainz Hilton, Mainz
CONFERENCE FEES
3-day conference, including all lectures, luncheons and evening events.
Early Registration
(Until July 31, 2000) Registration Fee
IFTA and VTAD DM 1.450, -- DM 1.590,--
Non-IFTA members DM 1.750,-- DM 1.890,--
Spouse program DM 900,--

Вам также может понравиться