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Strategies, News, and Analysis for Forex Traders

November 2006
Volume 3, No. 11


2007 U.S. dollar and CMO-forex p. 26
economic outlook p. 8
Tendencies, characteristics, trade analysis p. 42
and patterns p. 12
CURRENCY TRENDS go to court p. 29
and volatility p. 20

Advanced Strategies . . . . . . . . . . .20

Currency trends and volatility
Interesting insights come from putting
currency volatility under a microscope.
By Howard L. Simons

Currency System Analysis . . . . . .26

Intraday CMO-FX

Industry News
CME, CBOT join forces . . . . . . . . . .28
The Chicago Mercantile Exchange and
the Chicago Board of Trade announced a
merger in late October, creating what would
be the world’s largest derivatives exchange.
Contributors . . . . . . . . . . . . . . . . . . . .6
Lawsuit latest twist
in RefcoFX saga . . . . . . . . . . . . . . . .29
Global Markets . . . . . . . . . . . . . . . . . .8 After twice having deals for the company
Dollar doldrums fall through and seeing RefcoFX cease
The buck outlook: Will the dull dollar operations, customers of the brokerage
limp into a new year, or is it poised are filing suit to regain lost account balances.
for a new trend? Perhaps the economic
data holds some clues. Competition gives collegians
By Currency Trader Staff early entry into forex trading . . . . . .29
Finance students from 15 colleges took
part in a forex trading contest.
Trading Strategies . . . . . . . . . . . . .12
Breaking down the euro continued on p. 4

Studying the euro’s daily and intraday

performance statistics offers guidelines
for systematic and discretionary traders.
by Currency Trader Staff

2 November 2006 • CURRENCY TRADER


Currency Futures
FX futures hit
new volume highs . . . . . . . . . . . . . .32
Forex futures at the Chicago Mercantile
Exchange post record volume in September.

Currency fund manager New products and Services . . . . .38

performance . . . . . . . . . . . . . . . . . . .32

International Key Concepts . . . . . . . . . . . . . . . . . .39

Market Summary . . . . . . . . . . . . . . .34 References and definitions.

Global News Briefs . . . . . . . . . . . . .36 Global Economic Calendar . . . . . .40

Key dates for currency traders.

Events . . . . . . . . . . . . . . . . . . . . . . . .38 Forex Trade Journal . . . . . . . . . . . .42

Conferences, seminars, and other events. Will the kiwi provide a kick?

Have a question about something you’ve seen in

Currency Trader?
Submit your editorial queries or comments to

Looking for an advertiser?

Consult the list below and click on the company name for a direct link to the ad in this month’s
issue of Currency Trader.

Index of advertisers

FXCM FXCM Currency Trading Expo

Forex.com Las Vegas Trader’s Expo
InterbankFX Currency Trader Bookstore
NewsTrader Pro Futures Trading Summit
MetaStock PFG Forex

4 November 2006 • CURRENCY TRADER


A publication of Active Trader ®

For all subscriber services:  Volker Knapp has been a trader, sys-
tem developer, and researcher for more
Editor-in-chief: Mark Etzkorn
metzkorn@currencytradermag.com than 20 years. His diverse background

encompasses positions such as German

Managing editor: Molly Flynn
mflynn@currencytradermag.com National Hockey team player, coach of the Malaysian

Contributing editors: Jeff Ponczak National Hockey team, and president of VTAD (the
David Bukey (dbukey@currencytradermag.com) German branch of the International Federation of

Technical Analysts). In 2001 he became a partner in

Contributing Writers:
Marc Chandler, Barbara Rockefeller
Wealth-Lab Inc., which he is still running.

Editorial assistant and

Webmaster: Kesha Green
kgreen@currencytradermag.com  Howard Simons is president of

Art director: Laura Coyle Rosewood Trading Inc. and a strategist for
Bianco Research. He writes and speaks fre-
President: Phil Dorman
pdorman@currencytradermag.com quently on a wide range of economic and

financial market issues.

Ad sales East Coast and Midwest:
Bob Dorman

Ad sales
West Coast and Southwest only:
Allison Ellis

Classified ad sales: Mark Seger


Volume 3, Issue 11. Currency Trader is published monthly by TechInfo, Inc.,

150 S. Wacker Drive, Suite 880, Chicago, IL 60606. Copyright © 2006
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 pur-

poses 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.

6 November 2006 • CURRENCY TRADER


Dollar doldrums
The dollar has been in a coma, despite a raft of notable economic and geopolitical catalysts.
Any number of events could eventually breathe life back into the market, but given past performance,
it’s difficult to conclude when the patient might come off life support.


IFR-Forex Watch managing analyst Jamie Coleman notes

that major issues such as the North Korean nuclear test tra-
ditionally would have sparked a surge in volatility.
“In the old days, that would have gotten us rocking and
rolling, and today we just sit back and yawn,” Coleman

A look at a daily EUR/USD chart (Figure 3) shows the pair
comfortably ensconced in a range between roughly $1.30
and $1.2450 since mid-May.
“The guys whose profits depend on movement in
exchange rates are really struggling,” says Bob Lynch, head
of G-10 FX strategy-Americas for HSBC. “We saw a big
hedge fund blow up, as well as geopolitical events, and yet
they have not done anything to generate a breakout in the
Three-month statistical volatility is below 6 percent for
EUR/USD, the lowest on record since the euro was
launched in January 1999, notes Sean Callow, senior cur-
rency strategist at Westpac Institutional Bank.

T he U.S. dollar story of late has been the

marked lack of a story. Despite the expected
end of U.S. Federal Reserve tightening,
nuclear tests by North Korea, a coup in
Thailand, rumblings in Iran, a drop in crude oil prices, and
the upcoming U.S. mid-term elections, the trade in the
greenback has been, well, boring (see Figures 1 and 2).
One-year yen option volatilities are “extremely low” at
7.75 percent, according to Brian Dolan, director of research
at Forex.com, a division of Gain Capital. He says a typical
range for that option volatility is 9 to 12 percent.
“Anything sub-9 percent is considered low,” he says.

The $1.30 line in the sand

Implied volatility levels in euro/dollar (EUR/USD) and It’s no secret European finance ministers don’t want to see the
dollar/yen (USD/JPY) options have plunged, reflecting the euro/dollar push above $1.30. Concerns regarding export
stability — or stagnation — surrounding the dollar. competitiveness with a euro/dollar above $1.30 have kept

8 November 2006 • CURRENCY TRADER


The U.S. dollar index has chopped up and down in 2006 after establishing a
European finance ministers busy “jawbon- yearly low in May.
ing” the currency down from that level.
However, it is not just the Europeans
who seek to keep the U.S. dollar within
recent ranges.
“Various central banks have been
actively selling euros above $1.28 and
buying euros around $1.24 to 1.25,” Dolan
IFR’s Coleman says the euro/dollar sta-
bility reflects a structural change. China
and other Asian central banks have a vest-
ed interest in U.S. dollar stability.
“If they are going to be long a trillion
dollars, they’d rather not see it appreciate
or depreciate rapidly,” he says.
Chinese reserves of U.S. dollars totaled
around $769 billion as of the end of
September, but speculation is rampant
that it will quickly hit the $1 trillion mark.
Source: TradeStation
At the polls
Most market watchers expect the Nov. 7 U.S. FIGURE 2 — DIFFERENT TIME FRAME, SAME STORY
midterm elections to come and go without a The monthly dollar index chart is, interestingly, similar to the daily
blip on forex screens. Analysts say the markets chart: A sell-off followed by a consolidation. The congestion in Figure
are priced for the Democrats to regain control of 1 is simply part of a larger consolidation dating back to 2004.
one or both of the houses in Congress. But the
likely resulting deadlock between a Republican
president and a democratic congress makes the
scenario a non-event for the forex markets.
“The surprise would be if Republicans main-
tained control,” says Jim Glassman, senior econ-
omist at JP Morgan Chase. But even that, he
says, is not likely to spark currency action.
“The markets just view it as a gridlocked gov-
ernment,” he says.

U.S. rates: The Fed’s next move

A more important factor for currency traders to
monitor is the U.S. Federal Reserve. The Fed has
been on hold since its late-June interest-rate
hike, which took the Fed funds rate to 5.25 per-
Some analysts say the next move could be a
cut in early 2007, while others warn there could
Source: TradeStation
be additional monetary tightening in this cycle.
The Fed is scheduled to meet next on Dec. 12,
but for now market watchers expect no change in rates at He says if that were to occur, it should produce a downside
that meeting. range break in the euro/dollar.
“Unexpected resilience in the U.S. economy could put a Conversely, Dolan believes if the Fed shifts toward easing
Fed rate hike back on the agenda,” Westpac’s Callow says. continued on p. 10

CURRENCY TRADER • November 2006 9


Finstrom, senior financial futures analyst
The EUR/USD’s extended range has dropped volatility readings (bottom) at Citigroup.
to their lowest levels since the euro’s launch in 1999. The main culprit behind the slowdown?
Analysts say the restrictive monetary poli-
cy sparked a retreat within the housing
“Housing will have a strong and nega-
tive ripple affect on the rest of the econo-
my,” says Paul Kasriel, chief economist at
Northern Trust & Co. “A large portion of
jobs created in this expansion were in
housing. House prices are falling now.
Home ‘ATM machines’ are no longer refill-
ing. Housing is contracting and consumer
spending has slowed.”
Kasriel believes the U.S. economy is in
for a number of quarters of growth below
3.0 percent, even 2.5 percent or less. He
says recession worries will bring Fed rate-
cut talk to the FOMC table over the next
several months.
Source: TradeStation High crude oil prices have also been a
key factor for the economy. November
in 2007, the dollar could come off strong. crude oil futures have plummeted from
“The euro/dollar could challenge $1.30,” he says. over $80 per barrel in mid-July to below $60 per barrel as of
late October. However, some believe the benefits may be
U.S. economic overview muted.
A distinct economic slowdown has been recorded in recent “Even though $60 is better than $80, it is not like the ener-
quarters in the U.S. After a whopping 5.6 percent gross gy drop has given a huge shot in the arm to the economy,”
domestic product (GDP) reading in the first quarter of 2006, says Ken Goldstein, economist at The Conference Board in
readings tapered off to 2.6 percent in the second quarter, New York City. “We will end the year with consumer confi-
with preliminary readings for the third quarter scheduled dence that has cooled off considerably.”
for release on Nov. 29. Briefing.com forecasts a 2.0 percent
Q3 reading. Factors to watch
“The big question is the status of the U.S. slowdown and As always, there are potential wildcards that could shake
if we see a recovery into late 2006 and 2007,” says Lisa up U.S. dollar action. The U.S. housing market still looms
large. While prices have decelerated in
some parts of the U.S., if an all-out
plunge were to occur, that could poten-
HIT YOUR MARK! Contact Bob Dorman
Ad sales East Coast
tially force the U.S. Federal Reserve to
Advertise in and Midwest
consider cutting U.S. interest rates,
Active Trader Magazine bdorman@activetradermag.com which generally is considered a bearish
(312) 775-5421 factor for the greenback.
Allison Ellis
Also, traders should keep on an eye
Ad sales West Coast on upcoming trade deficit data. The
and Southwest latest numbers available in late
aellis@activetradermag.com October revealed a $69.9 billion deficit
(626) 497-9195 in August, up from July’s $68 billion
Mark Seger deficit. However, Tim Mazanec, senior
Account Executive foreign exchange strategist at
mseger@activetradermag.com Investor’s Bank & Trust, says falling
(312) 377-9435 crude oil prices could help narrow the

10 November 2006 • CURRENCY TRADER

trade deficit in the months ahead.
“So far, the trade deficit figures have The dollar/yen pair has rallied off its May low, and some market watchers
been expanding the wrong way,” he see more potential for movement in this rate than EUR/USD.
says. “But we haven’t seen the impact
from lower crude prices yet. That will
help lower the deficit.”
Mazanec speculates the trade deficit
could narrow toward the $63 or $62 bil-
lion mark, which should emerge in the
next report or two, he says. “That is one
item that could break us out of the range
— it could send the euro to $1.23,” he
Traders can mark their calendars for
Nov. 9 at 7:30 a.m. ET, when September
trade balance data is scheduled for
These days, certain issues are never
far from the minds of traders.
“Another terror attack on U.S. soil
would spark U.S. dollar selling as the
U.S. stock market reversed,” Westpac’s Source: TradeStation
Callow says. “Or, if China came out with
a surprise relaxation of its FX regime, than euro/dollar into 2007,” Callow says. “The Bank of
this would send dollar/yen sharply lower.” Japan has been paying attention to the huge amount of
Another factor to watch are hedge funds, in the wake of money placed in yen carry trades and could upset these
the September news that Amaranth Advisors had lost more trades by monitoring those borrowing at the Lombard rate
than $3 billion from collapsing natural gas prices. (currently at 0.4 percent) more closely.
“It is entirely likely we haven’t seen the last hedge fund “December 2005 saw dollar/yen slide over four yen in
to have problems,” Goldstein says. “If the U.S. stock and just two to three days,” he adds. “Attempts to lock in prof-
bond markets were to make quick U-turns, look for fire- its on carry trades in December could produce similar price
works out of the financial markets, because there have been action.”
so many speculative bets.” The bottom line is these ranges won’t be sustained indef-
Gain’s Dolan points to Iran as another flashpoint. initely.
“There is significant potential for U.S. military action “The question is, when will the break occur and what
against Iran,” he says. “A significant regional crisis could will be the catalyst?” HSBC’s Lynch says.
send oil up toward $100 per barrel.
That would disrupt U.S. and European
economies, and the dollar would prob-
ably be the biggest loser in that situa-

What’s a forex trader to do?

“The euro/dollar rate has been rangy,”
Mazanec says. “Trade the range with
confidence.” He cites key levels at
$1.2480 and $1.2750.
Westpac’s Callow sees the
EUR/USD at $1.28 at year-end, with
potential for USD/JPY to move toward
114.00 over the next eight weeks.
“Dollar/yen should be more lively

CURRENCY TRADER • November 2006 11


Breaking down
the euro
How far can the euro drop and still close higher on the day? If you’re trading the EUR/USD rate,
this is just one of the stats you should have at your fingertips.


P icture this situation: You’ve been bullish the

euro/U.S. dollar pair (EUR/USD), which has
sold off early in the morning and is now
down 0.0025 points. You step up and put on
Then news hits the wires and propels the euro upward
and the price is now 0.0075 points above yesterday’s close.
Do you look at this as a gift that should be accepted imme-
diately? Or should you hold on because this might be the
start of an unusually big day?
a long position and, after taking a little heat — five ticks or
so — the market begins to move your way. To be able to make a decision based on probabilities
rather than your gut feeling,
FIGURE 1 — ANALYSIS PERIOD you’d need to know the typical
behavior of the EUR/USD pair.
The review period encompasses uptrends, downtrends, and trading ranges.
How many EUR/USD traders
know what the average daily
range is for this 24-hour mar-
ket? What time of day is typi-
cally the most volatile?
Knowing the typical behavior
helps you make better decisions
during the trading day as well
as enhance trading systems.
The following study reviews
one year (Sept. 1, 2005 to Aug. 31,
2006) of EUR/USD price data.
Figure 1, which is a daily bar
chart of the review period, shows
the analysis period contained
uptrending, downtrending, and
sideways market conditions.
Additionally, intraday analysis of
the most volatile periods of the
trading day was performed over
the period from Aug. 1, 2006 to
Sept. 15, 2006 using 60-minute
Source: CQGNet (www.cqg.com)

12 November 2006 • CURRENCY TRADER

Sorting the daily ranges from smallest to largest does not Forty-five percent of daily ranges are clustered in the top four
indicate there is any typical range. categories (group 0.0070 to group 0.0100), which represent
daily ranges run larger than 0.0060 and up to 0.0100 points.

Source: CQGNet (www.cqg.com)

Source: CQGNet (www.cqg.com)

Daily price analysis:

Ranges and close-to-close changes
First, the ranges for each day are sorted from smallest to
During the review period the close-to-close daily change was
largest, as shown in Figure 2. The smallest range was 0.0026
0.0030 points or less 104 times (40 percent). The close-to-
points, the widest was 0.0233 points, and average was close change exceeded 0.0080 only 18 percent of the time.
0.0099 points.
Figure 3 is a frequency distribution that shows how often
daily ranges of different sizes occurred. The vertical axis
shows the number of occurrences. The horizontal axis
shows the different daily ranges. For example, “0.0050”
shows the number of daily ranges that are greater than
0.0040 up to and including 0.0050; in this case, there were
13 occurrences. There was only one day with a range above
0.0020 up to and including 0.0030. (This happened to be
April 14, 2006, which had a range of 0.0026 points.)
The most occurrences (33) fell in the 0.0070 category. The
daily range was larger than 0.0110 points only 33 percent of
the time, which means if the daily range has already
exceeded 0.0110 points, the probability the market will Source: CQGNet (www.cqg.com)
extend its range are quickly diminishing.
Although the average daily range was 0.0099 points, the 0.0049 points. (The market closed unchanged only twice
average close-to-close change (up or down) was only 0.0050 during the review period.) Figure 4 shows the frequency
points. If the market closed up, which occurred 125 times distribution for close-to-close differences. The absolute
during the review period, the average close-to-close gain value was used for negative closes.
was 0.0055 points. If the market closed down, which There is a noticeable drop in close-to-close differences
occurred 133 times, the average close-to-close loss was continued on p. 14

CURRENCY TRADER • November 2006 13



On most up-closing days, the euro usually did not trade more than
0.0050 below the previous day’s close.

larger than 0.0080 points (up or down).

Consequently, if the market is up or down more
than this amount, the chances of the close
exceeding this level drops off dramatically. In
fact, a close-to-close change larger than 0.0080
points occurred only 48 times (18 percent).
Another perspective is to look at how far the
euro moved up or down from the previous
day’s close on up-closing days and down-clos-
ing days. Figure 5 shows the 125 days on which
the euro closed up for the day. The low, high,
and close for each bar is shown relative to the
Source: CQGNet (www.cqg.com)
previous day’s close (the zero line). On days the
euro closes higher, the market rarely moves
more than 0.0050 points below the previous day’s close.
For a clearer view of the down moves the euro makes on
Currency characteristics: Euro
up-closing days, Figure 6 shows the distribution of the dif-
Some insights from analyzing the euro from Sept. 1, 2005 ferences between the low and the previous close for those
to Aug. 31, 2006: days the market closed higher. For example, if the market
continued on p. 16
1. The euro’s average daily range was 0.0099, and the
range exceeded 0.0110 only 33 percent of the time. FIGURE 6 — MAX DOWN MOVES ON DAYS
The range was most often between 0.0060 and THE EURO CLOSED HIGHER
Once the euro traded more than 0.0050 points below the pre-
vious day’s close, it had little chance of closing up on the day.
2. The close-to-close change exceeded 0.0080 only 18
percent of the time.

3. Once the euro has traded more than 0.0050 points

below yesterday’s close, there is only a 4-percent
chance it will recover to close higher on the day.

4. Once the euro is up more than 0.0045 points from

yesterday’s close, the odds are less than 10 percent
that it will close lower on the day.

5. The most volatile 60-minute bars were the 07:00

(CT) hour (0.0026-point median range) and the
09:00 hour (23-point median range).
Source: CQGNet (www.cqg.com)

14 November 2006 • CURRENCY TRADER


traded 0.0022 points below the previous day’s

close and the market closed in positive territo-
ry for the day, then that day landed in the Each day’s price action is plotted relative to the previous day’s close
-0.0030 category. (the zero line).
The market opened above the previous
day’s close and never traded in negative terri-
tory 10 times. Also, there were only 10 times
the market traded more than 0.0045 points
below the previous close and still closed high-
er. Once the euro has traded more than 0.0050
points below yesterday’s close, there is only a
4-percent chance it will recover to close higher
on the day.
Figure 7 examines the opposite scenario: the
difference between the previous day’s close
and the high on the days the market closed
lower. It shows each down-closing day’s high,
low, and close relative to the previous day’s
close. Figure 8 shows the distribution of the Source: CQGNet (www.cqg.com)

differences between the high and the previous

close for those days the market closed lower. The market
was up by more than 0.0045 points and still closed down FIGURE 8 — DOWN-CLOSING DAYS: MAXIMUM
24 times — just less than 10 percent. The market traded up INTRADAY UP MOVES
by 0.0025 points or less and then reversed to close lower 30 The euro gained more than 0.0045 points and still closed
percent of the time. The euro never traded above the pre- down less than 10 percent of the time.
vious close only two times.

Intraday analysis
The intraday analysis was based on 60-minute price bars,
using use a 24-hour clock referencing Central Time (CT).
Each Friday, the market closes at 15:00 (3:00 p.m. CT) and
reopens at 16:00 (4:00 p.m.) on Sunday. On the other days
of the week, the close occurs at 23:59 (11:59 p.m.) and the
market reopens at 0:00 (12:00 a.m.). Figures 9 and 10 are
60-minute bar charts of the euro.
Visual inspection suggests a pattern of short-term but
dramatic moves followed by trading ranges. To determine
which periods, if any, are more likely to trend, the high- Source: CQGNet (www.cqg.com)
low range of each 60-minute bar was calculated and both

16 November 2006 • CURRENCY TRADER

The intraday analysis was based on a 24-hour session. The market reopens at midnight each
night, except on Fridays, when the market closes at 15:00 and reopens at 16:00 Sunday.

the average and the median

ranges were determined for
each 60-minute bar. (The
median is included because it
measures the center point in
the ranges; if the average dif-
fers dramatically from the
median, outliers are skewing
the data.) Figure 11 shows
the average and median
ranges for each 60-minute
time period.
On average, the most
Source: CQGNet (www.cqg.com)
volatile 60-minute bar was
the 07:00 hour, which had an
FIGURE 10 — 60-MINUTE BARS, AUG. 23, 2006 THROUGH SEPT. 15, 2006 average range of 0.0032
The euro exhibited dramatic short-term moves interspersed with consolidations. points (and a median of
0.0026 points). Next in line
was the 09:00 hour, with an
average range of 0.0028
points (0.0023 points medi-
Figure 12 displays the
individual ranges for the
07:00 hour. There was one
very large range of 0.0093
points. Three bars had ranges
that peaked out just above
0.0060 points and three oth-
ers topped out just above
0.0050 points.
Figure 13 shows individ-
ual ranges for the 12:00 hour.
Although the ranges were as
large as 0.0025 points and as
low as 0.0008 points, the typ-
ical range was between
0.0010 and 0.0015 points.
Source: CQGNet (www.cqg.com)
continued on p. 18

CURRENCY TRADER • November 2006 17

(AUG. 1, 2006 – AUG. 22, 2006)
Most of the time, the euro’s 60-minute ranges were
between 0.0010 and 0.0015 points. Between 07:00 and
09:00 CT, however, volatility climbed.

Operating with a map, not your gut

All markets have tendencies. Understanding them helps a
trader progress from relying upon intuition to working
with solid guidelines. “Currency characteristics: Euro”
summarizes some of the highlights from this analysis of the
euro. Such tendencies can provide the basis of a trading sys-
tem or, if nothing else, reduce discretionary traders’ likeli-
hood of second-guessing a decision in the middle of a busy
trading day. 
Source: CQGNet (www.cqg.com)


Related reading One 0.0093-point outlier pushed the average range
figure higher than the median range.
“Trading the Euro inside out”
Currency Trader, September 2005.
Analysis of inside and outside days in the Eurocurrency
futures offer some interesting surprises — as well as
clues for how to trade this market.

“The euro FX vs. the E-Mini S&P and 10-year T-note”

Currency Trader, May 2005.
This article looks at the relationships between these
three markets and examines the trending characteristics
of each over different time frames.

“The euro and stock market indices” Source: CQGNet (www.cqg.com)

by Thom Hartle
Currency Trader, December 2005. FIGURE 13 — RANGE FOR THE 12:00 HOUR
This article builds upon the relationships between the
The 12:00 bars are more consistent in size — both the
euro and the stock market, looking at one sub index in average and median ranges were 0.0013 points.
particular: the Morgan Stanley Commodity Index, an
equity index that tracks companies that produce basic

“Intraday euro FX momentum trading”

Active Trader, April 2004.
The Polychromatic Momentum system previously used
to trade the QQQQs is tested on the euro futures to see
what it produces in a new market.

You can purchase and download articles at


Source: CQGNet (www.cqg.com)

18 November 2006 • CURRENCY TRADER


Currency trends Volatility can tell you a lot about

how a certain currency behaves —
and volatility if you’re ready to hear the unexpected truth.


V olatility is at once one

of the more fascinating,
useful — and misun-
derstood — topics in
finance. The fascination stems from
its ephemeral nature. Volatility is the
market’s cost of insuring against
Although the CAD trend since January 2002 has been almost exclusively
higher, excess volatility trended lower (from its 1998 peak) until mid-2006.

uncertain events arriving at uncertain

times with uncertain impacts. Risk is
quantifiable; uncertainty is not. But
the world is an uncertain place, and
thus we must hedge ourselves the
best we can.
Why is volatility misunderstood?
Too many people view a time series of
volatility as if it were a continuous
process, such as a stock or bond price.
It is not an asset, attempts by various
exchanges to make it one notwith-
standing. Volatility has no natural
return such as a coupon or dividend.
At best, volatility is an attribute of
other asset classes, not an asset class
per se. tion, be reflected in the prices for these instruments, and
Finally, why is it so useful? Markets are a convergent higher volatility by definition must discourage further
search process (by price) for some underlying economic demand for these hedging vehicles.
value. As price rises and falls, the direction of volatility tells Let’s take a look at how volatility interacts with price
us who the more anxious party is — buyers or sellers. That trends over long periods of time for the Canadian dollar
is useful information. Moreover, volatility often leads price (CAD), Japanese yen (JPY), and British pound (GBP). The
changes, as its patterns effectively carve a path of least euro would be a preferable choice, but its history began
resistance in the market: Money flows toward calm and only in 1999.
away from anxiety. We need to define some of the measures used, particular-
ly Parkinson’s high-low-close (HLC) volatility and its asso-
Currency volatility ciated trend oscillator. First, we need to create an N-day
It stands to reason volatility would be particularly useful in trend speed, which represents the number of days between
currency markets. The fundamental currency equation has 4 and 29 that minimizes the following function, in which P
three unknowns and therefore cannot be solved exactly, and is price, MA is a simple moving average and Vol2 is the N-
much of the trade in currencies is in options and option-like day HLC volatility measure.
instruments. Demand for caps and floors must, by defini-

20 November 2006 • CURRENCY TRADER

Plotting excess volatility against the CAD’s trend oscillator shows excess
volatility rises during sell-offs, while it increases only modestly in very strong
uptrends. The implication: Put option (floor) buyers tend to be more anxious in
the CAD market.

Function 1:

Once N is selected we can calculate the

trend oscillator, which is normally distrib-
uted; movements outside the range of
±0.40 tend to indicate overbought and
oversold conditions.


The HLC volatility is calculated from the same N-day critical trend speed. This
historical volatility has the advantage of incorporating both intraday true price
NewsTrader Pro
range and interday change into its calculation. A revolutionary new software
As a market meanders in a trading range, intraday range dominates interday product for Forex Traders
change and volatility rises. As a market moves in a strong directional trend, that trade economic
interday price change dominates intraday range and volatility (uncertainty) news releases.

Function 3:

Volatility does not exist in a vacuum, however. If we view the options market as
a form of insurance, we can readily see how forward-looking option implied
Historical price action
volatility needs to be placed into context against backward-looking HLC volatil-
for 7 major currency pairs and
ity. It is the excess of price insurance against a historic relative frequency meas-
ure that counts — similar to comparing flood insurance costs between coastal 30 U.S. economic indicators.
and upland regions. Yes, it costs more to buy flood insurance near the water, but Charts, detailed data analysis
relative to the actual risk, the price of the insurance itself may be cheap. We will and more.
use the ratio of implied volatility to HLC volatility to measure the fair value of
insurance in a market. More information,
screen shots
Case study 1: and a demo are at
The Canadian dollar
Over the available data sample, the CAD has undergone one secular trend http://www.wincorp.net
continued on p. 22

CURRENCY TRADER • November 2006 21



change. It weakened precipitously
Both skewness and kurtosis in the CAD flattened when the euro was introduced
into 1998, stabilized and then made a
in 1999 — evidence the euro led to significantly lower volatility in global
low in January 2002 (Figure 1). The
currency markets.
trend since then has been almost con-
tinuously higher. Given the comment
above about HLC volatility declining
during strong trends, we would be
within our rights to expect excess
volatility to rise against this smaller
In reality, however, excess volatility
trended lower from its 1998 peak until
mid-2006. This could mean the mar-
ket had been quite comfortable with

Volatility often leads

price changes, as its
patterns carve a path of
The yen’s dominant feature over the study period is the 1995-1998 sell-off. After
a violent rebound in October 1998, the yen mostly settled into a trading range flows toward calm and
between 100 and 125. Although a large number of event-driven, excess-volatili-
ty spikes occurred during this period, no significant volatility trend is apparent. away from anxiety.
the rising trend level of the CAD.
Until quite recently, those who were
long the CAD see no reason to pay
more for floors, and those who were
short the CAD saw no reason to pay
more for caps.
The same phenomenon is apparent
when mapping excess volatility
against the CAD’s trend oscillator.
The pattern is asymmetric: Excess
volatility rises during sell-offs such as
1997-1998, while very strong uptrends
produce only a modest increase in
excess volatility (Figure 2). From this
we can conclude the more anxious
party in the CAD market is the put
option, or floor buyer.

22 November 2006 • CURRENCY TRADER

Now let’s introduce two measures
used to evaluate many dealer options
in the currency market — skewness Comparing excess volatility to the JPY trend oscillator shows the increase in
and kurtosis. Skewness measures the insurance costs is relatively symmetrical in strong uptrends (right) and strong
degree to which a normal distribution downtrends (left).
of returns is biased toward higher or
lower values; a symmetric distribution
has a skew of zero. Kurtosis is the
degree to which a distribution of
returns is peaked; positive values of
kurtosis describe a market with a
greater-than-expected number of
observations clustered about the
mean, while negative kurtosis
describes a market with a greater-than-
expected number of large deviations
from the mean.
How have CAD skewness and kur-
tosis evolved over time? Using a
rolling six-month data sample, Figure
3 shows how both measures flatten
immediately after June 1999 — which
is when the euro was introduced. This
is prima facie evidence the presence of
the euro led to significantly lower FIGURE 6 — POSITIVE SKEW, FLATTER DISTRIBUTION FOR JPY
volatility in global, and not just The six-month rolling skew of JPY returns remains strongly biased toward
European, currency markets. positive values, indicating the yen call option and cap buyers are the more
anxious to seek protection.
Case study 2: Japanese yen
Over the available data sample, the
yen has only one dominant feature: a
strong sell-off from its 1995 high to its
1998 low (Figure 4). Once the violent
rebound occurred in October 1998, the
market leveled off into a trading range
between 100 and 125, with the excep-
tion of the post-9/11 period. During
this trading range, a large number of
event-driven spikes in excess volatility
occurred, but unlike the CAD, no sig-
nificant trend is apparent. We can infer
from this pattern the market is com-
fortable with the official Japanese poli-
cy of managing the JPY/USD rate.
This inference is bolstered by the
map of excess volatility against the JPY
continued on p. 24

CURRENCY TRADER • November 2006 23


trend oscillator (Figure 5). The increase in insurance costs is cannot conclude the sentiment of JPY traders is symmetri-
relatively symmetrical between strong uptrends and strong cal. The six-month rolling skew of JPY returns remains
downtrends. The market senses, correctly, that the Japanese strongly biased toward positive values, indicating the yen
official policy will be to prevent emergence from the range. call option and cap buyers are the more anxious to seek
protection (Figure 6). The large quantities of JPY borrowed
Despite this symmetrical distribution of volatility, we during the 2001-2005 quantitative easing campaign created
a large number of traders with short
JPY positions. The JPY they borrowed
FIGURE 7 — POUND VOLATILITY UNRESPONSIVE TO PRICE had to be repaid at some point, which
biases the distribution of returns to
With the exception of a few episodes (e.g., the January 1999 euro introduction
the upside.
and the 2003-early 2004 uptrend), the pound’s volatility vs. the dollar has been
generally unaffected by price level.
Even with this positive skew, the
distributions of returns remain fairly
normally distributed around the
mean. Just as was the case for the
CAD, the key date remains mid-1999,
six months after the introduction of
the euro. Prior to 1999, JPY returns
clustered about the six-month rolling
means with little deviation. Traders
sensed there was a right place to be in
this market, and everyone sensed it at

Case study 3: The British

The GBP/USD exchange rate is
nowhere near as important to the
British economy and its financial
markets as is the GBP/EUR. As a
result, the pound’s volatility vs. the
dollar has been largely unresponsive
to price. There are only a few excep-
FIGURE 8 — VOLATILITY RESPONSE TO TREND REMAINS MODEST tions, such as the January 1999 intro-
The symmetrical increase in discomfort with strong trends apparent in the JPY duction of the euro and the strong
is also evident in the GBP. Each move toward a trend extreme results in an uptrend in late 2003-early 2004
insurance response. (Figure 7).
Although we should expect trend
and volatility to be somewhat unrelat-
ed given these observations, the data
indicate otherwise (Figure 8). The
same symmetrical increase in discom-
fort with strong trends we saw in the
JPY occurs here, even though the GBP
chart is replete with sustained price
trends. Each move toward a trend
extreme in invites an “insurance
Finally, both the skewness and kur-
tosis of the GBP remains clustered
around zero; this has especially been
true since the 1999 introduction of the
euro (Figure 9). Traders in the
GBP/USD rate have no particular
hedge bias, and the relatively small

24 November 2006 • CURRENCY TRADER

The GBP skewness and kurtosis cluster around zero (especially since the 1999
importance of this rate relative to the
introduction of the euro), which implies GBP/USD traders have no particular
GBP/EUR means few traders feel hedge bias, while the relatively small importance of this rate relative to the
exposed in a major way. GBP/EUR means few traders feel major exposure.

Volatility’s lesson
Too many technicians persist in treat-
ing markets symmetrically. They say
each one is “just numbers” with a
smugness designed to hide their own
laziness. The lesson from volatility,
though, is each market has its own
unique characteristics and rhythms.
Trading a single system on them as if
they are substitutes is an approach
destined to end in failure.

For information on the author see p. 6.

Howard Simons will speak on “How to

trade the U.S. dollar” at the Las Vegas
Traders Expo on Nov. 19 (www.lasveg-

Related reading
Other Howard Simons articles:
“Currencies and conventional U.S. investments” “The index approach to currency risk management”
Currency Trader, October 2006. Currency Trader, April 2006.
The financial media often reports on moves in the stock and Using dollar index futures to hedge non-dollar investments.
bond markets vis-à-vis currency fluctuations, but these rela-
“The yen stands alone”
tionships might not be what you expect.
Currency Trader, March 2006.
“What does the dollar really affect?” The usual rules of the currency world haven’t necessarily applied
Currency Trader, September 2006. to the Japanese yen. Will that continue to be the case?
Find out how stocks, gold, and other markets actually respond
“Remember the forgotten currency”
to changes in the dollar.
Currency Trader, February 2006.
“The dollar and its hidden risks” It’s often labeled a “commodity currency,” but the Canadian dollar
Currency Trader, August 2006. tends to be ruled by other factors. Here’s a look at the factors
A look at the dollar in light of its recent performance vs. the impacting Canadian dollar movements.
yen and the euro.
“What drives the dollar index?”
“Of commodities and currencies” Currency Trader, January 2006.
Currency Trader, July 2006. Market watchers often point to deficits and interest-rate
Analyzing historic market relationships reveals some differentials to explain the dollar’s behavior, but analysis shows
interesting facts about movements in many so-called these factors might not be in the driver’s seat after all.
“commodity currencies.”
“The dollar index and ‘firm’ exchange rates”
“The yen carry trade, currencies, and U.S. bonds” Currency Trader, December 2005.
Currency Trader, June 2006. The majority of currency traders are familiar only with the current
The latest source of anxiety for bond traders has some sur- floating-rate system. Are we about to enter a new “firm exchange
prising connections to the currency market. Find out the story rate” era dominated by the dollar and euro?
behind U.S. Treasuries, the Japanese yen, and the Chinese
yuan. Note: A special “Howard Simons: Advanced Currency
Concepts, Vol. 1” article collection will be on sale until Dec. 3
“The euro index: The dollar index meets its match” through the Active Trader store.
Currency Trader, May 2006.
A look at the development of a viable — and tradable — euro You can purchase and download past articles at
index. www.activetradermag.com/purchase_articles.htm.

CURRENCY TRADER • November 2006 25



The CMO appears to catch the lows in this 60-minute chart of the
Intraday CMO-FX EUR/USD pair.

Market: Euro/U.S. dollar rate (EUR/USD).

System concept: In his book The New

Technical Trader (John Wiley & Sons, 1994),
Tushar Chande introduced the Chande
Momentum Oscillator (CMO), a momentum
indicator that ranges between +100 and -100
and has default overbought and oversold levels
of +50 and -50, respectively.
The Trading System Lab in the December
2003 issue of Active Trader magazine incorporat-
ed a daily CMO in the equity market. This test
applies a 14-period CMO on intraday forex data
(2,500 hourly bars).
Initial chart analysis suggested the +50/-50
rule overbought and oversold levels performed
as well as trade triggers, especially when multi-
ple entries are taken whenever the CMO cross-
es below -50 (see Figure 1). After testing, how-
ever, it was apparent this rule does a good job
most of the time, but when it is wrong, it is real-
ly wrong.
As a result, this system adds a conditional
time-based exit: If price is below the entry price
after 20 bars, the system exits on the next bar’s
open. Also, a 0.2-percent profit target was
added to help capture profits if the price goes
up a little in the first 20 hourly bars and the
CMO (14) does not cross above the overbought Source for all figures: Wealth-Lab
level of +50. The system is long only.
The second entry signal in Figure 1 shows the STRATEGY SUMMARY
market missed the profit target and exited after
20 bars with a small loss. The trade would have Profitability Trade statistics
been a winner if the system hadn’t included this
exit rule, but that is the price you often pay for Net profit $24,150 No. trades 47
security. Net profit (%) 20.75 Win/loss (%) 65.96
Exposure (%) 6.30 Avg. profit (%) 0.07
Rules: Profit factor 2.10 Avg. hold time 13.28
1. Enter long at the next bar’s open if the
CMO(14) crosses below -50. Payoff ratio 1.08 Avg. profit (winners) (%) 0.20
2. Exit long if the CMO(14) crosses above +50. Recovery factor 1.92 Avg. hold time (winners) 9.19
3. Exit long with a profit target of 0.2 percent. Drawdown Avg. loss (losers) (%) -0.19
4. Exit long at the next bar’s open after 20 bars Max DD (%) 9.38 Avg. hold time (losers) 21.19
if the price is below the entry price.
Longest flat days 26 Max consec. win/loss 8/3
Starting equity: $20,000

26 November 2006 • CURRENCY TRADER

This equity curve is the result of five months of intraday trading
using one lot per trade.

Money management/position sizing: To

trade one lot of the euro against the dollar
($100,000), we assume a margin of $5,000. Each
signal will buy one lot until there is not enough
margin to take another position.

Test data: The system was tested on 2,500 sixty-

minute bars of EUR/USD from May 2006 until
September 2006, using a 24-hour trading session
starting at midnight (ET).

Test results: The equity curve (Figure 2) has a

nice uptrend. The system produced $4,150 in prof-
its in just about five months, which would trans-
late into a 71-percent annualized gain.
The maximum drawdown was -$2,164 (only
9.38 percent), which occurred on Aug. 21, 2006
(Figure 3).
Sixty-six percent of the test’s 47 trades were
winners, and the average trade profit was $88.
Remember, the system only trades on the full
hour, except when a profit target is hit, which
could be at anytime. However, there were some
rather large flat periods of approximately 26 days;
for intraday traders this could represent a very
long time.
Bottom line: There are several issues to consid- Drawdown is shown here in terms of the initial account equity
er with this strategy. First, the number of bars test- ($20,000). Drawdowns were modest, but the system did have
ed was probably not enough to draw extensive relatively long flat periods for an intraday approach.
conclusions — even though 2,500 bars is the
equivalent of approximately 10 years of daily data
— because it did not seem to encompass all types
of market scenarios. The parameters used here
were not optimized in any way, but it would be
useful to test more markets and more time peri-
ods. However, the basic premise holds promise.

– Volker Knapp of Wealth-Lab

Currency System Analysis strategies are tested on a

portfolio basis (unless otherwise noted) using Wealth-
Lab Inc.’s testing platform. If you have a system you’d
like to see tested, please send the trading and money-
management rules to:
Disclaimer: Currency System Analysis is intended for
educational purposes only to provide a perspective
on different market concepts. It is not meant to rec-
% Max Max
ommend or promote any trading system or Avg. Sharpe Best Worst Profitable consec. consec.
approach. Traders are advised to do their own return ratio return return periods profitable unprofitable
research and testing to determine the validity of a
trading idea. Past performance does not guarantee Daily 0.18% 2.47 7.71% -7.75% 60.04% 4 3
future results; historical testing may not reflect a sys- Weekly 1.02% 3.55 5.61% -2.23% 63.16% 4 2
tem’s behavior in real-time trading.
Monthly 3.87% 4.83 6.76% -0.50% 80.00% 3 1

CURRENCY TRADER • November 2006 27


Futures central

CME, CBOT join forces

A s CEO of a company in the midst of one of the
most successful IPOs in recent memory and a bal-
ance sheet flush with cash, Craig Donohue of the
Chicago Mercantile Exchange heard the question countless
times: “When are you going to make an acquisition?”
“We had a lot of hurdles to clear,” Carey says. “The CME
was first to become a publicly traded company. They creat-
ed a currency. We had no currency until the last year. So
now you have the metrics, the currency, and the ongoing
business relationship. All those things played into being
Donohue and the rest of the CME executives answered able to combine these two entities.”
that with a bang in late October, merging with the Chicago
Board of Trade in a deal that would create a company, called What changes?
the CME Group, worth $25 billion and in control of almost By practically any measure the merger will create the
90 percent of daily U.S. futures volume. world’s largest derivatives exchange. However, there are
“We have consistently responded that our primary tar- many other issues that will have a much greater impact on
gets are derivatives exchanges that would potentially pro- traders, such as:
vide cost synergies, extend our product offering, and build
upon our global business,” Donohue said at a press confer- • When will the CBOT’s product line (agricultural,
ence announcing the deal. “We expect this transaction to interest rate, Dow Jones, metals) begin trading on
deliver on these objectives for the benefits of our customers Globex, the CME’s electronic trading platform?
and our shareholders.” • With a virtual monopoly over many of the domesti-
The merger hardly qualifies as a surprise. Although the cally traded futures contracts, will the CME Group
two exchanges have been rivals — bitter, at times — for raise fees?
decades, the winds of change have been blowing them • Will the trading floor, which has increasingly lost
toward each other for several years. market share to electronic trading at both
The two reached a monumental clearing agreement in exchanges, continue to shrink?
2003 through which all CBOT trades would clear through
the CME clearinghouse. Also, in June 2005 the CBOT admit- The deal is not expected to close until the mid-2007, but
ted it had “expressions of interest” from other companies, moving all CME Group products onto Globex will be one of
one of which turned out to be the CME. the first moves made by the new company.
However, the CBOT eschewed the offers and went for- Exchange leaders won’t talk about any pricing changes
ward with a successful IPO of its own a few months later. that may occur when the new entity is formed, but for all
While exchange consolidation talk has been constant for the the conjecture that prices might increase because of the new
past couple of years, the rumor mill had the CME backing exchange’s unrivaled stature, there is equal evidence that
off from the CBOT and looking at the New York futures prices will remain the same or even decrease.
exchanges or even European exchanges. Certainly, the CME Group will have virtually no compe-
But CME chairman Terry Duffy and his long-time friend tition in futures contracts based on interest rates, stock
Charles Carey, chairman of the CBOT, never gave up on the indices, currencies, and agricultural products. As such,
idea, and hammered out the details during one of their higher prices are a possibility, as traders will have no other
weekly dinners at a Chicago steakhouse. option if they want to trade those products.
“The idea to merge has been contemplated for decades,” On the other hand, there has hardly ever been any com-
Duffy says. “We have each spent the past several years lead- petition for the most popular products at both exchanges,
ing our organizations to dramatic and successful transfor- so the ability to raise fees just for the sake of raising fees
mation of our business models. While there has been much already exists.
speculation about a merger of our two companies, timing is Also, the exchanges believe the merger could create sig-
everything, and the time is now. nificant cost savings, some of which could potentially be
“In my mind, one of the things that really helped was the passed along to customers.
common clearing agreement. That helped build the trust “We expect annual expense savings of more than $125
that these companies could work together, and I think million,” Donohue says. “The bulk of the synergies result
Charles Carey’s leadership at the CBOT was instrumental from reducing technology and administrative costs, and
in that. Charlie and I picked up talks in the last year or so.” creating more efficient trading floor operations.”
Also helpful was the CBOT’s successful IPO, which gave As for the floor itself, the CME will move its floor opera-
the exchange a tradable currency. Getting a merger tions to the CBOT building. Because of cutbacks and clo-
approved by CBOT shareholders was more likely than get- sures over the years, a portion of the CBOT trading floor
ting approval from the members of an essentially private was being unused, so the consolidation is not expected to
exchange, which the CBOT formerly was. cause overcrowding.

28 November 2006 • CURRENCY TRADER

Neither exchange has announced immediate plans to tenance of trading floor facilities for open outcry trading,”
reduce the number of pits, but a slow erosion of the floor is he says. “That’s an easy part of this agreement, which is
a virtual certainty in today’s marketplace, merger or not. we have the same standards for volume and open inter-
Donohue says the floor, as always, will be closely moni- est.”
tored to determine if any additional closures are necessary.
“We have very similar rules that were adopted at the This is an excerpt. For complete coverage of the CME-CBOT merg-
time of each of our demutualizations with respect to main- er, read the January 2007 issue of Active Trader magazine.

Here we go again!

Lawsuit latest twist in RefcoFX saga

C ustomers of RefcoFX.com received bad news last
October when Refco LLC, RefcoFX’s parent compa-
ny, declared bankruptcy after an accounting scandal.
RefcoFX clients were still allowed to trade, although they
were not allowed to withdraw any funds. However, things
hundreds of other creditors — not a very promising sce-
nario considering the top priority of any bankrupt firm is to
pay off its large, corporate creditors first.
Nonetheless, RefcoFX.com customers are not taking this
situation lightly. In early October, they joined with FXCM to
haven’t gotten much better in the year since. file suit against Refco. The lawsuit asks for at least $10 mil-
Early in 2006, Forex Capital Markets (FXCM) agreed to buy lion and claims Refco told RefcoFX customers it was safe to
out RefcoFX’s accounts for $110 million. This would have keep trading and depositing money.
allowed RefcoFX users to get all their money back and allowed According to the suit, Refco took the assets of
them to continue trading without switching brokerages. RefcoFX.com and transferred them to its Refco Capital
However, that deal fell through when trustees in charge Markets unit, an unregulated division that is facing its own
of the Refco account decided the offer wasn’t large enough. lawsuit from customers.
A few months later, forex brokerage Gain Capital made a Refco had already made an offer to RefcoFX.com clients
bid for RefcoFX. That deal also fell through, partly because that would pay them a little more than a quarter for every
RefcoFX customers objected to the terms of the agreement, dollar they had in deposit, but the lawsuit essentially ren-
which would have required them to trade frequently over a ders that offer moot.
long period of time before they were able to withdraw all RefcoFX.com customers want a bankruptcy judge to
the money in their accounts. declare as much as $83 million of Refco Capital Market’s
But while many customers were glad the deal with Gain money as being property of the customers. However, as of
was never consummated, the failure of the two firms to late October, the case was still in its preliminary stages with
hook up also meant the end of RefcoFX. In announcing that lawyers (35 different lawyers representing 29 different
it and Gain had decided to terminate the potential agree- groups) jockeying to make sure the guidelines of the trial
ment, RefcoFX also said it would cease operations. are to their liking.
This left almost 15,000 RefcoFX.com customers with tens A group of traders affected by the FXCM closure have set
of millions of collective dollars in their accounts, and no up a Web site through Yahoo Finance so customers and other
good way to get it out. The only recourse for customers was interested parties can stay up to date on the happenings. The
to make a claim against Refco and take their chances against page can be found at www.refcofxaccountholders.com.

Back to school

Competition gives collegians early entry into forex trading

S ome college students with an interest in currency

trading were able to get a head start in October
thanks to a collegiate forex contest sponsored by
Global Forex Trading (GFT).
GFT invited finance and business students from 15 univer-
GFT. The account can be traded for six months, and any
profits will be retained by the student.
“We added the $10,000 trading account to allow students
to apply what they have learned from the competition and
experience the difference of trading with real money, which
sities across North America to gather in Texas for the Second is an important transition,” says Gary Tilkin, president and
Annual Texas A&M Inter-University FX Competition. CEO of GFT.
Students were given a $50,000 simulated account at GFT All competitors were required to keep a log of their trades,
and allowed to make trades in real-time. Contest organizers listing the reason for the trade and the end result. After the
say the number of participants has tripled since last year. first 15 days, the field was trimmed down and the eventual
This year’s contest was divided into two groups — grad- winner was determined by highest rate of return. The top six
uate and undergraduate students. The division winner finishers in each division received prize money, while the
with the highest balance won a $10,000 trading account at school with the best average also received recognition.

CURRENCY TRADER • November 2006 29

Managed money: Barclay Trading Group’s
currency trader rankings for September 2006
FX futures hit new volume highs Top 10 currency traders managing more than $10 million as of Sept. 30
As FXMarketSpace, the joint forex venture between the ranked by September 2006 return
Chicago Mercantile Exchange and Reuters, gained more 2006 $ Under
clients, foreign exchange futures volume at the CME set vol- September YTD mgmt.
ume records. Rank Trading advisor return return (millions)
The exchange averaged 520,000 FX contracts per day in 1. Algorithmic Trading (Currency) 11.59 69.72 11.9M
September, a new monthly record and an increase of 26 per-
2. Spot Forex Mgmt. (Zurich) 11.40 17.98 14.0M
cent from the same month in 2005. The contracts represent a
3. Spot Forex Mgmt. (Geneva) 5.20 8.3 12.0M
notional value of almost $62 billion per day, which would
account for nearly 10 percent of the daily cash forex market, 4. Harmoney Invest. Mgrs. (ProFund FX) 3.54 2.77 47.3M
based on the latest Bank for International Settlements data. 5. KMJ Capital (Currency) 2.76 18.81 23.5M
For the third quarter of 2006, the CME averaged $51.5 bil- 6. Greenbriar Global Mgmt (Currency) 2.49 10.44 104.0M
lion a day in notional value in FX contracts, with average 7. DKR Capital (DKR Strat. Currency) 2.35 -3.86 77.4M
volume of 423,000 contracts per day. That’s a 26-percent 8. Premium Currencies Ltd 1.52 6.4 69.1M
increase from the same quarter a year earlier. 9. Orchard Capital (Systematic FOREX ) 1.45 6.45 13.8M
In 2005, the CME traded more than 84 million FX con-
10. Geo Economic Mgmt System 1.27 11.11 14.7M
tracts with a notional value of more than $10.2 trillion.
Meanwhile, the number of institutions committed to join- Top 10 currency traders managing less than $10 million and more than $1 million
ing the FXMarketSpace program grew to more than 40. as of Sept. 30 ranked by September 2006 return
These firms will help in the beta and launch phases of the 1. Worldwide Capital Mgmt 3.00 74.11 3.0M
program, which is scheduled to begin in early 2007. 2. MIGFX Inc (Retail) 2.22 -2.62 2.5M
FXMarketSpace will combine spot forex pricing with the
3. TradeCom Currency Trader 1.08 -6.87 1.0M
centralized clearing of an exchange.
4. Alderon Capital Mgmt. (Managed Accts) 1.07 41.42 5.2M
5. IFX Capital Management (IFX) 0.95 0.08 2.9M
Currency managers take pounding
6. Black Flag (Gl. Macro) 0.43 3.69 2.0M
Through the third quarter, professional currency traders 7. Quay Capital Mgmt. (Forex) 0.07 -3.23 2.0M
were suffering a horrible 2006, according to data from the
8. SSgA Absolute Return Currency Fund 0.02 -1.29 8.4M
Barclay Group. After a -0.88 percent loss in September,
Barclay's Currency Trader index was down -2.17 percent. 9. Lambay Capital Limited (Intraday) -0.31 -4.67 3.7M
Also, the firm’s BTOP FX index, which tracks the 50 largest 10. Forex Funds -0.35 2.19 7.4M
currency managers, was down -4.17 percent through Oct. 30. Source: The Barclay Group (www.barclaygrp.com)
Unless forex funds bounce back in the final quarter of the Based on estimates of the composite of all accounts or the fully funded subset method.
year, 2005 and 2006 run the risk of being the first back-to- Does not reflect the performance of any single account.
back losing years for currency fund managers since 1993-94. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE.

CURRENCY FUTURES SNAPSHOT The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of each market’s
as of Oct. 26 liquidity, direction, and levels of momentum and volatility. See the legend for explanations of the different fields.

Contract Pit Elec Exch Vol OI 10-day % 20-day % 60-day % Volatility

sym sym move rank move rank move rank ratio/% rank
Eurocurrency EC 6E CME 141.7 143.8 1.06% 100% -0.32% 14% -0.92% 83% .55 / 88%
Japanese yen JY 6J CME 65.7 231.9 0.71% 100% -0.86% 40% -3.23% 69% .24 / 32%
British pound BP 6B CME 61.3 105.4 1.75% 100% 0.71% 28% 0.59% 8% .40 / 63%
Swiss franc SF 6S CME 42.0 88.0 1.14% 100% -0.90% 51% -1.94% 78% .43 / 70%
Canadian dollar CD 6C CME 36.9 95.0 1.10% 100% -1.26% 72% 0.30% 16% .65 / 92%
Australian dollar AD 6A CME 21.0 64.8 1.77% 50% 2.10% 85% -0.04% 7% .38 / 73%
Mexican peso MP 6M CME 17.7 64.5 1.69% 54% 2.73% 100% 2.23% 48% .19 /18%
U.S. dollar index DX NYBOT 3.4 24.6 -1.15% 100% 0.34% 21% 1.04% 81% .58 / 88%
New Zealand dollar NE 6N CME 2.2 17.2 -0.33% 29% 0.23% 4% 5.81% 55% .20 / 22%
Euro / Japanese yen EJ NYBOT 1.4 33.1 0.32% 47% 0.57% 30% 2.36% 43% .24 / 55%
Note: Average volume and open interest data includes both pit and side-by-side electronic contracts (where applicable). Price activity is based on pit-traded contracts.
LEGEND: past sixty 20-day moves; for the 60-day move, the % rank field shows how the most recent
Sym: Ticker symbol. 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
Vol: 30-day average daily volume, in thousands. the current reading is lower than the previous readings.
OI: 30-day open interest, in thousands. Volatility ratio/% rank: The ratio is the short-term volatility (10-day standard deviation of
10-day move: The percentage price move from the close 10 days ago to today’s close. prices) divided by the long-term volatility (100-day standard deviation of prices). The %
20-day move: The percentage price move from the close 20 days ago to today’s close. rank is the percentile rank of the volatility ratio over the past 60 days.
60-day move: The percentage price move from the close 60 days ago to today’s close. This information is for educational purposes only. Currency Trader provides this data in
The “% rank” fields for each time window (10-day moves, 20-day moves, etc.) show the good faith, but assumes no responsibility for the use of this information. Currency
percentile rank of the most recent move to a certain number of the previous moves of the Trader does not recommend buying or selling any market, nor does it solicit orders to
same size and in the same direction. For example, the % rank for 10-day move shows buy or sell any market. There is a high level of risk in trading, especially for traders
how the most recent 10-day move compares to the past twenty 10-day moves; for the 20- who use leverage. The reader assumes all responsibility for his or her actions in the
day move, the % rank field shows how the most recent 20-day move compares to the market.

32 November 2006 • CURRENCY TRADER

price vs. 1-month 3-month 6-month 52-week 52-week Previous
Rank* Country Currency U.S. dollar gain/loss gain/loss gain/loss high low rank

1 Brazilian real 0.4658 3.12% 2.15% -1.50% 0.4867 0.4157 16

2 Indian rupee 0.02209 1.14% 3.32% -0.94% 0.02273 0.02123 2

3 Australian dollar 0.7602 1.12% 0.77% 2.03% 0.7792 0.7014 15

4 Thai baht 0.02695 0.75% 2.32% 1.24% 0.02706 0.02404 4

5 Singapore dollar 0.6359 0.74% 0.84% 0.95% 0.6408 0.5859 12

6 Chinese yuan 0.1267 0.24% 1.12% 1.36% 0.1267 0.1233 5

7 Hong Kong dollar 0.1285 0.00% -0.08% -0.39% 0.129 0.1283 10

8 South African rand 0.1305 -0.38% -8.68% -20.96% 0.1678 0.1253 17

9 Swedish krona 0.1366 -0.65% 0.15% 2.71% 0.1416 0.1206 13

10 Russian ruble 0.0372 -0.67% 0.19% 1.95% 0.03754 0.03447 7

11 New Zealand dollar 0.6614 -0.78% 5.84% 5.37% 0.7198 0.5925 1

12 Canadian dollar 0.8877 -0.87% 1.25% 0.79% 0.9148 0.8345 14

13 Taiwanese dollar 0.03003 -1.09% -1.51% -4.00% 0.03197 0.02958 11

14 British pound 1.8756 -1.41% 1.52% 4.96% 1.914 1.7048 3

15 Euro 1.2576 -1.60% -0.38% 1.46% 1.2978 1.1638 9

16 Japanese yen 0.00839 -2.31% -1.97% -3.82% 0.00917 0.00824 6

17 Swiss franc 0.7901 -2.40% -1.46% 0.25% 0.8383 0.7525 8

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

Rank Country 2006 Ratio* 2005 2007+ Rank Country 2006 Ratio* 2005 2007+
1 Singapore 38.029 28.5 33.269 39.461 13 Mexico -0.478 -0.1 -4.789 -1.592
2 Switzerland 50.737 13.3 50.709 52.852 14 France -38.648 -1.7 -33.577 -40.111
3 Russia 120.128 12.3 83.558 124.368 15 India -17.569 -2.1 -11.9 -25.109
4 Hong Kong 16.431 8.7 20.276 15.665 16 UK -55.943 -2.4 -48.332 -57.963
5 Netherlands 50.091 7.6 39.986 55.997 17 South Africa -14.002 -5.5 -10.118 -12.889
6 China 184.172 7.2 160.818 206.478 18 Australia -41.397 -5.6 -42.247 -42.325
7 Sweden 21.895 5.8 21.57 22.846 19 U.S. -869.129 -6.6 -791.504 -959.109
8 Taiwan 20.68 5.8 16.116 22.04 20 Spain -100.577 -8.3 -83.001 -115.08
9 Germany 120.579 4.2 114.896 120.688 Totals in billions of U.S. dollars
10 Japan 167.273 3.7 165.69 162.871
*Account balance in percent of GDP +Estimate
11 Canada 25.48 2.0 26.261 25.422
Source: International Monetary Fund, World Economic Outlook
12 Brazil 5.808 0.6 14.193 4.43
Database, September 2006

34 November 2006 • CURRENCY TRADER

Currency 1-month 3-month 6-month 52-week 52-week
Rank pair Symbol Oct. 26 gain/loss gain/loss gain/loss high low Previous
1 Real / Yen BRL/JPY 55.5298 5.55% 4.21% 2.40% 56.0563 47.8241 18
2 Real / Euro BRL/EUR 0.3705 4.81% 2.55% -2.91% 0.3976 0.3331 17
3 Real / Pound BRL/GBP 0.2484 4.59% 0.61% -6.16% 0.2721 0.2274 19
4 Real / Canada $ BRL/CAD 0.525 4.04% 0.88% -2.27% 0.5517 0.4746 16
5 Aussie $ / Franc AUD/CHF 0.9624 3.58% 2.25% 1.78% 0.9861 0.9023 12
6 Aussie $ / Yen AUD/JPY 90.6224 3.49% 2.78% 6.06% 91.34 82.09 13
7 Aussie $ / Euro AUD/EUR 0.6046 2.77% 1.12% 0.55% 0.6402 0.5761 10
8 Aussie $ / Pound AUD/GBP 0.4054 2.56% -0.73% -2.78% 0.4323 0.3947 15
9 Aussie $ / Canada $ AUD/CAD 0.8567 2.00% -0.49% 1.23% 0.8898 0.8178 6
10 Real / Aussie $ BRL/AUD 0.6129 1.96% 1.37% -3.47% 0.6573 0.5633 14
11 Canada $ / Yen CAD/JPY 105.815 1.44% 3.30% 4.78% 106.155 97.8416 11
12 Pound / Yen GBP/JPY 223.58 0.89% 3.56% 9.13% 224.084 200.525 3
13 Canada $ / Euro CAD/EUR 0.7059 0.73% 1.64% -0.66% 0.739 0.6895 9
14 Euro / Yen EUR/JPY 149.897 0.70% 1.62% 5.48% 150.724 137.09 7
15 Canada $ / Pound CAD/GBP 0.4733 0.53% -0.27% -3.98% 0.5041 0.4652 20
16 Pound / Euro GBP/EUR 1.4917 0.19% 1.91% 3.45% 1.4957 1.4243 2
17 Franc / Yen CHF/JPY 94.1722 -0.12% 0.53% 4.21% 95.67 87.67 5
18 Franc / Euro CHF/EUR 0.6304 -0.47% -0.74% -0.86% 0.651 0.6262 4
19 Franc / Pound CHF/GBP 0.4213 -1.01% -2.93% -4.49% 0.447 0.4204 8
20 Franc / Canada $ CHF/CAD 0.8904 -1.54% -2.68% -0.54% 0.9273 0.8646 1
1-month 3-month 6-month 52-week 52-week
Rank Country Index Oct. 26 gain/loss gain/loss gain/loss high low Previous
1 Brazil Bovespa 39,645 10.68% 8.34% -1.89% 42,062.00 29,005.00 8
2 Singapore Straits Times 2,741.69 8.54% 13.94% 5.59% 2,741.69 2,190.07 6
3 Australia All ordinaries 5,360.6 8.15% 9.23% 1.68% 5,361.90 4,340.50 13
4 Japan Nikkei 225 16,811.6 8.06% 12.95% -1.43% 17,563.37 13,272.84 14
5 Mexico IPC 23,361.42 7.20% 17.32% 13.59% 23,461.49 15,382.90 3
6 Hong Kong Hang Seng 18,353.74 6.04% 10.45% 10.08% 18,378.84 14,189.47 10
7 Canada S&P/TSX composite 12,335.68 5.95% 3.84% 0.11% 12,494.72 10,164.92 15
8 Germany Xetra Dax 6,284.19 5.43% 12.56% 2.90% 6,304.78 4,762.75 7
9 UK FTSE 100 6,184.8 5.30% 5.24% 1.32% 6,244.60 5,157.60 12
10 France CAC 40 5,433.79 4.10% 9.93% 3.46% 5,458.21 4,288.15 9
11 U.S. S&P 500 1,389.08 3.95% 9.51% 6.41% 1,389.45 1,178.89 5
12 Italy MIBTel 30,188 3.53% 8.73% 1.13% 30,448.00 24,336.00 11
13 Switzerland Swiss Market 8,673.8 3.47% 10.99% 7.47% 8,750.00 6,806.50 4
14 India BSE 30 12,698.41 3.06% 19.60% 6.36% 12,994.45 7,656.15 2
15 Egypt CMA 2,194.5 -1.24% 19.38% 2.69% 2,653.25 1,657.42 1


Country Interest rate Rate Last change May 2006 November 2005
U. S. Fed Funds Rate 5.25 0.25 (June 06) 5 4
Japan Overnight call rate 0.25 0.25 (July 06) 0 0
Eurozone Refi rate 3.25 0.25 (Oct. 06) 2.5 2
UK Repo rate 4.75 0.25 (Aug. 06) 4.5 4.5
Canada Overnight funding rate 4.25 0.25 (May 06) 4.25 3.25
Switzerland 3-month Swiss Libor 1.75 0.25 (Sept. 06) 1.25 0.75
Australia Cash rate 6 0.25 (Aug. 06) 5.75 5.5
New Zealand Cash rate 7.25 0.25 (Dec. 05) 7.25 7
Brazil Selic rate 13.75 0.5 (Oct. 06) 15.25 18.5
Korea Overnight call rate 4.5 0.25 (Aug. 06) 4 3.5
Taiwan Discount rate 2.5 0.125 (June 06) 2.375 2.125
India Reverse repo rate 6 0.25 (July 06) 5.5 5.25
South Africa Repurchase rate 8.5 0.5 (Oct. 06) 7 7


Rank Country Rate Oct. 26 1-month 3-month 6-month Previous
1 Australia 10-year bonds 94.27 -0.07% 0.19% -0.03% 4
2 UK Short sterling 94.6 -0.11% -0.43% -0.67% 5
3 Japan Government Bond 134.15 -0.70% 1.31% 1.47% 2
4 U.S. 10-year T-note 107.15 -0.90% 1.85% 2.01% 1
5 Germany BUND 116.76 -1.49% 0.48% 1.28% 3

CURRENCY TRADER November 2006 35



 India’s second-quarter GDP for April-June grew a

 France’s August unemployment rate increased 1.0 per- robust 8.9 percent from the previous three-month period,
cent from the previous month to 9.0. That marked a 0.9-per- and 13.7 percent year-over-year.
cent decline from August 2005.
 Japan’s August unemployment rate remained at 4.1
 The United Kingdom’s August jobless rate stayed at percent, unchanged from both the previous month and
5.5 percent, the same as the July rate. Unemployment has from August 2005.
increased 0.7 percent from the same period in 2005.
 The Bank of Indonesia continued its loosening cycle
 With elections coming up Nov. 12, Polish Prime of its benchmark Bank Indonesia (BI) reference rate by cut-
Minister Jaroslaw Kaczynski is fighting back against polls ting the rate 50 basis points to 10.75 percent. The decline
that show his unpopularity with the voting public by point- was the fifth straight by the Bank of Indonesia, and it fol-
ing to the country’s growing GDP and declining unem- lows more than two years of tightening, which saw the
ployment. However, political opponents say the emigration rate grow from 7.4 percent at the end of 2004 to 12.75 per-
of more than 2 million Poles since 2004 is the reason for the cent in January 2006.
economic boom.
 The Bank of Israel dropped its benchmark short-term
 The European Central Bank raised the benchmark refi lending rate 0.25 percent to 5.25 percent. The cut was the
rate 0.25 percent to 3.25 percent in October. The ECB has first since January 2005; since then the rate had grown
been gradually raising rates since December 2005 after a from 3.5 percent to 5.5 percent.
more than three-year period in which the interest rate
remained at 2 percent.

 The National Bank of Denmark moved in step with the

ECB by raising the benchmark two-week CD rate 25 basis
points to 3.5 percent in October. Like the ECB, Denmark is  Brazil’s Q2 GDP grew 6.4 percent from the previous
entering a loosening cycle after leaving interest rates alone quarter. The country’s central bank also dropped the
for more than three years. benchmark Selic interest rate 50 basis points to 13.75 per-
cent. The rate reduction was the 11th since the Selic stood
 For the fifth straight month, The National Bank of at 19.75 percent in May 2005.
Hungry raised its two-week deposit rate in October, this
time 0.25 percent to 8.0 percent. The rate was at 6 percent at  Brazil’s Oct. 11 presidential election finalized nothing,
the beginning of 2006 after standing at 12.5 percent two and caused a second vote between incumbent Luiz Inacio
years earlier. Lula Da Silver, better known as Lula, and Geraldo
Alckmin. Lula had a comfortable lead heading into the
ASIA & THE SOUTH PACIFIC election but became the focus of a corruption scandal.
However, Lula won the second election.

 Australia’s September unemployment rate was  Canada’s September jobless rate fell 0.1 percent to 6.4
unchanged from the month before at 4.8 percent — a 0.3- percent, a decline of 0.3 percent from September 2005.
percent drop from September 2005.

 Hong Kong’s preliminary third quarter unemployment AFRICA

rate fell to 4.7 percent, 1.0 percent less than the previous
quarter. The rate marked a huge drop — 8.0 percent — from
the same period a year earlier. A government spokesman  The South African Reserve Bank increased their
noted the labor market showed improvement in the quarter, repurchase rate 50 basis points to 8.5 percent. Prior to 2006,
as employers increased their staffing levels amid the sus- the rate had changed only once in three years, but the lat-
tained economic revival. est hike was the third in the last five months.

36 November 2006 • CURRENCY TRADER


Event: The Options Intensive Event: The Traders Expo Las Vegas
Dates: Nov. 9-10 Date: Nov. 16-19
Time: 8 a.m -5 p.m. Location: Mandalay Bay Hotel & Casino,
Las Vegas
Location: The Options Institute at the CBOE,
Chicago For more information: Visit www.tradersexpo.com
For more information: Call (877) THE-CBOE •
• Event: 22nd Annual Futures & Options Expo
Event: Futures Trading Summit Date: Nov. 28-30
Date: Nov. 15-16 Location: Hyatt Regency Chicago
Location: Palms Hotel, Las Vegas For more information: Visit
For more information: Visit www.fts.cme.com

Event: FXCM’s Currency Trading Expo
Event: Second Annual MARHedge Trading Forum
Date: Dec. 9-10
Date: Nov. 16
Location: MGM Grand, Las Vegas
Location: Stamford, Conn.
For more information: Visit
For more information: Visit www.marhedge.com


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Quote.com. Acquired from Lycos Inc. in the spring of 2006 nered to provide forex traders with automated trading serv-
and recently redesigned, the new Quote.com provides ices via Ninja Trader’s platform. GAIN Capital Group will
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folio manager feature with e-mail alerts. Quote.com users forex trades carried out on the Ninja Trader platform. Ninja
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Exchange, and the Tokyo Stock Exchange. Coverage also form is currently available free of charge to professional users
includes a wide range of global futures, options, and foreign at GAIN Capital (www.gaincapital.com) and to self-directed
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NYMEX/COMEX, the ICE, Eurex, and Euronext. Quote.com Capital Group (www.forex.com). Ninja Trader’s regular sub-
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Zealand dollar (EUR/NZD), euro/Czech koruna (EUR/CZK),
South African rand/Japanese yen (ZAR/JPY), U.S. Note: The New Products and Services section is a forum for indus-
dollar/Hong Kong dollar (USD/HKD), Australian try businesses to announce new products and upgrades. Listings
dollar/Hong Kong dollar (AUD/HKD), euro/Hong Kong dol- are adapted from press releases and are not endorsements or rec-
lar (EUR/HKD), and Hong Kong dollar/Japanese yen ommendations from the Active Trader Magazine Group. E-mail
(HKD/JPY). These pairs can be traded through GFT’s press releases to editorial@currencytradermag.com. Publication is
DealBook 360 trading software. For a complete list of GFT’s not guaranteed.
currency pairs, please www.gftforex.com/forex/benefits.asp.

38 November 2006 • CURRENCY TRADER


Carry trades involve buying (or lending) a currency with CMO = ((up-day movement – down-day movement)/
a high interest rate and selling (or borrowing) a currency (up-day movement + down-day movement)) * 100
with a low interest rate. Traders looking to “earn carry” will
buy a high-yielding currency while simultaneously selling An oversold condition is typified by a CMO value of
a low-yielding currency. below -50, while an overbought level is 50 or higher. For
more information on this indicator, see The New Technical
Chande Momentum Oscillator: The Chande Trader by Tushar Chande and Stanley Kroll. Also, the
Momentum Oscillator is calculated by dividing the differ- “Trading System Lab” in the December 2003 issue of Active
ence between up-day and down-day activity by the sum of Trader incorporated the CMO.
up-day and down-day activity over a given period. The This system trades from the long side only, entering
result is multiplied by 100 to create an indicator that oscil- when the indicators signal price is in an oversold condition.
lates between -100 and 100.
Using daily data as an example, if today’s price (close) is Volatility: The level of price movement in a market.
above yesterday’s price, today is an up day, the up-day Historical (“statistical”) volatility measures the price fluctua-
activity is the difference between today’s price and yester- tions (usually calculated as the standard deviation of closing
day’s price, and the down-day activity is zero. The opposite prices) over a certain time period — e.g., the past 20 days.
is true when today’s price is lower than yesterday’s price. Implied volatility is the current market estimate of future
volatility as reflected in the level of option premiums. The
higher the implied volatility, the higher the option premium.

Monday Tuesday Wednesday Thursday Friday Saturday

1 2 3 4
U.S.: ISM Japan: Monetary base U.S.:
Japan: Account ECB: Governing Unemployment
balances council meeting
Australia: Index of Germany:
commodity prices Unemployment
Norway: Central bank Philippines: Central
meeting bank meeting

6 7 8 9 10 11
Germany: Germany: Production Great Britain: U.S.: Wholesale Brazil: CPI
Orders index; insolvencies Monetary inventories; trade
received and Australia: Official reserve policy balance
manufacturing assets; reserve bank meeting committee Great Britain: Monetary
turnover Brazil: Monthly survey of meeting policy committee meeting
mining and manufacturing Germany: Korea: Reserve bank
physical production Foreign trade meeting

13 14 15 16 17 18
Japan: Balance of U.S.: Japan: Monetary U.S.: CPI Brazil:
payments; corporate Retail sales; survey; monetary policy Japan: Monetary policy meeting Monthly
goods price index PPI meeting ECB: Governing council survey of
Australia: Statement Great Britain: Great Britain: meeting trade
on monetary policy CPI Unemployment Brazil: Domestic federal public
Italy: Balance of Germany: Canada: Manufacturing debt and open market
payments CPI survey operations

20 21 22 23 24 25
U.S.: Leading indicators Canada: Retail Canada: Germany: Brazil:
Great Britain: Capital trade; leading CPI National accounts Monetary policy
issues indicators announcement
Germany: PPI Brazil: Monetary
Canada: Wholesale trade policy and credit
Hungary: Central bank operations; unem-
meeting ployment

27 28 29 30 1
Japan: U.S.: Durable goods U.S.: GDP Germany: Retail turnover; unemployment U.S.: ISM
Corporate service Canada: Canada: Trade Canada: GDP
price index Unemployment balance Australia: International reserves and Japan: Account
Brazil: Fiscal Poland: National Poland: National foreign currency liquidity balances
policy bank meeting bank meeting Italy: International reserves and foreign
Israel: National Slovakia: National currency liquidity Australia: Index of
bank meeting bank meeting Czech Republic: National bank meeting commodity prices

4 5 6
Japan: Canada: Interest rate Great Britain: Monetary Legend
Monetary announcement Policy Committee meeting CPI: Consumer Price GDP: Gross domestic
base Australia: Reserve bank Germany: Orders received Index product
meeting and manufacturing turnover ECB: European Central ISM: Institute for Supply
Brazil: Monthly survey of Brazil: Monthly survey of Bank Management
mining and manufacturing mining and manufacturing FOMC: Federal Open PPI: Producer Price Index
physical production physical production Market Committee

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

40 November 2006 • CURRENCY TRADER


Currency consolidation takes its toll

on another position.


Date: Friday, Oct. 6.

Entry: Short the New Zealand dollar/U.S. dol-

lar (NZD/USD) at 0.6581.

Reason(s) for trade/setup: Analysis of

weekly price data indicated the NZD/USD was
set up for a downswing after Sept. 29, when the
market made a new 26-week high, exceeded
the previous week’s high by at least 0.0050, and
closed below the previous week’s low (not
Source: TradeStation
Three weeks after outside weeks with lower
closes, the NZD/USD rate closed lower around 64 percent at the initial stop level. Until price reaches the October high
of the time and the median largest down move over this of 0.6692, however, there’s no reason to even contemplate
period was -0.0086. adjusting the trade.
One could argue a trade that has gone on this long with-
Initial stop: 0.6713, a little above the round-number price out paying off is increasingly unlikely to do so — especial-
of 0.6700 and just below the Sept. 26 high of 0.6720 (which ly since the pattern’s expected move after three weeks did-
was the high of the outside week). n’t occur — but if the trading-range market conditions per-
sist, another down swing could at least offer the opportuni-
Initial target: 0.6433. Take partial profits and lower stop. ty to exit with a smaller loss, or even a small profit.
However, the next down move seems unlikely to develop
until the market has challenged the 0.6692 high.
Exit: Trade still open. If the trade moves back into the money, we’ll move the
stop to breakeven. Until then, the initial stop-loss will
Profit/loss: -0.0075 (1.1 percent). remain intact.

Trade executed according to plan? Yes. Note: Last month’s long trade in the September 2006 euro futures
was stopped out at 1.2751 on Sept. 7 for a 0.0074 loss.
Outcome: As of Oct. 30, the trade was still open. Like
much of the forex market, NZD/USD has been mired in a
Note: Initial trade targets are typically based on things such as the his-
trading range for weeks — conditions that have persisted
on and off in 2006 and made it a challenging year for cur- torical performance of a price pattern or trading system signal.
rency traders. The trade almost reached its maximum prof- However, because individual trades are dictated by immediate circum-
itability the day after entry, but it has since gone in and out stances, price targets are flexible and are often used as points at which
of the money a few times; most recently, the price action has to liquidate a portion of a trade to reduce exposure. As a result, initial
been to the upside and the market looks to be making a run (pre-trade) reward-risk ratios are conjectural by nature.

Date Currency Entry Initial Initial IRR MTM Date P/L LOP LOL Trade
stop target length

10/6/06 NZD/USD 0.6581 0.6713 0.6433 1.12 0.6656 10/30/06 -0.0075 (1.1%) 0.0049 -0.0111 16 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); MTM — marked to market (an open posi-
tion’s profit or loss at the current market price).

42 November 2006 • CURRENCY TRADER

3 article collections
• Psychology of Trading • Advanced Currency Concepts • Option Basics •

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