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www.futuresmag.com January 2005

How the Fed affects forex 48 | Patent battle heats up 64

US $4.95 CAN $6.95

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How Fund Fees

Stack

Up

page 60

Markets to face toughtest this year

Reproduction or use of the text or pictorial content in any manner without written permission is prohibited.Copyright 2004 by Futures Magazine Group, 833 W. Jackson Blvd., 7th Floor, Chicago, IL 60607

Circle No. 116 or go to www.oners.ims.ca/4545-116


TRADING TECHNIQUES42 Fade the breadth

By Larry ConnorsMarket breadth doesn’t work exactlyas is taught. Here’s insight on how itreally works and how to better interpret it and apply it.

Contents

48 Should forex traders battle the banks?By Cornelius LucaDespite the market's rapid growth,the role of central banks in foreigncurrencies is significant, and it paysfor traders to understand that role.

44 Open-ended questions for closed-minded peopleBy Howard L. SimonsWhile the oats/notes spread hasbeen effective on its own in thepast, this year being an electionyear, we look to some other funspreads for market analysis.

JANUARY 2005 VOLUME XXXIV NUMBER 1

Economic expansion: How solid is it?By Carla Cavaletti Bauch

Some analysts are optimistic that

2005 will bring in a stronger U.S.

economy. Others say certain

factors will call the shots: oil

prices, interest rates, the weak,

and potentially weaker, dollar, the

enormous trade imbalance, and

whether international buyers opt

out of investing in the United

States. Our experts discuss how

markets will be impacted.

24

cove

r sto

ry

F E A T U R E S

Contents Continued, page 8

FUTURES (ISSN 0746-2468) is published monthly except semimonthly in January, June and September by Futures Magazine Inc. at 833 W. Jackson Blvd., 7th Floor, Chicago, IL 60607. Volume XXXIV, Number 1. Periodicals postage paid atChicago, IL 60607 and at additional mailing offices. POSTMASTER: Send address changes to FUTURES, P.O. Box 2122, Skokie, IL 60076-7822. CPC IPM Product Sales Agreement No. 1254545. Canadian Mail Distributor information:EMI, P.O. Box 25058, London, ON N6C 6A8, Canada. Printed in the USA. COPYRIGHT© 2004 by Futures Magazine Inc. All rights reserved. Reproduction or use of the text or pictorial content in any manner without written permission is pro-hibited. Subscription rates: United States, its possessions, Canada and Mexico — one year, $39; two years, $68. All other areas, $92 per year. International online version also available; call 888-804-6612 for details. All orders from outsidethe United States must be paid in U.S. dollars by international money order only. Single copies $4.95 in the United States, $6.95 in Canada. Change of address must reach circulation office six weeks before it is to be effective; old and newaddresses must be given. Express delivery service available. For rates, please call 888-804-6612 or 847-763-9565. CONTRIBUTORS: Return postage must accompany unsolicited manuscripts, photographs and drawings if return isdesired. No responsibility is assumed for unsolicited material. Futures Magazine Inc. believes the information contained in articles appearing in FUTURES is reliable, and every effort is made to assure its accuracy, but the publisher disclaimsresponsibility for facts or opinions contained herein. MICROFILMS and MICROFICHE of all issues of FUTURES are available from University Microfilms Inc., 300 N. Zeeb Ave., Ann Arbor, MI 48106; Information Access Co., 11 Davis Drive,Belmont, CA 94002. The full text of FUTURES: News, analysis and strategies for futures, options and stock traders also is available in the electronic versions of the Business Periodicals Index.

COVE

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WAL

ANSK

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EQUITY TRADING TECHNIQUES36 An intraday setup for E-mini trading

By Andy McComasThe S&P market boasts high risk, but if you can handle it, we offer a setup that willhelp you profit by entering a trade early.

6 FUTURES | January 2005

D E P A R T M E N T S

10 Editor’s Note Poor Ben’s Almanac

12 Sound Off!

14 Trendlines Eurex US drops fees,takes on New York • Chartview:Riding the wave of FX growth •Indexes ditch exclusive listingrights • Climate exchange goesonline • International news •What’s your resolution?

20 Trading Places Two new CFTC commissioners

21 Managed Money Review

22 Hot Commodities Coffee, gold, cornand crude oil

34 Forex Trader Trend principles,tactics and new tools

68 New for Traders

70 Book Reviews Trend Following and Candlesticks, Fibonacci and ChartPattern Trading Tools

72 Dateline January and February

74 Ad Index

82 Trader Profile Stefano Durdic: Out with the old...

group publisher / editorial director Ginger Szala

editor James T. Holterassociate editor Daniel P. Collinsassistant editor Yesenia Salcedo

editor at large Steve Zwick

contributing editors Murray A. Ruggiero Jr.,

Howard L. Simonscontributing writers

Japan: M.K. News

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F E A T U R E S

Contents continued

52 Setting the stage for option sellingBy Tim ZurickIf you look at selling options froma different perspective, you’ll seehow you can use them to profit.Here are a few scenarios usingshort option positions.

FUTURES 10156 Oscillators explained

By Yesenia SalcedoUsing oscillators as a secondaryindicator can help you betterdefine where a market will movenext to confirm trades. Here’s aprimer on the most popular.

MANAGED MONEY

60 How much are you paying?By Daniel P. Collins Do you understand the fee structures behind managed futures?Knowing what fees go to whom,and why, will help you maintainbetter track of your investment.

TRADE TRENDS

64 Patent this!By Daniel P. CollinsTT’s newly awarded patents on itsdisplay of market depth is going toshake things up in the industry.Will all ISVs profit, or will thisturn into an antitrust issue?

For reprint information contact:

Marla Leopold • FosteReprints

(800) 382-0808


page 44



There’s no doubt that foundingfather Benjamin Franklin may

not have met Red State moral stan-dards (whatever those are), but hecertainly was an incredible humanbeing. Any man who could work asa writer, printer, statesman, inven-tor — and be a revolutionary toboot — deserves reverence and

respect. One of his most generous and benevolent actions wasto not patent many of his inventions, such as the Franklinstove or the lightening rod, believing some inventions weretoo important and must be freely available to everyone.

I wonder how old Ben would have fared in today’s world?As a publisher, I understand the importance of copyrights

and the need to protect what you create. As a member of afamily of attorneys, I also understand the need for and limits ofpatents. As a capitalist, I believe you should be paid for whatyou create. However, it seems, the role of patents can changethe face of an industry, and in the case of the futures business,that time has come.

As Associate Editor Daniel Collins writes in “Patent this!,”page 64, the latest move by ISV Trading Technologies hasbeen to patent market depth software provided by TT.Problem is, it’s software, albeit developed by Harris Brumfield,CEO of TT, that now is, perhaps in some ways, used by manyfront-end vendors and brokers and could be construed broadlyto affect all parties using electronic trading. Furthermore, ifhistory is any indicator, it could involve the futures exchangesin a new lawsuit that could force them to settle with TT andend up paying a fee per contract traded. Daniel’s piece explainsthe issues involved in this very unsettling turn of events.

Understandably, the industry is a bit on edge. Not onlyhave settlements been made with TT (ironically one currentlawsuit is with eSpeed, whose parent company CantorFitzgerald started the whole rigamarole with purchasing theWagner patent and suing all those involved, including theexchanges, who settled), but suspicions have arose that thosesettlements were nothing more than agreements to give TTsome leverage in fighting a bigger battle.

What’s interesting with this case is even the CommodityFutures Trading Commission may get involved, and already iswaving around antitrust language that could make any goodlitigator squirm. Further, TT may have no interest in suing,but may be using it as a way to alter the course of how TT andother ISVs make money. Right now, ISVs don’t receive com-missions and have razor thin margins. Like any good companyin the pipeline, they want to get a piece of the action. TT mayhave figured out a way to do it.

A per contract fee (in a Dec. 14 letter, TT asked for a 2.5¢ perside fee) could be a burden to an industry that has fought hard tolower fees and terminate tax talks throughout its lifetime. Howthis will turn out is still unknown, but despite regulatory threats,the end-user — meaning the trader — will likely pay an extra fee.

This brings us back to Benjamin Franklin, whose visionhelped start a country, but today whose currency that isadorned with his face will be spent mightily, either in payingthe patentee or the attorneys who will fight it. He might enjoythe fight...as he said, “opportunity is the great bawd.”

C U S T O M E R S E R V I C E C E N T E R

E - m a i l m e a t g s z a l a @ f u t u r e s m a g . c o m


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Special issues are published three times a year; the Sourcebook, a directo-ry of futures and options industry businesses, in January; the Guide toComputerized Trading, which provides a list of software database,Internet and computerized services, in July; and a trading issue inSeptember. For credit card orders, send information to Futures Magazine,P.O. Box 2122, Skokie, IL 60076. Call (888) 804-6612 or (847) 763-9565(outside of U.S.) or fax (847) 763-9569. Calls accepted 8:00am-4:30pmCST. Single special issue copies vary from $10-$20 each.

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Futures Web site is our Internet version of Futures magazine(www.futuresmag.com). The Web site includes the latest issue of themagazine with full text of selected stories, daily updates with commen-tary on hot markets, spreadsheet downloads, a library of articles, market news and links to other sites.

List Rentals Inquiries for list rentals can be made through CherylNaughton at (770) 995-4964.

Poor Ben’s AlmanacEDITOR’S NOTE

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NO BIG BROTHERAutomated trading is a troubling devel-opment [see “A hands-on look athands-off trading,” November 2004].[F]or the life of me I can’t imagine whyany normal small trader would thinkthey could flip a switch and watch theprofits roll in the window.

Charting applications are nice andbeing able to trade from today’s slickpackages is great, but you can keep yourautomated trading. If I’m going to havea Big Brother managing my money, I atleast want him to have a pulse.

Alex DonnerIndianapolis, Ind. IN THE DARK ON CANDLES

In the November issue [“Day-tradingwith candlesticks and moving aver-ages”] your writer said “of the 50 or 60candlestick signals, only 10 signalshave been identified as signals worthspending the mental time and energylearning.” Do tell! What are those 10signals. The article didn’t tell us.

John ThomasNew York, N.Y.

Stephen W. Bigalow responds: Therehave been some inquiries about the 10major signals found in candlestick analy-sis. Those 10 major signals have beenidentified in the last 15 years of using thecandlestick signals extensively.

The reason they are considered themajor signals is that they occur the mostoften in candlestick charts, as well as theiraccuracy percentage is relatively high.

Instead of trying to explain each onehere, it might be more advantageous foryour readers to peruse my Web site. Thesite contains more than 300 pages of can-dlestick information for free. They can geta full explanation of what the 10 majorsignals appear like and some of the back-ground of why they are effective.

Editor’s note: Bigalow’s free site on can-dlesticks is www.candlestickforum.com.

CORRECTION

In our chart of the top 50 brokers in theDecember issue, the column headings for2004 secured amount and 2004 adjusted netcapital were switched. Futures regrets theerror. Also, according to data submitted afterdeadline, American National Trading Corp.has both retail and institutional clients andoffers both managed futures and onlinetrading. Fimat is also a member of AEX, NYCEand CSE. A corrected table is available forreview at www.futuresmag.com.

Have an opinion, question, objection,idea or beef? Let us know.

Sound Off! Futures, 833 W. Jackson Blvd., 7th Floor

Chicago, Ill. 60607, Fax: (312) 846-4638

E-mail: [email protected] letters to 250 words. We reserve theright to edit for grammar, space and taste.


Sound Off!

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Visit our web-site: www.trade-system.comPAST PERFORMANCE IS NO INDICATION OF FUTURE RESULTS

Hypothetical or simulated performance results have certain inherent limitations. Unlike an actualperformance record, simulated results do not represent actual trading. Also, since the trades havenot been executed, the results may have under-or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are alsosubject to the fact that they are designed with the benefit of hindsight. No representation is beingmade that any account will or is likely to achieve profits or losses similar to those shown.

Circle No. 106 or go to www.oners.ims.ca/4545-106 or call 888-529-1512

A product of Futures Magazine Group. There is a risk of loss in futurestrading. Past results are not necessarily indicative of future results.



NEW YEAR, NEW RIVALS

Eurex US drops fees,takes on New YorkAs it approaches its one-year anniver-sary, Eurex US extends its offensive inits fight for market share in U.S.Treasury contracts while establishinganother front in stock index products.In this latest effort, the exchange islisting Russell futures, which are cur-rently listed at the Chicago MercantileExchange (CME) and the New YorkBoard of Trade (Nybot).

Starting Jan. 1, all Eurex US cus-tomers will pay 5¢ per side for allfutures and options transactions inU.S. Treasury products. All trades exe-

cuted in its order book are eligible forthe 5¢ rate. Block trades will be subjectto a 45¢ per side surcharge.

The new prices replace a scaledstructure that charged customers 25¢,20¢ or 10¢ per side depending onmonthly volume. However, whilethere appears to be a fee cut across theboard, the new structure represents anet fee increase for many traders whohave taken advantage of a fee holidayinitiated in July. Eurex US traded arecord 1.15 million contracts inNovember, surpassing the previousrecord in August of 1.04 million.Average daily volume was 57,000 inNovember.

The trading records coincided withrecord volume at the Chicago Board of

Trade, where the vast majority of USTreasury futures are traded.

Eurex US CEO Satish Nandapurkarsays the new pricing structure was ini-tiated after consulting with customerswho sought a simpler model. He saysthis new model is sustainable.

“With the very low cost base andthe way we run efficiently, we can sus-tain this pricing for the Treasury prod-ucts far out in the future,”Nandapurkar says.

CBOT non-members pay 30¢ per side.

RUSSELL ROLLOUTEurex US never intended to challengejust the CBOT Treasury complex. Thenext targets are Russell 1000 and 2000products scheduled to begin trading bythe end of January.

“Eurex US has always been aboutproviding a full service exchange witha full suite of products and services tothe customer,” Nandapurkar says.

Unlike Treasury futures, Eurex USwill be fighting for market share incontracts not as established as theCBOT complex. Further, with theRussell contracts, Eurex US will beable to offer the benefits of the firstphase of its Global Clearing Link fromthe outset. Customers with positions inEurex’s equity index products, the Daxand Euro Stoxx, can trade the Russellindexes and receive margin offsetsbetween the two sets of indexes byclearing all positions through theClearing Corp.

Nandapurkar says there are a lot ofpotential traders who are benchmarkedto the Russell but trade the S&P 500as a proxy because there is no liquidalternative.

The New York Board of Trade liststhe Russell 1000 and though the aver-age daily volume of 3,306 is not overlyimpressive, it has built up open interestabove 80,000.

“Our goal is to get the liquidity onthe screen and bring those naturallybenchmarked institutions into a 1000product as opposed to having themcontinue to use the [S&P 500] as a

Trendlines


CHARTVIEW:RIDING THE WAVE OF FX GROWTHForex trading isn’t only growing on the cash side. Forex futures trading also is settingrecords. While the $79 billion total daily notional value of CME currency product trad-ing still pales in comparison to the OTC market’s $1.9 trillion, it’s still a large and liq-uid marketplace. The below chart of the euro shows how volume has grown steadily inthe CME’s most popular currency contract as the euro has appreciated consistently vs.the dollar — a technical condition that may portend extended weakness for the U.S.dollar going forward.

1.35

1.30

1.25

1.20

1.15

1.10

1.00

.95

.90

.85

.80

Source: CME, CSI

‘99 ‘00 ‘01 ‘02 ‘03 ‘04

Euro (nearest futures), weekly

Volume 200K

150K

100K

50K

0K

proxy,” Nandapurkar says.Nandapurkar did not know what

margin offsets would be available fortraders holding Eurex listed equityindexes and Russell indexes but saidsavings would be significant.

Eurex US has not announced thepricing structure for the Russellindexes. The Chicago MercantileExchange fees are $1.14 per side fornon-members and 44¢ per side forproprietary traders.

A spokesperson for the CMEwould not comment on whether theCME would adjust its fees but says,“We are always evaluating our com-petitive position. We dealt aggressive-ly with competition in the past andwe will deal aggressively with compe-tition in the future.”

By Daniel P. Collins

RUSSELL PLAYS THE FIELD

Indexes ditch exclusive listing rightsBeginning as early as this month,you may be able to trade indexoptions based on the RussellInvestment Group’s family of index-es at any U.S. options exchange. Anexclusive agreement between Russelland the Chicago Board OptionsExchange (CBOE) expires at theend of this year, and Russellannounced in November plans toseek multiple exchange listings ofindex options and is negotiating pos-sible license agreements with all sixU.S. options exchanges.

“We are engaged in active con-tract negotiations with multipleexchanges and we hope to completedeals by the end of [2004],” saysKelly Haughton, strategic director ofRussell indexes.

The move follows Russell’s currentpolicy of signing multiple licensingagreements for its indexes to gain thegreatest exposure possible. Futures onits three main products — the large


Trendlines continued

Circle No. 109 or go to www.oners.ims.ca/4545-109Reproduction or use of the text or pictorial content in any manner without written permission is prohibited.

Copyright 2004 by Futures Magazine Group, 833 W. Jackson Blvd., 7th Floor, Chicago, IL 60607

cap Russell 1000, small cap Russell2000 and broad-market Russell 3000— are traded at the CME and Nybotand are also licensed to Eurex US.

Haughton refers to CBOE as a greatpartner but sees a competitive advan-tage to multiple listings.

“The volume on our ETF options isup 10-fold in two years since we wentto multiple listings. We suspect that itis because of multiple listings and wewant to see that in equity options,”Haughton says.

The International SecuritiesExchange petitioned the SEC in 2002to mandate the multiple listing of equi-ty index options. The SEC has nottaken action and whether or not theSEC has the authority to take suchaction remains up for debate.

The Russell 2000, the most popularof the indexes listed at CBOE, has anaverage daily volume of 3,411 con-tracts year-to-date.

By Daniel P. Collins

TRADING SO2

Climate exchange goes onlineDec. 10 marked the start of futurestrading on sulfur dioxide emissionallowances on the newly establishedall-electronic Chicago Climate FuturesExchange (CCFE), a subsidiary of theChicago Climate Exchange Inc. Thecontract, Sulfur Financial Instruments(SFIs), is designed to facilitate pricehedging for U.S. EnvironmentalProtection Agency SO2 emissionallowances.

Richard Sandor, chairman andCEO of Environmental FinancialProducts LLC, who was instrumentalto designing the CBOT interest con-tracts, says this is the first time afutures contract will be based on anenvironmental property right.

“I’ve always thought of futures asevolving, and we’re on the next waveof innovation and sulfur is just the

www.futuresmag.com | January 2005 17

FREE AT LASTThe New York Board of Trade andeSpeed announced in December arenegotiated agreement that termi-nates all provisions of a previousagreement. This frees Nybot to pursuepossible joint ventures or mergers.Since moving its operations into theNew York Mercantile Exchange build-ing, Nybot has signaled it would beopen to a closer arrangement with theother New York futures exchange.

The agreement with eSpeed datesback to a 1997 pact between CantorFitzgerald and the New York CottonExchange and the failed CantorFinancial Futures Exchange. Theexchange was an attempt to wrestleliquidity away from the Chicago Boardof Trade’s financial futures complexthrough offering contracts exclusivelyelectronically. The challenge, though afailure, arguably expedited the era ofelectronic trading.

Nybot and eSpeed will continuewith a service agreement, but eSpeedis now the sole owner of the dormantexchange and Nybot is entitled toenter into contracts, combinations,alliances and ventures of any kindwith any entity, other than arrange-ments involving the electronic tradingof Treasury futures.

ANOTHER ‘Q’ FOR YOUOn Dec. 1 the Nasdaq 100 IndexTracking Stock (QQQ) switched its list-ing from the American Stock Exchange(Amex) to Nasdaq with the new tradingand market data symbol QQQQ.

As an OTC security, QQQQ is nolonger subject to ITS rules, includingthe trade-through rule, and theSecurities and Exchange Commission’sde minimis ($0.03) exemption. Also,QQQQ will be exempt from Nasdaq’sshort sale requirements, allowing shortsales in this ETF to execute on a downbid tick.

The transfer of the listing was madepossible after Nasdaq and Amex mutu-ally agreed to amend the terms of theoriginal agreement, which provided for

the listing of QQQ on Amex throughJune 2005.

A spokesperson for Amex says themove was made early because therewere no plans to extend the licensingagreement and Nasdaq wanted to listthe QQQ as soon as possible. Amex willcontinue to trade the QQQ on anunlisted trading privileges basis.

The New York Stock Exchange andthe Boston Stock Exchange will not ini-tially trade QQQQs.

UBER-SOLUTION?GL Trade has purchased UbitradeGroup, an electronic trading and backoffice company. The deal lets GL Tradeprovide a fully integrated front-to-backsolution for equity, derivative and OTCmarkets.

GL Trade says this makes it the firstsupplier of a multi-instrument front-to-back solution. The solution will combineGL Trade’s front-end trading station (GLWIN) and its middle office solution (GLClearvision) with Ubitrade’s real-timeclearing and settlement system forderivatives markets (UBIX).

SLEEPLESS IN SINGAPOREThe CME is trying to expand globalaccess to its markets by establishing itsfirst Asian telecommunications hub in Singapore in the second quarter of 2005.

The hub, which will reduce connec-tivity costs for customers in the PacificRim, will also enable direct networkconnections to CME Globex.

The CME has more than doubled thenumber of European customers con-nected to CME Globex via its telecom-munications hubs since their openingsin Amsterdam, Dublin, Frankfurt,Gibraltar, Milan and Paris this year.

According to a CME spokesperson,pricing initiatives and service offeringsfor customers in Asia have yet to beput together and it is too early to predict if the same results from the European hubs will be duplicatedin Asia.

International News


Futures has thrived for more than threedecades by providing unbiased tips,news, profiles, advice and current mar-ket analysis. Here, we spotlight someevents Futures has covered during its 32years. This flashback includes some arti-cles from the January 1989 issue.

• A short piece discussed the evolv-ing nature of the U.S. Federal Reserve’sactive intervention in the currency mar-kets and how futures were expected tobecome more utilized by the centralbank. We quoted David Bodner, EVP atBank Julius Baer & Co. Ltd: “[The Fed]would not use Chicago to hedge itsposition but would take an open posi-tion to have an impact on the market.”For a current review of central bankmachinations, see “Should forex tradersbattle the banks?” (page 48).

• We looked at guidelines for com-modity pools proposed by the NorthAmerican Securities AdministratorsAssociation. Among the suggestionswere suitability requirements forinvestors and restrictions on fees andbrokerage commissions. See “Howmuch are you paying?” (page 60) for adiscussion of the current fee situation.

• Futures profiled one of the largestlocals at the London InternationalFinancial Futures Exchange, AlanDickinson. Dickinson was a pit traderwho looked for flag formations toexploit intraday. “I’m a great believer inthe flag formations’ breakout up ordown,” he said. He also suggestedtraders avoid surprises by not trading infront of major government reports.

beginning,” Sandor says. “The ideathat markets could be used to solvesocial and environmental problems isvery, very novel, but there are the crit-ical problems that we face. When Iwas a student of economics and when Itaught economics, I was always taughtthat air and water were free goods, andthere was so much supply that therewas zero price and that you never hadto worry about that.”

Sandor says that myth is over:“The most precious commodities wehave are the most valuable ones —the air we breathe and the water wedrink because they are absolute neces-sities of life.”

According to Sandor, the idea forhow these contracts would work wasborn a long time ago when the exten-sive acid rain in the Northeast lead tothe Clean Air Act of 1990’s “cap andtrade” program in SO2 allowances.Sandor was asked if a market could bemade from that.

“Could somebody be given a quota,a property right, and if they don’t use

all of that quota can they sell that?And could somebody else be given aquota, and if they use more than theirquota, they can buy it — as long everyyear you lower the quotas in the coun-try, you will be curing the problem,”he says.

At the time, 18 million tons of sul-fur dioxide was being emitted into theair each year and the objective of the1990 Clean Air Act Amendment wasto cut that amount in half to 9 milliontons a year. This year the amount isaround 9 million tons emitted.

The contract is designed for utilitiessuch as electric power plants and otherindustrial polluters, which by virtue ofthe amendment to the 1990 Clean AirAct, must make reductions to theirSO2 emissions.

The CFTC designated CCFE as acontract market in November. Eachcontract is for 25 tons of sulfur dioxideemission allowances.

Sandor says the sulfur dioxide“crop” is bigger than wheat.

By Yesenia Salcedo


Trendlines continued

What’s your resolution?

Jan. 1 delivers a new year and encourages newresolutions, stated or not, for most everybody.Leaders in the trading industry are no different.Here’s what a regulator, an exchange leader and atrading guru resolve for 2005...

“I resolve to strengthen customer protectionrules, especially for retail forex.”

— Daniel Roth, president and CEO of theNational Futures Association

“My resolution for 2005 is to read Futures magazinewithout fail from cover to cover, especially thecolumns by Dan Collins.”

— Leo Melamed, chairman emeritus of the CME

“Bet small, follow the rules and stay alive.”— Larry Williams, currently running

www.ireallytrade.com

32 years of Futures...


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Michael V. Dunn and Fred Hatfieldwere sworn in as commission-ers of

the CommodityFutures TradingC o m m i s s i o n(CFTC) inDecember.

Dunn sayshis main goal isto work towardensuring there’sno fraud ormanipulation in the futuresbusiness.

“Each of thecommissionersbrings some-thing to thetable and whatI bring is agreat deal ofbackground inr e g u l a t o r ydeve lopmentand writing,” Dunn says.

“I also have a great deal of back-ground in the agricultural commodityprograms,” Dunn says. He says heunderstands how important commodi-ty exchanges are for producers in agri-culture, who are true hedgers lookingto the exchanges for assistance inprice discovery.

Dunn says one of the main eventshe looks forward to is the reauthoriza-tion of the CFTC Act of 1974.

“It’s a 20-year review and we’regoing to look at what’s worked andwhat hasn’t worked,” he says.

Hatfield says he is committed toprotecting the public interest and theintegrity of the exchanges.

“I have a strong interest in efforts toprevent and deter market manipula-

tion, and certainly the energy sector isof great interest to me,” Hatfield says.“I hope to bring a balanced perspec-tive to the commission reflecting myexperience in both the public and pri-vate sectors. I understand the need forbusiness to be able to operate effi-ciently without unnecessary encum-brances. In addition, my years of pub-lic service have taught me the impor-tance of government oversight andcustomer protection.”

Dunn previously was director at theOffice of Policy and Analysis at theFarm Credit Administration, andHatfield was chief of staff to SenatorJohn Breaux (D-LA).

Jukka Ruuska has been named presi-dent of the Stockholm StockExchange. Ruuska will continue aspresident of OMX Exchanges.

James Steadman has been promotedto global product manager and head offutures at eSpeed. Most recently hewas responsible for the worldwidedevelopment and growth of eSpeed’sfutures products.

You Just Trade hired Nick DeCock asa senior associate. He most recently wasa project manager at Accenture.

Michael Adam has been namedchief investment officer at AspectCapital Ltd. He is co-founder ofAspect and previously was director ofrisk management.

The Chicago Mercantile Exchangehas promoted James E. Parisi to man-aging director and chief financial offi-cer. He previously was managingdirector and treasurer.

Send news of personnel moves to:Futures, 833 W. Jackson Blvd., 7th FloorChicago, Ill. 60607, Fax: (312) 846-4638

Attn: Yesenia SalcedoE-mail: [email protected]

Two new commissioners at the CFTC

BY YESENIA SALCEDO


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Strong returns in October andNovember put many commoditytrading advisors (CTA) back in

the black after what had been a diffi-cult year. The Barclay CTA Indexposted a preliminary return of 2.78%for November (78.9% reporting) fol-lowing an increase of 2.2% in Octoberand 1.2% in September. The Octoberreturn made the overall index positiveon the year, although more than 50%of the CTAs listed in the data were stilldown through October.

The late year surge was due to strongtrends in currencies and metals. Theindex experienced five consecutivedown months and threatened to post aloss for only the fourth time in 25

years. The difficult patch broke a stringof nine consecutive quarters of growth,as money under management remainedflat for the third quarter. CTAs maynot be out of the woods, though, as astrong reversal in gold and the dollar inDecember may have taken back manyof their hard-earned profits.

The year was a return to the indus-try’s roots as the agricultural tradersindex vastly outperformed all othersectors and discretionary traders out-performed systematic traders.

WHAT’S THE JUICE?Mark Cuban, owner of the NationalBasketball Association’s DallasMavericks, is planning to create a

hedge fund based on sports gambling,according to Cuban’s Web blog.Cuban, a successful investor, said therewas better available informationregarding the performance of profes-sional sports teams and their playersthan on public companies.

He may not have started on the rightfoot with his potential regulator, how-ever, writing: “The gaming commissionappears to actually enforce rules of play,unlike the [Securities and ExchangeCommission].”

Cuban would not be placing bets butselecting successful gamblers, à la afund of funds. “I will find the best andthe brightest, with a [confirmed] trackrecord and hire them,” he wrote.

Comparing index returns

Top performers in 2004Fund Trading advisor(s) November Return YTDSmith Barney AAA Energy . . . . . . . . . . . .AAA Capital Management . . . . . . . . . . . . . .-3.20% . . . .+50.10%Triad Trading Fund LP . . . . . . . . . . . . . . .AAA Capital Management . . . . . . . . . . . . . .-0.81% . . . .+48.28%Salomon Smith Barney Orion Futures Fund Multiple managers . . . . . . . . . . . . . . . . . . .+2.08% . . . .+26.23%Quadriga Superfund, L.P. Series B . . . . . .Quadriga Capital Mgmt. . . . . . . . . . . . . . .+17.33% . . . .+16.34%Dean Witter Portfolio Strategy Fund . . . .J.W. Henry . . . . . . . . . . . . . . . . . . . . . . . .+13.01% . . . .+14.22%

Worst performers in 2004Blue Danube Fund - Futures Aeneas* . . .Merit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .+0.12% . . . . .-29.47%Moriah Futures Fund, L.L.C. . . . . . . . . . . .Jalex Trading . . . . . . . . . . . . . . . . . . . . . . . .+1.61% . . . . .-29.33%GSL-JWH INT’L Foreign Exchange* . . . . .J.W. Henry . . . . . . . . . . . . . . . . . . . . . . . . .+0.47% . . . . .-26.12%GSL-JWH Currency Strategic Allocation* J.W. Henry . . . . . . . . . . . . . . . . . . . . . . . . . .+0.30% . . . . .-25.34%AHL Currency Fund* . . . . . . . . . . . . . . . .Man Investment Prod. Ltd. . . . . . . . . . . . . .+1.12% . . . . .-21.36%

public funds summary

September’s top CTAs

Number reporting: 99Average performance for the month: +5.02%Funds up: 84 Down: 14 Unchanged: 1

November 2004

Number reporting: 99 Average performance for the year: -0.20%Funds up: 48 Down: 51 Unchanged: 0

2004 results (through Nov. 30)

Note: Listed return may not be fully attributable to listed advisor(s). * Offshore fund.

Top performers in NovemberFund Trading advisor(s) November Return YTDShearson Select Advisors Futures Fund . .J.W. Henry . . . . . . . . . . . . . . . . . . . . . . . .+23.08% . . . . . .-1.55%Smith Barney Tidewater Futures Fund . . .Chesapeake Capital Corp. . . . . . . . . . . . . .+20.43% . . . . .+1.59%Hutton Investors Futures Fund II . . . . . . .J.W. Henry; Trendlogic . . . . . . . . . . . . . . .+17.75% . . . . .+6.66%Quadriga Superfund, L.P. Series B . . . . . .Quadriga Capital Mgmt. . . . . . . . . . . . . . .+17.33% . . . .+16.34%Dean Witter World Currency Fund LP . . .J.W. Henry; Millburn Ridgefield . . . . . . . .+16.54% . . . . .-11.80%Worst performers in NovemberSmith Barney AAA Energy . . . . . . . . . . . .AAA Capital Management . . . . . . . . . . . . . .-3.20% . . . .+50.10%Blue Danube Fund - Futures Dynamic* . .Multiple managers . . . . . . . . . . . . . . . . . . . .-2.72% . . . . .-10.62%TriFex Trading Fund LP . . . . . . . . . . . . . .Treasury Management Service Inc. . . . . . . .-1.41% . . . . .+5.63%GSL-JWH Strategic Allocation* . . . . . . . .J.W. Henry . . . . . . . . . . . . . . . . . . . . . . . . . .-1.03% . . . . . .-0.08%AHL Diversified Guaranteed II* . . . . . . . .Man Investments . . . . . . . . . . . . . . . . . . . . .-0.96% . . . . . .-6.66%

October YTDS&P 500 Total Return Index +1.53% +3.06%Lehman Brothers Treasury Index +1.28% +8.05%Morgan Stanley EAFE Index +3.35% +5.70%Futures Public Funds (September) +3.46% -6.84%

October YTDBarclay CTA Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .+2.22% . . .+0.08%Barclay Sub-Indexes:Agricultural Traders . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-0.21% . .+14.82%Currency Traders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .+2.05% . . . .-3.04%Diversified Traders . . . . . . . . . . . . . . . . . . . . . . . . . . . . .+2.71% . . . .-1.93%Financials and Metals Traders . . . . . . . . . . . . . . . . . . . .+1.47% . . . .-3.16%Discretionary Traders . . . . . . . . . . . . . . . . . . . . . . . . . . .+0.15% . . .+6.74%Systematic Traders . . . . . . . . . . . . . . . . . . . . . . . . . . . . .+2.77% . . . .-2.49%

More than $10 million under management

1. John W. Henry & Co. (Dollar) . . . . . . . . . . . . . . . . . .+26.08% . . .-25.26%2. John W. Henry & Co. (Original) . . . . . . . . . . . . . . . .+22.02% . .-+12.72%3. John W. Henry & Co. (Strat. Alloc.) . . . . . . . . . . . . .+20.04% . . .+4.47%4. Willowbridge Associates (Argo) . . . . . . . . . . . . . . . .+18.77% . .+18.96%5. Pacific Asset Mgmt. (Alpha) . . . . . . . . . . . . . . . . . . .+17.45% . . .-28.53%

Less than $10 million under management

1. Chicago Capital Mgmt (Intermediate.) . . . . . . . . . .+45.99% . . .-11.20%2. Schindler Trading . . . . . . . . . . . . . . . . . . . . . . . . . . .+32.02% . . .-10.14%3. Visioneering R. & D. Co. (V-100) . . . . . . . . . . . . . . . +21.99% . .+36.92%4. Alterama, Inc. (Forex) . . . . . . . . . . . . . . . . . . . . . . . .+20.00% . . .-25.33%5. Calaveras Trading (Standard 2X) . . . . . . . . . . . . . . .+15.29% . . . .-6.92%Based on estimates of the composite of all accounts under management; does not reflect the performance of any single account.Source: Barclay Trading Group Ltd., Fairfield, Iowa; (641) 472-3456

Comeback kids

Managed Money ReviewBY DANIEL P . COLL INS

Coffee higher...eventuallyThe notion that low prices take care of low prices is a basictenet of the law of supply and demand.

Jack Scoville, VP at Price Futures Group, sees the coffeerally as a sign of the return to amore historical valuation of thecommodity after years of lowprices dampening supply andsparking demand.

Scoville says low prices havehurt the farmers bottom line,which has led some to give upfarming coffee and others tospend less managing their crop.

“Brazilian farmers haven’t fer-tilized [coffee plants] in years,”Scoville says.

Overall production was offfive million bags last year and2005 is an off year in the on-one-year/off-the-next crop.

“We are looking at the second straight year of inventorydeclines,” Scoville says.

More immediately, the flowering for next year’s Brazilian

crop is down while the Central American crop looks poor,and producers in Southeast Asia are experiencing a drought.

“You are going from a market that people can’t sell enoughcoffee to cover their cost to one [where they] don’t knowhow much coffee is out there,” Scoville says.

After breaching $1 per lb.briefly in November, the Marchcontract found support at 95¢.

“They tried to take out 95¢and they have [failed]. It hasbeen an impressive market,”Scoville says.

Scoville sees coffee movingback to a historical rangebetween $1 and $1.25 in thenear term and possibly higherlong-term.

Peter DeSario, softs analystfor Elliott Wave International,while recognizing that coffee is

in a long-term bull market, says it is primed for a significantdownward correction.

“It has not rallied impressively since the August low,”DeSario says, pegging the mid-60¢ level as his downside target.

Hot Commodities


BY DANIEL P . COLL INS

Source: eSignal

Coffee (Mar. ‘05) daily

Gold surpriseJust as we were preparing to talk about the nearly uninter-rupted three-month uptrend in gold futures, it up and tanks$15 in one day. Despite the dramatic Dec. 8 sell-off in gold,analysts Futures spoke with are still bullish — though a lit-tle more restrained.

“I am cautiously optimistic that gold will come back, butyou have serious chart work to do,” says Charles Nedoss,senior account manager at Peak Trading.

Though Nedoss sees the move as a correction in an over-bought market, its fierce nature makes it more than a gar-den-variety correction and because serious technical dam-age was done, he is not recommending buying this dip.

“I would like to see a consolidation phase before gettingback in on the long side,” Nedoss says.

Dave Meger, director of metals trading for Alaron, is lessfazed by the velocity of the move and remains bullish.

“You might see some residual selling, but it will bottomout and return vehemently to the uptrend,” he says.

Both analysts point out that the dollar’s failure to retainall of its gains on Dec. 8 was a sign of a correction insteadof a trend shift. While fund selling fueled the early sell-off,stop-loss selling from retail traders who were late to thelong side accounted for much of the move.

“Late-comers to the [gold rally] got squeezed out. Theygot hurt and bailed out,” Meger says. “The bull trend isintact and we will see higher prices in the weeks to come.”

Nedoss points out that the gold rally has closely followedthe dollar and he does not see a shift in that relationship.

“The economics have not changed,” Nedoss says. “Goldhas reacted to the weak dollar. I don’t see that our fiscalhouse is back in order.”

Gold (Feb. ‘05) Daily

Source: eSignal


Corn under pressure A record crop this fall coupled with decliningexport figures and higher than expected feedwheat production is putting pressure on corn,according to industry analysts.

Shawn McCambridge, senior grains analyst atPrudential Financial, says the U.S. Department ofAgriculture has been ratcheting down expectedexport numbers and that high ending stocks of 1.8billion bushels will likely grow to 1.9 billion.

“That is a lot of corn hanging over the marketat this time,” McCambridge says.

Despite this, McCambridge sees limited down-side potential at this level. Bears are targeting the$2 support level in March corn but if it is takenout, McCambridge says the March contract willfind support at the December 2004 contract lowof $1.9150.

James Barnett, grains analyst for Refco GlobalResearch, says the record crop along with slowfarm sales and slow export sales are creating amore bearish scenario and is targeting $1.80 forMarch corn. Barnett says bears can take asmuch as 20¢ to 25¢ out of the March contractby selling rallies as March corn reaches a winterlow near $1.80.

McCambridge is more bearish longer term dueto farmers using government loan deficiency pay-ments (LDP) to avoid selling into the cash mar-ket at current prices. He says farmers are usingLDP to cover costs and holding out for better cashmarket prices.

“Where this will pressure the market is furtherout. The 2005-06 prices are most susceptible torecord lows under certain circumstances,” hesays. He adds that if farmers are still holdinghigher than normal stocks into the late summerand the prospects indicate another strong crop,prices could dive to $1.75.

Is crude rally over?The mere volume of bullish news over the last year supportinghigher crude oil prices had many analysts declaring a paradigmshift in oil pricing. Crude oil futures prices had never beenable to sustain $30-plus levels for very long, but some analystsnow believe it will never dip below $30 again.

That said, crude oil has dropped $14 from the high above$55, and some analysts see much more to come. Kyle Cooper,energy analyst at Citigroup Global Market, is targeting $30 to$35 crude oil by the second quarter. Cooper says the rallyovershot because the market was reacting on fear.

“Fear is what got us to $55,” Cooper says.

IFR Pegasus energy analyst Tm Evans agrees. “We enjoyed being afraid. We worried about everything,”

Evans says.To be fair, there was a lot to be worried about. Venezuela,

Nigeria, Iraq, Russian oil producer Yukos and a string of hurri-canes hitting the Gulf Coast. In reality, only hurricane Ivansucceeded in dramatically affecting production.

“A lot of our worst fears were not realized,” Evans says. Both Evans and Cooper say the market continued to worry

about potential production disruptions while inventories slow-ly recovered. Cooper says the recent sell-off was intensifiedbecause the market took its eye off of rising inventories.

The move may not be over. “Just because it came down to$42 from $55, doesn’t mean it is a bargain here,” Evans says.Inventories on Dec. 8 are 5.8% higher than one year ago whencrude oil was at $32.10, Evans says. He adds that worldwidedemand tends to dip by 700,000 barrels a day in the first quar-ter and 1.5 million barrels in the second quarter.

“If we have a little surplus now, we will see a larger surplusin the first quarter and an even larger one in the second,”Evans says.


Source: eSignal

Crude oil (Jan. ‘05) daily

Source: eSignal

Corn (Mar. ‘05) daily


COVER STORY MARKETS


COVER STORY MARKETS

Economicexpansion:How solid

is it?

Rising interest rates, an enormous trade imbalance, a swelling current

account deficit and a falling dollar. These are only a handful of the

economic issues the U.S. economy will face this year. So how will the

economy respond? Will this recovery stay on track?

BY CARLA CAVALETTI BAUCH

Common catch phras-es economists haveused to describe theirpredictions for 2005 include

‘moderate growth’ and ‘continuedexpansion.’ But many agree that if a wildcard is thrown into the mix — such ashigh oil prices — these economic forecastseasily could go from temperate to extreme.


http://www.futuresmag.com/talk.asp

RISING RATESThe interest rate debate has notchanged much since the mid-year eco-nomic update last July. The questionis not if, or for that matter, evenwhen, but how much will interestrates rise in 2005?

Ashraf Laidi, chief currency analystwith MG Financial Group, says 2005interest rates will depend largely onoil prices. “If oil stabilizes to the low$40s, I see U.S. interest rates going to3% and not above 3%,” he says.

Some analysts, however, predict aslightly higher increase. Ken Mayland,president of ClearView Economics, aneconomic consulting firm, predicts thatthe Fed will increase rates several timesthroughout the course of 2005. “I seethe Fed fund rate reaching 4% by year-end,” Mayland says.

Michael Malpede, senior foreignexchange analyst at Refco, agrees. Heexplains, “My expertise is in curren-cies not interest rates, but my predic-tion is the Fed will ultimately get to a4% Fed fund rate and I believe it isconceivable to see 6% in the 10-yearby the end of the year.”

Predictions on inflation, on theother hand, differ rather widely.Mayland explains that basic econom-ic factors such as a rise in averagewage growth, higher earnings and afalling dollar give rise to inflationarypressures, which leads Mayland tobelieve that inflation will increase in2005. “Inflation could be the sleeperitem of the year,” Mayland says.

Mark Zandi, chief economist withEconomy.com, however, characterizes2005 as having low inflation. But Zandidoes believe both inflation and interestrates will be higher than last year. Heexpects the Fed fund target rate toreach 3.5% by year-end and the 10-yearyield to climb slightly above 5%.

HOW LOW CAN IT GO?Since mid-October the dollar has fallen7% against other main currencies.Recently, it has seen all-time lowsagainst the euro, a five-year low against


SERIOUS MISMATCHBCA Research stated in a Nov. 30 report that there is a “serious mismatch betweenthe dollar’s trend and regional trade imbalances.” According, to BCA Research, theU.S. trade deficit with other industrialized countries should soon start to shrink inresponse to the dollar’s sharp drop against the major currencies. BCA Research statesthat the longer Asian countries resist an upward adjustment in their exchange rates,the greater the dollar undershoot versus the euro and other currencies, adding that current trends are unsustainable and Asian currencies will have to appreciate markedly in the years ahead.

%

3

2

1

0

140

120

100

80

130

120

110

100

90

%3

2

1

01975 1980 1985 1990 1995 2000 2005

U.S.: Real Trade-Weighted Dollar (LS)Trade Balance/GDP (RS)

Other Important Trading Partners

Major Trading Partners*

Source: BCA Research

IS THE ECONOMIC EXPANSION MATURE?Ken Mayland, president of ClearView Economics, says that based on his objective quantitativemeasures this economic expansion is far from mature and has plenty of room left to run.

Expansion 1975-1980 1982-1990 1991-2000 2001-2004GDP growth 23.20% 37% 37.70% 10.30%Prime rate* 8.50% 4.00% 1.75% 1.00%Jobless rate** -3.10% -5.80% -4.00% -0.80%Duration 58 mo. 92 mo. 120 mo. 36 mo. Source: ClearView Economics, LLC

* Includes Europe, Japan, Canada and Australia.


the yen and has lost 35% against theeuro since 2002. Unbelievable? Nothardly, if you consider the current $600billion account deficit.

“The sliding dollar suggests thatthese foreign investors may have hadtheir fill of dollar-denominated assetsand might have lost their appetite formore — or they’re growing con-cerned about our ability to repay thedebt,” says Dan O’Neil, principal ofXpresstrade LLC.

“The dollar will be thrown into theabyss until we get the deficit and ourfiscal house of cards in order,” CharlesNedoss with Peaktradinggroup.comsays. He adds, “China and Russia arestarting to spread money around. Theyare basically tired of financing U.S.debt and purchasing less US Treasuries,which is really kind of scary.”

The markets, of course, have react-ed negatively to concerns that for-eign banks might have reduced theirholdings of American Treasurybonds. This includes reports thatRussia and Indonesia are consideringthis move and reports that Chinaalready may have trimmed its pur-chasing. Keep in mind; China is thesecond largest holder of foreignexchange reserves.

Mayland describes this situation asdollar indigestion. “Foreign investorshave to finance $600 billion of U.S.debt while the United States isabsorbing $600 billion of the world’ssaving. At some point there is goingto be some indigestion,” he says.

However, Mayland expects thetrend of the dollar falling to persistonly moderately. “You do hear sometalk of a disorderly market, but I amnot anticipating that this is a risk. Ibelieve we will see a gradual ongoingretreat of the dollar,” he says.

But if the Chinese yuan is revaluedthis year as some predict, this revalu-ation may take a further toll on analready sliding dollar.

“I do believe the Chinese willrevalue their currency in 2005,”Zandi says. “This pressure has been

Markets continued

T-bonds: Waiting for the crashBY JES BLACK

Amid a crashing dollar, rising global equity markets and a rate hiking Fed,U.S. Treasury market yields adjusted for inflation are at the lowest levels

in history. From a fundamental perspective the opportunity to short bondscould not be greater.

The technical outlook confirms the bearish case. Bond prices broke belowrising trendline support from the January 2000 lows this year sending bullishsentiment to a record low, according to MBH Commodity Advisors. In typicalfashion, bond prices then rallied from the extreme level of pessimism to thesame trendline before backing down.

Despite the obvious implications of such a move, the Commitment ofTraders report shows speculators amassed a larger net long position in the10-year note during this year’s rally than at the previous price highs of June2003 and May 2004. One explanation may be that as the yield curve flat-tened, the five-year note has led the way down this year allowing yield hun-gry traders to buy longer maturity bonds and sell the shorter maturity ones.

But time is not on their side. Between 1990 and 2001 the gold-to-bondratio had a correlation of more than 90% with yields. That is primarilybecause bond yields move inversely with price and because rising inflationarypressures also help drive yields higher. But this relationship broke down in2001. As the gold-to-bond ratio has soared these past three years, the spreadbetween the two has reached an all-time high. The implication, of course, isthat yields must “catch up” to brewing inflationary pressures.

Editor’s note: You can view these charts at www.fxmoneytrends.com/dx1.htm.

Jes Black is president of FxMoneyTrends.com, a research service catering to hedge fundsand professional traders.


120

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105

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95

J O ‘00 A J O ‘01 A J O ‘02 A J O ‘03 A J O ‘04 A J O

10-YEAR NOTE CONTINUOUS CONTRACT

Source: www.FxMoneyTrends.com


there for sometime now for theChinese to change their currencypolicy. I believe they will finally takethe big step this year.”

Zandi predicts that a revaluation ofthe yuan will cause the dollar to fallanother 5%-10% in 2005.

Laidi believes early in the secondhalf of 2005 China may raise interestrates as opposed to taking the step torevalue. However, he says raisinginterest rates again would give a moreserious message by China about thepotential for revaluation. Laidi saysthat if China can cool its economywith an interest rate hike, this couldhave a negative impact on metals,such as gold, leading ultimately tothe dollar going up. Laidi, though,explains that in the long run aninterest rate hike will pave the wayfor revaluation of the yuan, whichcould be a dollar negative.

LOOKING FOR A 2005 FX TRADE?Some analyst and traders believe the dollar has gone as far as it needs to go against theeuro and as a result selling the EUR/JPY cross rate is touted as a solid 2005 currency trade.

139.20138.40137.60136.80136.00135.20134.40133.60132.80132.00131.20130.40129.60128.80128.00127.20126.40125.60124.80124.00123.20

Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec03 04

EURO/YEN (NEAREST FUTURES), WEEKLY

Source: CSI Unfair Advantage

Circle No. 108 or go to www.oners.ims.ca/4545-108 www.futuresmag.com | January 2005 27Reproduction or use of the text or pictorial content in any manner without written permission is prohibited.


Others, however, do not believethis issue will be a concern in 2005.“If China revalues they will disclose alot more problems,” Nedoss says.“The banking sector is not strongenough yet. I don’t believe this willhappen in 2005. A year from now Ibelieve we will be having the sameconversation,” Nedoss says.

Malpede explains, “In 2005 we willmove closer to having more flexibili-ty in the Chinese currency and wewill see currency appreciation in Asiaoverall, which will take some pressureoff the dollar slide.” He adds, “It isthe end of the line for aggressive dol-lar selling against Europe. I see a dol-lar-selling shift toward Asia. We have

gone as far as we need to go againstEurope.”

THE UPSIDEIf there is something good to befound in this dollar slide, commoditytraders point to the price of gold. Inthe last week of November goldfutures closed above $450 per ounce

Markets continued

The U.S. dollar has now been in a pro-

nounced downtrend for more than two

years. Since the beginning of 2002, the dollar

has fallen nearly 32% against the euro, 30%

against the Swiss Franc, 25% against the

British pound, 22% against the Japanese yen

and 30% on a trade weighted basis. The dol-

lar index is now at levels not seen since

August 1995. A well-defined downtrend con-

tinues to remain the predominant theme in

the dollar with the daily charts indicating

that ADX is at 40, prices are well below the

200-day moving average, and MACD is in

negative territory. The monthly chart of the

dollar index also reflects a recent break of

key support. Unless we see a move back

above the November high of 85.70, bearish

sentiment should continue to grapple the

dollar. A more sustained close above 90

would negate the overall bearish outlook.

As of Dec. 1, 2004 the EUR/USD was trad-

ing around its all-time highs of 1.3340.

Momentum is bullish, with ADX at 56, mov-

ing averages all pointing upwards and MACD

in positive territory. The high in the German

mark against the dollar of 1.3430 was reached in March

1995. This is equivalent to 1.4560 in the Euro. With a near

vertical 3-month rally, it would not be surprising to see a

retracement in the EUR/USD. However such corrections will

most likely be seen as opportunities to buy on dips towards

1.30, which represents the breakout point of the bullish tri-

angle on the weekly charts.

Similar outlooks are seen in the GBP/USD, USD/CHF and

USD/JPY charts. ADX is well above the trending level of 20

in all three of the currency pairs, which suggests that the

downtrend in the dollar should also continue against those

majors. The GBP/USD closed above a double top and is trad-

ing at 12-year highs, with 1.95 and 2.00 beyond the

strongest levels of resistance. USD/CHF and USD/JPY are

both basing momentarily, but are also likely to continue on

their downtrend as the descending channel pattern in both

pairs remains intact for 2005.

Kathy Lien is the chief strategist at FXCM. Reach her at www.dailyfx.com.

Tech Talk: More downside for the dollar BY KATHY LIEN

U.S. Dollar Index (CASH), Monthly

Stochastic (14(1),3)

Directional Movement (14,14)

MACD (12,26,9,C)

100

50

0

50

25

05

0

-5

120.00

115.00

110.00

105.00

100.00

95.00

90.00

85.00

80.00

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

0.000 (121.8)

0.236 (111.513)

0.382 (105.533)

0.500 (100.70)

0.618 (95.8667)

0.760 (90.0504)

1.000 (80.22)

28 FUTURES | January 2005 Reproduction or use of the text or pictorial content in any manner without written permission is prohibited.Copyright 2004 by Futures Magazine Group, 833 W. Jackson Blvd., 7th Floor, Chicago, IL 60607


— the highest since 1988. And sincethe beginning of 2004, the price ofgold has risen more than 50%. “Manytraders are looking at $460 and then$500 as the next price targets, butgiven the market’s rapid rise and loftyprice, we think the next $20 move ingold could go either direction,”O’Neil says.

Nedoss’ gold forecast, on the otherhand, is clearly bullish. His initialtarget for gold was $475 and hebelieves gold will still hit this point.From there, Nedoss says, his next tar-get is $502 and he says this preciousmetal can climb even significantlyhigher given that the dollar contin-ues its steady descent.

EQUITY RIDE OR SLIDE?We seem to know where the dollar isheaded this year, but what about thestock market? Predictions for the 2005market vary widely depending onwhom you ask and what you read.Some say if the economy continues toperform well and the geopolitical envi-ronment improves a bit, this year andnext the market could take off.Predictions of the market gaining morethan 60% over the next two years canbe found. However, in just one click orpicking up the publication next to theone touting a bull, you may find a verydifferent take. Opinions expressed herelean toward the bearish side.

“We expect the market’s forwardprogress to be somewhat restrained —stocks are trading at historically highvaluation levels, and we still haveconcerns about the war in Iraq, ter-rorism fears, high energy prices andthe possibility of rising inflationrates,” O’Neil says.

Nedoss seems to agree. He says whilethe market has been able to shrug

numerous unhealthy fundamentals,including rising interest rates and high-er energy costs, he does not see thisholding true through 2005. He predictsmoderate growth and points to less thanfantastic earnings and lackluster autosales as two of the culprits. “For thestock market to sustain the levels wehave seen we need more “E” in theP&E,” Nedoss says.

Zandi, another source for stockmarket forecasts, predicts a singledigit return for the 2005 market.Sectors that Zandi suggests to stayaway from include interest rates sen-sitive sectors, such as housing, housebuilding supplies and mortgagefinance. “Broadly speaking I expecthealthcare and educational servicesto continue to do reasonably well,”Zandi says. “Also globally orientedcompanies that export to Asia andthose with large operations in Asiawill do better in 2005.”

WHAT TO TRADE?Rising interest rates, a falling dollar,a focus on Asia...with this said, whattrades might traders find appealing in2005? Even though the euro has post-ed a string of record highs against thedollar, some industry sources, such asO’Neil, point to the euro as a decenttrade, explaining that it still has somemomentum.

“Given the euro’s strong move to thispoint, if I were to initiate a new longposition, I’d certainly want the protec-tion of a trailing stop. That way, if themarket were to continue higher, myprofits would be allowed to run, and thestop would trail behind. But if the eurowas to make a sudden reversal and themarket was to correct, I’d have the pro-tection of a stop order in place.”

Malpede, on the other hand, looks

“For the STOCK market to sustain the LEVELSwe have seen we NEED more ‘E’ in the P&E.”

— Charles Nedoss, Peaktradinggroup.com



to Asia for currency trades. “My pre-ferred trade is selling the euro/yencross,” Malpede says. He says becauseof the overvalue of the euro andongoing dollar slide, he predicts amove in the dollar/yen to a positive96 and suggests buying yen.

OIL’S PULL One common uncertainty found in2005 economic forecasts, is the ques-tion of where oil prices will end up andhow much of an impact they will haveon interest rates, the stock market, andconsumer-confidence — for that mat-ter the entire economic landscape.Analysts and traders concur that if they

had to predict where oil prices are dueto stabilize this year, their best guess —and many stress “guess” — is the high$30s to low $40s.

Zandi, who believes oil prices are keyto just how well the 2005 economy willperform, says “We will see oil prices byyear-end at $35-$40 a barrel, but if oiljumps back up to $50 or above, theeconomy will be less upbeat and willexperience a bit of a struggle.”

Mayland explains that because ofthe falling dollar, 2005 may be theyear of the commodity. However, helooks at oil as a “special commodity”and does not believe that it will bepart of this fundamental rise. “Oil

may settle next year at an equilibriumprice of around $38 to $40 a barrel,”Mayland says.

As for oil’s effect on interest rates,Laidi explains, “The Federal Reserve isfinally coming to terms with thenotion that oil prices near $50 perbarrel carry more of a negative impacton consumer demand than a positiveimpact on inflation.”

As a result, in November, Laidiwrote about his view that oil priceswould be the key determinant of theFed’s interest rate decision inDecember. According to Laidi, if oilprices revert to the low $40s throughthe first two weeks of December, thenit would present an opportunity for aDecember rate hike on the rationalethat lower oil prices are putting lessrestraint on inflation and growth. Ifon the other hand, prices remain atleast in their high $40s, then the con-tractionary risk on growth remainsapparent, thereby precluding the needfor a December tightening.

THE BIG PICTURE In the long run, knowing how analystsand other traders view the economyoverall can be an important compo-nent to your trading strategy. Andwhile opinions on the details differ,forecasts characterizing the entire yearshare some common themes.

“Our perspective is that the econo-my is gradually improving and gather-ing strength, thanks to a combinationof lower taxes and interest rates.Hiring seems to have turned a corner,consumers are continuing to spend,and though corporate profits perhapsaren’t quite as robust as we’d like,they’re moving in the right direc-tion,” O’Neil says. “We look for theeconomy to continue expanding in2005 — not explosive growth, butsteady improvement.”

Laidi describes a similar forecast,stating that the overall economy willexperience a moderate pace of recov-ery. He says he expects the stockmarket to continue growing cautious-


Markets continued

WILL CRUDE TELL ALL?Oil prices, according to many analysts, is the 2005 wild card in determining just howmuch interest rates will rise and how far the stock market will climb.

56

54

52

50

48

46

44

42

40

38

36

34

32

30

28Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

CRUDE OIL (NEAREST FUTURES), WEEKLY

03 04

ANALYSTS and traders CONCUR that ifthey had to PREDICT where OIL prices will stabilize this year their best GUESS is the

HIGH $30s to low $40s.

Source: CSI Unfair Advantage


ly, adding that the economy’s moder-ate pace could turn stronger if oilprices stabilize below $40.

According to Zandi, “2005 will bea reasonably good year, characterizedby solid growth, low inflation andgenerally low rates.” He says whilethis year’s growth will not measure upto 2004, he expects to see the econo-my grow by 3.5%.

Mayland labels this year as having“above average growth.” He also sees a3.5% growth in 2005 and says the sec-ond half of the year will experiencestronger growth than the first half.Mayland says in his view the funda-mental question is whether this eco-nomic expansion is “mature.” His defi-nition of mature includes the amountof GDP growth seen in this recovery,interest rate levels, the jobless rate andthe length of the duration of thisexpansion. Mayland then compareshow these factors stack up in past peri-ods of economic expansion. (See, “Isthe economic expansion mature?” page25). According to Mayland’s objectmeasure, this economic expansionhasn’t reached its maturity.

THE JOB FACTOR Sources point to job growth as reason-ing for a positive economic outlook,but November job numbers did experi-ence a setback. The nation created112,000 jobs in November, a drasticdrop from the 303,000 jobs added inOctober. Some analysts explainOctober’s high numbers are mainly dueto a burst of new jobs fueled by theneed to rebuild the South from hurri-cane damage. Regardless, low jobgrowth and low consumer confidencenumbers — November’s figure fell to90.5 from 92.9 — remind us of whatmany analysts have predicted, theeconomy is set up for steady improve-ment, vs. rapid growth.

Editor’s note: Visit www.futuresmag.com/talk.asp to discuss this article with other traders.

Carla Cavaletti Bauch is a freelance writer in Chicago.


FM

Circle No. 131 or go to www.oners.ims.ca/4545-131Reproduction or use of the text or pictorial content in any manner without written permission is prohibited.



To every yin, its yang, and to every yen, its euro – or dollar,for that matter, since the surging euro and yen owe as much

to the dollar’s decline as to any domestic strengths of their own.In fact, for the year ahead, most economists see the U.S. econo-my retaining its place as the global engine of economic growth,with even China dependent on what happens stateside. Still, cur-rency traders are notorious for getting blindsided by issues intheir non-native currencies, and no one in today’s global econo-my is immune to being caught off-guard by predictable develop-ments abroad. Even traders concentrated on domestic productsare well-advised to keep an eye on developments in Europe.

And while you’re peeking, check out some of the new trad-ing platforms that convert non-dollar-denominated marketsinto dollars in real time. They make it nearly as easy to tradeEuropean country and sector stock indexes as it is to do thedomestic variety, and with half of the European Union’s (E.U.)countries still using their old currencies, you can spread the euroagainst the Polish zloty, Hungarian forint, Czech koruna,Swedish crown, British pound, and a smattering of others onmany FX platforms.

On a macro policy level, this year’s E.U. expansion to 25 mem-ber states means 25 European commissioners in 2005. If theymanage to get real clout, true reform won’t be far behind — formost of the newcomers are avowed free-marketers like newCommission President Jose Manuel Barroso. The new commis-sioner for Internal Markets and Services is the Celtic Tiger’sCharlie McCreevy, while the new Competition commissioner,Neelie Kroes, has sat on several boards and has long been anadvocate of more accountable corporate governance. New TradeCommissioner Peter Mandelson has already made overturestowards easing the trade war between the U.S. and the E.U.

As for projections, Price Waterhouse Coopers finds itself onthe high end of consensus opinion by seeing overall E.U.growth at 2.25% in 2005, up from 1.75% in 2004, with Spainleading the pack at 3% and Germany bringing up the rear at2%. Among the new member states, entrepreneurial Polandleads with 5%. Bank of America is less optimistic, projecting1.7% for the whole of the Eurozone, but essentially agreeingon the relative performance of member states.

The differences hinge primarily on two variables: oil and thedollar. Everyone we surveyed believes oil has topped out andthe dollar will rebound in 2005, and at press time oil is in factdropping precipitously. But the horizon is far from clear. TheE.U. gets 40% of its oil from Russia, and most of that is chan-neled through one company, Gazprom — which routes nearly

all of its E.U.-destined oil through turbulent Ukraine. And onthe dollar front, a fear exists in Europe that if the Bush adminis-tration can’t signal seriousness about reducing the triple deficitsof budget, trade, and current account, then anyone holdingU.S. debt carries a risk of being paid back in greatly depreciateddollars. Although Europe’s exports are more quality-driven thanare Asia’s, such a fall would certainly whittle away at the E.U.’s$80 billion trade surplus with the United States and take a tollon jobs. If, on the other hand, the U.S.-led global recovery man-ages to keep on chugging, Europe will doubly benefit — due toits trade surplus and low inflation.

ABN Amro economist Rolf Elgeti has identified 10 areas whereschisms can open between expectation and reality, potentiallylaunching major market moves. Primary among these, hebelieves, is labor reform, especially in Germany: For while mostanalysts see more disenchantment than enchantment coming outof Chancellor Schroeder’s efforts to whittle away at the welfarestate, Elgeti — himself a native of Germany — sees real progress.That’s good news for the industrial sector, but bad news for con-sumer goods. So, how about spreading Eurex’s Dow JonesEuroStoxx Industrial Goods & Services index futures against theDow Jones EuroStoxx Retail index futures?

Elgeti also points out that the various national indexes oftenreflect the industries within the countries — so a country likeSpain, which missed out on the go-go 1980s and early 1990s, isnow benefiting from growth in construction and services.

And remember the stability and growth pact? That’s thepart of the Maastricht Treaty that puts a 3% of GDP cap on thebudget deficits of member states — a cap that Germany,France, and Italy, among others, have found difficult to remainbelow. E.U. finance ministers are meeting in January to considermore flexible fiscal rules. Might certain European countries thusfind their bonds out of favor? And what of the euro? Public sec-tor budgetary shortfalls could put a damper on the currency’srise, especially if low inflation keeps interest rates down there,while the Fed decides to jack things up a bit stateside.

Although markets have so far shrugged off the leniencyshown to Germany and France, Bank of America economistLorenzo Codogno says that E.U. countries with high levels of gov-ernment debt do end up paying a slight risk premium in the formof slightly higher yields on their government bonds. He warnsthis could blossom into greater differentials if the underlyingproblems are not corrected, and offers a warning to policymakerson both sides of the Atlantic: “The effects of doubts about acountry or economic area’s creditworthiness become exponential-ly more severe as those doubts grow,” he says.

Europe and the euro: What goes up… BY STEVE ZWICK


Markets continued

FM



As 2005 gets underway, we are at extremes in the currency markets. More specifically, the U.S. dollar hasbeen in a long-term downtrend. The phrase “the trend

is your friend” has certainly shown itself to be a good mantra forthose who have sold into the extended dip. And while manytraders swear by it, we need to admit the obvious: The conceptof trading with the trend is too vague as a tactical tool.

Beginning forex traders expectedly would follow-up thatadvice with a range of ques-tions. How specifically doyou trade with the trend?Where are the entrypoints? When do you getout? Are there principles tohelp the new trader tradewith the trend? Can webuild a strategic plan fortrend trading in forex?

A prelude to shaping atrend trading strategy inforex is to first review inter-market conditions such aspatterns in the U.S. dollarindex (USDX) and gold.While each currency pairreflects specific trading ofthe dollar vs. that foreigncurrency, the USDX is aquick measure of globalsentiment. Assessing gold trends also provides a leading indica-tor of global sentiment toward the dollar. When gold is break-ing a previous sideways range or a downtrend, it offers a leadingindicator of dollar sentient shifting.

The next step is selecting the time frame. Trends can bemonthly, weekly, daily and even at the tick level. By scanningall of the time frames, you can quickly see the predominanttrend direction. More important, countertrend waves can beidentified. If the daily trend direction is diverging from theweekly or monthly, new trading opportunities can be shaped.

The next step is selecting a predominant trading direction.Finding a trade in either direction is always possible becauseforex prices are not linear and different laws of price actioncome into play across time frames. By pre-selecting a directionto trade, based on fundamentals or longer-term technical analy-sis, the focus becomes not what the trend is, but the best loca-tion for your next trade. For example, those expecting a majordowntrend in the dollar in 2005 will focus on the best entrypoints for short trades until that major expectation changes.

Next, you need to focus on execution points. This is where

the concept of “trading at the edge” comes into play. Trading atthe edge is best understood as finding a probe of a key supportor resistance level. This requires some contrarian thinking.

It is a natural tendency to try to buy when a price is going upor try to sell when it is going down, but there are retracementsand waves. Thus, if the currency pair is in a downtrend but isretracing to its five-minute trendline, a trader looking to sellwill watch for a probe of this trendline. Waiting for a retrace-

ment to support or resis-tance also reduces the risksof being wrong becausestop losses can be placedrather tightly.

Selecting the exit is oneof the most challengingproblems. Getting out tooearly after initial profitsfeels good, but improvingthe average pip gain pertrade is key to long-termsuccess. After all, trading ishard work, and for thesame level of effort,increasing the gains pertrade is a legitimate goal.On the other side of thesame coin is getting out toprevent a serious loss.

Fortunately, a time-proven charting method is accessible to help with every stage ofthe trend trading process: three-price or three-line break charts.

In a three-line break chart, only the highs and lows areshown. If a new high is reached in a selected time frame, a newrectangle is added above, and if a new low is reached a newrectangle is drawn below. We see that for the pound, there wasa series of consecutive new highs with a few periods of reversalsin the accompanying weekly chart. The trend is up, but whereand when do you enter that trade? The intra-hour trendsequences helps us find a more precise location (see inset).Looking at the 30-minute three-line break patterns, we see thatthe trend aligns with the weekly trend direction with somereversals. This gives the trader the choice of entering into thetrend by buying after a reversal occurs or entering at any pointbut with a stop three lines below.

In 2005 trend trading offers opportunities, and with three-line break charts the trend may become even more friendlierto profits.

Abe Cofnas is president of learn4x.com LLC. E-mail: [email protected].

Trend principles, tactics and new tools

BY ABE COFNAS


Forex Trader

BREAKING DOWN PRICEThree-line break charts can indicate trading opportunities on any time frame.

Source: www.xtick.com


There are numerous tradingaxioms that have been pub-lished ad nauseam — takeyour losses...never trade ahead

of a major report...don’t average losers— yet, traders who lack disciplineconsistently don’t acknowledge theserules. However, just as critical is over-looking lesser-known rules followedby successful traders. One such guide-line is the ability to enter a trade earlybased on its setup.

Many day traders hail from techni-cally oriented backgrounds that pro-vide them with invaluable program-ming skills. The ability to write suc-cessful paper tradable systems is a luxu-ry of systematic pundits. Discretionarytraders are not so lucky. They mustbase their trades on innumerable mar-ket factors. Of these, most commonare chart formations, the value of thecurrent market, news events and timeof day. For the discretionary trader,keen understanding of the noise a par-ticular market exhibits is paramountto proper and timely execution.

In both camps, though, one ques-tion invariably looms, which “setup”should be traded and, more impor-tant, when.

ENTER THE INDEXESEach market has its own characteris-tics that either suit traders or discour-age them from participating. Infutures, the more commonly tradedmarkets — the E-mini SP 500 andNasdaq — provide ample opportunityfor traders to lose their money quick-ly. Non-systematic traders who consis-tently lose in these complex marketsoften share a common link: Theynever trade early on setups.

Setups are action points that arecalculated on time or price or as acombination thereof. Areas that callfor a response by traders specific topre-conceived buy and sell pointscompose setups. Chart formations,reaction trades based on time of dayand intraday countertrend pullbackscreate action points upon whichtraders react. The top chart in “Onlythe average” (right) shows the SP 500jeopardizing the 200-day moving aver-age (MA). The second chart showsthe intraday picture of the buying thatoccurs after this action point is real-ized. The 200-day MA held, and thebuying that occurred was heavy.

In all action points, the trader mustcalculate ahead of time where he will

enter the market. Once decided, hemust act upon it diligently. He cannotwait for follow-through; rather, hemust be predictive as to where themarket is headed. Any delay in theplanned trade, and the trader riskschasing the market.

Stock indexes are great markets inwhich to trade setups. When a marketsets a new intraday high in the morn-ing and then backs off that high intothe lunch hour, this high thenbecomes a key number that may be re-tested later in the trading session. Asthe market finds value throughout themorning by meeting buy and sellpoints along the way, this directionalprocess either continues by additionalbuying or it meets a short end by anincrease in selling. What occurs dur-ing the noon break is generally aswing to both sides of the market asmany participants are off-the-floor oraway from their screens, thereby caus-ing a deficiency in liquidity. Oncethose traders return, however, thestory changes.

Orders flow into the market fromall over the world and attempt to setthe tone for the remainder of the day.If that tone has been fairly bullish for

You don’t have to be a computer whiz to trade today’s electronic markets

successfully. Here’s a simple set-up for the E-mini markets that can provide

significant profit opportunity — if you can manage the risk.

BY ANDY MCCOMAS


Intraday setup for E-mini trading

EQUITY TRADING TECHNIQUES


the majority of the morning, but yet ahigh had been set earlier in the day,this high then acts as a magnet to testfurther value as to how many sells orbuy stop orders are above this high.Although this magnet effect seems todrag the market to it, often the mar-ket flirts with the high set earlier inthe day but does not break it immedi-ately. Here is the setup.

The possibility of a break throughthe high most likely will not occur onthe first try. More often, strong sellingresistance at the morning high createsdownward pressure on the market,thereby keeping the market below theintraday high.

Rarely does a market break its highor low of the day on the first try.What was established as the high ofthe morning now offers a level ofresistance that becomes difficult topenetrate upon first attempt.

The setup is evident by virtue of themarket desiring to trade higher andholding in the higher intraday range;however, it isn’t quite ready to bepenetrated. Many traders make thispoint far more difficult for themselvesthan it should be. Simply, if the mar-ket has traded toward the high of theday, it is for good reason. Buy ordersare winning over sells, and this sug-gests the market can trade above thehigh set earlier. New market partici-pants and existing longs looking toadd positions have but one goal — topush the market past previouslyrecorded numbers. As with any set ofcascading buy orders, there are anequal amount of sell orders until thatbalance becomes skewed. How is thismeasured and in what format?

TIME AND SALESThe time frame for which this setupmay be violated must be counted inminutes rather than hours. A longertime frame in which a high or low isheld represents lack of momentum,whereas a high or low broken withinshort order indicates increasedmomentum and follow through. Thisis helpful to the intraday trader.Penetration of a day’s high or low is

primarily based on momentum, mean-ing if there is lack of heavy momen-tum then the high or low may stick.Since it is momentum that helps inthe discovery process of new prices,one such way to help quantifymomentum is to review time andsales records.

Major quote vendors provide accu-rate time and sales records, which arehelpful in determining a move’sstrength (a.k.a., “momentum”).Learning to read them properly helps

to identify a powerful signal tradition-ally reserved for floor traders. Thissignal or market noise defines thebreadth of the move and subsequentlyindicates follow-through or exhaus-tion. In reference to the previousS&P 500 example, where the 1075low was held, the time and salesrecord shows minimal prints in the1075 range, suggesting the marketcannot penetrate the 200-day M.A.(see “Time to buy,” page 38).

The lack of prints between 1075


ONLY THE AVERAGEAn action point can be identified in any number of ways. Here, we use the 200-day M.A.

117011601150114011301120111011001090108010701060105010401030102010101000990980970960

Dec’03 Jan‘04 Feb’04 Mar’04 Apr’04 May’04 Jun’04 Daily

S&P 500, DAILY

Either held or broken, this 200-Day Moving Average creates anAction Point

1103110211011100109910981097109610951094109310921091109010891088108710861085108410831082108110801079107810771076107510741073

14:30 15:30 Wed 10:30 11:30 12:30 13:30 14:30 15:30 Thu 10:30 11:30 12:30 5min

S&P 500, FIVE MINUTE

200-Day Moving Average holds, thereby amassing heavy buying

Source: FutureSource


and 1076 indicates thatselling momentum is wan-ing and, subsequently,because the market doesnot trade heavily in the1075 range, the marketturns higher. A review ofthe time-and-sales recordindicates lack of momen-tum as the most recent lowis not broken. The impor-tant point to remember isthe current market’s prox-imity to the day’s high orlow, as well as when in theday this discovery processoccurs. The earlier in theday a market takes a stabat its high or low, the morethis signal becomes sugges-tive of price continuationrather than magnetic priceattraction. “Magnetic priceattraction” is a value areaof congestion, such as astalled top or mid-morningbottom, that later in thesame trading session actsdynamically to pull themarket to it. This attrac-tion is what lays thegroundwork for the setup.

MAGNETIC PERSONALITY“Drawing attention” (page40) shows how on April28, the June SP 500futures contract set a lowfor the morning at1122.30. For the remain-der of the morning andthroughout the noon peri-od, the market traded in asee-saw fashion higher offthat low. After lunch,however, traders beganselling stocks and stock indexes.

The 1122.30 morning low now actsas a magnet. It draws sell orders to it,to find value or determine how manycontracts are bid below the low. Thefirst attempt at the morning’s low wasunsuccessful as bids held firm andpushed the market higher for another25 minutes. Our setup was now com-

plete. The market traded at or nearthe low for a reason. Selling has domi-nated buying and the market direc-tion indicated the market wanted totrade lower. After the buying waned,the fifth five-minute bar brokethrough the low and provided thetrader with the follow-through heneeded to make this short successful.

This setup consists ofthe low acting as a mag-net to be taken out, butwill most likely not betaken out on the first oroften not even the sec-ond attempt. Tradersmust be predictive orearly when selling into ashort-term rally. Thetrader’s conviction mustbe that if the low wastested once, then it willbe tested again. Again,volume and generalmarket breadth arehelpful in determiningwhether the market hasin it the potentialmomentum to take outthe low. After a reviewof where other broaderindexes are trading and,more important, at whattime in the day this isoccurring, then it maybe argued that the lowwill not hold, and thetrader may act accord-ingly and sell on thetemporary bounce.

Discretion plays thedominant role in thisfast-paced style of trad-ing. Bounces may beviolent and coincidewith another marketmaking a move, such asa currency or Treasurybond closing imbal-ance. Additionally,there may be a piece ofnews adversely affectingthe general downnature of the market, inwhich case the low may

hold and not be broken at all. This,however, is the exception ratherthan the rule.

A sell through the low of the day ornew buying above the day’s high can-not be sustained without adequatevolume. Lack of volume slowsmomentum and causes the market totrade lower but uncertain of itself.


Equity Trading Techniques continued

TIME TO BUYAnalyzing the time-and-sales record indicates the 200-day M.A. islikely to hold at the 1075 level.


Uncertainty can spell trouble as themarket can turn immediately, causingwhat looked like a legitimate “setup”to be unworthy and necessitate cover-ing the position. Many times thesemoves are sudden and require notonly quick entry but, equally impor-tant, quick exit.

“The quick and the poor” (right)shows why an early entry and quick exitare necessary to capture profits. On May5, Nasdaq 100 futures set an early tomid-morning high of 1434. (The 1435high at 11:55 Eastern does not consti-tute a tradable new high as it was toolate in the morning session to be consid-ered as the true early to mid-morninghigh.) During the noon time period, themarket traded lower until buyers camein to push the session higher fromaround 1 p.m. forward. Shortly after2 p.m., the high was tested, but the testfailed. The setup of a potential penetra-tion of this high was now complete. Ifmomentum increases, then generallythis high will be broken with some

vigor. In this example, the momentumwas lackluster, as the high of the earlymorning session was penetrated byaround three full points.

The trick to this style of trading is tobe early after the high or low has heldon the first attempt. In other words, ifthe high has held on the first attempt,buy the dip with the expectation thehigh will be exceeded prior to the close.Selling the low also applies. (Often, thelow is exceeded with more exuberancethan any high.) Patience and goodmoney management are necessary asoften the wait involved can be tedious.An arbitrary time limit of 35 minutes,or seven five-minute bars, can be usedto validate the trade. Stop order place-ment should be based on each trader’stemperament and objective. That said,in experience, 3.50 S&P points or sevenfull Nasdaq points provide room for themarket to work.

INTRADAY PSYCHOLOGYIntraday support and resistance points


Equity Trading Techniques continued

DRAWING ATTENTIONHere, the extreme price of the morning trading period acted like a magnet in theafternoon. When price finally broke through, shorts were successful.

1130.501130.251130.001129.751129.501129.251129.001128.751128.501128.251128.001127.751127.501127.251127.001126.751126.501126.251126.001125.751125.501125.251125.001124.751124.501124.251124.001123.751123.501123.251123.001122.751122.501122.251122.001121.751121.501121.251121.001120.751120.501120.25

11:00 12:00 13:00 14:00 15:00 16:00

S&P 500, FIVE MINUTE

Morning low

Second attempt at the low successful

First attempt at the morning low


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are more temporal than permanent, asrelated to daily or even weekly charts.Once a set of numbers or a congestivearea becomes picked at enough, oddsincrease that this number will be pene-trated. How and why this penetrationoccurs isn’t random — again, refer tomarket valuation and where that valueis perceived to be. Floor traders oftenrefer to the market trading to where thelargest numbers are, meaning that ifbuying support for the S&P 500 is largeat a round number, such as 1100, thenthat price level acts as a magnet to pullthe market to it.

Arguably, buyers have sizeableorders to be filled on dips to 1100 andthereby give the off-the-floor traderthe temporary feeling that support isto be held at 1100. Traders who watchhow those numbers are hit and, moreimportant, the frequency with whichthey are hit, are more often ready tosell on a short rally above the 1100support mark with the expectationthat this number will be penetrated.Again, accepting the importance of

being early substantiates the need forproper risk assessment in the event1100 is not penetrated.

Early setup trading is not for thefaint of heart. This style of trading,like any, has complications. Manyvariables such as event news, lightafternoon volume and counter-trendbuying or selling may undermine thebest setup and make it not worthy ofreal dollar risk. Traders who use cleardiscretion may help to mitigate risk byonly entering early setup trades thatoccur late in the trading session. Asmost discretionary trading comprisesmultiple ingredients, adding a non-programmable systematic flavor suchas late day setup trading, may give thetrader the edge over others who ran-domly trade at the market.

Andy McComas is a principal of AmericanFutures & Options Inc. and AmericanDiversified Funds Inc. based in Naples, Fla. Hetrades complex futures and option spreadstrategies for various retail and institutionalclients. You may reach him via e-mail [email protected].

FM


THE QUICK AND THE POORAfter the first attempt at the morning high, price quickly resumed the upturn. However,a trader would have had to have been quick to offset to garner significant profits.

1436.501436.001435.501435.001434.501434.001433.501433.001432.501432.001431.501431.001430.501430.001429.501429.001428.501428.001427.501427.001426.501426.001425.501425.001424.501424.001423.501423.001422.501422.001421.501421.001420.501420.001419.501419.001418.501418.001417.50

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NASDAQ 100, FIVE MINUTE

Early to Mid morning highFirst attempt unsuccessful

Early Buy in anticipationof break of high



One of the trading aphorismsthat many of us have beentaught is that marketbreadth is important. Market

breadth refers to the number of indi-vidual shares participating in a movein a broader index that includes thoseshares. Supposedly, when advancingissues are stronger than decliningissues, the market is healthy and it’s asign of likely further market gains.Conversely, when declining issuesoutnumber advancing issues, it’s a signthe market is breaking down andprices will be heading lower.Statistically, nothing is further fromthe truth.

In our recently published book How Markets Really Work, we lookedat a number of common indicatorsused by traders to help them time themarket indexes. We looked at howmarkets reacted during one day, twodays and one week when the S&P 500cash market and the Nasdaq 100 cashmarket made 10-day highs, 10-daylows, multiple closes in the samedirection, and multiple higher highsand lower lows. We also looked athow the market has behaved atextreme put/call ratio levels, extreme

Vix levels and large-volume days.We also looked at market breadth,

asking a handful of questions:• How did the market perform after

advancing issues outnumbered declin-ing issues a number of days in a row(again, supposedly a sign of marketstrength)?

• How did the market do afterdeclining issues outnumbered advanc-ing issues a number of days in a row(supposedly a sign of weakness)?

• How did the market do whenadvancing issues were 2:1 and 3:1greater than declining issues for the dayand how did the market do whendeclining issues outnumbered advancingissues by at least 2:1 and 3:1 for the day?

We looked at the market from1996-2003. This period of time tookinto account a four-year bull run(1996-99), one of the worst bear mar-kets in history (2000-02), followed byanother year of higher prices in 2003.The results of this study will openyour eyes, and will likely allow you tosee potential edges that much of thefinancial media, along with manytraders, do not understand.

TRADING THE UNEXPECTEDThese results look at the market duringa one-week period of time (meaning anexit five trading days after the signal).

Multiple days of declining issuesgreater than advancing issues consis-tently performed better than multipledays of advancing issues outnumberingdeclining issues. This is not conven-tional thinking.

Conventional wisdom states thatmarkets are healthy when more issuesare rising and not healthy when moreissues are declining. But the resultsshow that is not true. The weakness, asdefined by declining issues has beenconsistently followed by strength, andthe strength, as defined by advancingissues has been consistently followed

Think you know how to trade market breadth? Think again.

Depending on your time frame, past strength may mean anything

but future bullish follow-through.

BY LARRY CONNORS

Fade the breadth

TRADING TECHNIQUES


by weakness (see the top chart in“Breadth of market,” right).

In spite of an upward bias duringthe period we looked at, the Nasdaqhas actually lost money on averagewithin a week after advancing issuesoutnumbered declining issues twodays in a row. Think about this: Acouple of good days and everyonewants to jump in. But, it is usually thewrong time to do so. The market hasalready risen and further gains onaverage have not been seen (see themiddle chart).

When advancing issues outnumberdeclining issues by a 2:1 margin (andeveryone is on television telling youhow healthy things are), the markethas on average lost money during thenext week. And, when declining issueshave outnumbered advancing issues atleast 2:1, not only is the world notcoming to an end, the market on aver-age has risen far beyond the averagedaily gain seen during that period oftime (see the bottom chart).

BUY WEAKNESS, SELL STRENGTHThe statistics show that within thecontext of this study, it has been betterto be buying when breadth has beenpoor and better to be selling whenbreadth has been good.

The stock market does not go in onedirection. Short-term strength usuallydoes not follow through, as taught byothers, and short-term weakness doesnot mean more short-term weakness.Not only is this logical — otherwise themarket would rise forever or drop tozero — but, more important, the statis-tics prove this out.

Using breadth indicators asdescribed here gives you a potentialedge that other traders don’t see and allows you to enter and exit the markets at potentially moreopportune times.

Larry Connors is the chairman and CEO of TheConnors Group Inc. and TradingMarkets.com, afinancial markets information company. He isalso the Managing Partner of Connors CapitalLLC, a private investment company. He hasauthored a number of top-selling books onmarket strategies and volatility trading.

BREADTH OF MARKETThree consecutive days of declining issues greater than advancing issues have stronglyoutperformed three consecutive days of advancing issues greater than declining issues.

.60%

.50%

.40%

.30%

.20%

.10%

0%

S&P 5003 DAYS IN A ROW


1.00%

.80%

.60%

.40%

.20%

0%

-.20%

-.40%

1.20%

1.00%

.80%

.60%

.40%

.20%

.0%

-.20%

Two days in a row of declining issues greater than advancing issues in the Nasdaq significantly outperformed two days in a row of advancing issues greater than declining issues.

Days with 2:1 declining issues to advancing issues outperformed days with 2:1 favoringthe advancing issues.

Average One-Week Performance of the S&P 500when NYSE Advancers are greater than NYSEDecliners for at least three days in a row.

Average One-Week Performance of the S&P 500when NYSE Advancers are less than NYSE Decliners for at least three days in a row.

Average One-Week Performance of the Nasdaq100 when Nasdaq Advancers are greater than

Nasdaq Decliners for at least two days in a row.

Average One-Week Performance of the Nasdaq 100when Nasdaq Advancers are less than Nasdaq

Decliners for at least two days in a row.

Average One-Week Performance of the S&P500 when NYSE Advancers are at least two

times NYSE Decliners today.

Average One-Week Performance of the S&P 500when NYSE Decliners are at least two times

NYSE Advancers today.

NASDAQ 1002 DAYS IN A ROW

S&P 5002:1 RATIO

FM


Take it on faith, you take it to the heartWaiting is the hardest part

— Tom Petty

The sun is the same in the relative way,but you’re older

And shorter of breath and one day closer to death

— Pink Floyd

In homage to the Vietnam-eraposter, suppose they gave a mar-ket and nobody traded? We can-not say that universally about all

markets in the year just departed; theenergy market in particular decided topoke around the stratosphere, but thereturns on conventional investmentsall hovered around the unchangedline for interminable periods.

What is the best explanation forthis flatlining, this languid torpor,this beat-your-head-against-the-wall inaction? Waiting, that’s what.We kept waiting: Waiting for theFed, waiting for the political con-ventions, for the Olympics, for theelection, for something. It got sobad that Godot himself could havestrolled by and no one would have noticed.

What, if anything, could have alert-ed us to the possibility that ourthumbs would have been safe and in awarm place for the better part of a cal-

endar year? This being January, therecan be only one answer to that ques-tion, and that is the oats/notes spread,the very real difference between the

front month contracts for oats and10-year notes. The logic is impec-cable: The lower interest rates go,the higher note prices go, and thusthe lower the oats/notes spread. Ithas done nothing but provide uswith clues to the inner workings ofthe market for the past decade, butlike the dearly departed RodneyDangerfield, it gets no respect.

Last year was all about the waiting. Is the wait over? We consult with

the oats/notes spread to find out what’s in store for the markets.

BY HOWARD L . S IMONS


Open-ended questions for closed-minded people

TRADING TECHNIQUES


Its breakaway gap to the downsidein April 2003 alerted us to thearrival of a huge rally until the endof the year. But, then a funny thinghappened: Despite the FederalReserve’s series of rate hikes com-mencing in June 2004, note yieldsrefused to go higher. No, they werereacting to the depressive effects ofhigher energy prices. The end result,and one there for all to see, was theone and only unfilled gap in the his-tory of the oats/notes spread. Untilthis gap is filled, either by a hugerally in oats or a major sell-off innotes, f inancial markets will not move.

OATS/NOTES TRADERS FOR TRUTHOf course, as effective as theoats/notes spread has been, it isunfair to ask it to shoulder the entireforecasting burden itself. It needshelp. In previous years, we haveoffered measures as disparate as theHU/NG spread between gasoline andnatural gas, the brass/ball spreadbetween a synthetic London MetalsExchange brass forward and the stockof the Ball Corporation, and theDXY/CHX spread between the dollarindex and Pilgrim’s Pride stock.

But, as many of you noticed, 2004was an election year, and an unneces-sarily long one at that. President Bushwas unchallenged for the Republicannomination, and John Kerry wrappedup the Democratic nod by early March.The two major parties then spent eightmonths and hundreds of millions of

dollars to change what could havebeen a few thousand votes, althoughthe actual tally might run into thehundreds.

The only real excitement came inlate August when the last battle of theaforementioned Vietnam War wasfought over the American airwaves.When the oddly named Swift BoatVeterans For Truth emerged at thesame time the extraordinarily steep

yield curve, one that defines the costof carry in financial markets, began toflatten, the whole thing came togeth-er in a Eureka moment. The Swiftieswere driving the yield curve, its carry,and by extension the political fortunesof John Kerry.

How so, you ask? We can measurethe steepness of the yield curve bytaking the ratio of forward ratebetween two and ten years, the rate at

which we could lock in borrowingfor eight years starting two yearsfrom now, to the 10-year rate itself.

The lower the number, theflatter the yield curve; a

number less than 1.00indicates an inverted

WHAT RHYMES WITH GAP?The financial markets are being held hostage by the oats/notes spread, which stubbornlyrefuses to fill a recent price gap.

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-101982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

The Only Unfilled GapIn Oats/Notes History

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www.futuresmag.com | January 2005 45Reproduction or use of the text or pictorial content in any manner without written permission is prohibited.Copyright 2004 by Futures Magazine Group, 833 W. Jackson Blvd., 7th Floor, Chicago, IL 60607


yield curve, one wherein short-termrates are greater than long-term rates.By the end of the Federal Reserve’sseries of rate cuts between 2001 and2003, this ratio was the highest it everhad been.

The next part of our spread is theSwift-Boat indicator, which we canderive by multiplying the respectivestock prices of Swift Transportation(ticker: SWFT) and Travis Boats(ticker: TRVS). Is the cost of carryrelated to swift boats? We report andyou decide.

THIS IS YOUR EXCHANGE ON DRUGSStock markets, like elections, are sup-

posed to reward winners and punishlosers, and they do this after a fashion.Let’s revisit a spread introduced lastyear, the Merc/Merck spread betweenthe Chicago Mercantile Exchangeand the homonymous pharmaceuticalgiant. The Merc has rocketed forward-ed since its December 2002 initialpublic offering, stepping on (or per-haps “in” would be a more appropriatepreposition) its competition. By theend of October 2004, its stock hadrisen 86.75% since Euronext.liffebegan offering a virtually identicalEurodollar contract in March 2004.Merck did not have a similarly goodyear; not only did all pharmaceutical

stocks retreat under the threatof a Kerry presidency, but thefirm had to withdraw Vioxxfrom the market. TheMerc/Merck spread has been aone-way street.

THE ABBYCNN closed its financial net-work. CNBC started runningtalk shows with old tennisplayers. The VIX hit new lowswith regularity. Has money lostits sexiness? What happened tothe stars of the 1990s, the ones

who managed to stay on the outside ofCamp Cupcake? Fear not, for we keepthe flame burning bright next to that$2.50 gasoline you have been buying.

Yes, it is time once again to bestowthis year’s Abby Award, the mostprestigious non-existent prize in exis-tence. If you want to win an Abbyinscribed with Druid incantations andfestooned with a symbolic brokenclock for your skills at fearless fore-casting and peerless prognostication,you actually have to do somethingright, which apparently is the highesthurdle in the business. It is on theorder of the Boston Red Sox finallywinning the World Series. Perhapsnext year’s award should simply be thebroadside of a barn with the words“hit this” painted on the sides.

The contest is simple. Each weekBloomberg tracks the forecasts andasset allocation recommendations ofWall Street’s leading strategists. Wetrack the tracking. The weekly fore-cast for the year-end of 2004 was aver-aged and compared to the S&P 500’sactual value at the end of September.The closest ratio to 100% takes theAbby, no questions answered, espe-cially if they are about mistakes.

The winner for this year is FrancoisTrahan of Bear Stearns. He joins thisauthor, Ron McEwan, ChrisCostakos, Beth Loeb & DarleneDemor, Douglas Cliggott and AbhijitChakrabortti in the select company ofAbby Award winners.

What was Mr. Trahan’s secret? Itwas not sticking to his guns nor was


Trading Techniques continued

SWIFT BOATS AND CARRYCarry or Kerry, in 2004 your fortunes were tied closely to the performance ofSwift/Boats.

1.15

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1.091982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

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Swift

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Boats

it changing his position frantically.Several strategists did not botherupdating their forecasts at all duringthe course of the year; these includ-ed Thomas McManus of Banc ofAmerica, Subodh Kumar of CIBCand Abby Joseph Cohen of GoldmanSachs. Others adopted the weathervane approach. Trahan went fromJanuary through June with an S&P500 forecast of 1160, dropped it to1100 and then lowered it to 1050 forthe last week of the contest. The netresult was an average forecast errorof 1.00%.

THE ABBY GOES SIDEWAYSThere is a poetic justice to this outcome.Many of the most famous market gurusearned their bones by simply stayinglong during a bull market, or more rarelyby staying short in a bear market andnever varying their opinion. No matterhow devoid of content their work was,the market bailed them out. This wasthe year when doing little and doing itquietly paid off in the markets. Do notexpect this to continue.

Howard L. Simons is president of RosewoodTrading and a strategist for Bianco Research. E-mail: [email protected].

GOOD ENOUGH FOR GOV’T WORKSome years in the markets, doing nothing or little is better than doing anything else.Last year was one of those years.

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THE MERC/MERCK AT WORKThe Chicago Merc’s relentless drive higher and Merck’s Vioxx troubles made theMerc/Merck spread a one-way trade last year.

$22

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$6Dec’02 Mar’03 Jun’03 Sep’03 Dec’03 Mar’04 Jun’04 Sep’04

FM





Foreign exchange marketshave come a long way sincethe dark days of the BrettonWoods Accord, which kept

currencies chained to each other in arange of only 1%.

In the past 30 odd years, the global-ization of the economies, the techno-logical breakthroughs and the stagger-ing growth in investment funds andcommodity trading advisors haveexpanded the daily trading volume inforex to $1.9 trillion dollars by 2004,according to the BIS TriennialCentral Bank Survey of ForeignExchange and Derivatives MarketActivity.

If this figure were not impressiveenough, remember that volume inforex has been greatly reduced by themelting of most individual Europeancurrencies, such as Deutsche mark andFrench franc, into the euro and by theincessant process of mergers andacquisitions, which reduced the num-ber of commercial and investmentbanks considerably.

Despite the market’s rapid growth,the role of central banks in foreigncurrencies is significant, and it paysfor traders to understand that role.

Central banks are involved in forexfor a variety of reasons, such as pay-ments. However, when it comes toforeign exchange, traders focussquarely on market interventions.Considering that central banks gener-ally get involved in interventions onlywhen specific currencies are atextreme highs or lows and that theyuse large amounts of money to controlor manipulate, you may wonder if

these banks are driven by profit. However, while they tend to be suc-

cessful only in the long term (as theytypically lose in the short and mediumterms), major central banks do notspeculate in forex. Their trades aregenerally executed to restore orderlyconditions in the market or to manip-ulate exchange rates away fromextreme levels that have a negativeimpact on exporters.

Central banks have lost their ability to dictate trading ranges as they

did in the 1980s, but their role in today’s forex market is still

significant. Here’s what forex traders need to know.

BY CORNEL IUS LUCA

TRADING TECHNIQUES


OCTOBER SURPRISEThe dollar/yen’s slide in October 1998 was unprecedented but it sparked no action onby the U.S. Fed or the Bank of Japan.

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Source: DealBook FX 2

Should forex traders battle the banks?

USD/JPY,weekly


HOW DOES IT WORK?In the United States, foreignexchange interventions are conductedby both the U.S. Treasury and theFederal Reserve. If the New York Fedbuys dollars, then it means that itdrains reserves; if it sells dollars, thenit adds to reserves. The intervention issplit equally between the FederalReserve and the Treasury. Shouldthere be minor differences, they willbe reset at a later date.

Typically, the Treasury pays for itsportion in currencies from the so-called Exchange Stabilization Fund.In this case, the intervention will notimpact the reserves. Only in the veryunlikely case that the intervention iscovered by sales of special drawingrights from the InternationalMonetary Fund are reserves increased.

The foreign exchange desk at theFederal Reserve Bank of New Yorkexecutes the Fed’s currency interven-tions. There are two types of foreignexchange interventions: unsterilized(naked) and sterilized.

An unsterilized or naked interven-tion consists only of foreignexchange. For instance, the Fedeither buys or sells U.S. dollarsagainst a foreign currency, such asthe yen or euro. However, an inter-vention has a side effect that’sunpopular among the major centralbankers: in addition to the effect onforeign exchange rates, there is anadditional monetary effect on themoney supply. In this case, signifi-cant adjustments must be made ininterest rates and prices and at alllevels of the economy. Consequently,an unsterilized foreign exchangeintervention has a long-term effect.

This makes sterilized interventionsthe tool of choice, as they defuse theirimpact on the money supply. Toachieve a neutral effect on the moneysupply, an additional step to the origi-nal currency transaction is needed:sales of government securities to offsetthe increase in reserves that the inter-vention creates. The impact of steril-ized interventions tends to have ashort- to medium-term effect, but in

the world of foreign exchange, that’sgood enough.

Interventions can have a negativeimpact on traders’ positions.Therefore, it is important to under-stand the reasons behind these inter-ventions to both protect and takeadvantage of the opportunity.

Central banks might intervene inthe market to provide liquidity, pro-tect certain levels, slow down trendsand even reverse trends. This beingsaid, don’t expect a mechanicalapproach, where central banks will

automatically spring into action whencertain conditions emerge.

If a crisis affects a currency pair orseveral currency pairs, then the mar-kets could become chaotic, either interms of pure high volatility or withone of the sides of the price disappear-ing. In this case, a central bank mightstep in to supply the missing side of themarket. However, there is no guaran-tee the bank will operate this way. If itdoes, then it means that the centralbank’s task is only providing a safetyexit to traders, not changing the direc-

YEN BENDS HIGHERThe Bank of Japan sold ¥32.9 trillion ($311 billion) in the fiscal year ending March 31,2004, to weaken its currency.

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BRINGING BACK THE BACONThe Bank of Japan bought the euro/yen in 2000 to help Japanese investors exit losingeuro-denominated assets and repatriate capital to Japan.

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USD/JPY,weekly

EUR/JPY,weekly


tion of the market. Consequently, theimpact will be short-lived.

A classic example occurred inOctober 1998, when for two days, thedollar/yen collapsed nearly ¥11 perday, which was more than three timesits previous largest one-day range.While unknown at the time, it wasthe doing of Long-Term CapitalManagement, which was in the midstof collapse. While mainly making itsmoney (or, during this final chapter,losing it) in the interest rate markets,to offset some losses, the fund also liq-

uidated enormous amounts of longdollar/yen positions opened at below¥100 several years earlier. The enor-mity of their sales and the smallappetite to buy during those two fate-ful days created an unprecedentedimbalance (see “October surprise,”page 48). However, those hoping tosee central banks stepping in weresorely disappointed. Central banksmay help, but they don’t have to.

Protecting certain levels hasbecome a thing of the past, as centralbanks have lost their ability to dictate

trading ranges as they did in the1980s. However, central banks mightstill defend certain levels. Forinstance, the Bank of Japan (BoJ) maybe quite active in March, toward theend of the Japanese fiscal year, so itsmajor exporters can either make moreprofit or fix their hedges at more con-venient exchange rates.

In the most extreme example, theBoJ sold an unprecedented ¥32.9 tril-lion (or bought $311 billion) in the fis-cal year ending March 31, 2004, as for-eign investors purchased a recordamount of Japanese stocks, pushing theyen to a four-year high against the dol-lar (see “Yen bends higher,” page 49).

Faced with the crude reality thatthey could not change the direction ofthe market, central banks may exe-cute interventions to slow down thepace of the trend. When volatilityaccelerates, momentum funds tend toincrease their positions, further fuel-ing the movement. Central banks willthen target the speed of movement,not the direction. For instance, a bankmight buy small amounts at differenttimes to slow down the downtrend. Inthis case, traders may take advantageof the intervention by selling at theend of the intervention and buying itback before the next.

An interesting additional reason isthat in extreme occasions, a centralbank might intervene to help thelocal economy. Specifically, the BoJ,which is the most aggressive of the G7central banks, bought euro/yen formonths throughout 2000 to helpJapanese investors who purchased sig-nificant euro-denominated assets afterthe introduction of the euro as theyrepatriated that money to Japan (see“Bringing back the bacon,” page 49).

Not many central banks, if any, areready and able to intervene andreverse trends. The typical mantra isthat the foreign exchange marketsshould find their own equilibrium,which arguably is not the case duringsharp trends. However, that’s a gooddefensive position as forex markets aretoo large to be manipulated by one oreven several central banks.



BEGINNING OF THE DOWNTRENDThe long-term joint central bank intervention following the Plaza Accord in 1985 wassuccessful in devaluating the dollar.

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SHORT-TERM REVERSALThe dollar hit record lows against the yen and the other major currencies in thespring of 1995.

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USD/JPY,monthly


The best example is the PlazaAccord in September 1985, when theFed led other central banks in a suc-cessful long-term effort to reverse thedollar uptrend and slow the wideningof the trade deficit (see “Beginning ofthe downtrend,” left). But that was 19years ago.

By the spring 1995, the dollarreverted to record lows as its decade-long devaluation process was aug-mented by the Mexican financial cri-sis in late 1994 and by then newPresident Bill Clinton, who called fora stronger yen (see “Short-term rever-sal,” left). While the dollar hit theskids against all major currencies, it’seasier to measure the dollar/yen,which tends to move in clips of ¥20 inthe long term. The dollar/yen col-lapsed from ¥100 to ¥80 before even-tually recovering to ¥100, ¥120 and¥140. That decline went out of handand the subsequent process of rebal-ancing the dollar was slow, expensiveand required special skill. In 1995,that skill was provided by TreasurySecretary Robert Rubin.

THE NEXT MOVEFast forward another (nearly) 10 yearstoward the end of 2004 and the begin-ning of 2005. Where is the dollar/yennow? Once again, on the brink of theabyss. The pair is very close to the¥100 mark, and a move below thislevel will encourage another slide tothe record low in the ¥80 area.Adding to the negative outlook is along-term head-and-shoulders forma-tion, which targets the ¥96 area (see“Channeling weakness,” above).

The dollar is under structural sellingpressure as both rising world power hous-es, such as China and Russia, and estab-lished G7 economies, such as theUnited Kingdom and even FedChairman Alan Greenspan, questionthe desire of foreign investors to contin-ue financing the record U.S. deficits.

Assuming that the G7 central banksactually want to intervene, and this is abig assumption, their impact will dimin-ish by the day if the fundamental back-ground doesn’t change, namely if the

Bush administration doesn’t pledge toreduce the domestic deficits. Only thischange would increase the odds for astrong joint G7 central bank interven-tion led by the Fed to strengthen thedollar. If not, the dollar will spiral down-ward for months. Once their hedges aresurpassed, European and Japaneseexporters will start suffering and voicecomplaints; but the U.S. deficits will seea reprieve.

Technically, the dollar is oversold, soit’s due for a bullish correction. Take alook at the record-breaking euro/dollaron the weekly chart in “Euro unhinged”

(above). Every other time the euro/dol-lar was so overbought — namely in June2003 and February 2004 — it camecrashing down for about 11 weeks. Atthe end of 2004 the market shows simi-lar conditions. Will the major centralbanks capitalize on the opportunity toslow down the dollar devaluation?


Cornelius Luca is the currencies analyst forGlobal Forex Trading and the author of Tradingin the Global Currency Markets (New YorkInstitute of Finance).


CHANNELING WEAKNESSA long-term head-and-shoulders formation in the dollar/yen targets the 96 area.

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EURO UNHINGEDThe euro/dollar is overbought, at record highs and ripe for intervention.

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FM

USD/JPY,monthly

EUR/USD,monthly

Selling options can mystifynew traders. Some of the fac-tors that come into play arevery different from conven-

tional long or short trading. Buying afutures contract or option and sellingat a higher price makes sense to most— as does selling futures at a highprice and buying it back at a lowerprice. Deciding what to buy or sellusually hinges on technical or funda-mental analysis, or some combinationof the two.

Option sellers see opportunity in adifferent light. We sell the option andcollect the premium for doing so. If theoptions becomeworthless, we get tokeep the premium.Market direction,time and volatilitydecay can all drivedown the premium(price) of an option.

Waiting foroptions to lose theirvalue is definitely notas exciting as predict-ing price direction,being right and reap-ing the benefits as the

market streaks in the predicted direc-tion. But it’s also not as painful as beingwrong about price direction. Thismonth we’ll contrast some factors tounderstand before you trade. The bot-tom line remains constant: we want tobe short option premium.

THREE CONFIGURATIONSA basic short option position is shownin “Diagramming potential” (right).This particular configuration is called ashort strangle. It’s “short” because theoptions are sold, and a “strangle”because the short call and put are saidto “choke” the market’s trading range.

When the market price is centeredwithin the short strangle, the positionis considered delta neutral. This meansthe deltas of the call and put canceleach other out. Such a delta neutralposition makes or loses money at anapproximately equal rate regardless ofwhether the market goes up or down.As the market does its thing, theoptions tend to lose value. Time decayhappens. For an option seller, this is agood thing.

A few points are apparent. First, ifthe futures contract expires in betweenthe strikes sold, the seller keeps thepremium from both sides. Second, it

should be impossi-ble to lose on bothsides. (It isn’t.) Ifthe market skyrock-ets, driving up theprice of the shortcall and creating aloss on that side, atleast the short putwill be profitable.Finally, the key tosuch a positionwould seem to be tofind a market thatwill remain range-

Traders should understand all viable means to exploiting market moves, and

that includes selling options. For some traders in many market situations, short

option positions might be the best way to trade the markets.

BY T IM ZUR ICK

Setting the stage for option selling

TRADING TECHNIQUES


bound, thus ensuring that the optionstrikes will be unchallenged and expireworthless.

As is often the case with options,appearances can be misleading.Predicting that a market will remainwithin a given range is no easier thanpredicting it will go up or down. It real-ly is not important that the market stayinside our sold strikes. While maxi-mum profit is achieved within thestrikes, overall profit is merely dimin-ished as the price violates the strikes.So the real key is to know what to dowhen that happens.

The next position, the short strad-dle, is really just a very tight shortstrangle (again, see “Diagrammingpotential”). A call and put are sold —just as in a strangle — but they are soldat the money. There is no gap of hap-piness within which the futures canexpire so that the seller keeps all pre-mium sold.

The last, and most basic position isthe naked sale of a call or put. This isnot a delta-neutral position. If we sellan out-of-the-money put and the mar-ket drops, we will tend to lose fasterthan time decay can bail us out. So anaked short put has a bullish bias — itwill make money faster if the marketrises. Depending on the delta of theoption sold, such a position behavesmore like a mini futures contract thana long option. And because there areno protective profits if the marketmoves against the position, don’t trythis at home — just yet anyhow.

BREAKEVENSShort options have a specificbreakeven point at expiration. If yousell a $450 gold call for 800 points(8.00 or $800 cash), the breakeven isthe strike price plus the premium sold,or $458. If you also sell a $400 put foranother 800 points your overallbreakeven on the high side is $466($458 + 8).

This is significant because most newoption sellers have a “fear of the strike”— they tend to panic if the price ofgold exceeds the 450 call strike. In fact,there is no immediate significance if

DIAGRAMMING POTENTIALThe range of potential profits at expiration on sold options is wider than the soldstrikes. It varies depending on the type of short option strategy you employ.

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the market exceeds your call strike orfalls below your put. At expiration,your profits are reduced by the in-the-money amount, but prior to then it’simportant to know just how wide yourbreakeven range really is. It’s widerthan the strikes sold.

SIMILARITIES AND DIFFERENCESA short option is unique. In somerespects, it’s similar to a long option.But in others it behaves more like afutures contract (or a mini futures con-tract). The table “How they compare”(above) summarizes these differences.

The risk in buying an option is limit-ed to the premium paid for it. Andwhile that premium frequently disap-pears, that is the most you can lose. Forfutures and short options, there is nolimit to the potential loss. As long asthe market moves against your posi-tion, losses can continue to mount.However, the short option does havetwo advantages over a futures contract.First, it will only rarely be affected by alimit move — so the danger of beingtrapped in a “locked limit” situation fordays on end is remote and the optioncan be bought back at any time.Second, option premiums change at aslower speed than futures and thatslows the rate of potential loss.

The maximum potential profit for ashort option is the value of the premi-um sold. This is the factor traders findmost objectionable: limited reward forpotentially unlimited loss. But in fact,any short option that does reaches itsmaximum profit — near zero — can

be bought back and rolled to a differ-ent strike to create more profit poten-tial. Futures and long options bothcarry the potential for unlimited profitwithout rolling.

Both long and short options move ata slower pace than the futures onwhich they are based. This relationshipbetween the futures and the resultingoptions price is called delta, and isexpressed as a percentage. Most tradersconsider this slower price change a keyadvantage for options — flexibility inthe form of staying power. Adverseprice moves that might stop out afutures position often can be easilyabsorbed by an option.

Over time, options tend to lose theirvalue. This is because options buyersbecome less willing to pay as much forthe diminishing chance of the optionexpiring with real value, or in themoney. If you’ve purchased optionsand watched them melt like an icecube in the sun, you’re probably famil-iar with the concept. While optionvalues can be diminished by other fac-tors, time decay remains the majoradvantage to option sellers.

Short options, unlike long options,require posting of margin just like for afutures contract. The reason for this isthat if the market moves against a shortoption position, it is possible to beassigned a losing futures position andthe futures contract’s theoreticallyunlimited potential for further loss. Along option that goes badly simplyexpires worthless and dies — no marginnecessary. Next month we’ll go into

some detail on estimating marginrequirements for a short option position.

Futures positions are typically protect-ed with stops — which offer no protec-tion whatsoever when the market isclosed. Options, especially shortoptions, are normally protected not bystops, but by spreading other optionsagainst them. Such protection — profitfrom a secondary position to protect aprimary position — does function whenthe market isn’t open. And while suchprotective profits won’t completelycompensate for large losses, they can bea big help until the market does open.

LOCK AND LOADHaving mulled the above factors andmentally mastered them, we’re nowready to ask the next big question —what to trade? Our number one screenis liquidity. You do not want to tradeilliquid markets.

Years ago, I persisted in annoying anexperienced broker with questionsabout platinum options. He rolled hiseyes and ignored me. What he knew,that I didn’t, was that there really wasno market in platinum options — stillisn’t. While they may be authorized fortrade and the exchange certainly wantsus to trade them, the fact remains thatthere is no liquidity in platinumoptions. The point here isn’t to pick onthe New York Mercantile Exchange —all exchanges have their share of quasi-viable contracts and illiquid options —but illiquidity means bad fills.

We are traders, not pioneers. Thereare enough liquid option markets —in which you can obtain quality fills— that you shouldn’t participate in illiquid ones.

Next month we’ll look at specificindicators of liquidity and which mar-kets are worth our hard-earned tradingdollars. If you have any questions orwant to share any horror stories aboutoption selling, they are welcomed [email protected].

Tim Zurick has been selling options for morethan 10 years. He is a manager at Silver StateTrading (www.sstfutures.com), a futures bro-kerage firm in Las Vegas, Nev. Tim is also a registered CTA and principal of ZurickTrading Group.



FM

HOW THEY COMPARENote that the delta of options, either long or short, is subject to change.

LONG SHORTFUTURES OPTIONS OPTIONS

RISK Unlimited Limited Unlimited

REWARD Unlimited Unlimited Limited

SPEED OF RISK (DELTA) Fast Slow Slow

TIME DECAY None Hurts Helps

MARGIN High None Lower (vs. futures)

RISK CONTROL Stop Spread Spread

A product of Futures Magazine Group. There is a riskof loss in futures trading. Past results are notnecessarily indicative of future results.

Trends In Futures provides

traders with insightful market

commentary and specific trade

recommendations. Editor, Noble

DraKoln, is a full-time trader,

licensed futures professional and

author. With Trends In Futures

you’ll improve your ability to spot

market moves with greater

accuracy, build confidence in your

trading decisions and improve your

results.


Reproduction or use of the textor pictorial content in any man-

Being a trader, and not afortune teller, you have noidea what the markets youtrade are going to do exactly,

which is why you use indicators tohelp you narrow down your projec-tions of what could happen after youplace your trade. Oscillators are onegroup of indicators that can be a criti-cal part of your trading plan, as mosttraders use them as a secondary confir-mation tool to help better definewhere a market will move next.

"Generally, the use of the momen-tum indicator can often warn oflatent strength or weakness in theindicator or price being monitored,often well ahead of the eventual and final turning point," saysThemistoklis G. Kikis, an accountmanager at GreekShares.com, aneducational Web site on the finan-cial markets.

Oscillators help find turningpoints in trending andrange-bound marketsand usually are lead-ing indicators. Theyoften turn prior toprices changing direc-tion and help a tradertime trade entry andexit points by identify-ing overbought andoversold marketextremes. An over-bought conditionexists when an oscilla-

tor reaches a high level associatedwith past highs in price, and an over-sold condition is when an oscillatorreaches low levels associated withpast lows in price, according toChuck LeBeau, a system developerwho operates the System TradersClub (www.traderclub.com).

Oscillators, also called momentumindicators, are basic measures of howstrong a market move is and, in mostcases, in what general direction themarket is heading. A strong uptrendshows high readings and a strongdowntrend shows low readings; mid-dle readings signal weak trends and apossible reversal or correction.

Oscillators are typically graphed on aseparate chart below price and an equi-librium level indicating a neutral read-ing is displayed as the x axis. An oscil-

lator value above the equilibrium linethat’s increasing means the market isin an uptrend gaining strength and val-ues below the equilibrium show themarket is in a downtrend.

In this article we’ll cover the fivemost popular oscillators: Moving aver-age convergence/divergence (MACD),momentum, the relative strength index(RSI), rate of change (ROC) andstochastics. While most oscillatorsbased on similar time periods may lookalike, they have their differences.

MACD Moving average convergence/diver-gence is a smoothed, unbound oscilla-tor that’s made up of two lines: A solidline called the MACD and a dashedline called a signal line.

The MACD line consists of twoexponential moving averages

(EMA): A 12-period EMA ofclosing prices and a 26-

period EMA of closingprices. The differencebetween these two cal-culations is the MACDline, which is usuallydrawn as a solid line andis sometimes called the“fast line.”

The signal line is theMACD line smoothedby a nine-day EMA. Thesignal line is also calledthe “slow line,” and isplotted as a dotted line.

BY YESENIA SALCEDO

FUTURES 101

Oscillators explained

If you need a trading tool to complement your primary indicator,

these market measurers may be what you’re seeking.



“The two EMAs will tend to crossover each other from time to time, sig-naling buy and sell action,” says ShaunTaylor, president of Phase IIConsultants Inc. “The best signalscome with the fast line crossing theslow line. A buy signal occurs whenthe fast line crosses below the slow lineand a sell signal occurs when it crossesabove the slow line. It is clearly under-stood that crossovers will signal thebeginning and the end of bothuptrends and downtrends. The centerline of the MACD is key to thestrength of this indicator.”

Adds Kikis: “Unfortunately, MACD’smain problem would be that it is a lag-ging indicator. Therefore, there existssome lag in the indicator itself. This ismore likely to be the case with weeklycharts than with daily charts.”

However, Kikis says he chooses touse the MACD because it incorporatesaspects of both momentum and trendanalysis in one indicator.

“Being a trend-following indicator, itwill not be wrong for very long,” hesays. “The use of moving averagesensures that the indicator will eventu-ally follow the movements of theunderlying security, and by using expo-nential moving averages, as opposed tosimple moving averages, some of thelag has been taken out.”

RSIThe relative strength index allows forthe analysis of overbought/oversoldconditions. It is one of the most popu-lar indicators for monitoring diver-gence. Divergence occurs when thetrend of a security’s price does notcorrespond with the trend of an indi-cator. Divergences are sometimes usedto forecast a top or a bottom.

RSI attempts to estimate the mar-ket’s current strength or weaknessdepending on where prices close dur-ing a given period. This assessment isbased on the assumption that highercloses indicate strong markets whilelower closes indicate weaker markets.Usually, you can expect price bottoms

when the index reading drops below30 and price tops when it movesabove 70.

RSI is calculated as follows:

RSI = 100 - (100 / (1 + RS)), where

RS = average of the days closing high-er during the interval divided by theaverage of the days closing lowerduring the interval.

The RSI indicator is plotted on avertical scale. It is a “bound” oscillatorwith readings restricted to valuesbetween zero and 100. When thereading of the indicator surpasses 70,an overbought condition exists. Anoversold condition exists with read-ings below 30, although differenttraders are known to use differentoverbought/oversold levels for differ-ent markets. RSI works best as anoverbought/oversold indicator in trad-ing range markets and as a divergenceindicator in other types of markets. A14-day interval is typically used forthe interval input.

MOMENTUMMomentum measures the change in acommodity’s price over time. This

overbought/oversold indicator tellswhether prices are rising or falling andat what rate. A momentum number isobtained simply by subtracing a pastprice from the most recent price overa consistent period of time.

The calculation of the momentumindicator is relatively simple. It com-pares the current period’s price to theprice of a selected previous time peri-od. Specifically:

M = Pc - Pn where

M = momentum

Pc = current period’s price

Pn = price n periods ago.

The time length is important withmomentum. The length of time usedshould match the cycle of the marketunder analysis. The value is a matterof personal preference and time hori-zon of the trader. A narrow window offewer than five periods would beshort-term in nature, while six to nineperiods would be considered interme-diate and 10 or more would be alonger time perspective. The mostcommon value is 10 periods.

The focus is on the zero line, not the


LONG RUN DOWNOn this 2004 gold chart, the MACD indicator showed the trend would change in lateFebruary, when the fast line, called the MACD line (blue), crossed the slow line (red)going downward. In early June, at the end of that downtrend, a buy signal was givenwhen the blue line crossed above the red line.

30.00

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0.960

0.009

18 22 5 20 2 9 17 18 22 5 19 3 17 17 21 6 19 29 23 7 20 4 18 18 15

(C,CG,D) Dynamic, 0:00-24:00 (Delayed)

MACD(12,26,9,C)

Dec 2004 Feb Mar Apr May Jun Jul Aug Sep Oct Nov

Source: eSignal


upper or lower zones. Crossing this lineindicates an overbought/oversold con-dition may exist. Momentum is posi-tive if today’s price is higher than thepast period’s price and negative if not.

The general rule is to buy when theindicator passes up through the center-line and sell when it passes downthrough the center line.

RATE OF CHANGEThis is another indicator that mea-sures both price direction and speed.

“ROC is similar to momentum, butdoes have key differences. ROC has ahorizontal median called equilibriumand this median tells us everything weneed to know about ROC,” Taylor says.

The normal time frame for ROCmeasurement is 10 days. The formulafor the ROC indicator is:

ROC = 100 (Y / Yn), where

Y = most recent closing price

Yn = closing price n days ago.

“If the price of a stock closes highertoday than it did 10 days ago, the rate

of change value will be above the equi-librium, thus indicating to chartiststhat prices are rising,” Taylor says.“Conversely, if the price in today’s ses-sion closes lower than it did 10 tradingdays ago, the value point will be belowthe equilibrium, indicating that pricesare falling off. It is safe to say that if theROC is rising, it gives a short-termbullish signal, and a bearish signalwould have the rate of change falling.”

Taylor says long-term views of themarket will use a 26- to 52-week timeperiod for n and a shorter view woulduse 10 days to six months.

STOCHASTICSThe stochastics indicator measures therelative position of the closing pricewithin a given time interval. This indi-cator is based upon the premise thatprices close near the upper portion of atrading range during uptrends and nearthe lower portion of a trading rangeduring downtrends. When prices closein the middle of the range, it suggests asideways market.

There are two components to this

calculation, the %K line and the %Dline. The %K line is:

%K = C - Ln / Hn - Ln * 100, where

C = closing price of current period

Ln = lowest low during n periods

Hn = highest high during n periods

The %D value is derived from the%K value. Here’s the formula:

%D = 100 * (Hn / Ln), where

Hn = the n period sum of (C - Ln) inthe %K formula and

Ln = the sum period of (Hn - Ln) in the%K formula.

These formulas produce two linesthat oscillate between a scale of 0% and100%. As with other oscillators, a valuebelow 30% suggests an oversold condi-tion while a value greater than 70%suggests an overbought condition. Here,a buy signal would be triggered whenthe fast line crosses the slow one andboth are rising while still below 30%.

BEWARE FALSE SIGNALSThe basics behind oscillators such asRSI and stochastics, which use highlevel markers to indicate buys andlow level markers to indicate sells,work well in non-trending marketsby indicating many profitable signals,but you must be wary of using themin trending markets.

LeBeau says strict interpretations ofoverbought- and oversold-type indica-tors that focus on buying when theindicator shows the market is over-bought and selling when the oscilla-tors shows the market is oversold canbe dangerous and can wipe you out.

“Those interpretations of the indi-cators works pretty well when themarket is range-bound, and more orless going sideways within a well-defined trading range, but problemsarise, however, whenever the marketstarts to trend,” LeBeau says.


Futures 101 continued

OVERBOUGHT EXTREMESIn this 2004 crude oil chart, the relative strength index indicated that the price of crudewas extremely overbought when it neared the $60 range late April by showing a highRSI reading. Overbought conditions were also indicated by high RSI readings near 100 inlate June when prices neared $60 again, and in early September when prices werebelow $55 and in mid-November when prices were just below $50. This suggests theprice of crude is still too high and may come down eventually.

60.00

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20 2 9 17 18 22 5 19 3 17 17 21 6 19 2 9 23 7 20 4 18 18 15

(C,CL,D) Dynamic, 0:00-24:00 (Delayed)

RSI(14,C)

Feb Mar Apr May Jun Jul Aug Sep Oct Nov

Source: eSignal


FM


“In an uptrending market, for exam-ple, the RSI and stochastic indicatorswill both rise to the top of their bound-aries and give continuous indicationsthat the market is [overbought and]about to change direction, but themarket doesn’t change directionbecause there is a trend in place,”LeBeau says. “These indicators arecontinuously trying to initiate trades inthe direction opposite of the trend.”

LeBeau says the way he gets aroundthat problem is by combining oscilla-tors with the average directionalindex (ADX). The ADX measuresthe strength of a prevailing trend. Ahigh ADX value indicates a strongtrend, either up or down, and a lowADX value indicates a weak trend.

“I find that when the ADX is ris-ing, signals from oscillators such asRSI and stochastics can be expectedto give a lot of false signals andshould probably be ignored or used ina trend-following fashion rather thanthe original countertrend strategythey would normally be used for,”LeBeau says. “When the ADX isdeclining, it indicates the market isrange-bound and not trending, andunder that circumstance the over-bought/oversold indicators would beexpected to be quite accurate andprobably very profitable.”

FOLLOWING OSCILLATORSThat’s not to say that these oscillatorscannot be used in a trending market.

“[Oscillators] can be used in a trend-ing market,” Lebeau says, “but you haveto ignore the traditional boundaries of70/30 or 80/20 because in a trendingmarket they don’t make equal excur-sions to both sides. In a rising marketenvironment it’s quite easy for the RSIand stochastics to get up to the top oftheir range, but the moves downward donot go an equivalent distance.”

“Say we get to 80 on the high side.We would expect to go down to 20 onthe low side, but if the market is in anupward trend it’s quite easy to get to 80,

but the dips, or the movements againstthe trend, do not go an equal distancein the opposite direction. If they didthere really wouldn’t be a trend.”

As with any tool used for trading, youshould not rely solely on oscillators.Oscillators should be used secondary toyour primary trading tool.

STOCHASTICS CALLED ITOn July 12, 2004, a buy signal was triggered when the %K line (blue) crossed up overthe %D line (red), while both lines were facing upward and under the 30% level. Thistold us the S&P was oversold and the trend was about to turn up. Then in early October,the %K line crossed below the %D line while both lines were facing down and abovethe 70% level, showing the S&P was overbought and the trend was about to turn down.

SIMILAR INDICATORSROC and momentum are similar indicators. Both can tell us whether prices are rising orfalling at an increasing rate. Here, in this daily corn chart, you can see both indicatedthe same buying opportunities when each indicator passed above the zero line, and bothindicators signaled the same selling opportunities when each passed down through thezero line.

55.00

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0

0

5 12 19 26 3 10 17 245 1 7 14 21 28 6 12 19 26 2 9 16 23 30 7 13 20 27 4 11 18 25 1 8 15

(C,C,D) Dynamic, 0:00-24:00 (Delayed)

ROC(10,C)

Apr May Jun Jul Aug Sep Oct Nov

12.00

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10.00

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100

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05 12 19 26 3 10 17 245 1 7 14 21 28 6 12 19 26 2 9 16 23 30 7 13 20 27 4 11 18 25 1 8 15

(C,SP,D) Dynamic, 0:00-24:00 (Delayed)

Stochastic(14[1],3)

Apr May Jun Jul Aug Sep Oct Nov

Momentum(10,C)

Source: eSignal

Source: eSignal


MONEYMANAGED

B Y D A N I E L P . C O L L I N S


How much are you paying?

The way managed futures fundsare structured can lead to con-fusion over what an investor ispaying and to whom. While

many commodity trading advisors(CTA) have a straightforward fee struc-ture usually involving a managementfee of 1% to 2% and an incentive fee of20% (more or less), when working inbrokerage costs and how distributors ofa managed futures program are compen-sated, it can get muddled.

One basic widespread model keeps itsimple. Third party marketers will workout a fee-sharing arrangement with aCTA — typically 20% of the CTA’smanagement and incentive fee —allowing investors to know they are notbeing charged anything additional onthe brokerage side.

Another model has introducing bro-kers bringing investors to the CTA. IBswill get a portion of the brokerage com-mission. Typically they will charge theend user an all-in brokerage and clearingcharge and negotiate with the futurescommission merchant (FCM) what theFCM charges and keep the difference.

The problem with this model is thatonce an investor selects a CTA, most ofthe work an IB performs is done butthey will continually get trail commis-sions. Though some argue that IBs pro-vide ongoing service, the CTA makesall the trading decisions and entersorders directly to the FCM, so whateverthe IB does to service the account afterthat point is not necessary for the execu-tion of the program.

“They are not involved in the execu-tion of the trade. They are not involvedin order entry. The order goes straightfrom the CTA to the clearing firm,” saysDavid Matteson, partner at GardnerCarton and Douglas LLP.

Melinda Schramm, chairman of theNational Introducing BrokersAssociation (NIBA), argues that the IBis the point of contact person for cus-tomers and services accounts even ifthey are making no trading decisions.

Other structures can include a loadfee or IB management fee but thesestructures are rare. The load fee, whichis much more prevalent in traditionalinvestment products, is not subtracted

from the performance numbers.“Occasionally, there is a CTA that

shares in commissions, but that is rare,”says Carol Dannenhauer, director ofmanaged accounts at Lind Waldock.

An IB that is also a commodity pooloperator (CPO) often charges the IB’sown pool a roundturn rate greater thanwhat the FCM charges, creating anadditional revenue stream.

Institutional investors understand thecost of trading and won’t pay any addi-tional charges. Brad Cole, president ofthird party marketing firm ColePartners, says that 20 years ago largeinstitutional investors would routinelypay $20 a roundturn including all feesfor execution of a managed futures pro-gram. That level is now south of $10,according to Cole. Commission com-pression has been democratic allowinginvestors in retail-sized programs to getwhat 10 years ago would be a good insti-tutional rate.

Matthew Weingardt, principal atCTA Amen Asset Management, whichhas a $25,000 minimum, will allow IBsbringing investors into his program to

The fee structures for various managed futures products can vary greatly. While

brokerage fees have been dropping dramatically, there are often several layers

of fee takers involved before an end user sees profits. Before investing, it’s

important to know how much you are paying and for what service.



charge a $15 roundturn but prefersinvestors get the clearing broker’s bestrate and to offer a percentage of his man-agement and incentive fee to third par-ties bringing investors into his program.

Amen receives low rates because it is ahigh-velocity trader — more than12,000 roundturns per million undermanagement — but most small CTAscan negotiate low rates if they shoparound. Dannenhauer says that theroundturn rates investors of managersoffered through Lind vary from $8 to $30depending on the program. She says theaverage is below $20.

Amen notwithstanding, where there isflexibility in terms of fees is in programsthat cater toward the retail-level investoror CPOs that allow lower minimuminvestments. Institutional investors andhigh net worth individuals tend to haveestablished brokerage arrangements.They also tend to select their invest-ments and have no need to pay a down-stream distributor. Institutions will workwith third-party marketers, but they pre-dominantly work on a percentage ofCTA management and incentive fees.

BEWARE, THE REGULATOR!Matteson, who specializes in futurespractices, believes it is time for theindustry to take a critical look at its feepractices. With the SEC and EliotSpitzer examining fee structures withinthe mutual fund and insurance indus-tries, it could be time for a little housecleaning in managed futures, he notes.Matteson says fee structure played apart in the inquiries into both themutual fund and insurance industries.

“Our industry could learn from thatand get ahead of the curve,” Mattesonsays. “I am not saying that we need toget rid of fees. Let the free marketdecide what fees are appropriate or not.I am just saying, call the fee what it isand accurately disclose who is receivingthe fee for what service.”

Matteson says it is getting increasing-ly more awkward when you are payingsomeone, in essence, for money raisingbut you call it a brokerage commission

or brokerage service fee. He notes thatcurrent practice is legal.

“My issue is that if you look at mutu-al funds and now the insurance indus-try, there is greater regulatory scrutinyover compensation arrangements. Inother industries, we have seen wherethe ultimate consumers don’t knowwho is being paid for what service.There is compensation sharing that isgoing on and they don’t know what it’sfor. That underlies a lot of current reg-ulatory actions taking place,” he says.

DISCLOSUREThe futures industry has benefited andsuffered from a maverick reputation.The rule on fees has always been abasic market test but everything has tobe disclosed. The National FuturesAssociation and Commodity FuturesTrading Commission shy away fromgetting too involved in what fees arecharged. The watchword has alwaysbeen disclosure. A manager is entitledto charge what the market will bear,but those fees must be fully disclosed.

“Is it sufficient disclosure to disclosethat the roundturn rate is $100 or in

order to satisfy your disclosure obliga-tions should you also disclose that $100is substantially in excess of the round-turn charged by other CTAs or otherFCMs?” asks Matteson.

NFA President Daniel Roth says thatin som settings full disclosure can meanmore than simply providing a laundrylist of all the applicable fees. “We havealways taken the position that in certaincircumstances full disclosure of fees hasto go beyond a mere recitation of whatthe fees are and could include a require-ment to provide the customer with abreakeven analysis to show the customerthe total impact of all the fees that he isbeing charged and the return a customerwould have to achieve to break even inthe first year,” Roth says.

One instance in which the higherstandard could be applied is in caseswhere a load fee is charged by an IB,according to Roth. In that case theCTA’s performance numbers would notreflect the load charge and a breakevenanalysis would be more useful.

VISIONJustin Boshnack, SVP of Vision LP,


HEADS I WIN, TAILS YOU LOSECommission charge options by a Vision IB:

Fee Structure Option (A)

I hereby acknowledge that my managed account traded by ACE Investment Strategists, LLC is to becharged a round turn trade transaction cost of $55.00, inclusive of all commissions and fees. I amaware that these fees will be deducted from my account on initiation of each trade. I am also awarethat a $20.00 monthly accounting fee will be charged to my account at the end of each month. I amaware, further, before the CTA is eligible to earn any incentive or management fees, all monthly,round turn commissions (including fees), CTA management fee and accounting fees, must first berecovered.

Fee Structure Option (B)

I hereby acknowledge that my managed account traded by ACE Investment Strategists, LLC is to becharged a commission of 0.83% based on the month-ending account net asset value and a round-turn trade transaction cost of $21.00 inclusive of all commissions and fees. I acknowledge that the0.83% is to be deducted from my account on the first day of the succeeding month and that paymentis to be made to ___ , the introducing broker servicing my account. I am aware that a $20.00monthly accounting fee will be charged to my account at the end of each month. I am further awarebefore the CTA is eligible to earn any incentive fees, all monthly, round turn commissions (includingfees), CTA management fee and accounting fees charged to my account, must first be recovered.


refers to the firm as the pioneer in retailmanaged futures. Vision does not offerretail in the true sense of creating publicfunds, but by marketing private place-ments, CTAs, with lower minimuminvestment requirements. Vision recom-mends CTAs — some of them throughexclusive arrangements — with mini-mum investment levels between$25,000 and $100,000.

Over the years Vision has developed areputation for aggressive marketing andmodels that allow their guaranteed IBsto charge above-market fees. “Visionwould allow you to skin the cat any wayyou wanted to. I don’t think there was acommission rate too high with thatoperation,” says a veteran broker.

NIBA’s Schramm doesn’t see a prob-lem with Vision’s structure and saysmost IBs won’t offer managed futuresbecause its fee structure has to be so low.

Vision has a unique structure inwhich it allows its IBs to charge a $55roundturn fee or a 0.83% IB manage-ment fee (10% annually) in front ofthe typical CTA management andincentive fees. Vision also allows its IBsto charge up to a 10% load fee.

“It is very simple: It is a $55 commis-sion and the IBs get paid a portion ofthe $55. Or it could be fee-based. It isup to the broker how they want tocharge. Basically, the CTA gets a 1%management fee and 20% of the profitsand clearing is $55 and the IBs get $34out of the $55,” Boshnack says. “Thefront load is optional and it is up to thebroker to charge.” He notes that loadfees — which Boshnack estimates that50% of Vision IBs charge — are stan-dard structures for many mutual fund Ashares and private placements. “It isjust a way for our brokers to make a liv-ing. We present a good product tosomeone, [they] make up that load intwo or three months and the rest goesto the client. It is a way for the brokersto feed their families,” Boshnack says.

The problem is that the rest does notgo to the client. The $21 roundturnrate that investors pay if they choosethe 10% annual IB management fee ison the high end for brokerage withoutthe IB management fee or an addition-al $34 a roundturn.

“This is a very competitive industryand CTAs can get really good service

and good clearing for between $10 and$15 all in a roundturn,” says Keith Perry,SVP of Price Asset Management.

John Yackley, president of Be FreeInvestments, agrees. Yackley allows upto $15 per roundturn but prefers a lowerrate and to share his incentive fees. “Ihave an aversion to anybody in the foodchain being paid just because a tradewas done. I’d rather pay on incentive.”

For most of the industry, fees arebeing squeezed. Many emerging CTAsfind it difficult to retain even theirmanagement fees. Weingardt says therehas been a trend away from payingmanagement fees. He would like to seethat reverse because he fears it couldeffect how managers trade. “I hope thatpeople find value in the CTA knowingthat if market conditions are not con-ducive to your trading style to just siton the money,” Weingardt says.

While defending management fees,Weingardt believes that brokerageshould not be an endless pool for any-one to dip into. His performance isbased on a $10 all-in fee and won’tallow any third party to charge above$15. “End users should be able to hire aCTA and pay nothing in addition to itsmanagement and incentive fees. If anastute investor [who discovered methrough a ranking service] comesdirectly to me I could get them below$4 a roundturn. The track record is seton $10 a roundturn,” Weingardt says.“As a CTA, we have a fiduciaryresponsibility to our client, not to an IBor an FCM.”

Boshnack says that Vision is able tocharge more because its selection pro-cess ensures that it is adding value.“They want the selection. They wantthe third party research. They want usto recruit good managers to managetheir alternative investment asset class,and people are willing to pay for it.

“People are willing to pay more of afee to pay for our due diligence and payfor our strict criteria in selecting CTAslike Max Ansbacher,” Boshnack says.

He compares it to the investmentbanking industry. “There are many


Managed Money continued

BREAKEVENPublic funds and private pools are required to provide a breakeven analysis that gaugeshow much the fund must earn to offset all of the cost to the client. The NFA can requiresome private placements to provide this analysis.

Breakeven Analysis

30.00%

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%

6.25%8.75% 10.63%

6.80%

0%

25.60%

MLJWHStrat.

Alloc. Fund

QuadrigaSuperfundSeries A

QuadrigaSuperfundSeries B

MoriahFuturesFund

Dunn Cap.Mgmt.

ACE (with$55 rt)

Note: The ACE & Ansbacher figures are estimates based on their fee structure and the roundturn per million figure they provided the Barclay Mapdatabase. It includes a 6% load fee that only 50% of IBs use.



IPOs. There are many companies thatgo down, and there are many invest-ment banking deals that go bust, butthe investment banker always makeshis commission because they put themtogether and they gave them theopportunity to make it work.”

Vision’s CTAs have performed well.ACE Investment Strategists is up morethan 28% through October in 2004since Vision started marketing ACE.The program has a compound rate ofreturn of 95% since its October 2001inception. Vision exclusively offersMax Ansbacher’s retail program. Theprogram is the same as Ansbacher’shighly successful full-sized programoffered at a minimum of $25,000.While the programs are basically thesame, the retail program is not able toparticipate in every trade because of itssize. The retail program does not allowthe $55 roundturn but does allow the10% annual fee and load fee.

Michael Doherty, Vision LP directorof compliance, says that the added costis not only due to the quality of themanagers offered but also for addeddue diligence and back office support.“We monitor the trading. We do allthe allocations. We do the perfor-mance records to make sure the trackrecords are accurate. We do the calcu-lations of the incentive and manage-ment fees,” Doherty says.

However, Vision’s aggressive market-ing has led to regulatory scrutiny. CTAsoffering their program’s through Visionmust disclose in their D-doc that onAugust 2000 the NFA business conductcommittee issued a complaint allegingthat Vision and its founder RobertBoshnack used promotional material inviolation of NFA rules. In April 2002the committee issued a settlement deci-sion ordering Vision to pay a $200,000fine and requiring it to submit certainpromotional material to the NFA forpre-approval. The charges were dropped,as is routine when there is a settlement.The case was the third in which Visionagreed to pay a fine to the NFA afterbeing cited for alleged violations.

Vision is currently sending promo-tional material to IBs extolling howbrokers can earn $130,000 in 90 days.In promoting Ace Investments, Visionmaterial states that for every $1 mil-lion raised for Ace, an IB will typicallyearn — between sales loads and ongo-ing commissions — $130,000 or 13%.That is a 13% hurdle for investorsbefore they can see profits, whichdoesn’t include the $21 roundturn rateto be paid to Vision or the CTA man-agement fee (see “Breakeven,” left).

Doherty says that Vision audits allof the CTAs it recommends prior tomaking a recommendation. Visionalso prepares all promotional materialand submits it to the NFA prior to anyof its guaranteed IBs using it to solicitcustomers (see “Can’t lose,” above).

A LOSING GAMEHigh fees are counterproductive forCTAs because they ultimately takeaway from their incentive fee.

“The problem is that you are pass-ing on those increased costs to theinvestor, which is definitely going tohurt your performance,” Perry says. “Ilook to lower the commission rates toa very competitive level, [because] Ihave to, but the bottom line is that itis going to be better for our investorsand it is going to be better for the

CTA because you are going to havethe ability to improve their perfor-mance. In the third-party marketingrelationships that we have, I look tobe paid out of the incentive fee,”Perry says.

High up-front fees hurt the overallperformance of a CTA. “The CTAshould be doing due diligence on thedistribution model they are entering.You sign up for exclusive distributionyou need to know what the distribu-tion is going to charge,” Cole says.

Vision defends its fee structure bypointing out its added back officeduties and manager selection process,but other third parties provide serviceswithout such a heavy burden. If youhave faith in a manager, a third-partymoney raiser will share in the CTAmanagement and incentive fees with-out taking a significant portion of acustomer’s investment before it isallowed to work for the customer.

“We are counting on the fact that ifwe did our homework and this is agood CTA and a good product and webelieve in it, they’re going to be suc-cessful and we in turn will eventuallybe compensated primarily through thefee structure,” Perry says.


FM

CAN’T LOSEPromotional material sent out by Iowa Capital Mgmt., a Vision guaranteed IB.

Dear Investors,What would you say if I said I have a trader – that you could hire – that has deliveredover the last 35 months a compound rate of return of +96.6% and a totalreturn of +616%!!!

Well stop laughing and start reading. This is as real as it gets!

Every initial dollar invested with this CTA in October 2001 is now worth $6.16. And, bythe way, that is NET after all fees and commissions.

Past performance is not necessarily indicative of future results. The risk of loss exists in futures trading. In addi-tion to the opportunity for profit, one must be aware that the possibility of unlimited loss exists in writing options.



TRADE TRENDS

Harris Brumfield, CEO ofindependent software ven-dor Trading Technologies,estimates that 50% of the

electronic trading volume at theworld’s four largest futures exchangesis executed through TT front-endsoftware. And of the remaining 50%,TT contends much of it is executedthrough systems that are infringingon TT’s patents. Thus, TT isattempting to extract a 2.5¢ fee perevery electronic contract executed atall four of the major exchanges.Indeed, a source close to TT saysthere have been substantive discus-sions between TT and the Chicagoexchanges regarding TT’s request.

Since TT was awarded two patentsfor “click-based trading with intuitivedisplay of market depth” by the U.S.Patent Office in August it has been

awarded a similar patent in the UnitedKingdom and the European PatentOffice has issued an intent to grant apatent relating to the same technology.The widening of the patents to a globalarena allows TT to approach Eurexand Euronext.Liffe with its plan.

However, TT is not suing theexchanges, and no one has suggestedthat the company would have anygrounds to sue the exchanges, but thefees ostensibly would help TT dis-tribute exchange products and wouldbe less disruptive to the industry than a10¢ per contract fee charged to allFCMs using front-end software thatTT says infringes on its patents. TTwould be willing to drop current litiga-tion and void service fee agreementsstemming from settled litigation if theexchanges would agree to the subsidy,according to sources close to TT.

“They will drop all litigation againstpeople and firms infringing, and theywill open up all intellectual propertyfor everyone to use not only on this buton patents pending forever,” the TTsource says, adding that if TT gets asubsidy from the exchanges, the com-pany would lower the price of its soft-ware or possibly eliminate it.

Still many feel the exchanges are anodd target because they are not users ofthe software, though TT argues theexchanges benefit from it.

“The people who are using the soft-ware are the FCMs and the brokers. Ifind it difficult to see how theexchanges should pay for somethingthey are not using,” says PatsystemsCEO Kevin Ashby. “We now have awork-around solution so no one who istrading through Pats into thoseexchanges is using or abusing any-

BY DANIEL P . COLL INS


Patent this!

When technology firm Trading Technologies was awarded patents for its depth

of market order entry software, it sent a shudder through the industry. What

does it mean for other software firms whose front-ends look similar to TTs? And

with few profitable software firms, would TT turn to the deeper pockets of

brokerages and exchanges to cash in on its patents?

TT is not SUING the exchanges and NO one has suggested that thecompany would have any GROUNDS to sue the exchanges, but theFEES ostensibly would HELP TT distribute exchange PRODUCTS....



body’s patent. I would object to every-body using Pats having to pay a tax.”

TT sued electronic marketplacedeveloper and erstwhile patent litiga-tor eSpeed shortly after being awardedthe patents. While few in the industryhad sympathy for eSpeed, which hascreated a significant profit center fromsettlements related to its ownership ofthe Wagner patent, when TT quicklyfiled and settled lawsuits withGoldenberg Hehmeyer and Kingstree,two firms closely associated with TT,people got nervous.

Many industry sources felt the suitswere a stalking horse, filed and settledquickly to give greater validity to thepatent. The settlements, which set a10¢ per contract user fee, could beprecedent-setting and establish a taxon the industry for everyone notsigned up with TT but who uses soft-ware that is vulnerable to litigation.

“The royalty rates that were agreedto may have some evidentiary value ina subsequent litigation on what dam-ages should be,” said Joseph Laughon,patent attorney with Clifford ChanceUS LLP at a roundtable on patents atthe Chicago Futures IndustryAssociation Expo in October. Anexplosion of patents is not uncommonin a new industry. Panelists at theroundtable noted that it has happenedin the railroad industry and has hap-pened with semiconductors.

TT TO THE RESCUEOne theory is that if TT would aggres-sively enforce its patents, it could indi-rectly hurt its own customers.

“TT’s competitors have screens thatlook remarkably like TT screens. If TTis able and chooses to enforce itspatents, it could cause a disruptionwith their clients,” says Gary Schirr,president of technology consulting firmMarket Solutions.

While TT is the rarest of birds, anISV that is actually profitable, thoseprofits may not be as strong as onewould expect from a company with itsmarket share.

“The basic model of the industry —

pay per screen — has really worked outto the disadvantage of TT because theydid a wonderful job of getting the bestand most active traders, but they arejust getting a little more per screenthan [Patsystems] does, even thoughPats probably does a quarter of the vol-ume per screen,” Schirr says.

It is a model that resulted from toomany developers chasing too few cus-tomers with ISVs dropping fees to getin the door in the hope that increasedscale would eventually create profits.

When TT’s patents were firstannounced, many in the industrythought it could be the end for manyISVs who were struggling to see a prof-it during times of record volumes andnow face the possibility of having to

pay TT a licensing fee. But as TT’sstrategy unfolded, some in the industrysurmised that it could change the fun-damental model of how ISVs were paid— a model many feel is stacked againsttechnology providers — and create anew model that would allow the ISVs amore equitable piece of the trading pie.

Phillippe Buhannic, CEO of ISVTradingscreen, is not a supporter ofTT’s lawsuits and questions thegrounds they are asking for paymentsfrom exchanges. He also says thatprior art may eventually invalidatethe patents but does agree that themodel in which ISVs are compensat-ed is not working.

“That is where, in one sense, TT isright,” Buhannic says. He says that


THAT WAS MY IDEA!The futures industry is no stranger to patent law, R.S. Jennings for a time held a patenton the trading pit but apparently never held the right to big burly clerks used to take upspace and block out competing order fillers.


Trade Trends continued

exchanges, brokers and ISVs make upa matching triangle for futures execu-tion but the only two sides makingmoney are the brokers and theexchanges.

“If the model continues that way,then you will have no ISVs left. Idon’t think that is good for anyone.Not only are the exchanges not help-ing the ISV community but they areimposing costs for upgrades and sys-tem changes,” Buhannic says.

Ashby says that ISVs have createdtheir own mess and must work their wayout of it. “If what [Brumfield] is doing isfor the benefit of the industry, he wouldhave talked to me about it first andasked for my support. I would be veryinterested to hear how what [TT] isdoing is benefiting other ISVs,” he says.

Others argue that if TT could getpaid by the exchanges, others could aswell once they establish the proprietarynature of their own software.

“The ISVs are dumb in that wecould have kept our prices higher, butwe all fought each other and broughtthe pricing down,” Ashby says.

He adds that other industries haveexamples were one key sector hasbeen unprofitable due to a faulty pric-ing model. Ashby agrees that the ISVcommunity is adding more value thanit is being paid for but he isn’t lookingfor scapegoats.

“Pats did its own little bit towarddestroying the industry, and we haveclawed our way back from it. I don’tbelieve it is anybody’s fault, and I don’tbelieve I have a God-given right to goto exchanges and say pay Pats moremoney,” Ashby says. “I agree we arenot making enough profit but I don’tblame the FCMs and I don’t blame theexchanges. I blame ourselves.”

WORK-AROUNDPatsystems has recently released a trad-

ing methodology called Reflector thecompany claims does not infringe onTT’s patents. Not that it concedes itsexisting technology was infringing butthe company says they feel more securewith Reflector. They are not alone.

FCM Peregrine Financial Groupannounced that it would upgrade itsBest Direct order entry system througha strategic alliance with technologyfirm TradeMaven. PFG will use andmarket TradeMaven’s proprietary soft-ware, which it claims does not infringeon the TT patent.

Both firms are seeking patents ontheir new technology but see that asmore of a defensive measure than turn-ing the patents into a profit center.

“The problem with patent law is youcan come out with a great idea andsomeone can adopt that idea and changeit slightly to get a patent. We now haveto get it patented,” Ashby says.

Laughon says the problem with work-around solutions is that customers maywish to be indemnified against lawsuits.“If it is a savvy consumer who hasknowledge of this TT patent war, theyare going to want some assurance that ifthey buy this product they are not goingto be exposed to any liability.”

LEGAL AND REGULATORY BATTLEA rash of patents and patent litiga-tion has the potential to have a chill-ing effect on competition in theindustry. Laughon points out that apatent is a right to exclude. Eventhough in most instances patentholders choose to license others touse patented material, in an industrywith narrowing margins, any entitygranted a patent on a technology inwide use by the industry would havethe ability to exclude or set licensefees at levels that could eliminatecompetitors and raise antitrust issues.

The effect on the industry will dependin large measure at how broadly thecourt interprets TT’s patent. Many inthe industry felt and still feel that priorart should have invalidated the Wagnerpatent, which eSpeed used to collect$48 million in settlements from


THAT AIN’T CHUMP CHANGE!TT is asking the four major futures exchanges to pay them 2.5¢ per electronic contract5¢ per RT. Whether from exchanges, brokers or end users, a per contract fee would bemore profitable than the current per screen fee TT and other ISVs charge.

$60

$50

$40

$30

$20

$10

$0CBOT

November

CME Euronext.Liffe Eurex

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exchanges. The cost of litigation wasone reason eSpeed was successful. Thechief factor was the patent itself. NickNeubauer, CBOT chairman at the time,says that patents once granted are veryhard to invalidate.

Because of the potential to disrupt theindustry as a whole, the CommodityFutures Trading Commission (CFTC)has taken an interest in the patent issue.

CFTC Commissioner Walt Lukkenspeaking at the FIA panel noted that theCFTC does have authority to getinvolved but would do so begrudgingly.

“We have in our statute provisions totake a look at anti-competitive activi-ties, and if we find something is beinganti-competitive we have the ability tostep in and prohibit it. You have to bal-ance that with a private property right.When does one interest overtake theother?” Lukken says. “It would be a pret-ty high bar for us to get involved in pri-vate property rights that are legitimatelyheld by people.”

Lukken sees the CFTC playing alarger role early on in the process,helping the patent office avoid award-ing overly broad patents that wouldhave a negative effect on the industry.

“We need to concentrate on makingsure that patents that are issued in ourindustry are targeted, are legitimateand are not overly broad. Part of this ismaking sure that people issuing thepatents have the right information andhave access to prior art in this area.That is the role the CFTC should playprimarily,” Lukken says.

The recent controversies are not thefirst time the futures industry has dealtwith the patent issue and the possibilityof an overly broad patent disrupting thestatus quo. Lukken noted that in 1877Reuben S. Jennings of Chicago patentedhis “invention” of the trading pit (see“That was my idea!” page 65). Thepatent states: “I, Rueben S. Jennings ofChicago, in the County of Cook andState of Illinois, have invented a newand improved Trading Pit or Platform,to be used by stock, provision and grainboards or boards of trade or exchange, orother associations of a like nature, as a

convenient stand while trading.”Jennings goes on to describe the

dimensions and acoustical advantages ofhis invention, and he asked for royaltypayments from futures exchanges usingthe design. The courts ended up over-turning the patent when challenged.

“Had the CFTC been involved, wemight have prohibited this patent fromever being issued in the first place,”Lukken says.

What may be a key is how the courtrules in a “Markman hearing.” AMarkman hearing is where the courtwill tell the jury and the parties whatthe claims of the patent mean,Laughon says. A favorable interpreta-tion of the Wagner patent in aMarkman hearing in eSpeed’s group oflawsuits against numerous exchangesput eSPeed at a great advantage andprobably led to the exchanges’ decisionto settle, according to Laughon.

Having a broad interpretation on apatent, though, is a mixed blessing to aplaintiff. Laughon points out that whilea broad interpretation would make iteasier for TT to prove infringement, abroad interpretation also makes it easierfor a defendant to claim prior art.

An overly broad interpretation couldalso create antitrust and monopolyissues. The Futures Industry Associationis watching the issue closely and has cre-ated a committee of the board directorsto examine the issue.

“If there are other technologies outthere that can be used in lieu of[Brumfield’s], that is one thing, but if thepatent granted was so broad that nobodycan invent a front-end system that does-n’t in some way abridge that, then there

are issues there that relate to anti-com-petitive practices,” says John Damgard,FIA president.

The strategic way in which TT isasserting its recently awarded patentsindicates that it is not as interested ingaining a huge windfall — as whatseemed to be eSpeed’s approach withthe Wagner patent — but that it is try-ing to fundamentally change the pricingmodel of the industry. With the trend inthe industry inexorably moving towardelectronic trading, having a healthy ISVindustry is good for the futures industryas a whole.

“A strong and innovative ISV indus-try is good for the futures industry sofinding a model that allows the ISVs tobe profitable when they are innovative isgood for the industry,” Schirr says.

Few in the industry see it likelythat the four major exchanges willaccept a 2.5¢ fee on electronic execu-tions. However, with ISVs providingthe gateway to end users to theexchange and having the capabilityto widen the distribution of exchangeproducts, it may be beneficial forexchanges and the industry in generalto find a model that allows all thosein the value chain to profit.

How the courts view the breadth ofTT’s patents will be vital to the indus-try. If they are viewed as valid uponchallenge but are not interpreted sobroadly as to restrict other ISVs fromadopting work-around solutions, thenit may ultimately have a positive effecton the futures industry.


FM

“I don’t believe I have a God-given right togo to exchanges and say pay Pats more

money. I agree we are not making enoughprofit but I don’t blame the FCMs and I don’t

blame the exchanges. I blame ourselves.” — Kevin Ashby, Patsystems CEO



SoftwareFidelity Investments has released Wealth-Lab Pro, trading software offering techni-cal indicators, charting, portfolio analysisand simulation and real-time scanning. Wealth-Lab Pro alsohas 10 years of daily historical market trading data from Fidelitywith 10 months of intraday minute bars, and the automatedtrading functionality allows traders to execute trades “hands-off” in real-time based on selected market entrance and exitstrategies. Wealth-Lab Pro has been fully integrated intoFidelity’s Active Trader Pro trading platform and market data.Current Fidelity customers placing more than 120 trades in arolling 12-month period can use the software at no extracharge. Other features include drag-and-drop programmingfunctionality to build and back-test customized trading strate-gies. See www.fidelity.com or call (800) 823-0175.

TradingScreen Inc. has launched TradeSmart version 2.0,a customizable trading front-end, which combines aredesigned user interface with enhanced functionality forelectronic trading across multiple asset classes. The productenables buy-side clients such as hedge funds, traditionalasset managers, private bankers and proprietary tradingdesks to trade a broad portfolio of financial instrumentswith a wide range of counterparties. TradeSmart givesusers the abilityto aggregatemultiple deal-ers and prod-ucts onto a sin-gle screen for-mat for thee l e c t r o n i corder routing ofboth directmarket access discretionaryorders and Notice of Executions to a large number of brokerdestinations. See www.tradingscreen.com. or [email protected].

ServicesDTN has released DTN ProphetX 2.5, a real-time marketdata tool and analytical workstation for futures traders. Theprogram offers customizable charts and analytics. Traders canorganize and display data from all domestic and major interna-tional exchanges in a variety of industry-specific formats,including crack spreads, crushes or strips. News stories frommajor sources are available, and users can link quote sheets to

chart windows and news indexes.Newtools now available include MarketProfile, point and figure and advanced sea-sonal charting. The tool also allows users

to set parameters to monitor various markets and link real-timeand historical data to Microsoft applications such as Excel.DTN ProphetX also delivers agricultural and energy forecasts,histories, current conditions and climate predictions. E-mail:[email protected] or call (952) 851-7216.

Interactive Brokers LLC (IB) has launched Inter-marketSmart-Routing for Spread Orders, a new service that sup-ports spread strategies for equities and options traded acrossmultiple U.S. markets. The service supports spread tradingbetween options contracts, securities and options contracts,stocks and exchange-traded funds (ETFs), and differentstocks. The pro-gram addresses thespread trading riskwhere one seg-ment or “leg” ofthe complex orderremains unfilled.IB guarantees theentire spread isexecuted or thefirm will take responsibility for the order. IB’s spread offeringcan involve different financial instruments, equities,ETFs and options. Futures may be added at a later date.See www.interactivebrokers.com or call (203) 618-7711.

Algorithmics Inc. and Bloomberg LP have released AlgoRisk version 1.6, which has features that enable users tocustomize user interfaces to their specific requirements withmore control over how information is displayed, processedand analyzed. The new version allows users to remove andre-order sections and tabs to create a new front end. Riskanalytics are now more transparent and users can see under-lying computations. With custom scenarios, users can nowname specific changes to the shape of interest rate curves,letting users interactively create additional curve shift sce-narios and assess the impact those changes have on theirportfolios. Historical reporting through time enables usersto recall stored historical risk and P&L data to conductbacktesting and performance analysis to compare the actualperformance over time of a portfolio or instrument toexpected results. Also included is more coverage of prod-ucts including derivative products such as options andswaptions. See www.algorithmics.com, www.bloomberg.com or call (212) 318-2517.

New For Traders


Send new product information to:Futures, 833 W. Jackson Blvd. 7th FloorChicago, Ill. 60607, Fax: (312) 846-4638

Attn: Yesenia SalcedoE-mail: [email protected]

There is a risk of loss in futures trading

Go to www.oners.ims.ca/4545-149 or call 888-804-6612

Trend Following: How GreatTraders Make Millions in Up or Down MarketsBy Michael CovelPrentice Hall (2004)311 pages, $27.50

REVIEWED BY JAMES T. HOLTER Michael Covel had an intelligent,if somewhat ultimately slanted,approach to laying out this book. Hismethod was to examine the players infinancial disasters, but not those whowere losing all the money — they’vehad their share of headlines. Covelwanted to know who made all themoney that was lost.

Having found the winners — gen-erally, those money managers whohad strong returns during the periodsof the scandals — he compared themand found that many, such as JohnW. Henry, who profited handsomelyduring the Barings Bank fiasco, weretrend followers.

That led him to explore questionssuch as, “How do trend followers winin the zero-sum game of trading?” and“Why has trend following been themost profitable style of trading?”

Before going any further, perhaps afew trading neophytes and quite a fewtrading pros know those are loadedquestions. Of course, more trend fol-lowing money managers made moneyduring select scandals. More trendfollowers also lose money when the

managed money industry as a wholesuffers a rough spot. The reason issimple: More professional moneymanagers are trend followers, andthat alone doesn’t make trend follow-ing the best strategy anymore than itmakes it the most marketable to insti-tutional investment allocators.Understanding that, it may just asreasonably be asked how option sell-ers, contrarian traders, fundamental-ists, pit traders or Elliott Waveenthusiasts make money trading.

Still, the point isn’t to question thevalue of a book on trend following. Itis indeed the most popular tradingdiscipline. It is indeed profitable inthe hands of many traders. Trend fol-lowing is certainly a capable way totrade, but it’s not the only way. If youcan get beyond that nugget of bias,you’ll be rewarded with a quality edu-cation in this trading approach.

One strong point of this book is itputs you into the mind of a successfultrend trader. It helps you understandthe sentiment, risk aversion (or lackthereof) and profit time frame you’llneed to embrace mentally to make atrend-based approach work.

You’ll also find practical knowledge— facts you’ll need to know to imple-ment a trend-following trading pro-gram. Covel looks at trading systemdevelopment (targeting novices —it’s not too technical) and basic datasuch as what markets successful trendtraders trade well. Money manage-ment (how much to trade) isaddressed and risk management (pro-tecting the downside) is given itsdue. There is also practical discussionof what many traders consider farmore important than whether you getinto a trade using moving averagecrossovers or even a six-sided die:exit management.

Beyond that, however, the practi-cal advice is limited. Those with seri-ous intentions of systematic trendtrading, would do well to pick up ageneral book on system development,such as Cybernetic Trading or TradingSystems that Work.

Trend Following is accessible (youcan come into it completely green)

and it is comprehensive in its statedsubject matter. If you’re a beginnerwho wants to trend trade or if you’rean experienced Gann trader, for exam-ple, who wants exposure to anotherapproach, this book will do it.

Candlesticks, Fibonacci and ChartPattern Trading Tools: ASynergistic Strategy to EnhanceProfits and Reduce RiskBy Robert Fischer and Jens FischerJohn Wiley & Sons (2003)256 pages, $89.95

REVIEWED BY JAMES GOULD The authors promise to provide read-ers with “an easy, reliable tradingmethod and tools together with trad-ing rules that can be applied to real-time trading.” Their trading method isa trend-following system based onFibonacci ratios, candlestick patterns,Elliott wave theories and PHI-ellipses.As is true of all trend-trading meth-ods, market entry is late — OKbecause false price moves are reduced— and so is market exit — not OKbecause profits are reduced.

PHI-ellipses, the heart of the trad-ing method, are patterns of varyingelliptical shapes formed over timebased on current price patterns. ForPHI-ellipses to be a “reliable” tradingsignal, their formation must followstrict rules as a three-wave price cor-rection, which must occur withinboundaries circumvented by theellipse. Price breakouts from a properlyconstructed PHI-ellipse become thesignal to enter or exit a trade.

The authors contend the “accuracy”of PHI-ellipses can be improved byincorporating candlestick formationsand Fibonacci ratios. Construction ofPHI-ellipses is based on a proprietarydata transformation; however, accom-panying software enables readers toconstruct and use PHI-ellipses ontheir own data. Ten years of data hav-ing the same price scale are recom-mended to fine-tune PHI-ellipse pat-terns. PHI-ellipses can be constructedfrom monthly, weekly, daily or intra-day prices and can be used for equities,indexes or commodities.

Book Reviews


The book is reader friendly.Mathematics and statistics are almostnon-existent. Theauthors provide anexcellent overviewand summary ofcandlestick analy-sis, Fibonacci andchart patterns. Alsodiscussed is how todetermine estimat-ed price targetsusing Fibonacciratios. Many charts(mostly equities)are used to illus-trate ideas present-ed. Several actualcase histories alsoare included toillustrate how the“theory” was applied in practice. Andan excellent summary of major con-

cepts is presented in a final chapter. The book’s appendix contains a

manual for usingPHI-ellipse software,which is includedwith the book. Theauthors also invitereaders to visit theirWeb site (www.fibotrades.com) forassistance.

To appreciate thisbook, you mustaccept the premisesof technical analysis.Readers familiarwith the essentialsof technical analysis,especially candle-sticks, Elliott waveand Fibonacci, will

find the book to their liking because itbuilds on these concepts. Readers

interested in knowing more aboutthese trading ideas also will benefit.The book offers all readers thepromise of fine-tuning their tradingmethod, even if the PHI-ellipse con-cept does not work as promised.

Most readers will have to read thisbook carefully several times to get itsfull benefits. If you are serious aboutfine-tuning your technical skills and ifyou like trading with candlesticks,Elliott wave analysis and Fibonacci,then this is a book you should buy. Ifyou are new to technical analysis, youmight want to borrow the book orpostpone reading it until you are ade-quately versed in the essentials oftechnical analysis.

James S. Gould is a professor of marketing atPace University in White Plains, N.Y. E-mail himat [email protected].

Circle No. 119 or go to www.oners.ims.ca/4545-119 www.futuresmag.com | January 2005 71Reproduction or use of the text or pictorial content in any manner without written permission is prohibited.



Dateline

C O N T R A C T D A T E S

3 FND: BM&F Alcohol F, Cotton F, Nybot Orange juice F.LTD: BM&F Alcohol OF.

7 LTD: CME CME $ Index OF, Currencies OF, Live cattle OF,Nybot Currencies OF, Dollar index OF, Feb Cocoa OF.

10 LTD: BM&F Alcohol F, Nybot Orange juice F.

14 LTD: BM&F Feb Cotton OF, Feb Arabica coffee OF, FebConillon coffee OF, CBOE, Amex, PCX, Phlx, ISE Currency O,CBOT Soybeans F, Soybean oil F, Soybean meal F, CME 13-wk. T-Bills OF, Eurodollar F,OF, Euroyen OF, Libor F,OF,Lumber F, Peso F, Nybot CRB index F, CRB index OF, FebCoffee OF, Feb Sugar OF.

17 LTD: BM&F Live cattle OF, CME Rand F, Eurex 1-,3-mo.euribor F.

18 LTD: BM&F Feb Soybeans OF, CBOT DJCI F, CME 13-wk. T-Bills F, GSCI F,OF , Mexican Cetes F.

19 LTD: CME Mexican TIIE F.

20 LTD: CBOE, Amex, PCX, Phlx, ISE A.M. settled index O,CBOT Rice F, Nymex Feb Crude oil F.

21 FND: BM&F Arabica coffee F. LTD: CBOE, Amex, PCX,Phlx, ISE P.M. settled index O, CBOT DJIA OF, Feb T-

bonds/10-,5-,2-yr. T-notes/inflation-indexed Treasuries OF,Feb Grains and oilseeds OF, CME E-mini S&P 500 OF, S&P 500OF, S&P 500 Barra Growth OF, S&P 500 Barra Value OF, S&P400 OF, Russell 2000 OF, Nikkei 225 OF, Nasdaq 100 OF,Eurex Dutch equity O, Finnish equity O, French equity O,German equity O, Italian equity O, Titans OF, Stoxx 50 OF,Dax OF, Nemax 50 OF, SMI OF, Hex 25 OF, Swiss equity O,KCBT Value Line OF, Feb Wheat OF, MGE Feb Wheat OF,Nybot Stock Index OF, Feb Orange juice OF.

24 LND: Nybot Orange juice F. LTD: BM&F Feb IGP-M F,Eurex bobl/bund OF, schatz OF, Euronext-Liffe Feb Longgilt/bund OF.

27 LTD: CBOT Gold F, Silver F, CME Feeder cattle F,OF,Nymex Aluminum F, Copper F, Gold F, Palladium F, PlatinumF, Silver F, Feb Natural gas F.

31 FND: CBOT Feb Gold F, Feb Silver F. LTD: BM&F Arabicacoffee F, Cotton F, Feb Ei bond F, Feb Euro F, Feb Gold F, FebIDI O, Feb US dollar F,O,OF, Feb 1-day deposits F, Feb IDxUSdollar F, CBOT Fed funds F, CME Live cattle F, Feb Real F,OF,Feb Lumber OF, Eurex Eonia F, MGE HWI F,OF, Nymex FebHeating oil F, Feb Propane F, Feb Unleaded gas F.

MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY

10 11 12 13 14

17 18 19 20

24 25 26 27 28

Crop summary.France Production index,

Merchandise trade. GermanyProduction index

Japan Balance of payments.U.K. Production index. Australia Employment.

France CPICOT report, PPI. GermanyCPI. Balance of payments

COT report. Japan Productionindex, Employment, CPI.

France Unemployment, PPI

J A N U A R Y

21

3 4 5 6 7

COT report, Employment

31 1 2 3 4

COT report

Cotton ginnings, Annual Cropproduction, Grain stocks,

Production index.U.K. Merchandise trade

Crop summary

Crop summary. GermanyEmployment

U.K. CPI. France Balance ofpayments

Crop summary, CPI.U.K. Unemployment.

Germany PPI.Australia Merchandise trade

COT report. AustraliaProduction index

Cotton ginnings. Australia PPI Crop summary. Australia CPI

Holiday: U.S.

COT report, Livestockslaughter, Cattle on feed

Merchandise trade. U.K. PPI.Germany Merchandise trade

Japan Merchandise trade


CBOE, Amex,

PCX, Phlx, ISE

A.M. settled index O ....1/20 ......2/17

Currency O ..................1/14 ......2/11

P.M. settled index O ....1/21 ......2/18

CBOT

DJCI F ..........................1/18 ......2/15

DJIA OF ........................1/21 ......2/18

Fed funds F..................1/31 ......2/28

Gold F ..........................1/27 ......2/24

Grains and oilseeds OF12/23 ....1/21

Rice F ..........................1/20 ............-

Silver F ........................1/27 ......2/24

Soybean meal F ..........1/14 ............-

Soybean oil F ..............1/14 ............-

Soybeans F ..................1/14 ............-

T-bonds/10-,5-,2-yr.

T-notes/inflation-indexed

Treasuries OF ............12/23 ......1/21

CFE

Vix F ..................................- ......2/15

CME

13-wk. T-Bills F ..............- ......2/14

13-wk. T-Bills OF........1/14 ......2/11

CME $ Index OF..............1/7 ........2/4

Currencies OF................1/7 ........2/4

E-mini Nasdaq 100 OF ....- ......2/18

E-mini S&P 500 OF ....1/21 ......2/18

Eurodollar F ......................- ......2/14

Eurodollar F,OF............1/14 ............-

Eurodollar midcurve OF ..- ......2/11

Eurodollar OF ....................- ......2/11

Euroyen OF ..................1/14 ......2/11

Feeder cattle F,OF ......1/27 ............-

GSCI F,OF ....................1/18 ......2/15

Lean hogs F,OF ................- ......2/14

Libor F,OF ....................1/14 ......2/14

Live cattle F ................1/31 ......2/28

Live cattle OF ................1/7 ........2/4

Lumber F......................1/14 ............-

Lumber OF ................12/30 ......1/31

Mexican Cetes F ..........1/18 ......2/15

Mexican TIIE F..............1/19 ......2/16

Mid-sized milk OF ........2/3 ............-

Milk F,OF ........................2/3 ........3/3

Nasdaq 100 OF ............1/21 ......2/18

Nikkei 225 OF ..............1/21 ......2/18

Peso F ..........................1/14 ......2/14

Pork bellies, frozen F ......- ......2/23

Pork bellies, frozen OF ....- ........2/4

Rand F ..........................1/17 ......2/14

Real F ........................12/31 ............-

Real F,OF ..........................- ......1/31

Real OF ......................12/30 ............-

Russell 2000 OF ..........1/21 ......2/18

S&P 400 OF ..................1/21 ......2/18

S&P 500 Growth OF ....1/21 ......2/18

S&P 500 Value OF........1/21 ......2/18

S&P 500 OF ..................1/21 ......2/18

Weather F,OF ................2/2 ........3/2

KCBT

Value Line OF ..............1/21 ......2/18

Wheat OF....................12/23 ......1/21

MGE

HWI F,OF ......................1/31 ......2/28

NCI/NSI F,OF......................- ......2/28

Wheat OF....................12/24 ......1/21

Nybot

Cocoa OF ......................12/3 ........1/7

Coffee OF....................12/10 ......1/14

CRB index F..................1/14 ......2/11

CRB index OF ..............1/14 ......2/11

Currencies OF................1/7 ........2/4

Dollar index OF ..............1/7 ........2/4

Ethanol F............................- ......2/28

Ethanol OF ........................- ......2/11

Mini coffee F ....................- ......2/16

Orange juice F ............1/10 ............-

Orange juice OF ........12/17 ......1/21

Stock Index OF ............1/21 ......2/18

Sugar #14 F..................12/8 ............-

Sugar OF ....................12/10 ......1/14

ABOUT THE CALENDAR… Dates are believed to be correct but sometimes do change. Holidays may affect government offices or banksbut not trading. Check with your broker or the exchange. Reports are U.S. reports unless indicated otherwise. Contracts traded are forcurrent month unless indicated. Abbreviations used with contracts: F futures. OF options on futures. O options. LTD last trading day. FND first notice day. LND last notice day.

Last trading dayContract month JAN FEB

Last trading dayJAN FEB






MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY

4

7 8 9

14 15 16 17

22 23 24

28

Japan Production index

F E B R U A R Y

1

18

2

Germany Employment

331 1

3

11

2

10

4

21 25

Crop summary.Germany Production index

COT report

Crop summary

Japan National accounts.U.K. Unemployment

COT report. France Nationalaccounts. Merchandise trade

Japan PPI.Germany Merchandise trade.

France Production index.Australia Employment

COT report, Cattle onfeed. Germany CPI

COT report, Annual Livestockslaughter

Crop summary.U.K. CPI.

COT report, Livestock slaughter.Japan CPI, Merchandise trade.

France PPI

Crop summary.Australia Merchandise

trade

Japan Balanceof payments. U.K. PPI

Crop summary. France CPI Crop summary

Cotton ginnings,Crop production.

U.K. Production index,Merchandise trade

Holiday: U.S.

Managed Funds Association Network 2005. FEB. 6-8. The Ritz-Carlton, Key Biscayne, Fla.

International Online Traders Expo. FEB. 12-15.The Marriot Marquis Hotel, New York.



ADVERTISER PAGE ADVERTISER PAGEAlaron . . . . . . . . . . . . . . . . . . . . . . . . . . . .C3Chicago Board Of Trade . . . . . . . . . . . . . .7CMC Group . . . . . . . . . . . . . . . . . . . . . . . .15CMC Group . . . . . . . . . . . . . . . . . . . . . . . .33Capital Market Services, LLC . . . . . . . . . .29Commodity Price Charts . . . . . . . . . . . . . .81Direct Trade . . . . . . . . . . . . . . . . . . . . . . .47Esignal . . . . . . . . . . . . . . . . . . . . . . . . . . . .19Futures Magazine Group . . . . . . . . . . . . .39Futures Magazine Subscriptions . . . . . . .69Futures Trading Academy . . . . . . . . . . . .47Global Forex Trading . . . . . . . . . . . . . . . .35Go Futures . . . . . . . . . . . . . . . . . . . . . . . . .40Interactive Brokers . . . . . . . . . . . . . . . . . .16InterShow . . . . . . . . . . . . . . . . . . .50a,b,c,dMan Financial . . . . . . . . . . . . . . . . . . . . . .C4

MG Financial . . . . . . . . . . . . . . . . . . . . . . . .9Need to Know News . . . . . . . . . . . . . . . .41Open-E-Cry . . . . . . . . . . . . . . . . . . . . . . . .20Pricecharts.com . . . . . . . . . . . . . . . . . . . . .13Qcharts from Quote.com . . . . . . . . . . . . . .3Quadriga Asset Management. . . . . . . . .31QuoTrek by eSignal . . . . . . . . . . . . . . . . .11Reader Service . . . . . . . . . . . . . . . . . . . . .75Refco . . . . . . . . . . . . . . . . . . . . . . . . . . . . .c2Trade Bolt . . . . . . . . . . . . . . . . . . . . . . . . .40Tradestation . . . . . . . . . . . . . . . . . . . . .p4-5Trade-System, Inc. . . . . . . . . . . . . . . . . . . .12Trends in Futures . . . . . . . . . . . . . . . . . . .55Wisdom Financial . . . . . . . . . . . . . . . . . . .20Xpresstrade . . . . . . . . . . . . . . . . . . . . . . . .27Xpresstrade . . . . . . . . . . . . . . . . . . . . . . . .71

SEE CLASSIFIED ADVERTISING ON PAGES 76–81

Nymex

Aluminum F..................1/27 ......2/24

Copper F ......................1/27 ......2/24

Crude oil F..................12/20 ......1/20

Gold F ..........................1/27 ......2/24

Heating oil F ..............12/30 ......1/31

Natural gas F ............12/28 ......1/27

Palladium F..................1/27 ......2/24

Platinum F....................1/27 ......2/24

Propane F ..................12/30 ......1/31

Silver F ........................1/27 ......2/24

Unleaded gas F..........12/30 ......1/31

BM&F

1-day deposits F ..............- ......1/31

Alcohol F ......................1/10 ......2/10

Alcohol OF......................1/3 ........2/1

Arabica coffee F ..........1/31 ............-

Arabica coffee OF......12/10 ......1/14

Conillon coffee OF ....12/10 ......1/14

Cotton F ........................1/31 ............-

Cotton OF ..........................- ......1/14

Ei bond F ....................12/31 ......1/31

Euro F ........................12/31 ......1/31

Feeder cattle F..................- ......2/28

Feeder cattle OF................- ......2/15

Gold F ........................12/31 ......1/31

Ibovespa F,OF............12/31 ......2/16

iBrX 50 F............................- ........2/1

IDI O............................12/31 ......1/31

IDxUS dollar F ..................- ......1/31

IGP-M F......................12/24 ......1/24

Live cattle F ......................- ......2/28

Live cattle OF ..............1/17 ......2/15

Soybeans OF ....................- ......1/18

Sugar F ..............................- ......2/10

US dollar F,O,OF ........12/24 ......1/31

Eurex

1-,3-mo. euribor F......1/17 ............-

3-mo. euribor F ................- ......2/14

bobl/bund OF ..............1/24 ......2/21

Dax OF ..........................1/21 ......2/18

Dutch equity O ............1/21 ......2/18

Eonia F..........................1/31 ......2/28

Finnish equity O ..........1/21 ......2/18

French equity O ..........1/21 ......2/18

German equity O..........1/21 ......2/18

Hex 25 OF ....................1/21 ......2/18

Italian equity O ............1/21 ......2/18

Nemax 50 OF................1/21 ......2/18

schatz OF ....................1/24 ......2/21

SMI OF ..........................1/21 ......2/18

Stoxx 50 OF ..................1/21 ......2/18

Swiss equity O ............1/21 ......2/18

Titans OF ......................1/21 ......2/18

Euronext-Liffe

Equities (Den, Fin,

Fra, Ger, Gre, Ire,

Net, Spa, Swe,

Swz, UK, USA) F ................- ......2/18

Equities (Italy, Nor) F ........- ......2/17

Equities O ..........................- ......2/18

Euribor F,OF ......................- ......2/14

Eurodollar F,OF ................- ......2/14

FTSE 100 O ........................- ......2/18

FTSEurofirst O ..................- ......2/18

Long gilt/bund OF ............- ......1/24

Swapnote F,O....................- ......2/14

Safex

Bonds F ............................- ........2/3

Jibar F................................- ......2/16

Rand F ..............................- ......2/14

Last trading dayContract month JAN FEB






EVENTS COMING UP

Call the numbers listed for more information. For other seminars, see the classifieds on pages 76-81.

AD INDEXTops & Bottoms 2004You couldn’t keep a good commoditydown in 2004, when crude, gold,soybeans and other markets broke hardto the upside. However, they also brokesome traders, with money managersbanking one of their weaker years.Meanwhile, the U.S.patent office has beenissuing patents ondisplaying market depthand the proud newowners are not beingshy about using them.

Power warsMost of the talk and attention hassettled on crude recently, and withgood reason, but natural gas is makinga case for itself as the energy to watch.What’s in store for energy markettraders?

Nonlinear model for S&PThis article will demonstrate thebuilding of a nonlinear trading modelfor the S&P 500 using financialmodeling software.

Option selling liquidityWe look at specific indicators ofliquidity and which markets are worthour hard-earned trading dollars.

GARP 2005 6th Annual Conventionand Exhibition. JAN. 31-FEB. 3. Marriot MarquisHotel, New York. +44 (0) 20 7626 9303.www. www.garp.com/events/garp2005. E-mail:[email protected].

Investment Education Symposium.FEB. 2-4. Royal Sonesta, New Orleans.www.opalgroup.com. (212) 532-9898.

Managed Funds Association Network2005. FEB. 6-8. The Ritz-Carlton, Key Biscayne, Fla.(202) 367-1140. www.mfainfo.org. E-mail:[email protected].

International Online Traders’ Expo.FEB. 12-15. The Marriot Marquis Hotel, New York.(800) 970-4355. www.tradersexpo.com.

FIA Annual International FuturesIndustry Conference. MAR. 16-19. Boca Raton Resort and Club, Boca Raton, Fla. (202) 466-5460. www.futuresindustry.org.

FIA OpTech 2005. APR. 12. MarriottMarquis Hotel, New York. www.futuresindustry.org.(202) 466-5460.

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Stefano Durdic loves the rubbery flooring in the SouthChicago Loop loft that houses proprietary tradinghouse Speed Trading Group and high-end brokerage

RedSky Securities.“It’s the same stuff they have on the trading floor of the

exchange,” he points out, skidding his shoe along the surface.“Too bad it’s so old. We’ve got to get rid of it.”

Knowing when to abandon the old and embrace the newhas been a key to Durdic’s success. The 37-year-old native ofOak Brook Terrace, Ill., cut his teeth at the Chicago BoardOptions Exchange and sharpened them at Chicago Researchand Trading (CRT) — the company that made a fortunebringing binomial pricing models like Black-Scholes andCox-Ross-Rubenstein into the pits, leaving more efficientoptions markets in their wake.

Durdic, who holds anhonors degree in financefrom the University ofIllinois, landed a trading jobwith CRT on March 15,1993 — the Ides of March,he points out — after earn-ing respect trading OEXoptions for the now-defunctHarmony Trading.

“It was an exciting time tojoin CRT,” he recalls, “inpart because they were aboutto get into equity options forthe first time.”

A few months later, how-ever, NationsBank boughtCRT. And since banksweren’t allowed to trade equi-ty options in the United States back then, Durdic and his wife,Traci, shipped off to CRT’s Frankfurt, Germany, office “for sixto 18 months” while NationsBank applied for an exemption.

They ended up spending seven years at the epicenter of thefutures industry’s electronic revolution.

At first, he arbitraged between the Deutsche Terminboerse‘sFrankfurt screens and the London International FinancialFutures Exchange’s (Liffe) London floor. After becoming com-fortable with the then-revolutionary process of electronic trad-ing, he took over CRT’s stock options trading and arbitragedesk. By 1995, the options desk had overtaken the DAX deskto become CRT Europe’s top profit center, and in 1996 Tracigave birth to their daughter, Dara.

A year after Dara’s arrival came the migration heard roundthe world: DTB’s transparent and efficient screens wrestledthe bund volume away from Liffe. Durdic, like many others,took the message to heart.

“This was the future,” he says. “There was no denying it.” In 1998, Bank of America (BoA) took over NationsBank,

and Durdic found himself on the board of BoA International,in charge of exchange-traded derivatives for all of Europe.That’s when he noticed waves of traders logging intoGermany from small prop shops concentrated in Chicago. Hepitched the bank on offering cutting-edge brokerage for high-end shops and other parts of the bank in need of sophisticat-ed execution, arguing it would both save money and earn it.

When the bank said no, he, Traci, and Dara headed backto Chicago, where Durdic hooked up with fellow former BoAtrader Brent Starck and Joe Perry, who he met stateside.They hired a team of software developers, and essentially cre-ated the entity BoA had turned down.

Red Sky Securities has memberships on 27 exchanges andruns a proprietary trading platform called R3, which enablestrading not just in, but among a variety of instruments: equi-

ties, futures, single stockfutures, options, cashTreasuries and forex.The functionalityappeals to high-net-worth individuals andsmall prop shops,including their owneight-trader shop, SpeedTrading Group.

Each of SpeedTrading’s traders spe-cializes in sophisticatedarbitrage and spreadingamong instrumentswithin one market, andthey are paid accordingto a semi-subjective

compensation schemebased on how well traders perform relative to the opportuni-ties presented in the markets they manage.

“This way, we can have a foot in every market,” Durdicsays. “If a cool market suddenly gets hot, we are ready for it.”

He sees platform development as a key way brokerages candifferentiate themselves from competition, and offers a veryCRTesque way of solving the current bandwidth shortage.

“Why does an exchange have to disseminate implied pricesbased on outright prices?” he asks. “For every update in anoutright futures price, some exchanges publish five updates inimplied calendar spreads, butterflies, etc. They should limitthemselves to disseminating actual bids, offers and trades, andjust let end users calculate their own implied prices.”

He praises LiffeConnect for letting customers disable clut-tery functions and plans on building RedSky into the country’spre-eminent boutique futures commission merchant for hedgefunds, prop shops and sophisticated individuals. “That’s whereI’ll be concentrating my energies,” he says. “I’m getting a bitlong in the tooth for trading.”

BY STEVE ZWICK


Trader Profile

Stefano Durdic: Out with the old...

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0105 Futures Mag

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