clouds TRADER MAGAZINE 2393 trading tecHniques on tHe forex How sHould a successful trader work...

His trading tecHniques on tHe forex How sHould a successful trader work

exclusiVe interViewJohn Bollinger

TRADER MAGAZINE

OCTOBER - DECEMBER 2009

2393 where wills&P 500 be?

IchImoku c l o u d s

oPTIoNs

workINg IN mulTI TImeframe

Trading systemsIdeN TIf y aN edge

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CONTENTs FX

05 editor’s note

fundaMental analYsis:46 XXIV century: where will the s&P 500 index be in 2393?

trading strategY:06 working in multiple Time frames: a srategic approach giving a broader vision of the market direction

trading sYsteMs:31 Building a robust fX Trading system – Part 3 – identifying an edge

Broker reView: 54 cmc markets

interViews: 38 henrik Pedersen, explains Pareto’s strategy and how he manages a 44,5 billion usd portfolio.

51 ross donoghue, explains the advantages of spread betting and how cMc Markets run the fx business

focus: 56 should fX managers also be marketers and educators?

oPtions: 49 To hedge or not to hedge?

tecHnical analYsis: 62 technical outlook eur/JPY eur/usd usd/ Zar58 Majors report: dollar/Yen, euro/dollar, euro/Yen, euro/gBP

international data65 fx spot Monitor66 central Bank rates67 economica data - fx Poll68 Markets View

69 econoMic calendar

t e c H n i c a l analYsis:

learn how to use ichimoku clouds with moving averages and graM to create an fx spot trading model10

CONTENTs FXJoHn Bollinger interView:

How he created the Bollinger Bands. His favorite tools and methodologies on the forex, and what traders should do to be successful.

18

MaJors: . . . a nd t He g r een sHoots BlossoMed

is the current macro evolution of the majors a sign of the return of the carry-trade, and a historical turning point for the Yen?

27

FX TRADER MAGAZINE October - December 2009 3

alessandro Balsotti, worked for several years as market maker of italian lira, greek dracma and czechoslovak koruna in JP Morgan. He was then in charge of the fx trading desk in abax Bank and caboto. He is currently responsible in Jw Partners for the fx single Manager strategies.

alessandro fugnoli, covered the roles of investment director in gestnord broker and account executive in Merrill lynch. He worked as director of research for caboto group. He is head of macroeconomic and strategic research for abaxbank.

steffen gregersen has played a leading role in saxo Bank’s Quantitative analysis and advance research department in its development of the bank’s option pricing models. He holds a degree in Mathematics and economics from the university of copenhagen where his thesis was on the effects of jumps in underlying prices on option prices.

Jason alan Jankovsky has been trading extensively in futures, options, and forex since 1986. He has authored several trading systems and has trained other successful traders. He has been published in many industry periodicals. His numerous articles on global cash forex have appeared in “tradersavvy”, “The Perspective”, “sfo Magazine” and other industry publications. He is the author of the Best sellers: “trading rules that work: The 28 essential lessons every trader Must Master” and “The art of The trade: what i learned (and lost) trading the chicago futures markets” (wiley & sons, october 2006). Jason can be contacted at [email protected], www.forexbriefings.com

Jw Partners is an independent fx solution provider, based in Milan, with a strong fx specific know-how. Jw supports institutional investors and Hnwi in building quality fx multimanager

portfolios, and fx underlying structures. steve Jarvis, from traderMade international has over 20 years’ experience of providing technical analysis to fx professionals. formerly chief technical analyst at McM currencywatch and informa global Markets, steve now heads the technical analysis at interpreta, tradermade’s newly launched technical analysis service.

caspar marney, started his trading career, as a spot currency trader and technical analyst with HsBc in london. He then moved to sBc warburg (later uBs) as a proprietary trader and global head of technical analysis for fx and precious metals, where he became one of the bank’s most successful traders and a regular commentator on financial television.

giorgio martini has been a forex trader since 2000 and has worked for leading italian banking groups. His articles are regularly published on the italian financial portal www.smarttrading.it . He also collaborates with age italia, an independent financial consultancy firm.

maurizio milano, began his career as forex dealer in 1995. He started the technical analysis department at Banca sella group. He teaches technical analysis at the university of turin, italy. His contributions can be found in the most renowned italian financial newspapers and televisions: Borsa&finanza, il sole24ore, il corriere della sera, class-cnBc, radiorai1. He is member of siat (the association of the italian technical analysts) and ifta (the international federation of technical analysis).

giovanni Pozzi, worked as key professional or managing director of fx teams in leader market making banks such as uBs, swiss Bank corp. and american express Bank, … and brokers. today he runs Jw Partners, which is an independent currency multimanager advisory company.

CONTRIBUTORSFX

editor : emmanuelle girodet

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trading carries a high level of risk, and may not be suitable for all investors. The objective of fx trader Magazine is to give readers the tools, training and information which will help them be better prepared to trade on the foreign exchange. However, any analysis, news, research, strategy, or other information contained on this magazine is provided as general market information and does not constitute investment advice.

fx trader Magazine, will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.

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FXEDITOR’s note

is it, or is it not, the end of the global economic crisis?

on the one hand, we hear reassuring statements from the iMf leaders who - while enjoying breathtaking views over the Bosphorus in istanbul - raised their 2010 growth forecast to 3.1% and consider that the global economy is recovering faster than expected. our much appreciated analyst alessandro Balsotti analyses the first recovery signs through the last moves of the majors and talks about a potential return of the carry-trade and a historical turning point for the Yen, in his article “and the green shoot Blossomed”.

on the other hand, many

economists remain very skeptical about the current recovery signs. nobel Prize-winning economist Michael spence said last month that the performance of the u.s. economy is probably more sluggish than reflected in stock markets. unemployment is still growing in many parts of the world, and thousands of people will lose their jobs and see their purchasing power reduced over the next years. The more rigid economies of some european countries don’t help them to take a deep breath and build strength for recovery, making it more difficult and slower for europe to get started again.

some analysts even talk about the risk of the return of the pendulum.

Professor nouriel roubini, from new York university who predicted the financial crisis, says that “Markets have gone up too much, too soon, too fast,” and that stock and commodity markets may drop in the coming months as the gradual pace of the economic recovery disappoints investors.

so everybody is looking for more forecasts… and we’ve got a striking analysis from alessandro fugnoli in this

edition: “where will the s&P500 be in 2393?” everybody also knows that forecasts can be dangerous in uncertain times.

John Bollinger - who has had the kindness to spend time with us explaining about the way he works and giving us his vision of the forex market - is the first person to tell you that “hope is something traders should never have”. so, back to your trading strategy, your

favorite trading psychology books and practice exercises and, remember that forecasts can be your worst enemy!

But this is also the perfect time to use technical analysis tools. watch signal convergences, for example. or use Bollinger Bands, which are perfect to identify whether a market is trending or not. John explains that there is much more to the process of using the bands than buying at the lower band and selling

at the upper band. He explains how he finds it useful and efficient to work on forex using various traditional technical analysis tools in combination with the bands. This is also a good time to learn about new tools. see how our experts from the nomura global research team use ichimoku clouds to create an fx spot trading model. or follow Jason Jankovsky’s multi timeframe approach in order not to lose a panoramic view of the markets.

and this brings us back to the Bosphorous… Having a panoramic view has always made everyone feel safe and relaxed, and therefore ensures more objective analysis and better decisions. This is precisely what we are committed to do at fx trader Magazine: to give traders a panoramic view of the currency market to help them make better decisions. enjoy this edition!

Emmanuelle Girodet

Perfect times for technical analysis


working in Multiple time frames

for the most part, traders have a tendency to focus on the time frame that they personally are attempting to exploit. as an example, a day-trader intends to be flat at the end of every trading day. He might be watching a 5 minute or 15 minute time fame and using his system to find buy/sell points with the goal of making a smaller profit daily. However, the market he is trading might have stronger potential in one direction over time and that

potential needs to be seen in context to better exploit intraday price action.

i like to compare the issue of multiple time frames to listening to a piece of music. Your ear hears eVerYtHing written by the musician as one unfolding event; you hear the rhythm, harmony and melody together and that is the music. They contribute to the overall theme separately but your ear hears

the finished product as a complete event. in the markets, each individual time frame represents a certain group of traders who will eventually put price pressure into the overall market. Those traders have different goals and see the market differently over time but their force on the market needs to be understood in order to exploit the time frame with the system you choose to use. watching only one time frame when trading is similar to listening to a

piece of music but only hearing every other note and trying to make sense of what you hear. to best understand the markets potential (no matter what time frame you personally use) you need to listen to what everyone is playing.larger timeframes work against the smaller time frames for the most part. for example, look at the first chart where a solid downtrend is in play on the five minute timeframe in the

eurofx futures. an intraday trader might be looking to sell the market on a slight retracement somewhere around the 1.2760/80 level as the market finds overhead trend resistance. note that the oscillator is showing overbought.

now compare chart1 to chart2 on the 60 minute timeframe: note that the 60 minute chart shows the current price level as being a possible support zone and the oscillator has

potential to become divergent should the market stabilize and rise slightly. at the moment when the smaller timeframe is retreating to a possible sell area; the larger timeframe may be on a support zone. given the conflict between the two time frames, an intraday 5-minute time frame trader would be well advised to be cautious about a short position because the larger time frame will likely have

TRADING STRATEGIESFX


finding quality trading opportunities can be a challenge even for the most seasoned trader, but your system’s inherent probabilities can be improved when you begin

working in multiple time frames.

watching only one time frame when trading is similar to listening to a piece of music but only hearing every other note and trying to make sense of what you hear

FXTRADING STRATEGIES

traders looking to buy the market and possibly hold for a longer amount of time than an intraday trader will. additionally, the intraday short-seller will likely cover before the end of the day adding to the pool of buy orders that the market must process regardless of whether or not he has a profit—because an intraday trader will always cover at the end of day (that’s what his trade plan requires). The four-hour chart shows additional potential for a near-term bottom increasing the possibility that the short would be at a greater risk:

Bear in mind, this discussion is not an exhaustive study on the potential the eurofx has to rally from this point forward, it is intended to help the trader understand that no matter how he analyzes the market or what how sophisticated his study/approach is there is more to be learned about the entire market structure by looking at multiple time frames than by using only the time frame you intend to trade on. for the most part, my personal study has shown me that knowing

what long time frame traders might be thinking can be a tremendous help to trading on a short time frame. Many low-probability trades can be avoided or liquidated faster and high probability trades can be held longer when you see the market in a larger context.

it is important to remember a few things about trading in any market. for the most part, the market is subject to the “80/20” rule common

in most activities. simply put, 20% of the participants are producing 80% of the desired results. 80% of participants are producing 20% of the results. as an example, any professional salesperson can tell you that if there are 10 salespeople working in the office, 2 of them create 80% of the sales volume. The rest take up space.

in the markets, roughly 80% of traders are experiencing a loss at any time; regardless of what their trade plan is or what time frame they operate under. Most clearing firms will tell you that roughly 80% of traders close their accounts at a loss no matter who they are or what they use to try and exploit market price action. if you were to look directly at the trading plans or results of these losing traders you will see quite clearly that losing traders tend to operate on a time frame of one hour or less. larger traders and professional traders tend to operate on a time frame of more than one hour and in most cases a time frame of days. That means the winners (professionals and large


chart 1: 5 min. chart - EUROFX Future

chart 2: 60 min. chart - EUROFX Future

traders) are thinking about what the market might do over days or weeks

and use the hourly time frame to find their entry point. The losers tend to

be day-traders attempting to make a small gain more often and attempt to analyze random noise in the market which the professional ignores.This doesn’t mean day-trading is “wrong” or using a small time frame is “bad”. The point is that larger time frames control the market and if you intend to trade on a short time frame you need to know what the larger time frames are thinking. Otherwise, as we have seen above, your position might be in direct conflict with the actual force in the market increasing

your risk of loss.

Jason Alan Jankovsky

TRADING sTRATeGIesFX


chart 3: 4 hour chart - EUROFX Future

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We discuss how Ichimoku clouds can be used to create technical rules for trading G10 and EM deliverable currencies. First, we examine pure technical models based on both Ichimoku clouds and moving averages. Then we combine Ichimoku clouds with a mixture of moving averages and GRAM (our global risk appetite monitor) to create more complex trading rules which reduce draw-downs substantially. Finally, we create a basket using the trading rules discussed here. Our final trading basket, with GRAM, has historical annualised returns of 4.95% and an information ratio of 1.16 since 2002. Our pure technical basket, which excludes GRAM filtering, has annualised returns of 4.89% and an information ratio of 0.98.

ichimoku clouds (full name ichimoku kinko Hyo) originated in Japan in the 1930s and were published in the 1960s. They have developed a strong following amongst many investors. The clouds can help to identify areas of important price action, such as support/resistance and also general momentum of an asset.

Ichimoku cloud Trading rules

exhibit 1 shows the ichimoku cloud for aud/JPY from Bloomberg. in the appendix we give the calculations for each of the different components of the ichimoku cloud, giving both the english and Japanese names.There are several standard trading rules that can be used to generate systematic

trading signals from the ichimoku cloud. we shall use the following commonly used rule.if the tenkan (conversion) line crosses above the kijun (base) line this is a:• strong buy signal if the current close is above the cloud• moderate buy signal if the current close is within the cloud• weak buy signal if the current close is

FX technical analysis


In the Ichimoku cloudscreating an fx spot trading model using ichimoku clouds

exhibit 1. ichimoku cloud for aud/JPY

under the cloudif the tenkan (conversion) line crosses below the kijun (base) line this is a:• strong sell signal if the current close is below the cloud• moderate sell signal if the current close is within the cloud• weak sell signal if the current close is above the cloudwe assume that strong signals are worth 100% unit of leverage, moderate signals 25% and weak signals 12.5%. other variations on these rule do exist, which, for example, look at the depth of the cloud to gauge the strength of breaks and the use of other crossovers (eg. senkou span crossovers).we also compare the ichimoku trading rule with moving average based trading rules. we examine the use of 20-day and 55-day simple moving averages (20d and 55d sMa) which are two of the most common moving averages used by market practitioners. to start with, we use the standard trading rule for moving averages:• If the close is above the moving average, then buy.• If the close is below the moving average, then sell.• Later we use a variation of this when combining moving averages with

ichimoku clouds.we use as our currency universe the major g10 and eM deliverable currency crosses. our historical sample runs from 2002 to the present and we use Bloomberg tokyo close fx data. we have avoided pre-2002 periods, when most major deliverable currencies in eM were pegged as opposed to floating/managed floating. we have included transaction costs of 3.5bp bid/ask in all cases and carry.

using technical trading rules only

exhibit 2 presents the results for the

trading rules detailed above. we note that on the whole the 55d sMa has the highest annualised returns, but it also has higher draw-downs than the ichimoku cloud trading rules. for example the peak-to-trough drawdown in usd/Zar is over 50% with 55d sMa, but is around 30% using ichimoku clouds. later we discuss techniques to reduce these draw-downs further.The best performing crosses by information ratio using 55d sMa are eur/Pln and nZd/JPY. for 20d sMa and ichimoku, the best performer is usd/ils.

FX TRADER MAGAZINE July-September 2009 11

FXtechnical analysis

Exhibit 2. Trading returns with momentum

applying gram as a risk filter to technical rules

one way of improving draw-downs, which we observed can be very steep, is to use graM (our global risk appetite monitor) in tandem with our momentum trading rules. graM looks at various capital market based risk factors and aggregates them to create a final risk signal, which is either risk averse, risk neutral or risk seeking.we apply similar trading rules to those above, but:• we allow long positions in risky currencies only if graM is risk neutral or risk seeking.• we allow s h o r t p o s i t i o n s in risky c u r r e n c i e s only if graM is risk averse.• otherwise, if the technical t r a d i n g rules and graM are in disagreement we remain flat (e.g. if the m o m e n t u m rule says buy a u d / J P Y , but graM is risk averse, we would be flat).we also

compare the results with those achieved using the graM-only signal ignoring technicals in fx spot:• buy high-risk currencies (vs selling low risk) when graM is in risk-neutral or risk-seeking territory• sell high-risk currencies (vs buying low risk) when graM is in risk-averse territory.in order to use this trading rule, we need to define the relative

riskiness of each currency. we have calculated how far each trade-weighted index has moved when graM has been in risk-averse territory. we then rank currencies by their average move during risk aversion. Based on this measure, usd is the lowest-risk currency and trY is the highest (exhibit 3). clearly, slightly different methodologies could result in a shuffling of the order (for example, in many cases, we might expect


Exhibit 4. Trading returns with momentum and GRAM filter

Exhibit 3. Currency riskiness based on GRAM


JPY to be classified as lower risk than usd). we can then use the scores below to classify currency crosses. for example, if the model were trading gBP/JPY, gBP would be classified as the “high-risk” currency and JPY as the “low-risk” currency.exhibit 4 presents the results for our momentum rules combined with graM. we note that in virtually every case, draw-downs are reduced by adding the graM filter compared with the momentum-only trading rule. furthermore, we note that the draw-downs using the graM-only signal are considerably greater, but the information ratios are only slightly higher. we note that the aud & nZd vs. usd & JPY are the best performers in g10 fx space. in eM, usd/trY and usd/Zar have the highest information ratios.

combining the trading rules and applying stop loss/take profit

as a final step we combine the rules (ichimoku, 55d sMa and graM) and also apply a stop loss/take profit

for each trade. we use a slightly modified version of the standard moving average crossover trading rule as a confirmation rule for our ichimoku cloud and graM rules:• if the close is above the moving average, wait till the close turns lower and define this as “sMa bullish”• if the close is below the moving average, wait till the close turns higher and define this as “sMa bearish”the reason behind waiting until the price action reverts is to reduce the problem of whipsawing , i.e.

rapidly changing signals and repeatedly getting caught on the wrong side of the trade in range-bound markets. it makes sense to use this modification when we are using the 55d moving average as a longer-term broad confirmation signal as we are doing here when we combine it with graM and ichimoku clouds. in the appendix we look at other ideas for reducing the effect of whipsawing.Hence, our combined trading rule is as follows:• graM, the ichimoku cloud and the modified 55d sMa rule must


Exhibit 5. Combining the trading rules and applying stop loss/take profits with/without GRAM


be consistent for us to be long or short.• the ichimoku cloud also gives us the size of our investment in that cross (i.e. 100%, 25% or 12.5%).• otherwise we go flat, if the signals are conflicting.

we also include stops (at -5%) and take profits (at 10%) for each long or short position in an effort to cut the overall model draw-downs. for example, once a long position is stopped out or we take profit, we go flat and wait for a short signal

before re-investing. in addition we present results for a combined ichimoku and 55d sMa rule (with stops), without graM in exhibit 5. in the appendix, we present the same rule excluding graM, but with other commonly used parameters 20d, 100d and 200d.on a generalised level, we again note that including graM significantly reduces draw-downs on a cross by cross basis (comparing middle and right columns). in addition adding the stop loss/take profit rule also reduces draw-downs and often also

improves the information ratio (in particular for aud/usd, most other dollar bloc crosses and eM crosses comparing left and middle columns). only one of the crosses (eur/cHf) is loss making with the graM filtered ichimoku rules in exhibit 5, during our data sample.

creating trading baskets combining momentum and gram

in exhibit 6, we now create a basket using our combined trading rule (ie. ichimoku cloud & sMa with graM filtering and stops/take profits). we have selected those crosses with an information ratio greater than 0.25 (from exhibit 5). we have also used a leverage filter based on rolling monthly returns, cutting overall model leverage if monthly returns become significantly negative. creating a large basket which includes both g10 and eM considerably diversifies idiosyncratic risk. we note that the model performed very strongly during the financial turmoil of 2008. it should not be surprising given the strong trends in the market during that period which are likely to favour technical based trading models.

in exhibit 7, we have created equally weighted baskets for the best performing crosses for g10 and eM, using the combined graM, ichimoku and 55d sMa rule with stops/take profits.


exhibit 6. combined trading model – technicals with graM filtering

exhibit 7. g10 and eM baskets – technicals with graM filtering


creating trading baskets using pure technical trading rules only

in exhibit 8, we repeat the exercise, but this time creating a basket based on combined 55d sMa and ichimoku clouds ( ie. pure technical trading model ignoring gr aM). we note that the model performs sl ig htly worse than the gr aM filtered basket. However, creating the diversified basket does reduce the impact of draw-downs and the final trading model has information ratio of close to 1 since 2002. some investors may prefer to trade pure technical trading

models if they a lready have significant exposure to risk based trading models .

c onclus i on

we have f o un d that i t i s p o ss i b l e to us e ic h im o ku c l o u d b a s e d tra d ing r u l e s c om b in e d wi th m o ving avera g e s an d g r a M to cre ate m o d e l s that have strong h i stori ca l re turns . at th e s am e t im e , d raw- d owns are re du c e d by c om b in ing th e s e var i o us r u l e s .in th e f uture , we inten d to l o o k at a d d i ti ona l tra d ing r u l e s f or ic h im o ku c l o u d s , f or e x amp l e e x am in ing c l o u d d ep th an d o th er cro ss o ver s ( l i ke s en ko u sp an cro ss o ver s ) .

Exhibit 9. Combining the trading rules and applying stop loss/take profits excluding GRAM


exhibit 8. g10 and eM baskets – technical trading rules only


aPPeNdIX

Ichimoku cloud components

Below we give the formulaes for of the five lines. the cloud is displayed in exhibit 1. unlike moving averages, ichimoku clouds also use high/low data in their construction. we have used the standard parameters for each component.

tenkan line (conversion line – purple) = average of maximum high and minimum low during the past 9 periods

kijun line (base line – black line – yellow is default colour) = average of maximum high and minimum low during the past 26 periods

chikou span (lagging span – grey) = 26 period lagged closing price

senkou span a (leading span 1 – orange) = average of tenkan and kijun lagged by 26 periods

senkou span B (leading span 2 – green) = average of maximum high and minimum low during past 52 periods but lagged 26 periods

the blue area between the senkou spans is known as the cloud.

in this paper, we stick to these standard parameters.

further Technical Trading rule resultsin exhibit 9, we present the results for several trading rules combining moving averages with ichimoku clouds, but for different parameters, namely 20d, 100d and 200d.

earlier, we discussed that momentum rules can be subject to

whipsawing (ie. rapidly repeated false signals). in exhibit 10, we present historical returns for a modified moving average trading rule. essentially, we put on trades only if the close has been above the moving average for the past 5 days, otherwise we go flat. for certain crosses such as eur/usd this approach is more profitable than using a standard moving average rule (exhibit 2). However, this approach is largely loss making for eM crosses.

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Exhibit 10. Applying a 1 week delay to SMA trading rules


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J o H n B o l l i n g e re x c l u s i V e i n t e r V i e w : J o H n B o l l i n g e r a n s w e r s t o f x t r a d e r M a g a Z i n e

“don’t muck around. execute your system. and if you do, you’ll be successful.”

Bollinger Bands

“i copied the volatility formula next to a price history.and that was the key.”

tradingtecHniQues

How he workson the foreignexchange Market.

FX Technical analysis



fxtM: How did you become a trader, having started your career in cinematography ?

JB : Many of the skills that i used in cinematography, i use in trading. i specialized in complex special effects photography in high-speed photography of a very technical nature so, as i became more and more interested in the securities markets, i found that many of the analytical skills that i had developed in cinematography were in fact useful in the markets.

fxtM: which ones of those skills were actually key to your development as a trader ?

JB : in order to be a good special effects cinematographer you have

to be able to master a very large quantity of technical material, organize that material and bring it to bare at a given point in time, and it’s much the same way that traders prepare for trading . they master a very large value of knowledge, then they have to organize that body of knowledge into a useful trading discipline and then execute that trading discipline in real time, and it’s very much the same process in cinematography.

fxtM: is trading now your main activity and does it take a lot of your time? what kind of a trader are you?

JB: trading is in fact my main activity and, as years have gone by, i tend to devote more time to

trading rather than less time. i ’m not a very short term trader but, i do trade for what i consider to be very short-term trades, usually for 1, 2, 3 or 4 days, up until more intermediate to long-term positions. occasionally, when i find a very specific opportunity, i will trade it on an intra-day basis, but i don’t do that very much.

fxtM: would you define yourself as a swing trader?

JB: You know when i came into this business, they called people like me “swing traders”. But the definition was different. then, a swing trader was somebody who looked to exploit moves that ran in a stock for 20 or 30 or 40%, and would last from a week or

FXTechnical analysis

John Bollinger has been an avid researcher of financial markets for many years. He is the well known creator of the Bollinger Bands, adaptive trading bands based on volatility, which are integrated into most of the analytical software and charting platforms currently in use today.

John strongly believes in discipline and simple trading techniques. He insists that stops are incredibly important and hope is something that no trader should have.

On the Forex market, he recommends 4 simple trading methodologies and considers convergences between Bollinger Bands and traditional technical analysis tools to be a very useful and successful approach.

In a very positive and straightforward way, John answered FX Trader Magazine questions and explains how he became a trader, how he happened to create the Bollinger Bands, how he prefers to work on the foreign exchange market, and what are the keys to becoming a successful trader.

FX Technical

two, to 3 to 6 months, or may be even more. our primary type of chart was the daily chart, and we also used weekly charts. But as the years have passed, the definition changed. today, a swing trader holds positions from a couple of hours to a couple of days. in the old days, commissions were very high, so that sort of very short term trading couldn’t be done because you had first to overcome the cost of doing the trade. so the combination of commissions being very high, and the spread between the bid and ask being very wide, made very short term trading difficult.

fxtM: You’ve been running Bollinger capital management for many years. which instruments do you trade ? are you mainly an equities trader, or do you also trade forex or futures ?

JB : i started out as an options trader and then i learned the futures business. then, gradually, i became an equity trader, and more recently, i have shifted my focus back towards the futures market, and of course i have a very strong interest in forex.

fxtM: what do you think about forex as a market ?

JB : i was tempted to start exploring the forex market because i saw many reports that said that the sort of technical tools and the sort of techniques that i

used worked very well in forex. and i had had experience in my prior operations that suggested

that some tools and techniques did indeed work better in some markets. for instance, many traders are very anxious to trade the very largest contracts and the most liquid markets, but as we study technical indicators, we

find that technical analysis actually works better in the smaller markets. Your win/loss ratios improve and

your Profit/loss ratios improve in the smaller markets. The tools simply work better in the less efficient markets.

fxtM: does this mean that when you have less people looking at the market, the market is more prompt to follow technical analysis standards and when you have more people using similar tecniques in liquid markets, this creates noise in the market ? How do you explain this ?


the bands are very useful in identifying whether the market is trending or not, and identifying what types of trading styles are appropriate in any given market

JB : that’s correct. let’s take for example a simple market which trades 100 different stocks. ever ybody trades those stocks for years and then you introduce options on those stocks. some of the players who were in that market start trading the options as well . But the introduction of options brings in a whole new crew of players who start trading options, and because the options business involves the stocks, they start trading the stocks too.

so the volume increases, the liquidity increases, but there is a lot more intention being played,

and the market is becoming more efficient. it’s more of a battle.

then, you introduce and index futures. and some of the equities players and options players start trading the index future because it helps them in their operations. and another whole new group of players will start trading the options and the equities themselves.

so now you have 3 times as many players as you had orig inally. You have the same market, the same 100 stocks, but the market is much more efficient. there is

a lot more activity going on, a lot more noise on the market , a lot of arbitrage going on. so the entire character of the market changes.

fxtM: when you trade, which techniques and instruments do you use ? Presumably the main one is the Bollinger Bands.

JB : of course i use my own work: Bollinger Bands and the related 2 indicators : %B and Bandwith, which are derived from Bollinger Bands . those are my primar y tools. interestingly enough, when i focused primarily on equities, i used to do a lot of


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volume ana lysis , but on the foreig n exchang e market , volume data i s ver y hard to come by. s o i had to g ive up a l l my volume indicators . and that was a hug e pie ce of my activit y in the e quities markets . when i starte d looking at foreig n exchang e, i concentrate d more on some of the c lass ica l tools , l ike pivot points , or price patterns and where the y would occur in re lation to the bands . and i starte d concentrating much more than i had before on the information conta ine d in the various price patterns .

i found it to be a ver y usef ul and ver y successf ul approach . on the forex market i found that c lass ica l te chnica l ana lys is tools combine d with Bol l ing er Bands ma ke f a n t a s t i c opportunities .

fx tM : s o you se em to endorse the idea of converg ences in te chnica l ana lys is . if you f ind 2 or 3 s ig na ls at the same time, does that convince you to put up a trade ?

JB : Yes , that ’s corre ct . if you g et 2 or 3 bits of e vidence, let ’s say, when the market i s coming down prett y hard and you ta g the lower band, so you think “this i s a prett y g ood place to

look for the possibi l i t y of a re versa l”. then you g et a price pivot at the lower band and you

ra l ly back up toward the upper band and then sel l back off a g a in . then you ma ke another price pivot , which comes inside

the lower band. s o you’re combining 3 different thing s here . You’ve g ot your def inition of Hig h and low that you derive from the bands . You’ve g ot a w bottom being bui lt by price . and you’ve g ot some price pivots and some price patterns that lead you into the trade. s o you have se vera l pie ces of information that help you into a successf ul trade.

fxtM : You mentioned that you started as an options trader. at the time, volatility and standard

deviation were mostly used in statistics, not in trading . so did this experience influence you when you created the Bollinger bands ?

JB : Yes. absolutely. You know any kind of trading bands provide a definition of High and low, and then you use that definition in your trading process. when we used fixed width bands in the old days, you always had to keep on adjusting the bands and setting the bandwidth to fit the current price structure, and what happens when you

do that is you paint the picture that you want to see, not the picture that is really there. so if you’re bullish you draw

the bands so that you get a bullish config uration, if you’re bearish, you draw them so that you get a besarish config uration, and i

recognized that. i knew there had to be some mechanism that would set the bands automatically and would adjust over time.in those days we believed that volatility was a fixed quantity and it wasn’t variable. But people were beginning to realize that volatility was in fact variable. as i was calculating the volatility for an options position - tr ying to do an arbitra g e bet we en


on the forex market i found that classical technical analysis tools combined with Bollinger Bands make fantastic opportunities

a convertible bond and a warrant, i was calculating the volatilities to tr y to fig ure out if one was cheap and one was rich - i copied the volatility formula down a spreadsheet next to a price histor y. and i saw that the volatility was changing a lot as time went by. that was the key ! i had been working on tr ying to fig ure out a way to set the bandwidth of trading bands automatically, and i looked at the volatility and said : “ wow, may be this can do it !”. then it was just a matter of time. i tried out a bunch of volatility formulas, a bunch of calculations, and after a few months i came up with the Bollinger Bands, and the formula hasn’t changed in all these years.

fxtM : Have you ever regretted not to have patented the bands ?

JB : no i ’ve never had regrets whatsoever. the bands have been ver y useful in my own trading process, but they are also the greatest calling cards that one could ever want. ever ywhere i go, traders are interested in the bands. i travel the world and the ver y wide adoption of the bands has provided me with many wonderful opportunities. so i don’t regret making the bands open source at all .

fxtM: in one of your conferences, you talked about the misconception about the bands: some traders only sell at the upper band and buy at the lower band. You also talked about “walking up the bands” and explained how Bollinger Bands can be a fantastic

trend indicator. so how many people really understand the bands and are capable of using them in a proper technical way?

JB. Very few people understand this. and it’s a shame. People think that they should sell at the upper band and buy at the lower band, but there is so much more to the process than that. in a trending market, you can expect the band prices to behave in a certain manner, and when that behaviour starts to change, you have very good indication that the end of that trend is at hand. it might not be an immediate reversal ; you may transition to a sideways market, but the bands are very useful in identifying whether the market is trending or not and identifying

what types of trading styles are appropriate in any given market.

fxtM: You created BBforex.com, a website that gives education to the forex market on the use of the Bollinger Bands. what is the feedback of the forex market on the

Bollinger Bands?JB: we have

very good feedback. i built this site for myself. it was the tool that i wanted to use to trade forex. i have built the tools that i need for my own process. so when i was trading stocks, i

built equitytrader.com. when i got really involved in Bollinger Bands, i built the site BollingeronBollingerBands.com, which is totally devoted to Bollinger Bands, and so forth. so when i got more and more interested in foreign exchange, i realized that the sort of tools that i wanted to use weren’t available, so i built the site for myself.

fxtM. on BBforex.com, you teach 4 trading methodologies: Volatility Breakout, trend following, reversals and confirmed Breakout. do all 4 techniques work on the forex market? or is there one that you would recommend more to forex traders?

JB. i think people should



the best advice anyone has given me:pick a system, any system,

and use it !

http://equitytrader.com/

http://bollingeronbollingerbands.com/

http://bbforex.com/

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c h o o s e th e m e th o d that m o st su i ts th em . i re a l l y l i ke th i s s imp l e p attern re c o g n i ti on s or t o f tra d e , f or e x amp l e us ing th e b an d s a s a g u i d e to h i g hs an d l ow s , or p i c king re ver s a l s in a s trong up tren d . th e n i c e th ing a b o ut that s or t o f s tr u c ture i s that , usua l l y, y o u can have a ver y g o o d i d e a o f wh ere to p la c e y o ur stop , b e caus e y o u kn ow ri g ht away that i f i t g o e s b e y on d th e pri or tro ug h , that y o u were wrong in y o ur ana l y s i s , th e r i s k / re ward rati o f or th i s s or t o f tra d e s i s usua l l y pre tt y g o o d .

f x t M . d o y o u b uy bre a ko uts , or d o y o u pre f er to wa i t f or re tra c em ents ?

J B . i ’m ver y f on d o f tra d ing th e s qu e e z e , b ut i pre f er to b uy bre a ko uts on l y wh en th e b an d s are ver y t i g ht to g e th er.

f x t M . s o y o u’re wa i t ing f or a vo lati l i t y bre a ko ut .

J B . c orre c t . i d on’t l i ke ord inar y bre a ko uts wh en th e b an d s’ wi dth i s n orma l or e ven

wi d er. But vo lati l i t y bre a ko uts work qu i te we l l on th e f ore x marke t .

f x t M : w hat wo u l d b e y o ur

a dvi c e to a n e w tra d er ? w hat i s th e ke y, in y o ur op in i on , to b e c om ing a su c c e ss f u l tra d er ?

J B . w h en i s tar te d in th i s b us in e ss , i tr i e d to l e arn i t f or a y e ar or t wo an d that wa s ver y hard . in th o s e day s th ere wa s n o intern e t , s o y o u c o u l d n’t

ma ke re s e arc h e a s i l y. But i wa s ver y lu c ky. i m e t a p ar tn er wh o wa s a f uture s an d op ti ons tra d er in a tra d ing f i rm , an d i

apprenti c e d to h im f or a y e ar, f or f re e . i kep t h i s c har ts f or him, in rea l-time, wi th a p en an d a p i e c e o f p ap er, d o ing p o int an d f i g ure c har ts . an d h e taug ht m e a trem en d o us am o unt o f b o th what to d o an d what n o t to d o. th i s wa s th e b e st th ing wh i c h happ en e d to m e . But h e taug ht m e on e imp or tant th ing . we were ta l king a b o ut s y stems an d what worke d in th e marke t – th i s wa s 1 9 8 2 – an d th e g re at b u l l marke t wa s just g e tt ing un d er way, an d i l o o ke d at h im an d i s a i d : “ we l l , i s th i s

re a l l y g o ing to b e a g i ant b u l l marke t ? ” an d a l l th e e vi d en c e wa s th ere that i t wa s g o ing to b e , an d turn e d o ut to b e on e o f th e g re ate st b u l l marke t in a l l t im e . “ s o y o u s h o u l d re a l l y just g o out e ver y day and buy the ne w h i g h e st l i s t an d st i c k wi th i t ! ”.


tr a d i n g u l t i ma t e l y i s a v e r y s i m p l e b u s i n e s s . if y o u c o m p l i c a t e i t t o o unn e c e s s a r i l y, i t w o n’t w o r k .

and he said “Yes, that would work.” But most important, he said: “pick a system, any system, and use it!” and that was the best advice anyone had given to me. Because people forget to execute the plan, they read, they study, they learn they go to seminars, and they sit down to start trading and they have some mediocre results, they get discouraged and they stop. that’s the wrong thing to do.

People stray, they adjust the parameters, the style, they muck around with the plan that they have agreed in their mind that they were going to execute, and they don’t follow my friend’s advice : he said “pick a system, any system, and use it!”. don’t muck around and execute this system. and if you do, you’ll be successful.

of course you have to pick a good system that works and you have to have a good plan , etc. (i ’m not trying to make it too simple) but once you’re there, you have to go to work every day and you need to execute the system. You need discipline to march forward. and that’s the difference between successful traders and unsuccessful traders: successful traders go out there and execute their system.

fxtM: talking about trading

psycholog y, what comes first in your opinion: do you first need to have the right psycholog y, or do you first need to have the right system? in other words, do

you get the right psycholog y if you get the right system? or do you get the right system if you implement it in the right way ?

JB. it’s all about discipline. one day i got in a discussion about stops with my best friend from many years and we got on the idea of stops. and he absolutely wouldn’t talk about it. it was just as innate to him as breathing. if the trade didn’t work, you killed it! that was another great lesson: “stops are incredibly important and hope is something that no trader should have.”

fxtM. what’s your opinion about the internet ? do many people contact you? is it something positive for you?

JB. i love it! i was a very early adopter of the internet. when i started trading it didn’t exist. when it became available i became interested immediately, and i try to stay up with the latest happenings. this instant communication across the world is just fantastic. it has changed technical analysis. it has changed trading and everything else. But change is inevitable and if we want to be successful traders we have to adapt and adjust.

fxtM. after 20 years, are you still researching new techniques, new patterns, and trying to improve the use of the Bollinger Bands ?

JB. Yes. But i must say that my actual trading techniques

are remarkably simple. over the years, i have come to understand that, even though we have the best tools, the best computers, the best graphics and the best data, that trading ultimately is a very simple business. if you complicate it too unnecessarily, it won’t work.

Who is he?



John Bollinger is the president and founder of Bollinger Capital Manage-ment.

He is a Chartered Financial Analyst (CFA) and a Chartered Market Tech-nician (CMT).

He first became publicly known for his analysis and commentary on Financial News Network and CNBC in the US.

He is an ongoing researcher of financial markets and trading tech-niques. He developed a number of widely used investment tools and analytical techniques, from which the Bollinger Bands and related trad-ing tools, made him popular all over the world.

His book, Bollinger on Bollinger Bands has been translated into seven languages and has helped countless traders worldwide.

John Bollinger is also the founder of several web sites for investors inves-tors including: www.BBforex.com, www.bollingerbands.com, www.bollingeronbollingerbands.com, www.EquityTrader.com, www.FundsTrader.com, www.GoupPower.com, www.MarketTechnician.com, www.PatternPower.com

http://www.bbforex.com/

http://www.bollingerbands.com/

http://www.bollingeronbollingerbands.com/

http://www.equitytrader.com/

http://www.fundstrader.com/

http://www.gouppower.com/

http://www.markettechnician.com/

http://www.patternpower.com/

http://www.investix.co.uk/

More than two thirds of 2009 are now behind us. a quick glance at the major moves of various asset classes in these eight months can help us understanding where there were some important macro trends (and where these have been rather absent). the prices of assets that are generally associated with investors risk appetite have risen, no doubt: gold, nikkei, s&P 500 rose between 14 and 19%, major indicators of credit (u.s. investment grade and xover among the others) have tightened in the order of 40-45%, oil rose 56%, the u.s. swap 10 years is higher by 40%. despite volatility and recent concerns the chinese stock market (a-share) is +63% from January.

this helps us putting into perspective the very strong (and certainly unexpected after the first few weeks of the year) rebound of ‘risky assets’ we have witnessed and continue to see every day. in the fx world a trend that has unquestionably followed this

improvement of macro conditions (real and / or perceived), albeit with a less spectacular extension (consistent with the lesser volatility typical of the fx market), has been the dollar weakness. this trend is particularly remarkable against ‘high risk’ currencies (i.e. emerging and other peripheral currencies), less against the majors. in fact the dollar

has lost only 5% year to date against euro, and it is stronger against the Yen. Much more significant losses are suffered against other currencies: nzd/usd +22%, usd/Zar -21%, usd/sek -12% are good examples. and all this counting from Jan 1st. observing the change from the first week of March (stock market lows), the trend is far more significant.

“ Sometimes, it’s better to be lucky than good”Old proverb

..and the green shoots Blossomed

chart 1. The overwhelming rally of the chinese stock market

FXMACROECONOMIcs


FX MACROECONOMIcs

Is carr y-trade back ?

Higher risk and higher yielding currencies have undoubtedly performed great this year in what could be considered a quick and interesting return of carry trade. still it should be noted that the two currencies traditionally shorted to invest in currencies with higher yield, i.e. the swiss franc and the Japanese Yen, have not been showing noticeable weakness as they were in the golden years of the carry-trade, 2005, 2006 and most of 2007. the Jpy, as we will analyze in more detail in the next chapter, is experiencing a period of relative strength. the chf even manages to resist the clear aim of its own central bank, the snB : having a weaker currency. swiss franc is trading not far from its year highs

(around 1.5000) against the euro, certainly not one of the weakest currencies in 2009.to believe that the strengthening of currencies with high risk / high yield is in itself a symptom

good enoug h to declare that a massive return of the carr y-trade is taking place may be premature, or at least the result of an incomplete analysis . to estimate with any rel iabil ity the existence and size of carr y-trade positions is ver y complex . when this strateg y was widely used before the crises some studies were putting the total size of the explicit carr y-trade around approximately 1 tri l l ion dollars, but no hard data to confirm these estimates were available. strong speculative short Yen positions reported in iMM data and hig h debt position held by foreign banks in tokyo money market have been a g ood indicator of important carr y positions. Both these indicators are now stable at low levels , well away from those seen in the years before the financial crisis .

chart 3. The unrelenting drop of usd/chf. a switch between funding currencies?

chart 2. dollar weakness vs. emerging Market currencies: usd/Zar.


therefore an exact replay, after less than two years, of popular carry-trade strategies based on debt in Jpy (and to a lesser extent in chf ) seems unlikely.

could the dollar have become the favourite substitute in the role of funding currency? weakness of the greenback, data on iMM speculative short positions and short-term rates down to the minimum levels that the Yen have been experiencing for years, all these factors seem to give an affirmative answer to this question. as mentioned, to find evidence on the existence and size of carry-trade strategies is quite complicated if not impossible. let alone to isolate a ‘funding factor’ in the dollar, given its role as major reserve currency, global mean of exchange and accounting. this hypothesis remains, therefore, at the level of conjecture based on inductive logic. in any case this possibility, an

additional risk facing the future of the dollar, cannot be dismissed were the popularity of carry as a strategy to rally back to 2006 levels. at the same time, however, shorting the dollar to fund carry trades will grow the chances of violent rebounds in its value any time a period of risk aversion resurface.

yen into the limelight

after its violent movements that characterized 2008 and early 2009 against usd and, in an even more emphatic way, other widely traded crosses (vs. eur, gbp, aud, etc.), the Yen has experienced a few months of torpor with volatility falling, tighter ranges and general diminished interest from the market alongside losing its risk-barometer function to which we had become accustomed in recent years: since March, the s&P500 rallied from 666 to 1070 (+60%), while eur/Jpy’s move up

has been quite contained from 125 to 134, a change which could easily be linked purely to wider euro strength.

recently, however, the Japanese currency has begun to strengthen, a move easier to point out against the dollar and the Pound. Market attention is quickly coming back. the main event able to bring back traders focus has surely been the awaited elections for the lower house in late august: a clear victory, even beyond expectations, for the main opposition party dPJ (democratic Party of Japan) with 308 seats out of 480. after more than fifty years in charge, interrupted only by a brief period of ten months in 1993-94 with the dPJ forming a government in a coalition with other smaller parties (governments Hosokawa and Hata), the ldP (liberal democratic Party) had to abandon power after a tough electoral defeat.

the new Hatoyama government has a very detailed manifesto that looks like the exact opposite of the policy pursued by the ldP for decades: their main effort seems to be to stimulate domestic demand where longstanding ldP policy had the effect to subordinate interests of consumers to the ones of big corporations fitting well in an export-driven machine as Japan aimed to be. the capacity and the real will of the new government to pursue these policies to support domestic demand and to finance them (allegedly reducing bureaucratic waste) can hardly be taken for granted.

FXMACROECONOMIcs


in any case, the potential for a historic turning point is undeniable and should be carefully monitored: the disbelief about Japanese politics being able to bring about positive changes has solid foundations, especially after the disappointment coming from the koizumi reforms failure a few years ago but, the push for change in the political class may well be much stronger now that china’s overtaking of Japan as the second world economic power is imminent.

if such a different economic policy will have an even partial implementation, the shift from an economic model based on exports to one based on domestic demand should have a future positive impact on Yen. More specifically we would like to point out the following factors able, in the new political situation, to lend support to the Japanese currency.

• The new finance minister (already covering such a role in the earlier brief dPJ government over fifteen years ago), Hirohisa fujii, in recent statements seemed more tolerant than his predecessors towards the possibility of Yen strengthening. “i wouldn’t describe the rate at which Jpy has been appreciating as dramatic. in fact, it’s been quite gradual.” “i think that intervention should be reserved for very abnormal situations.” “generally speaking, a strong currency is a good thing for the country concerned, although it is definitely negative for its trade balance in the short term.

when all is said and done, Japan is better off with a strong currency”. all these comments seem to indicate a reluctance to intervene at least any time soon at these levels and with this pace of appreciation.

• In 2006 and 2007, the dJ has underlined its support to BoJ independence while the ldP was resolutely opposing the exit from quantitative easing in an evident push to influence central bank decisions. if this respect for independence will be confirmed it is possible that the BoJ could raise rates in the future sooner than it would under an ldP government, giving support to the Jpy.

• Yukio Hatoyama, the new prime minister, has stated in a recent article his “new path for Japan”, bringing forward the idea of a new common currency in asia. it is a long-term project (at least ten years) but certainly to be kept on radar screens, especially for the impact it may have in the global debate on reserves diversification away from dollars into other currencies. the Yen would certainly play an important role in a new common currency in asia.

Beyond the impact of recent political events we want to point out the possibility that two major forces which in the recent past have fought (and often reversed) any upward tendency in Yen strength may be on a weakening path.

as discussed in the previous chapter

the use of Jpy as ‘funding currency’ seems to have declined significantly. even considering possible a revival of carry-trading strategies to pre-crises levels it seems likely that such a use of the Jpy will not be as widespread. Moreover, if we place ourselves in a longer timeframe observation point, it is interesting to analyze the clear demographic trends developing (obviously this has been true for several years and will continue to be true for years). the Japanese population has long been in the process of aging typical of many western countries, with dynamics even more powerful and extreme than in europe, where immigration can lessen such effects. the investment profile of an aging population moves generally from riskier strategies to more conservative ones: in Japan this would likely mean less foreign equity and more domestic bonds, reversing a trend of diversification and search for yield which had been a significant force in Yen weakening during this decade. on the other end if the dPJ were able to successfully implement policies in order to stimulate domestic demand and to redistribute wealth from large corporations to consumers, the added welfare for the middle class, bringing new enthusiasm for diversification and tolerance for risk, might be sufficient to offset the impact of more conservative investment policies of an aging population.

Alessandro Balsotti

FX MACROECONOMIcs


FXTRADING SYSTEMS

in the previous two articles in the series, we discussed the need to identify a robust edge and that it must be easily explained, with a sound rationale and that it needn’t be a significant edge, to produce incredibly significant and consistent returns. Just as a casino’s edge is very small, when exploited many, many times, the net result is incredibly profitable.

we then discussed the need to have good, clean historic data, with which to test ideas, as inaccurate data with gaps or spikes, could easily lead to misleading or wrong results.

in this article we build on those foundations and explore the development of some ideas, from conception, through to creating trading rules, testing them and determining whether they give us a robust edge.

suBJecTIVe aNalysIs aNd hIgh success raTe TechNIques

when i first became a trader, it never ceased to amaze me how subjective the vast majority of analysis was. The number of ideas that are in common use, many of which can be proven to be flawed, or cannot be objectively tested, upon which millions is risked daily, is nothing short of astounding.

read almost any technical analysis on the market, easily

accessible via a quick search of the web and one will find countless examples such as, ‘the oscillator is overbought and therefore the market is a good sell here’, or ‘the market has breached the 10 day or 200 day moving average’, or ‘the price is at an extreme level, testing the lower Bollinger Band’.

The reason that most of these views continue to be followed is summed up beautifully by the legendary william eckhardt, of the famous turtle trading experiment,

‘Since most small to moderate profits tend to vanish, the market teaches you to cash them in before they get away. Since the market spends more time in consolidations than in trends, it teaches you to buy dips and sell rallies. Since the market trades through the same prices again and again and seems, if only you wait long enough to return to prices it has visited before, it teaches you to hold

on to bad trades. The market likes to lull you into false security of high success rate techniques, which often lose disastrously in the long run. The general idea is that what works most of the time is nearly the opposite of what works in the long run.’

the amount of books which also teach these ‘high success rate techniques, which often lose disastrously in the long run’ is equally astounding. let us take one of literally countless possible examples from one of the better known trading strategy platforms of a Bollinger Band strategy:


Building robust fx trading systems identifying an edge

‘To succeed as a trader, it is absolutely necessary to have an edge. You can’t win without an edge… incidentally, if you don’t know what your edge is, you don’t have one.’

Jack schwager

input informationName Type default descriptionBollingerPrice numeric close a bar price or other value

used to calculate the venter-line average.

testPricelBand numeric close triggers placement of stop order at lowerBand when this price crosses over lowerBand.

lenght numeric 10 number of bars used to calculate the Bollinger band.

numdevsup numeric 2 number of standart deviations for the Bollinger Band calculation (enter a positive number; the strategy will calculate the lower band).

usagelong entry based on the low price crossing above the Bollinger Band.

descriptionBollinger Bands are generally placed two standart deviations above and below the market. Prices within the standart deviation are said to be &rsquor;normal’ prices. whenever the price moves below the lower band, the strategy generates a buy stop order for the next bar when the low price of the current bar has crossed back above the lower band. The stop value is the level of the lower Bollinger band.

you can change the number of bars and standart deviation used to calculate the Bollinger band.

‘Whenever the price moves below the lower band, this strategy generates a buy stop order for the next bar when the low price of the current bar has crossed back above the lower band.’

This is a good example of a ‘high success rate technique’, which can often, ‘lose disastrously in the long run’. if we applied both the long, and equivalent short, rule to audJPY over the last 10 years, we can see that it was indeed a ‘high success rate technique’, which then lost disastrously from June ’08-June ’09, as shown by the chart below and the equity curve in the sub graph.

TRADING SYSTEMSFX


FXTRADING SYSTEMS

However, most people trading such a technique may well believe that they were just ‘unlucky’, rather than appreciating the statistical certainty that it was only a matter of when, and not if, the strateg y would ‘lose disastrously in the long run’.

another one of the mistakes that one sees time and time again in testing strategies is optimising the markets and parameters used. while back testing , one will find many markets where a given strateg y has performed well and it’s therefore a trivial exercise to construct a successful back tested simulation, of various markets and strategies that have performed well in the past.

Victor sperandeo underlines the same point in his book, ‘trader Vic on commodities’,

‘Any system or method based on optimization will fail in the long run. This is because markets change and evolve, they do not remain constant. So if you structure a system based solely on the past, it cannot survive the future.’

as highlighted in the previous articles, any trading rule will have periods and markets where it is profitable, even buying on a full moon and selling on the following full moon, will doubtless work in some markets, over some time periods. suffice to say, that does not make it a robust strateg y.

there are countless other subjective strategies which have huge followings and again are usually high success rate techniques, which therefore appear to be profitable but are possibly flawed in the long run. Many of these enjoy the benefit that they can never be disproved, lacking objective rules with which to test the theories, such as the infamous elliot wave or tom deMark studies. though many have tried to write rules for them, i have yet to see a successful and robust translation into an objective and profitable trading strateg y, though i would be delighted to do so.

roBusT sTraTegIes

so, what do we mean by a ‘robust’ strateg y ? the foundations for a robust strateg y are in having an edge and knowing what that edge is, put ver y well by Jack schwager of ‘Market wizards’ fame.

‘ To succeed as a trader, it is absolutely necessary to have an edge. You can’t win without an edge, even with the world’s greatest discipline and money management skills. If you don’t have an edge, all that money management and discipline will do for you is to guarantee that you will gradually bleed to death. Incidentally, if you don’t know what your edge is, you don’t have one.’ an edge starts with a sound idea and then knowing you have an edge can only come from rigorous testing (as opposed to optimisation) of that idea , so let us start with the idea that, ‘in the longer term, markets trend’ and as long as markets are driven by people, fear and greed will always play a strong role and markets will therefore continue to trend.

we then need to test that idea and therefore need to develop some trading rules. this could be using a one, two or even three moving average cross over system, a channel break out, where the market makes a new ‘n day’ high or low, or even breaking outside of a Bollinger Band – the opposite to the strateg y shown above.

the channel Break out system is one that has gained a great deal of press over the years, largely thanks to it being the basis for the famous turtle experiment by william eckhardt and richard dennis. it has certainly stood the test of time and there are vast quantities of research on the system, as well as software programs, designed specifically to develop such a system, such as tradingBlox™, though it can be done in almost any software package, or even excel.


so why has the channel Break out (cBo) system stood the test of time and resulted in so many successful systematic funds, when other trend following systems, such as a Moving average crossover system, have not?

let’s analyze the results side by side. i started by taking 20 years of fx data for aud, cad, cHf, eur, gBP, JPY against the us dollar and then constructing all 21 possible crosses of those; audJPY, eurgBP, eurcHf etc., as described in the previous article. i also did this for intraday data, which was a considerably more demanding exercise, but am using daily data for the purposes of this analysis.

i broke the data down into two periods, 1993-2003 and 2003-2009, simply because 2003 was a convenient overlap between various data sets.

let’s start by defining the two systems:

chaNNel Break ouT sysTem (cBo)

Buying or selling on a new ‘x’ day high, or low, and closing the position out on a new ‘y’ day low or high. for example, if the market made a new 80 day high, we’d enter a long positions and if it then made a new 30 day low we’d exit that position, and vice versa for a short trade, as per the example below.

Two moVINg aVerage cross-oVer sysTem (maX)

we plot two moving averages on a chart, as per the example and buy when the shorter (fast) moving average crosses above the longer (slower) moving average:

of course we could also trade the inverse of those two systems, selling , instead of buying on a new high, or selling when the shorter moving average crossed above the longer moving average, treating them as counter trending systems, so those tests were run as well.

we ran them in tradestation 2000i, as that’s a product many will be familiar with and into which one can easily import ascii data files, but we could have run it in many other software packages such as excel, Mathcad or Mathematica etc.

an exhaustive test of every cBo system and Max system was run on each of the 21 currency pairs, over the 20 years of data, for every combination of values between 5 and 200, in increments of 5 i.e. 40x40 = 1,600 tests.

we have approximately 20yrs x 252 trading days x 21 currency pairs of daily data = 105,840 days of data. Multiply each day by the 1,600 tests, gives us more than 169 million potential trades, which is statistically a fairly significant sample.

incidentally, this is another major mistake often made, which one see in forums all of the time; people having claimed to have found the holy grail because they found a system which performed well over the last three months on a certain instrument. this is clearly of no statistical significance and therefore such a small sample will often be extremely misleading.

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aNalysINg The resulTs

after taking all of the results for each currency pair and converting them into us dollars (as usdJPY produces results in JPY, usdcHf produces results in cHf etc.) we can create a 3d chart to analyze the results (using rina financial’s ‘3d smart View’).

The results of the two tests are below:

for ease of viewing only the trending half of the results are shown and what is striking is that most cBo parameters are profitable, whereas the Max system has a distinct peak, surrounded by many losing parameters.

if the results were always stable, around that same peak, then perhaps we’d have a robust Max system too, so now let’s look at how the two systems performed from 2003-2009:


Channel Break Out 1993-2003

Moving Average Cross Over 1993-2003

Channel Break Out 2003-2009

Moving Average Crossover 2003-2009

again we see the cBo system having the majority of parameters being profitable but this time the profitable parameters for the Max system have completely shifted to the right and the best parameters, which looked robust for the test from 1993-2003 became losing parameters in the following years.

if we look closer at the cBo system, we also see that the greater the ‘cBo entry’ value, the more profitable the results. going back to our initial premise, that for any system to be truly robust, it must be easily explained and have a sound rationale, this intuitively makes sense. The fact that a market has made a new 100 day high, is much more significant than if it’s made a new 10 day high and this is born out by the result.

also we can see that in both cBo tests that a shorter exit signal is more robust and profitable in almost all cases, with a distinct high in the 0 to 30 day region. again this is intuitively correct, as it allows profits to run, but cuts losses:

if the market made a new 100 day high and we entered a long position, with an exit at a new 15 day low, it’s going to exit the trade relatively quickly if it went against us, but it will have the ability to re-enter the long position, should the market then continue to rally and make a new high.

so let’s now look at the cBo results a little closer. william eckhardt in his interview in Jack schwager’s ‘Market wizards’ told us:‘The general idea is that what works most of the time is nearly

the opposite of what works in the long run.’

above is a 3d plot of the percentage of trades that were profitable with the cBo system, using the 2003-2009 results for illustrative purposes.

Here we can see that the majority of trades are losing trades – in fact, at best, only 30-40% of the trades are profitable and this is again similar for the previous 10 years of data.

we can also look at the ‘Profit factor’, which we touched on in the first article of the series. The Profit factor is the gross Profits of all winning trades divided by the gross losses of all the losing trades. for example, if all the winning trades made $1.1mio and all of the losing trades lost $1mio, we would have a Profit factor (Pf) of 1.1/1 = 1.1again using the 2003-2009 results, we can see that although the

system produces robust results, the edge is ‘only’ in the range 1.1 to 1.2, at best. if we recall the casino comparison though, a casino’s edge, when a player bets on red, for a roulette wheel with two zeros, is 20/18 = 1.1111 (where the casino wins on any black (18 slots), plus the zeros (2 slots).

By contrast, if we look at the Max system for the two periods, we see much ‘better’ results in terms of both profitability and Profit factor, with the Profit factor exceeding 2.5 for some results in the 2003-2009 test.

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However, remember that had we have chosen what looked to be the most robust results and started trading in 2003, those same parameters would have actually lost money in the following years. as Victor sperandeo observed above,

‘Any system or method based on optimization will fail in the long run. This is because markets change and evolve, they do not remain constant. So if you structure a system based solely on the past, it cannot survive the future.’

coNclusIoN

intuitively, the results of this analysis are logical and rational, as there is very little importance, psychologically, or otherwise, that two arbitrary moving averages have crossed, no matter how good the results may look for a given currency pair, over a given time period. This is true of an infinite number of systems, as almost any system can be show to profitable over a given time period on certain markets.

This fuels the belief that systematic trading doesn’t work consistently and that systems work for short periods and then stop working. That is absolutely true in the vast majority of cases, but there are clearly a number of ideas, as we have seen, which are robust, as Jim simons (renaissance technologies), Monroe trout and toby crabel would all certainly agree with and to which their returns stand as irrefutable testament.

when testing the cBo strategy, we have confirmed our initial theory that, ‘in the longer term, markets trend’. for a robust application of that idea one would not try to pick the ‘best’ results from the simulations, but simply to apply some robust rules and sound money management principles.

That the market has made a new high or low and particularly a new long term high or low is important, and will likely always remain important, both psychologically and in terms of being the very definition of a trend, that the market is making higher highs.

Therefore, next time you hear someone talk about how important it is that a market has crossed a certain moving average, that the elliott wave is about to make an ‘abc’ correction, or a tom deMark reversal has been made, ask whether they’ve done the maths, and if they haven’t, or have only done so with small samples, on specific markets, with limited time frames, or have optimised the results, then probably best to just smile politely, say many thanks and ask whether the market has also made a significant new high or low.

Caspar Marney


MAX System 1993-2003

MAX System 2003-2009

Jw: How long have you traded foreign exchange and what first attracted you to this industry? tell us about your career evolution until you got to Pareto

HP: since 1985. right out of gymnasium in 1982 i had been hired as an economic trainee at a large danish shipping and oil company. Having done the company rounds as part of my training i applied for a job in the finance department which was always my real interest and ended up at the currency desk. i enjoyed it so much that i never turned back. The main attraction was the markets, trying to understand what was going on, identifying patterns of behavior and looking for arbitrage

opportunities, many of which were much more prevalent back then due to regulatory constraints.

working in a shipping company definitely helped understand the longer term perspective of the market where like for shipping markets what goes up, at some point tends to come down. i also liked the instinctive nature of the currency markets, as it was at the time already a global market place. deep fundamental analysis often mattered less than they did in say equity analysis and to watch and learn the power of sentiment. in addition i also enjoyed the global nature and international flavor of the markets, daily contact with dealing rooms in new York and london as

well as visiting their premises has always impressed me.

Jw: what do you particularly like about your job?

HP: The constant challenge of trying to understand what is driving the markets and identifying ways to benefit from opportunities that is presented to you from behavioral biases in the market place and the fact that you are competing with others trying to do the same using similar, or totally different approaches to you, is very appealing to me.

Jw: is fx a unique market? in what trading currencies is different than trading other financial instruments?

Henrik Pedersen

Chief Investment Officer at Pareto Management Limited.a wholly owned subsidiary of The Bank of New York Corporation

explains Pareto’s multi strateg y program and how they manage a 44,5 billion usd portfolio.

INTERVIEW

Manager Pareto

Strategy Currency multistrategy, MECO (Mellon currency option), MELSEC (Mellon Long Short Emerging Currency)

Location LondonAssets Under Management 44,5 bln UsdType Mostly SystematicStyle MixInstruments Currency forward and optionsCurrencies Developed and Emerging

interview by Jw Partners for fx trader Magazine

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HP: i still think that fx is a unique market. apart from the absence of an official exchange, currency markets are driven by a complex structure of market participants some of which trade currencies for other reasons than profit. at the same time it is probably one of the more accessible markets to analyze, yet the same types of opportunities and drivers seem to reappear time and time again, obviously with some variation. trying to understand the interplay between short-term factors and the bigger picture has always been a good place to start for me.

Jw: when was Pareto born? what ideas brought to its creation?

HP: on the 1st of March 1991, an initial group of investment professionals formed a corporate partnership with Mellon Bank, which provided start-up capital and infrastructure support. Mellon originally owned 65% of the firm, and the six original individual founders owned the remaining 35% share through a special purpose corporation. five years on, xl capital ltd., a Bermuda based re-insurer, was brought into the partnership as a new strategic partner in June 1996. xl capital purchased a 30% interest in Pareto from Mellon Bank.

in september 2004, Mellon acquired 70% of the corporate partnership making Pareto a wholly owned subsidiary of Mellon. around the same time, the structure of Pareto Partners was changed to a limited company called Pareto investment Management limited.

on 1st of July 2007, Mellon

merged with The Bank of new York creating a new global market leader in securities servicing and asset management, The Bank of new York Mellon corporation.

Pareto is now a wholly owned subsidiary of The Bank of new York corporation.

Pareto was founded on the principle that advanced technology could be applied to investment management, both to manage risk and to enhance returns. Pareto’s investment process focuses specifically on downside risk (the risk of loss), rather than symmetrical measures such as volatility or ex-ante tracking error (which also penalise the upside). By tightly controlling the downside risk while leaving the upside potential unconstrained, Pareto is able to generate alpha through positively skewed returns.

Jw: How is today Pareto structured in terms of headcount and offices/geographic distribution?

HP: Pareto has its headquarters in london. in new York and australasia, we operate through an fsa appointed representative, Pareto nY llc and Pareto australia Pty. in Japan, we operate through an affiliate. The total number of employees of 62 is spread across these regions.

Jw: what are the key positions in an fx Management company?

HP: operations/compliance, trading/execution and Portfolio Management/research should be key areas within any fx Management company. operations is key when

you handle large turnover for 3rd party client as you do when you are an institutional currency manager. trading/execution team is key to providing best execution and are also your ear to the market. Portfolio Managers/research (depending on the strategy you implement) is obviously where your trading ideas are coming from. without these, you cannot operate effectively.

Jw: which authority regulates the company? do you keep and update procedure manuals and a compliance and risk management policy? How time consuming and important is it to satisfy regulation requirements on one side and internal procedures on the other?

HP: we are primarily regulated by the uk financial services authority (fsa). in addition, Pareto is registered with the local regulatory bodies in usa, Japan, all canadian regions and australia.

we do maintain a procedure and compliance manual which covers all investment management processes. The firm’s chief compliance officer carries out a detailed, risk-based monitoring program covering all aspects of the firm’s business activities and maintains the compliance Manual which covers requirements of all regulators with which the firm is, and oversees the maintenance of the firm’s policies and procedures as well as the compliance monitoring program.

our risk Manager is responsible for ensuring that the risk and control framework in place at Pareto is adequate for the investment


FX FX MANAGERS

activities undertaken by the firm. risk and control self assessments are performed regularly and a register is maintained of the key risks and controls identified. risk issues are highlighted to senior management more frequently if necessary and formally reported to senior management and the Board on a quarterly basis. in addition, kPMg conducts an annual audit of the control environment and record their findings in a sas 70 report, which is made available to clients of Pareto upon request.

Jw: You are in charge of the currency program. How would you describe your investment strategy?

HP: The bullets below summaries our investment approach and philosophy for our multi strategy program. in essence it’s a 3 stage process where we 1) identify environments and potential strategies 2) portfolio construction to

create a balanced core portfolio across strategies and markets (developed, emerging and options and 3) dynamic risk allocation between strategies driven by our commitment to control the risk of loss .

•Incorporates a range of Pareto’s ‘best of breed’ currency strategies strategically structured to seek alpha opportunities across a variety of market environments typical to currency markets.

•Alpha attained from a carefully constructed portfolio of proprietary currency strategies each targeting independent and profitable opportunities in developed and emerging currencies via trading in forward contracts and selective purchases of currency options

•Employs Pareto’s risk management philosophy, which strictly controls loss on each strategy without unduly compromising the opportunity for

upside capture. This drives active risk allocation towards strategies that are in favour and designed to deal with the impact of rapid market transitions

•High level of liquidity and transparency in instruments used to implement philosophy. internal systems have strict embedded risk controls to continually measure exposure to market counterparties.

•Low correlation with traditional asset classes and other alternatives

Jw: How and when did you develop your current fx management strategy?

HP: the history of our product range began in 1991 with ronald liesching who was a founding member of Pareto. ron was responsible for developing the currency risk Management model

which has formed the basis of the business and still is with around $43bn of auM from clients globally.

in addition to the active currency risk Management strategy, we have also dedicated a considerable amount of resources over the years towards developing absolute return programs aimed at the institutional space, but without detracting resources from the core currency risk management strategy. initially, development was based on the risk management strategy but given the objectives of the program the majority of investment strategies were developed independently. also in 2007 additional expertise was made available to the business following the merger between BnY and Mellon where we acquired an experienced team who brought


their interest rates and emerging markets expertise and new ideas to Pareto.

the result of this effort has provided us with a suite of fx management products listed as follows:

•Currency Risk Managementcurrency alpha•Currency Multi Strateg y

(Portfolio with 5-10 independent alpha strategies, majority of which are unique to Pareto)

•Currency Option alpha (stand-alone fund since 2007)

•Long Short Emerging currencies (stand-alone fund since 2009)

global macro•Global Risk Adjusted Alpha

(stand alone fund since dec-08) trading global currency and interest rates

Jw: risk, an exciting yet dangerous word. How do you manage it?

HP: risk management is in many ways synonymous with Pareto and its core beliefs. our key assertion is that – as opposed to standard practice in measuring risk – risk is not symmetrical as profits are desirable and losses undesirable, hence we consider short and long term skew in market returns rather than standard deviation to assess and manage the ‘risk of loss’ in our portfolios. this is done with a view to create an element of optionality (limited losses, but unlimited profits) in our excess return profile. this philosophy is engraved in everything we do.

Jw: can you give us an example of the kind of trade you might have used in the past but would never repeat today, or would not be possible today?

HP: if you think of actual trade drivers, pure fundamental analysis used to play a bigger part in the analysis of currency hedging & trading strategies but experience teaches you that exchange rates can often move much further than fundamental factors dictate, or you would normally expect that some kind of common-sense approach, including risk management discipline, is essential to be able to play another day.

Jw: do you use a blend of strateg y types for diversification, or one and only?

HP: our product range is composed both of specialist currency strategies like our currency option alpha which is very focused and targeted to a single investment approach and philosophy on how you can identify and exploit what we call unstable equilibrium that periodically occur in currency markets as well as multi-strateg y solutions that combine different alpha strategies into a portfolio where we determine the risk allocation. the single strateg y offerings are predominantly targeted for fund-of-funds, or professional investors who add value doing their own portfolio construction, with the multi-strateg y offering a one-stop solution for institutional investors looking for a limited number of

currency managers.

Jw: How do you think has your performance been over time ? what market conditions are expected to have a positive and negative impact on it ?

HP: Pareto has added value on its combined portfolio active currency risk management and alpha programs since 1991. Because we are looking to protect clients against adverse currency moves in our currency risk management programs we tend to add the most value when significant currency moves occur and have the most difficult periods where markets experience significant short-term volatility without direction. Because we are risk focused this will also tend to be the case for our alpha programs.

Jw: can you give some recent examples of where you have made a unique winning decision?

HP: in december 2008, we saw that deleveraging flows which took place during the second semester led to a sharp increase in value of the us dollar against the euro. our option strateg y correctly identified that the conditions by late 2008 had become stretched. we therefore created a short us dollar position. in typical fashion, the reversal which followed proved brutal, with the dollar losing over 15% of its value in less than a month. this was of course, beneficial to us having taking the short position in the currency.

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Jw: do you use less mature currencies, or do you plan to add them to your studies and trading ? or do relative lack of liquidity and wider dealing spreads outweigh any potential gains from being able to capture more inefficiencies? HP: less mature currency pairs tend to be the less liquid but can also be the most interesting from an opportunity point of view.

things can vary from one strateg y to another. across our product range, we trade the most liquid markets from developed g-10 currency down to the smaller emerging currencies subject to certain minimum liquidity requirements. for us, trading a certain emerging market currency is more a consideration of scalability. for example, if liquidity is severely limited in a given currency it does make a difference to the overall portfolio if we trade it or not. on the other hand some strategies can be adapted to deal with less liquid

currencies so while emerging markets remain a stable of our alpha programs they are considered on a case-by-case basis.

Jw: when developing strategies how approximately would you expect to allocate your time among building entry signals, exit signals and money management rules?

HP: for some strategies the core composition (such as carry or valuation strategies) remains relatively stable over time so money management rules become the most important part of the development. for other models the entry and exit signals as well as the risk you are prepared to employ forms the core of the model and it will be developed as part of a whole and so time shared is approximately equal.

Jw: How much time do you allocate to further research and development of existing or new trading strategies?

HP: a lot of time is spend understanding the drivers of existing strategies in order to improve on them or in preparation to close them down if they are no longer working. while the themes in currency markets remain the same the implementation and methods are constantly evolving as markets and participants themselves evolve even if the underlying philosophy remains intact. a key factor of success lies in risk management and in understanding the limitations of your trading strategies and the kind of environments they like, or more importantly do not like.

Jw: do you believe in ever-valid rules, or every strateg y loses its accuracy sooner or later? Have you ever found strategies that come back into phase after a long time in negative?

HP: i think the answer depends on your investment horizon. for example warren Buffet seems to have followed an ‘ever-valid’ guide to investing in his career, although the implementation has certainly evolved with the increasing instruments available in financial markets. if you are looking for short investment horizon such a ‘high frequency trading’ i think the half-live is relatively short and a high degree of adaptation is necessary.

consequently for a longer investment horizon i do believe that common sense, or certain rules of thumb if you may, prevails, however the way you implement strategies around this theme evolves.


one of the lessons learned during 2007 and 2008 is that blindly following a ‘rule’ such as carry can lead to devastation so the key thing to recognize is that no single investment strateg y will provide stellar performance at all times and to be smart in risk allocation and risk management decisions.

Jw: do you agree that one way to react to the ever-changing market is to adjust parameters? do you already use changing parameters based on volatility measures or filters?

HP: that is certainly one way of approaching it, but the pitfall is to always adjust parameters to what worked yesterday. i think the future increasingly lies in adjusting parameters based on forward looking estimates of the market environment.

Jw: do you favour any particular time frames in your strategies, or do you diversify across a range of them? what is your average trade duration, and how high the trading frequency?

HP: diversification in currency is limited by the finite number of crosses one can realistically trade. different investment horizons – or time frames – are an interesting alternative route to achieve diversification in a portfolio. at Pareto, our strategies have different investment horizons – while never falling into the category of high frequency trading.

Jw: what should an inexperienced trader watch when choosing the time frame to trade on?

HP: the pitfall of any inexperienced trader is to start competing in the short-term trading space where they have a significant information disadvantage to the huge trading rooms of banks. obviously most trading platforms will seek to encourage this approach as they make their money from turnover; however it is hard to see consistent profits available in this space for an inexperienced trader other than the same amount of excitement that can be gained in a casino. in general, the longer the time horizon the higher the probability of ‘beating the bank,’ but also the higher the requirements to have a disciplined stop-loss, or risk management approach.

Jw: How many execution counterparties do you use? How do you split execution between electronic and “dear old voice”?

HP: we emphasize a strong partnership with our counterparty banks and deal with most of the major names in the industry. electronic execution is done where practical as there are significant operational benefits to electronic booking of trades, but we are extensive users of ‘voice’ to access market information.

Jw: How does you backtesting process work?

HP: for all our products, strategies and enhancements to the strategies, are only implemented after a rigorous back testing procedure is completed, which involves a diversified range of techniques, including Monte carlo

FXFX MANAGERS


simulations and stress testing. stress test scenarios are implemented on a quarterly basis or in the event that the Var measure exceeds 3%. the stress measure is taken by considering the total possible loss should all open positions lose all their value. this is the maximum possible loss that a particular product can incur.

it does vary across strateg y. Yes, we do have auM limit on a number of our strategies as a result of our liquidity monitoring however we are currently nowhere near this limit

Jw: what is the single biggest strength of your team? and is there any particular advance that has taken place since Pareto started that has particularly benefited your trading ?

HP: diversity and breadth of core skills, required to effectively

manage existing programs and introduce enhancements are the biggest strength of the team. Product innovation is a huge differentiator and over the years we have seen a number of these innovations come into play in new products. we have also invested heavily in technolog y used to assist the firm in its investment process.

Jw: can you give us your feeling about the most popular, eurusd, over the next 6/12 months?

HP: i don’t think at 1.47 there is an obvious answer. Market currently looks for a weaker dollar then a stronger dollar once the us starts increasing interest rates sometime in 2010. odds are it won’t play out like that. Prefer to look at the usd index close to all time lows around 72 and we may try one more time over the next 3-6 months, once the world gets disappointed with the

recovery the usd may strengthen so lets go for 1.25 eur/usd in 12 month just to make it interesting.

Jw: what’s the best advice to give to an individual trader and to a semi professional trader who wants to enter the fx fund management industry?

HP: 1) do not try to prove the market wrong – it will always be expensive

2) do not get emotionally attached to any position or strateg y, be disciplined

3) find the way that works for you and always be skeptical about exchange rate forecast (almost never correct) and the reasons provided for yesterdays move. stick with your plan no matter what others say. some of the best opportunities comes when everybody has got the same positions

FX FX MANAGERS


www.tradeinterceptor.com

http://www.tradeinterceptor.com/forextradingtraining/

xxiV centurY

where will the s&P 500 index be in 2393 ?

on March 9th last, donald duck and gladstone gander went to their bank for important decisions on their portfolio of investment. donald, with the typical sense of responsibility of somebody who has a family to sustain, invested everything in 3 months t-Bill. gladstone bought and etf’ed on the s&P 500.from that day up to now (s&P from 666 to 999) gladstone g a n d e r has earned on average a b o u t 30 basis points per day. That is 5,000 basis points (i.e. 50%). d o n a l d duck on the other side has added up a return of 6.5 basis points (i.e. 0.065%) and we do not dare imagine what the real return could be after expenses and commissions for the two quarterly renewals are taken into account.

following the current trend donald will reach gladstone’s performance in 2393. 3 months t-bills yield 13 bp per year and 384 years will be needed to earn those 5,000 basis points (to be precise we did not count composite interest which will anyway be less than commissions

for the 1,536 renewals, four every year). it is difficult to forecast where the s&P 500 will be in 2393, 384 years are a lot of time, the same amount of time passed since 1625.

quite interestingly it was exactly in 1625 that new amsterdam was established in the southern tip of Manhattan island. 28 years later, a fence was erected nearby, the now wall street area, in order to defend the city from the iroquois and delaware tribes.

donald duck is good with numbers. He is ashamed, worried, a bit envious and fears his n e p h e w s ’ opinion. kids, he says to them, it cannot keep going like this. to earn 50% when every month there are 300,000 new u n e m p l o y e d reported, when hundreds of bank are still due to declare

bankruptcy (fdic estimate) and consumption and investments are still stagnant (only inventories and exports are improving ) is almost immoral.

FUNDAMENTAl ANAlYSISFX


Johannes Vingboons. new amsterdam (today new York). 1664

donald reads a lot, cuts out articles and interviews and refers to his nephews that the home buying incentive program will stop on december 1st and that more generally the effect from last february’s fiscal stimulus package is reaching the highest point just now and the stimulus will be felt less and less from now on, even giving a negative effect from end 2010.

don’t mention to donald duck the cash for clunkers program. it is finished, it is finished, statistics will still be impacted for another month or two but, final demand is already back to levels seen before this mad program. He is particularly angry at cash for clunkers because his wreck car has not been admitted to the program being from the 30s and so considered an historic car. the program stops at cars produced in 1984. also in germany incentives to new cars buyers, which lasted for several months and were miraculous for industrial production, are now ending. this morning donald was quite comforted by goldman sachs daily comment. He quickly printed it out, magnified it and hung it in a showcase in his entrance hall. the comment brings up a parallel with the re-stocking recovery in 2002. that bear market rally ended even before the industrial production peaked. in other words positive macro data ceased to impact on the stocks and the market sank till the great turning point in spring 2003.

Meanwhile gladstone gander is not particularly worried but he has started to follow with more attention the macro evolution. He is not hyper-optimistic as Bruce kasman and all JPMorgan research and he knows that countries which recovered quicker in the last four-five months, china and generally asia, are now growing slower. However, he thinks that in europe and the us the re-stocking effect can still give a more than decent push to the economy. for sure, a couple of months of stronger production have not been enough to fill up store draw downs seen from october up to June.

gladstone, who just traded in his second car at terrific terms thanks to the incentives, has been struck by car dealers estimates on structural yearly demand up from 9 million last spring and winter to the current 10.5 million (700,000 non recurring car sales from

the cash for clunkers program would need to be added), on the way to 11 million next year and gradually climbing back to 13-14 million by 2013. estimates only, we could argue, and estimates coming with the credibility of car dealers. still their parking lots are quite empty and buyers, even after the incentives ended, are not diminishing.

donald duck has forwarded to gladstone gander the goldman sachs note adding some confused comments, the end is near for you bulls, now everything will go down, you will see... and the likes. gladstone read it carefully till the end and appreciated remarks on stock valuations: they are not particularly low but far from being as high as those at the beginning of 2002. even more, he liked some obser vations on the industrial production at global level : growth will be good for

wall street view from Broadway corner. 1867

FXFUNDAMENTAl ANAlYSIS


another two or three months and anyway will stay positive further ahead.

to feel even surer gladstone has used his credit card spending 5 dollars to be sent the last Martin feldstein paper from nBer . He considers feldstein the most credible of pessimists, appreciating him more than the ‘newnormalist’ of Pimco (always interesting but a bit too conceptual), more than roubini (somehow erratic lately) and more than the extreme bearishness of rosenberg (now indicating 800 anyway and not 600 anymore as the correct level of the s&P) or albert edwards.well, feldstein, even without falling into optimism, firmly rules

out a great depression scenario and the possibility that after the current recovery we could fall again into a dramatic vicious cycle. feldstein is still very much critical on a fiscal exit strateg y based on raising taxes but this reasoning is brought up as a medium term view.

in the end gladstone decides that untill macro data will remain as positive as they are now there is no reason to change his investment strateg y much. of course, september is coming , the market has its traditions and superstitions and for a few weeks will face some headwinds. gladstone will sell some calls, planning to invest revenues from the sale in buying

calls at lower levels in case the market would show some serious setback. He still believes we can see new highs by year end, even if not spectacular, and he promises himself to lighten up his investments with more diligence in that case.

at the moment 2010 does not look at all as a deadly year. the world will grow, even if slower than the violent rebound we are experiencing now. if a dangerous zero growth point will be approached again, stimulus (monetary more than fiscal) will kick in again. such support will not be enormous, but it will be precious and likely sufficient to avoid a double dip.

However markets will fear the worst, at least for a short while, so it will be a good idea to keep some liquidity available (to be created around year end) to enter again at lower levels.as far as donald duck is concerned, gladstone gander advises him. go and buy at least some bank bonds (implicitly or officially guaranteed) and some good quality corporate bonds. Your t-Bill yields in the end will go up for sure but, they could stay at very low levels for a long time. today everybody speaks about exit strategies but, they mostly do it to reassure markets and keep low rates on the other end. do not wait for 2393.

Alessandro Fugnoli

FUNDAMENTAl ANAlYSISFX


times square in 2393 ?

the first articles have introduced options and their pricing dynamics. in this article we will look at how risks can be effectively hedged using options and what cost concern might arise. we will look at how options can be used in risk management, as opportunity seekers or to hedge away currency risk from a portfolio with assets spread across multiple currencies.

a corner stone in risk management of a trading portfolio is to keep a stop loss on a position in order to limit the loss from a wrong view on the market. this is a simple way to hedge some of the risk encountered by trading. However, the stop loss is not the perfect instrument it is sometimes made out to be. when a stop is hit a market order is automatically placed, but as the market is already moving the trader might sustain an additional loss from slippage. furthermore, the stop loss might just be hit before the asset changes directions and moves in favor of the original trading stance. Both problems could be solved by hedging using an option instead. in the case of a long position the down side risk would be hedged by buying a put option. with the

possibilities offered for tailoring the option in the otc market the strike can be chosen to match the stop loss chosen for the trading strateg y. the price of the put option would thus represent the price of the hedging slippage and the knock out of the stop loss. the reader of the last article will be aware of the fact that having a spot position and put position is the same as having a call option position, through the put-call parity. in the call option case the price for hedging slippage and knock out of the stop loss would be the time value of the option, as

the intrinsic value (the payoff of the option if exercise immediately) is simply the price of the perfect stop loss. considering whether to hedge thus boils down to a tradeoff between the price of the option which is certain and the possibility of slippage and knock out which is less certain.

a natural extension from the stop loss scenario is a buy/sell the break strateg y, which also renders itself easier to do with options instead of stop orders. if a currency has been trading in a range one might expect a rapid move upon breaking this range. using a stop order might get a very bad fill due to the potential runaway price spike, while buying the asset still in the range ties up capital if no breaks happens and even worse, if the asset breaks in the other direction, a possible loss. this can be solved in the case of a buy the break strateg y executed with a long call option placed at the top of the range. this hedges away the risk of a runaway price or false break out. furthermore, one gets the opportunity to take part in a move while tying up less capital.

To hedge or not to hedge

Figure 1 The red line shows the P/L on the covered call. The green line is the P/L on the long call and the blue line is the P/L on the short call.

FXoptions


the price for this hedge is simply the premium which can then be weighed against the use of a stop order. if the price is deemed too expensive one might consider making a call spread. this is done by shorting a call further out of the money, thereby limiting the upside but lowering the premium. the payoffs can be seen in figure 1. the sell the break can be replicated in the same manner but by using put options instead.

fx options are not only for the fx minded traders or portfolio managers. a stock or bond investor easily gets involved in multiple markets thereby obtaining currency risk on the native value of his underlying portfolio. it is only natural and logical that the primary focus should be on the risk/return of the stock/bond itself. But this is not to say that focus on translation risk to the manger’s home currency should be ignored. as recent events have showed the quick redraws from riskier emerging stock and bond markets can result in not only losses on these assets but also additional

losses coming from the currency as well. an example could be an investor based in the euro zone thus measuring his performance in euros. if this investor is holding positions in Hungary he will automatically be expose to the performance of the eurHuf, whether he like it or not. if a crash occurred in the Hungarian market a flight to safety would probably follow leading to a rising eurHuf, opening up for a double loss for the investor. However, the currency risk could be hedge by holding a call position. the investor is thereby able to focus on his main investment strategy and obtaining a price for his fx exposure.

as with the break out trade above the investor might find the price for avoiding the loss too expensive, therefore, a traditional hedge is to buy a risk reversal that is still holding the long call but funding the premium by shorting a put. in this way, if the market stays stable both option expire out the money, if the emerging currency starts to rise you would lose out on this appreciation, but due to the capital inflow that makes the put in the money this could potentially be made up for by the increase in stock or bond market. the risk reversal position can be seen in figure 2.

even an investor that is not focusing on the emerging markets cannot be immune to swings of the fx market. as seen this year since equity markets have bottomed in february the eurusd as rallied

too. an euro investor taken part in the opportunity presented at that time in the us market would have given up a substantial part of the gains in the currency market. Here a call option could secure the gains. furthermore, given the current correlation in the market, a change of direction towards risk aversion again, might possibly sink not only the stock market but also the eurusd. Here a put option on the eurusd could protect against the currency risk.

This article has presented some simple strategies that can be constructed to hedge currency risk obtained through willingly or unwillingly trading in the fx markets. in the coming articles we will look further into how we can leverage opportunities by using options.

Steffen Gregersen

Figure 2 The red line is the P/L on the risk reversal. The green line is the long call and the blue line is the short put. This position is often used hedge currency risk in a stock or bond portfolio.

FX options



fxtM: can you give us a bit of history about cMc Markets, and explain your role in the company?

rd: The company was established in the uk in 1989 by businessman Peter cruddas. cMc Markets is still owned by Peter cruddas although investment Bank, goldmans sachs, purchased a 10% stake in 2007.

cMc Markets specialises in offering financial spread Betting, cfds and fx to a global retail audience. The last couple of years have been extremely busy and exciting for cMc Markets as not only have we expanded rapidly in the uk due to the rapid growth and popularity of the retail derivatives market but also globally. in addition to our offices in relatively established derivatives markets such as the uk, germany and australia, we have worked hard to launch new offices to offer our cfd and fx products to relatively new markets such as scandinavia, spain, italy, Japan, singapore and china. we have also spent a lot of resources improving out trading platforms, increasing our product offering and service and rolling out our comprehensive education

program, trading iq.as Head of distribution in the uk and ireland i oversee many of the client facing departments such as the sales team, our education department, client services as well as our Marketing function.

fxtM: tell us about the company’s products and the people that trade them...

rd: spread Betting is far more popular than cfd trading for cMc Markets’ uk clients. This is because they can access the same range of instruments, tight spreads and trading platform without having to pay any of the commission or tax that is associated with cfd trading (tax laws can of course change).

our customers spread bet for many reasons. we do have customers that use spread betting to hedge their portfolio but largely, clients typically use it for a short to medium term investment. These range from full time traders who make a living from spread Betting, to those who enjoy it as a hobby. The great thing about spread Betting is that low stake sizes and dealing costs have

made financial markets accessible to everybody. we also have many clients who have only invested in shares in the past and who use spread betting as an alternative to the stock market, and as a way of gaining exposure to markets they may not have preciously considered such as commodities and currencies. our clients include teachers, builders, it professionals, policemen and city workers.

fxtM: which markets attract the most interest from your clients?

rd: The main indices always attract a lot of attention and our highest volumes are often seen on the ftse 100, the dow and the dax. currencies always attract a lot of speculation as volatility and liquidity is good which present many opportunities to profit for our customers. uk clients are always very active in uk stocks – both ftse 350 and the smaller capitalized companies. with the volatility seen in commodity markets such as oil and gold these markets continue to see a lot of business in size ranging from as small as £1 per point to many hundreds of pounds per point.

Ross Donoghue

Head of Distribution UK & IrelandCMC Markets

explains the advantages of spread betting and how foreign exchange business works at cmc markets

FXFX MANAGERS

INTERVIEW

fxtM: How does the foreign exchange business work at cMc Mrakets?

rd: our fx team execute margined and spreadbet foreign exchange and precious metal business. They are responsible for analysing and managing the exposure, implementing strategies in order to maximise cMc’s risk/return ratio, and most importantly, to provide a consistently high level of service to our clients. we offer over 70 currency instruments ranging from popular currencies to the emerging markets in order to provide a spectrum of choice from our world-wide client base.

There is a lot of emphasis on product development at cMc Markets so many senior traders are involved in enhancing the software, trading tools and product offerings as well as develop trading models in order to manage the business more effectively.

fxtM: cMc Markets now has 16 global offices providing services to clients in over 70 countries. does each region operate independently when it comes to trading or is there a more integrated level of co-ordination and co-operation between them?

rd: in dealing we operate out of two risk centres, london and sydney. in london we run 24 hours a day in order to provide complete coverage to our spread bet and locally based clients during the asian session

fxtM: do you have a preference for trading certain currencies and would you agree with some traders who believe that from a micro perspective they all trade differently?

rd: Personally speaking, i focus most

of my attention on the g10 currencies because that is where the majority of our clients tend to trade. i think it would be fair to say that retail clients often migrate to the tightest spreads and most fluid execution. some more risk adverse clients look at more liquid currencies which might provide greater price stability within their trading. They also look at the margin costs of aquiring a position, so where margins are reasonably low this might appeal more. Having said that, because cMc Markets offers highly competitive spreads and exceptionally low margin requirements across all currency pairs we do have some clients moving towards exotic currencies.

fxtM: technology and the internet has revolutionised the trading landscape over the last 10 years. where has the greatest impact been on your job?

rd: 10 years ago cMc Markets had a small team of dealers that dealt with a reasonable amount of phone business each day. today, we have a similar number of dealers assigned to fx business. we continue to execute telehone business but the overwhelming difference is that 99% of fx business is transacted over the internet. not only that but we now offer clients a variety of asset classes includuing cfds, indices, equities, commodities, and treasuries. other enhancements include a news and charting package through to many technical indicators and analysis tools available from our all inclusive trading platform, Marketmaker. it is estimated that to deal solely on the phone with the our current levels of business, we would need to quadruple the number of dealers we have. cMc Markets’ chairman and founder, Peter cruddas, has embraced the idea of e-tools trading which has established as

FX FX MANAGERS


What is Spread Betting?

Financial spread betting is one of the most popular forms of trading in the United Kingdom. Spread betting (sometimes referred to as spread trading in the UK) is one product that a trader can use to enter the market to trade without buying the underlying shares. You can also use other products to trade like contracts for difference, futures, options or even buy the shares themselves as in traditional share trading.So spread betting is a method of speculating on the price movements of an instrument without actually owning any shares or derivatives. A financial spread bet allows a trader to bet on whether they believe that the price quoted for a particular financial instrument is likely to strengthen (go up in value) or to weaken (go down in value). So in a nutshell it is a way to bet on whether an instrument will go up or down.

This could be an index (for example the FTSE 100), a share (for example Tesco), a commodity (for example gold or oil) or a currency (say USD/JPY). When spread betting you do not own the underlying instrument, you are betting on which direction you think the price will move in. Instead of buying shares or contracts, you would be betting in £’s per point movement in the price (a point may be 1p, 1c, 100th c or a $ depending on the instrument you are trading).

The principle is quite easy to understand; essentially you stake a certain amount per point movement of a given instrument - such as a share or an index. The profit or loss for a spread better is determined by the difference in the buy and sell prices. When you bet that the price will rise, it is called going LONG and when you bet the price will fall you are going SHORT.

Financial spread betting in the United Kingdom closely resembles the

FXFX MANAGERS


one of the key players in our industry and these technological developments have revolutionised the way people have been able to conduct their investments.

technological development has brought greater price transparency, and competition has lead to an increase in liquidity and a reduction in trading spreads/costs which has effectively democratisezed the trading industry.

fxtM: what services are you offering that others aren’t?

rd: cMc Markets are known for offering some of the tightest spreads in the industry. also, our trading platform Marketmaker is one of the best in the business as not only is it fast and reliable

but has superb charts, news facility and analytical tools.

The reason why we have won awards for our service every year since 2004 is this combination of low cost dealing and cutting edge technology.

fxtM: and finally, what advice would you give to those new to spread betting fx markets?

rd: it’s a marathon not a sprint – don’t see financial trading as a get rich quick thing and try to double your account in a month, because this would mean taking on silly levels of risk. Just focus on trading well and grinding out steady profits.

futures and options markets, the major differences being:- the “charge” occurs through a wider bid-offer spread- spread betting has a different tax regime compared with securities and futures exchanges- spread betting is more flexible since it is not limited to exchange hours or definitions, can create new instruments relatively easily, and may have guaranteed stop losses - the trading is off-exchange, with the contract existing directly between the market-making company and the client, rather than exchange-cleared, and is thus subject to a lower level of regulation although the spread betting companies themselves are some of the most regulated entities in the City of London.

C

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CM

MY

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CMY

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advert-armageddon copy.pdf 25/03/2009 10:35:32

cMc Markets was established as a foreign exchange market maker in 1989. the rapid growth and progression it has since undergone has been remarkable. Peter cruddas, cMc Markets’ primar y shareholder, founded the company with a modest £10,000. By 1996, they had released the world’s first online foreign exchange trading platform which proved to be the catalyst for their success. today they have 500 employees in the london head office alone, boasting an impressive

16 g lobal offices and continue to open offices all over the world, the most recent being sweden, nor way and spain. cMc Markets have also recently opened a dedicated italian sales desk . in 2007 investment bank goldman sachs recognised the potential for further success and invested in a 10% share bolstering cMc Markets’ position as a g lobal leader in online derivative trading . cMc Markets is authorised and reg ulated by the financial ser vices authority in the uk .

InnovatIon and MaIn StrengthS

cMc Markets is committed to creating a trading advantage for their clients through product and technological innovation. their clients have benefited extensively from the award-winning Marketmaker® trading platform, renowned for its efficiency, reliability and user-friendly features.

a major force in the global cfd market, cMc Markets have been bestowed many awards to reflect their high quality service and products. Marketmaker® was awarded Best online trading Platform in 2003, 2004, 2005 and 2007 by shares Magazine and most recently, Best active trading Platform 2009 by Money aM. cMc Markets has also been recognised as a pioneering cfd provider and honoured with number of international awards from australia, Hong kong, germany and the uk.

cMc Markets’ pride themselves on their famously low commission which makes it faster and easier for their clients to potentially profit. they have competitive margin rates and offer commission free trading on indices, commodities and treasur y cfds as well as some of the lowest commissions in the market on equity cfds

there are thousands of instruments to trade on including major currency pairs, crude oil , gold and g lobal equities and the trading platform is ideal for all levels of trading experience. there are also a number of risk management tools available such as stop loss, l imit orders, ocos, “if-dones” and g uaranteed stops which provide valuable support when trading .

BroKer revIeW

CMC MarKetS

Peter CruddasFounder CMC Markets

Broker review FX


aCCount optIonS cMc Markets offer standard and fixed risk cfd accounts. the fixed risk account is ideal for investors who want to take advantage of the leverage, and short-selling benefits of cfds while limiting the possible loss, the two key advantages of the fixed risk account are that your account cannot go overdrawn and that stop orders you place will benefit from our unique ‘no-slip’ guarantee, protecting you from unforeseen market slippage.

all accounts give you free access to the award-winning trading platform Marketmaker® as well integrated charting and resource tools.

tradIng CondItIonS

all trades are placed through Marketmaker® which is managed directly by cMc Markets dealing desk and supported by a 24hr multilingual client services team. clients can trade with commission rates as low as 0.08% and margin rates as low as 0.5 %, allowing for more powerful leverage when trading. flexible risk management orders are available on all accounts. a cMc Markets account can be funded with as little as €200 and the minimum stake is only 1 cfd (the equivalent of 100 shares)

LanguageS and Support cMc Markets offers 24hr global trading and has both dealing and client services available from sunday night through to friday night to support clients’ while they trade. our multilingual staff are on hand to help with any queries from clients around the world. Help is available in italian, spanish, german, french, english, russian and Hindi. eduCatIon

cMc Markets has an extensive education programme which caters for all experience levels. seminars and

webinars are presented on a variety of topics by our in-house market strategists and numerous courses are available to equip clients with in depth knowledge on technical analysis, charting and much more.

tradIng pLatforM and tradIng tooLS

the Marketmaker® trading platform provides access to real time prices across thousands of global instruments. available via desktop and mobile handsets, clients can take advantage of features such as ‘one-click’ dealing providing split second trading. Powerful and flexible, the desktop version is fully customisable and allows for screens and charts to be tailored to suit individual trading needs.

the professional charting package integrated with the platform has a wide variety of research and analysis tools providing valuable trading support. charts can be customised using a range of technical indicators such as Bollinger bands, rsi, cci and pivot points. the charts also allow order tickets to be opened, price alerts to be set and tailored news to be displayed allowing for a faster reaction to the market.

cfds are a leveraged product and carries a high degree of risk to your capital. losses can exceed your initial investment. this product may not be suitable for all investors, therefore ensure you fully understand the risks involved and seek independent advice if necessary.

FXBroker review


sHould currencY Managers also Be Marketers and

educators?

i was recently invited to attend fx invest europe, a one day conference well organized by fx week for professionals of the fx industry in Zurich. from the sell side currency managers, software and information providers, market makers; from the buy side, multimanager entities like us, institutional investors and on the side a couple of mid/large size corporate treasuries.

it was an interesting 8 hour rundown, both from the networking and contents perspectives. Panel discussions and presentations spanned from currency fundamental perspectives to algorithmic high-frequency trading, from benchmarking methods of the currency manager’s performance, to risk detection and management issues.

There would be a lot to talk about, focusing on each single argument aroused from the single panels but, there are two things i took away at the end and that will remain the strongest memories from that day … in order of appearance.

first, the cool anti-stress rugby-shaped balls that the socgen guys guys provided as a souvenir for visitors at their e-commerce desk (thanks leon) ... my sons (and i) throwing the balls around home will make this by far the most noisy and lasting memory.

second, the final part of the very clear closing remarks from our excellent host Justyn trenner, ceo of clientknowledge: “go out there and

try to be less fx managers and more fx marketing people”.

now, disappointing the audience interested in kids and rugby stories, let’s focus on the second point. That was a great statement as it summarized in a positive and, at the same time, negative way the status of the fx world globally.

let’s start with the “negative”, and to explain this thought i have to start from different worlds if compared to the very professional industry participants who were attending that conference. foreign exchange, in its most commonly known abbreviation, forex, is today as ever mostly associated to the retail trading on line community, where most of the people unfortunately end up losing money. This is no different from on line trading as a whole in the financial markets, the reason behind it being a powerful greed that often drives the final smaller users, who forget all discipline and risk-reward logics for an activity, which is closer to pure gambling excitement than to a successful method for making money. we are talking about the unconscious choice between 2 targets, having fun or making money. This is a psychological issue, and it happens even to people who have been in the financial markets for a long time and who are not supposed to be making the same mistakes all over again – obviously not from the abovementioned professional fund manager category.

Marketing activity from all retail

oriented brokerage companies was very powerful over the last few years, making forex one of the most clicked financial words in the web. i very well know some of these companies and, in most cases, there was no direct aim at pushing people towards losing money, even if this creates a direct revenue benefit for the broker-dealer but, the marketing message was definitely more effective when stressing the features of the market which – guess what – are the ones that make more losing trades happen; on top of all, high leverage/low margins.

taking this from a different angle, one of the reasons why the financial world ended up in a dramatic bubble which caused several injuries when it exploded was that the growth strategies of banks and financial institutions were rarely driven by the quality of the underlying products, being supported almost always by the commercial suitability of such products. The focus was – too often – on that side, marketing, rather than on the product quality side. and the consequences were of course a more rapid and further reaching – but less solid - growth, and a more destructive comeback.

last, let’s get into the hedge fund companies, how many stories of companies raising excellent assets to manage thanks to their commitment and performance, and then losing money because of the natural shift of the focus towards marketing.

FOCUSFX


These three examples, or real history case studies, suggest that the word marketing by itself, when it becomes the priority, can be dangerous to say the least.

if my regard for the quality of the participants at the Zurich event wasn’t very good, i would have to stop here. But knowing where that remark was made, and to whom, i can move on to the positive thought deriving from it.

we, in the currency management industry, are in a situation where many, or most investors, whether they are small or big, retail or Hnwi or institutional, do not even know that they could somehow access high quality fx investment products. for this reason, we as professionals need to tell people about it, using communication tools to – see what word i’m using – educate! i prefer to read trenner’s word “marketing” in its most appropriate meaning here, which is communication and education. as far as we as market professionals focus on explaining, educating, without forgetting the dangers connected to the pure focus on marketing and sales, then our effort will be rewarded, because what we are trying to do here is only to satisfy what are evident needs of the investors, liquidity and non correlation, and we know these can be easily provided and guaranteed. But not easily explained to the “foreigners visiting this new world”.

in fact, it’s not over, as the investors will at last know about the currency single or multimanager products, an important part of such education

process goes through explaining then what difference is there between one strategy and another, how to identify quality in the “alpha generation” process, and how to guarantee that the non-correlation feature remains valid over time. in fact, if there is no discussion about the possibility to deliver easy revaluation and thus liquidity, there is no single behaviour of the performance and correlation components to the story.

Performance, first we’d suggest all investors to resist the temptation of those apparently hyper perfoming

traded accounts presented on some forex websites; that is obviously not the quality we are talking about, hardly any due diligence can be made on such companies and their strategies which belong mostly to the retail brokerage world rather than the professional currency managers industry. second, even among the professionals, there’s no straightforward guarantee on what performance will be achieved, as someone will manage to post a better or worse performance, but within the features of volatility and past behaviour of our single or multi manager investment

products as they have been presented initially to the potential client.

correlation, it may still happen to an investor to see the naV of its currency asset moving downward in a straight line while equity markets are in a downtrend. why could this happen? for example because of the possibly heavy presence of carry-type strategies. carry, from the concept of carrying the position forward and taking advantage from the time going by while sitting on a position long in one currency which gives us high interest rates, and short in another currency where financing cost is

very low; the typical examples in the past, all crosses against the Japanese Yen. now, some carry strategies can retain an intrinsic long term value, if they are built on solid methodology and match the investment time horizon; but, if the main target is no correlation, they don’t really fit unless they are built on very robust basis, or unless they represent only a modest percentage of the allocated

risk.The hardest part of the education

process will thus be to help the investor to really understand what he’s buying, without forwarding the wrong message, because otherwise the whole industry may be damaged.

Before closing to go to play home-rugby with my kids, let me say i’m honoured to write a piece on fx trader Magazine; i believe its contents and style will help over time this education process towards those “foreign visitors”.

Giovanni Pozzi


FXfocus

MaJors rePortTREND EURO, US DOLLAR, YEN, BRITISH POUND

SPOT PRICE 18/09/2009 01/01/2009 ∆% 01/01/2008 ∆%

EURUSDUSDJPYEURJPYEURGBP

1.470291.35 134.30 0.8989

1.395290.79

126.65 0.9573

5.4%0.6%6.0% -6.1%

1.4583111.79163.04 0.7350

0.8%-18.3%-17.6% 22.3%

DOLLAR/YENdollar/yen has been moving in a major down trend for several decades: at the beginning of the seventies it was trading at around 350, since the mid-eighties it went stably below 175. after having collapsed to a historical low at 79.75 in april 1995, the dollar started a strong reversal, reaching a top at around 147.65 in august 1998. from that level, the major down trend resumed, with a series of falling highs and “raids” below the key support at 115 (a level repeatedly supported by the Bank of Japan’s interventions). The dollar reached a bottom at around 101.35/85 at the end of 1999, level tested again at the end of 2004. The break of that support last year caused a new sell-off, that led the dollar towards 87 at the beginning of this year. The subsequent rally reached a peak at 101.50 on april 6th

from the beginning of april, the pair moved strongly downwards. from the top at 101.50, the pair started coming down again and reached a bottom around the psychological support at 90 in the last weeks. as long as the pair stays below 94 the tone remains very weak. The break of 90 would push the dollar towards the year’s low around 87, where a technical reaction looks likely. Below that support, the pair would target, in the coming months, the april 1995 low at 79.75. a bounce would be possible only if the pair gets over 94, targeting 96 and then (not very likely) strong resistance at 98, where sell orders are to be expected. only should the pair succeed to overcome 101.50 would a significant rally be possible (unlikely). The major trend remains of a slow but constant decline of the us dollar against the Japanese yen.

TREND SUPPORTS SPOT PRICE RESISTANCESTrend 3-6 months down S1 90+

91.35R3 101.50++

Trend 6-12 months down S2 87++ R2 98+Trend 12-18 months down S3 84.60 R1 94-96


TECHNICAl ANAlYSISFX

EURO/DOLLAR

euro/dollar was first traded in January 1999, at around 1.1800-1.1900 and fell to a historical low at 0.8231 on october 26th, 2000. from that bottom, the euro began accumulating and – since summer 2002 – moving upwards, entering progressively a major up-trend and reaching a top at 1.6038 on July 15th, 2008 (+95% vs. the historical low). the fall below the strong support at 1.5275 on august 8th, 2008 (a level that had supported the pair in the period april-July) caused a major reversal, with a fast decline towards 1.3900, followed by a pull-back to a top at 1.4866 on september 23rd and a new sell-off to a bottom at 1.2330 on october 28th. in mid-december, a strong rally brought the pair, in just a week, to a top at 1.4719. then it started going down again and fell to a bottom at 1.2460 at the beginning of March, 2009.

since the beginning of march, the pair has moved strongly upwards. after a first wave that reached a top at 1.3738 and a pull-back towards the support at 1.2885 (april 20th-22nd), a second rally reached a peak at 1.4340 at the beginning of June. after a modest correction towards the support at 1.3750 – tested in the middle of June – the uptrend resumed and the pair climbed, in recent weeks, towards the mid-december 2008 high around 1.4719 and marginally above. as long as the pair remains above 1.4340, the trend for the coming weeks remains bullish, targeting 1.4865-1.4900 and then the key resistance at 1.5000, with extensions, not very likely, towards the resistance at 1.5300. only a break of the strong support at 1.4000 (extension towards 1.3750) which is unlikely, would signal weakness for the euro. The major trend remains of a slow but constant decline of the us dollar against the euro.

TREND SUPPORTS SPOT PRICE RESISTANCESTrend 3-6 months up S1 1.4500

1.4702R3 1.5000++

Trend 6-12 months up S2 1.4340+ R2 1.4865-1.4900+Trend 12-18 months up S3 1.3750-1.4000++ R1 1.4720/70+

TECHNICAl ANAlYSIS FX


EURO/YENThe cross euro/yen was first traded in January 1999, at around 132.50-135.50, and fell to a historical low at 88.96 in october 2000. from the bottom, the euro began moving upwards, entering progressively a major up-trend, and reaching a historical high at 169.95 in July 2008 (+91% vs. the october 2000 bottom). The strong depreciation of the yen during recent years has been mainly caused by the so called “carry trade”, i.e. funding in low-yield currencies like the Japanese yen with contextual reinvestment in asset classes in other currencies (i.e. stocks and bonds in euro, australian and american dollars, etc.). after the burst of the real estate and financial bubble – which began in the summer of 2007, with an acceleration after september 2008 – a progressive strong divestment from stock exchanges around the world led to massive yen buying in order to square up carry trade positions. That provoked a crash of euro vs. yen, driven by a double source: the fall of euro against the dollar and, at the same time, the decline of the us dollar versus the yen. after the break of 156 in september 2008 (in correspondence with the trend line

that sustained the major upward trend), the cross collapsed to a low at 113.65 on october 27th, 2008. in the following months, the cross moved sideways, above that level and below 131. in January 2009, the euro reached a new low at around 112.10 (-34% from the historical high).form the end of January, the cross started to rally, reaching a high of 137.41 at the beginning of april, followed by a correction towards 124.40 on april 28th and a second up upward movement with a peak at 139.19 on June 5th. The cross then started moving sideways below that peak and above the support at 127, with an intermediate support at 131. within this trading-range, if the support at 131 holds the momentum remains positive, with a possible rise towards the top at 139.20. only above this resistance, however, should the cross give a convincing bullish signal, targeting the resistance area 140-142, with extensions in the following months towards 147-150, where strong sell orders are to be expected. loss of momentum below 131 and renewed weakness below 127 (unlikely), with first target the support area 124.40-126.

TREND SUPPORTS SPOT PRICE RESISTANCESTrend 3-6 months up-side S1 131

134.30R3 140-142+

Trend 6-12 months side S2 127++ R2 139.20++Trend 12-18 months side S3 124.40-126+ R1 136.70



EURO/GBP

the cross euro/gbp was first traded in January 1999, at around 0.7100, and fell to a historical low at 0.5683 in May 2000. from the bottom, the euro began moving upwards, entering progressively a major up-trend, and reaching a historical high at 0,9809 on January 1st, 2009 (+72.6% vs. the May 2000 low). from that peak a strong correction drew the cross down to a low at 0.8638 on february 10th, 2009. then the cross bounced back to a top at 0.9478 on March 19th. then the downtrend resumed and pushed the cross towards a 2009 bottom at 0.8402 on June 2nd.from the bottom at 0.8402 of the end of June, the cross started heading north, increasing pace since the end of august. in mid-september, the cross overcame 0.9000 and is targeting the

resistance at 0.9080. above that level, the current up-trend would gather momentum targeting , in the coming months, the January-March highs in the area 0.9475-0.9520, where sell orders are to be expected. above these levels (unlikely), the cross would aim at the historical high at 0.9809, reached on January 1st 2009, with extensions towards the psychological resistance level at 1.0000. loss of momentum below 0.8700, targeting the June lows at 0.8400, where buy orders are to be expected.

Maurizio Milano

TREND SUPPORTS SPOT PRICE RESISTANCESTrend 3-6 months up S1 0.8800

0.8989R3 0.9809-1.0000+++

Trend 6-12 months up S2 0.8700+ R2 0.9475-0.9520++Trend 12-18 months up-side S3 0.8400++ R1 0.9080+



tecHnical outlook



eur/JPY bottomed at 88.97 in 2000, but it was not until late 2002 that a major uptrend was confirmed. an initial rise to 140.90 in 2003 was followed by a prolonged consolidation phase, during which time yearly lows in 2003, 2004 and 2005 were left at higher levels of 124.20, 125.91 and 130.66 ahead of an eventual resumption of strength beyond the 1998 (calculated) peak of 163.34 to reach 169.05 and 169.96 highs in 2007 and 2008. as the chart below shows, a sharp reversal commenced in august 2008 and a 169.05 / 169.96 double top was completed when the august 2007 and March 2008 lows at 149.33 and 151.82 were lost. Between 61.8% and 76.4% of the 8 year rise was retraced at the october 2008 / January 2009 extreme lows of 113.74 / 112.08, which marked a double bottom for a corrective recovery to between 137.39 and 139.14 since april. Price action

over the past five months is that of a head and shoulders top, above a rising neck-line connecting the 124.44 and 127.01 setback lows. However, while the neck-line is intact a top pattern is not confirmed and a positive sign is that the falling 260 day (1 year) moving average was successfully regained en-route to the right shoulder at 138.70. eur/JPY remains above that trend-line which continues to fall and almost now coincides with the rising neck-line, around 129.50-129.75. while above that area, which is key support, the correction to the 2008 decline retains potential to extend, possibly towards the base of the previous double top around 149.33-151.82. However, the overall move higher from 112.08-113.74 is classed as corrective and an eventual return towards the 112.08-113.74 area and possibly 88.97 on a clean break is favoured.

EUR/JPY


eur/usd retreated from its new all-time traded high at 1.6039 on 15 July 2008 to reach a 2 ½ year low at 1.2329 on 28 october 2008, close to the 50% retracement of the 8 year rise from the october 2000 all-time traded low at .8232. a strong corrective recovery followed, reaching 1.4721 in december 2008, slightly over the 61.8% retrace of the 1.6039-1.2329 decline, but spot-on the falling 260 day (1 year) moving average, from where a steep and sustained retreat commenced. The rise from 1.2329 was almost fully retraced, reaching 1.2459 in early March 2009, from where steady recovery phase has been enjoyed. This recovery has been contained within a bullish channel (shown in pink) and key

resistance at the downtrend line connecting the september and december 2008 highs at 1.4862 and 1.4721 has recently been breached. The 260 day (1 year) moving average (in blue) has stopped falling, further evidence that the long-term trend is no longer down, with the bullishly aligned and rising 22 and 65 day (1 and 3 month) moving averages now favoured to underpin short-term corrective dips. our initial upside target area of the december and september 2008 highs at 1.4721 and 1.4862 is now being tested, with hopes rising for a move towards the 76.4% retracement of the 1.6039-1.2329 decline at 1.5163 over coming months. The top of the six month bull channel currently intersects at around the same point.

EUR/USD


Current level Major trend Major target Trend change levelEUR/CZK 25.400 Down 23.711 27.098EUR/HUF 272.50 Down 252.85 290.12EUR/PLN 4.1700 Down 3.8867 4.4381EUR/RON 4.2675 Up 4.5700 4.1850USD/ILS 3.7600 Down 3.6591 4.0136

USD/RUR 30.90 Up 36.353 29.143USD/TRL 1.4900 Down 1.4069 1.5885USD/ZAR 7.4150 Down 6.4318 8.3587

MAJOR TRENDS AND TARGETS FOR FX EMERGING MARKETS

usd/Zar exploded higher in the latter part of 2008, peaking at 11.8700 in october 2008 before undergoing a two-legged reversal to 9.2295 at the end of december 2008. This was close a 50% retracement of the entire 11 month rise from 6.4318 and a base pattern was then traced out. However, the rise off 9.2295 was limited to 10.6880 in March 2009 and a sharp reversal followed, breaking the recovery uptrend to warn of a further retracement of the 2007-2008 rise. a very bearish sequence of events has followed, with numerous key support levels having given way. current action is contained within the lower part of an 11 month bear chart drawn off

the 11.8700 and 10.6880 peaks, the lower end of which is now well below the august 2008 higher low at 7.1857 which marks the current target for the decline. There are no signs yet of an impending base and a 100% retracement of the rise to retest 6.4318 is favoured over coming months. recent lower tops near 8.35 and 8.20 are confirmed as key resistance by the broken 20 month uptrend line, with the bear channel top and the now falling 260 day (1 year) moving average the next key barrier above there around 8.95-9.05.

Steve Jarvis

usd/Zar



Current level Major trend Major target Trend change levelEUR/USD 1.4600 Up 1.5163 1.3739USD/JPY 91.25 Down 87.12 97.77USD/CHF 1.0375 Down 1.0018 1.1262GBP/USD 1.6475 Up 1.7451 1.4975USD/CAD 1.0875 Down 1.0005 1.1725AUD/USD .8575 Up .9330 .7705NZD/USD .7000 Up .7431 .6070EUR/JPY 133.25 Up 147.09 127.01EUR/CHF 1.5150 Up 1.5881 1.4913EUR/GBP .8850 Up .9081 .8524EUR/NOK 8.6400 Down 8.4597 9.1610EUR/SEK 10.2500 Down 9.8511 11.1880

MAJOR TRENDS AND TARGETS FOR THE MAJOR FX RATES

Country Flag USD Spot Last vs USD % Ch 3M % Ch 12M 12mth High 12mth Low

Eurozone EUR= 1.4674 -4% 0% 1.5987 1.2457

UK GBP= 1.6009 -3% -13% 2.008 1.3746

Japan JPY= 90.6 -6% -15% 110.49 87.31

Switzerland CHF= 1.0291 -5% -6% 1.2241 0.9843

Australia AUD= 0.8682 8% 4% 0.9787 0.6018

Canada CAD= 1.0904 -6% 5% 1.2995 0.9832

New Zealand NZD= 0.7187 11% 5% 0.8097 0.4923

Sweden SEK= 6.9132 -10% 5% 9.2927 5.838

Norway NOK= 5.815 -9% 3% 7.2227 4.953

Iceland ISK= 124.17 -3% 33% 147.55 71.67

Israel ILS= 3.768 -4% 10% 4.236 3.213

South Africa ZAR= 7.4752 -4% -8% 11.62 7.2025

Egypt EGP= 5.5026 -2% 1% 5.694 5.2825

Saudi Arabia SAR= 3.7501 0% 0% 3.7685 3.7115

Czech Rep. CZK= 17.146 -7% 3% 23.438 14.404

Poland PLN= 2.8652 -10% 26% 3.9003 2.0221

Hungary HUF= 184.67 -6% 12% 251.64 143.19

Russia RUB= 30.11 -3% 20% 36.3438 23.1531

Turkey TRY= 1.4906 -3% 20% 1.806 1.1512

China CNY= 6.8283 0% 0% 7.083 6.8108

Hong Kong HKD= 7.7504 0% 0% 7.8142 7.7483

Singapore SGD= 1.4164 -2% 0% 1.5562 1.3476

Taiwan TWD= 32.417 -1% 1% 35.21 29.996

India INR= 48.03 0% 5% 51.96 39.75

South Korea KRW= 1184.25 -7% 3% 1570.1 973.5

Thailand THB= 33.61 -1% -1% 36.26 31.04

Malaysia MYR= 3.469 -2% 1% 3.726 3.1305

Indonesia IDR= 9655 -6% 3% 12100 9070

Philippines PHP= 47.31 -2% 2% 49.94 41.3

Mexico MXN= 13.4965 2% 25% 15.555 9.858

Brazil BRL= 1.7985 -8% -3% 2.511 1.5591

Chile CLP= 541 2% 0% 682.5 430.6

Venezuela VEB= 2144.6 0% 0% 2144.6 2144.6

Colombia COP= 1919.5 -11% -11% 2608.15 1655.9

Levels Date:25-Sep-09 Source: Thomson Reuters

fx sPot Monitor

FXINTERNATIONAl DATA


FX INTERNATIONAl DATA

Country Flag Central Bank Rate Name Actual Previous

USA FED Fed funds 0-0.25 0-0.25

Eurozone ECB Refi 1.00 1.00

UK BOE Bank Repo 0.50 0.50

Japan BOJ O/N Call 0.10 0.10

Switzerland SNB 3 mth Libor 0.25 0.25

Australia RBA Cash 3.00 3.00

Canada BOC O/N Funding 0.25 0.25

New Zealand RBNZ Cash 2.50 2.50

Sweden Riksbank Repo 0.25 0.25

Norway Norges Bank Depo 1.25 1.25

Iceland CBI Policy 12.00 12.00

Israel BOI Short Term Lending 0.75 0.75

South Africa Reserve Bank Repurchase 7.00 7.00

Egypt CBE O/N Depo 8.25 8.50

Czech Rep. CNB 2 Week Repo 1.25 1.25

Poland NBP 28 Day Intervention 3.50 3.50

Hungary MNB 2 Week Depo 8.00 8.50

Russia CBR Refinancing 10.50 11.50

Turkey TCMB O/N Borrowing 7.25 7.75

China PBC 1 Year Lending 5.31 5.31

Taiwan CBC Discount 1.25 1.25

India RBI Repo 4.80 4.80

South Korea BOK O/N Call 1.97 1.99

Thailand BOT Repo 1.25 1.25

Indonesia BI BI 6.50 6.75

Philippines BSP Repo 4.00 4.00

Mexico BDM Target 4.50 4.50

Brazil BCB Selic 8.75 8.75

Chile CBC MPR 0.50 0.50

Levels Date: 25-Sep-09 Source: Thomson Reuters

central Banks


3 Month Days since Poll Poll Median Poll Min Poll Max Poll Mean Std Deviation Spot@Poll Date

EurUsd 23 1.4 1.25 1.51 1.406 0.058 1.4215

GbpUsd 23 1.635 1.48 1.85 1.636 0.073 1.6156

AudUsd 23 0.83 0.7 0.9 0.821 0.046 0.826

UsdJpy 23 96 86 105 96.6 3.7 92.92

UsdChf 23 1.081 1.02 1.19 1.091 0.042 1.0656

UsdCad 23 1.1 1 1.25 1.103 0.048 1.104

EurJpy 23 135.6 118.8 153.2 135.8 6.7 132.08

EurChf 23 1.535 1.47 1.586 1.536 0.025 1.5151

EurGbp 23 0.853 0.805 0.92 0.86 0.024 0.8797

GbpJpy 23 158.7 136.7 179.2 158.1 9.4 150.1

1 Year Days since Poll Poll Median Poll Min Poll Max Poll Mean Std Deviation Spot@Poll Date

EurUsd 23 1.4 1.18 1.6 1.387 0.103 1.4215

GbpUsd 23 1.65 1.34 1.88 1.648 0.111 1.6156

AudUsd 23 0.845 0.68 1.02 0.835 0.069 0.826

UsdJpy 23 101.3 87 116 102.1 6.9 92.92

UsdChf 23 1.109 0.94 1.33 1.112 0.081 1.0656

UsdCad 23 1.1 0.93 1.3 1.094 0.07 1.104

EurJpy 23 141.9 122 170.5 141.5 11.2 132.08

EurChf 23 1.564 1.418 1.647 1.559 0.043 1.5151

EurGbp 23 0.833 0.78 0.941 0.843 0.044 0.8797

GbpJpy 23 165.9 134 201.3 168.2 15.4 150.1


GDP CPI Industrial Production Unemployment

y-o-y y-o-y y-o-y level

USA -4.90 0.40 0.80 9.70

Eurozone -4.60 0.30 -0.30 9.50

UK -5.60 0.40 0.50 7.90

Japan 0.90 -2.20 2.10 5.70

Switzerland -2.00 0.10 4.00

Australia 0.60 1.50 5.80

Canada -3.40 0.00 8.70

New Zealand (partecipation) -2.10 1.90 68.4(partecipation)

Sweden -6.20 -0.80 -0.50 8.00

Norway -1.30 1.90 0.50 3.00

South Africa -2.80 6.40 -13.70 23.60

Czech Rep. -5.50 0.20 -18.20 8.50

Poland 1.10 3.70 -0.20 10.80

Hungary -7.50 5.00 -19.40 9.70

Russia 10.50 0.60 -12.60 8.10

China 7.90 -1.20 12.30

India 6.70 11.89 6.80

Mexico -10.30 0.21 -6.50 6.28

Brazil -1.20 0.15 -9.90 8.10


econoMic data

fx Poll

FXINTERNATIONAl DATA


Stock Indices Last % Ch 6M % Ch 12M Commodities Last % Ch 6M % Ch 12M

Gold 996.3 8.73% 13.77%

MSCI World 1122.92 36.3 -9.7 Silver 16.18 24.17% 22.95%

Dow Jones Ind. 9748.55 26.7 -10.3 Brent DTD 65.14 32.64% -35.41%

S&P 500 1060.87 28.9 -10.7 WTI 65.71 35.51% -41.09%

Nasdaq 100 1709.76 38.5 2.9

Eurostoxx 50 2838.22 33.4 -9.0 Bonds Last % Ch 6M % Ch 12M

UK FTSE 100 5079.27 29.9 -0.3 5Y Euro 2.446 0.164 -1.582

Dax 5605.21 33.9 -7.4 10Y Euro 3.305 0.271 -0.929

Cac 40 3758.36 30.8 -8.7 10Y US Treasury 3.379 0.656 -0.475

FT MIB 22953.4 44.9 -14.8 30Y US Treasury 4.172 0.571 -0.238

Swiss SMI 6275.44 27.5 -7.4 10Y UK Gilt 3.684 0.501 -0.938

Nikkei 225 10544.22 24.2 -13.0 10Y CH Govt Bond 2.073 -0.088 -0.772

Australia AORD 4707.9 33.8 -6.0

HK Hang Seng 21050 51.3 11.0 Money Markets Last % Ch 6M % Ch 12M

Shanghai Comp. 2853.554 22.0 28.7 US 6M Depo 0.6394 -1.1056 -3.3356

Singapore StraitT. 2667.43 56.3 7.7 EUR 6M Depo 1.0210 -0.6590 -4.2750

India BSE30 16781.43 77.2 22.6 GBP 6M Depo 0.7475 -1.1413 -5.6275

Brazil Bovespa 60496.19 44.8 20.5 CHF 6M Depo 0.3967 -0.1350 -2.5833

Russia RTSI 1242.23 72.1 -5.6 JPY 6M Depo 0.5475 -0.2369 -0.4525


Markets View

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FX INTERNATIONAl DATA


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http://www.fxtradermagazine.com/Index_en.php

october

wed 7 1:30am aud Home loans m/m

Thu 8

1:30am aud employment change

1:30am aud unemployment rate

12:00pm gBP asset Purchase facility

tentative gBP MPc rate statement

12.00pm gBP official Bank rate

12:45pm eur Minimum Bid rate

1:15pm cad Housing starts

1:30pm eur ecB Press conference

1:30pm eur unemployment claims

fri 9

12:00am usd fed chairman Bernanke speaks

9:30am gBP PPi input m/m

12:00pm cad employment change

12:00pm cad unemployment rate

1:30pm cad trade Balance

1:30pm usd trade Balance

3:30pm cad Boc Business outlook survey

sun 11 10:45pm nZd retail sales m/m

tue 13

9:30am gBP cPi y/y

10:00am eur german Zew economic sentiment

tentative gBP Boe inflation letter

wed 14

tentative JPY BoJ Press conference

9:30am gBP claimant count change

1:30pm usd core retail sales m/m

1:30pm usd retail sales m/m

7:00pm usd foMc Meeting Minutes

10:45pm nZd cPi q/q

Thu 15

12:30am aud rBa gov stevens speaks

1:30pm usd core cPi m/m

1:30pm usd unemployment claims

fri 16

8:15am cHf retail sales y/y

12:00pm cad core cPi m/m

2:00pm usd tic long-term Purchases

tue 20

1:30am aud Monetary Policy Meeting Minutes

1:30pm usd Building Permits

1:30pm usd PPi m/m

2:00pm cad Boc rate statement

2:00pm cad overnight rate

wed 21 9:30am gBP MPc Meeting Minutes

Thu 22

9:30am gBP retail sales m/m

1:30pm cad core retail sales m/m


3:30pm cad Boc Monetary Policy report4:15pm cad Boc Press conference

fri 23

9:00am eur german ifo Business climate

9:30am gBP Prelim gdP q/q

3:00pm usd existing Home sales

Mon 261:30am aud PPi q/q

26th-30th gBP nationwide HPi m/m

tue 27 3:00pm usd cB consumer confidence

wed 28

1:30am aud cPi q/q

3:00am nZd nBnZ Business confidence

12:00pm gBP cBi realized sales

1:30pm usd core durable goods orders m/m

3:00pm usd new Home sales

9:00pm nZd official cash rate

9:00pm nZd rBnZ rate statement

Thu 29

1:30pm usd advance gdP q/q


10:45pm nZd Building consents m/m

fri 30tentative JPY BoJ Press conference

1:30pm cad gdP m/m

november

sun 1

10:45pm nZd employment change q/q

10:45pm nZd labor cost index q/q

10:45pm nZd unemployment rate

Mon 2

10:30am gBP Manufacturing PMi

4:00pm usd isM Manufacturing PMi

4:00pm usd Pending Home sales m/m

tue 34:30am aud cash rate

4:30am aud rBa rate statement

wed 4 1:30am aud Building approvals m/m

octoBer, noVeMBer, deceMBer 2009gMt london time

FXEconomic Calendar


wed 4

1:30am aud retail sales m/m

10:30am gBP services PMi

2:15pm usd adP non-farm employment change

4:00pm usd isM non-Manufacturing PMi

8:15pm usd foMc statement

8:15pm usd federal funds rate

Thu 5

1:30am aud trade Balance

10:30am gBP Manufacturing Production m/m



1:00pm gBP official Bank rate


2:30pm cad Building Permits m/m



4:00pm cad ivey PMi

fri 6

tentative gBP Halifax HPi m/m



2:30pm usd non-farm employment change

2:30pm usd unemployment rate

Mon 9

1:30am aud Home loans m/m

1:30am aud rBa Monetary Policy statement


tue 10 9:00pm nZd rBnZ financial stability report

wed 11


11:30am gBP Boe gov king speaks

11:30am gBP Boe inflation report

Thu 12




fri 13

12:50am JPY Prelim gdP q/q

8:00am eur german Prelim gdP q/q



sun 15 10:45pm nZd PPi input q/q

Mon 16

10:30am gBP PPi input m/m2:30pm usd core retail sales m/m2:30pm usd retail sales m/m10:45pm nZd retail sales m/m

tue 17

1:30am aud Monetary Policy Meeting Minutes9:15am cHf retail sales y/y10:30am gBP cPi y/y11:00am eur german Zew economic sentiment2:30pm usd PPi m/m3:00pm usd tic long-term Purchases

wed 1810:30am gBP MPc Meeting Minutes2:30pm usd Building Permits2:30pm usd core cPi m/m

Thu 1910:30am gBP retail sales m/m2:30pm usd unemployment claims

fri 20 tentative JPY BoJ Press conference

Mon 231:00pm cad core cPi m/m4:00pm usd existing Home sales

tue 24

10:00am eur german ifo Business climate2:30pm cad core retail sales m/m2:30pm usd Prelim gdP q/q4:00pm usd cB consumer confidence

wed 25

3:00am nZd inflation expectations q/q2:30pm usd core durable goods orders m/m4:00pm usd new Home sales8:00pm usd foMc Meeting Minutes10:45pm nZd Building consents m/m

Thu 26

1:30am aud Private capital expenditure q/q3:00am nZd nBnZ Business confidence10:30am gBP revised gdP q/q12:00pm gBP cBi realized sales2:30pm usd unemployment claims

fri 27 2:30pm cad gdP m/m

Mon 308:00am gBP nationwide HPi m/m10:45am gBP inflation report Hearings

december

tue 1

1:30am aud Building approvals m/m

4:30am aud cash rate

4:30am aud rBa rate statement

10:30am gBP Manufacturing PMi

4:00pm usd isM Manufacturing PMi

FX Economic Calendar


4:00pm usd Pending Home sales m/m

wed 2 2:15pm usd adP non-farm employment change

Thu 3

1:30am aud retail sales m/m

1:30am aud trade Balance

10:30am gBP services PMi




4:00pm usd isM non-Manufacturing PMi

fri 4

tentative gBP Halifax HPi m/m



2:30pm usd non-farm employment change

2:30pm usd unemployment rate

4:00pm cad ivey PMi

Mon 7 2:30pm cad Building Permits m/m

tue 8

10:30am gBP Manufacturing Production m/m

3:00pm cad Boc rate statement

3:00pm cad overnight rate

wed 9

1:30am aud Home loans m/m


9:00pm nZd official cash rate

9:00pm nZd rBnZ Press conference

9:00pm nZd rBnZ rate statement

Thu 10



9:30am cHf libor rate

9:30am cHf snB Monetary Policy assessment

9:30am cHf snB Press conference



1:00pm gBP official Bank rate




10:45pm nZd retail sales m/m

fri 112:30pm usd core retail sales m/m

2:30pm usd retail sales m/m

Mon 1410:30am gBP PPi input m/m

1:30am aud Monetary Policy Meeting Minutes

tue 15

11:00am eur german Zew economic sentiment

2:30pm usd PPi m/m

3:00pm usd tic long-term Purchases

wed 16

12:50am JPY tankan Manufacturing index

1:30am aud gdP q/q


2:30pm usd Building Permits

2:30pm usd core cPi m/m

8:15pm usd foMc statement

8:15pm usd federal funds rate

Thu 17

3:00am nZd nBnZ Business confidence

9:15am cHf retail sales y/y


fri 18 tentative JPY BoJ Press conference

Mon 211:00pm cad core cPi m/m

10:45pm nZd gdP q/q

tue 22

10:30am gBP cPi y/y

10:30am gBP current account

2:30pm cad core retail sales m/m

4:00pm usd existing Home sales

10:45pm nZd current account

wed 2310:30am gBP MPc Meeting Minutes

4:00pm usd new Home sales

Thu 24

10:00am eur german ifo Business climate

10:30am gBP retail sales m/m

2:30pm usd core durable goods orders m/m


tue 2912:00pm gBP cBi realized sales

4:00pm usd cB consumer confidence

wed 30 2:30pm cad gdP m/m

Thu 318:00am gBP nationwide HPi m/m


FXEconomic Calendar


THE NEW Maserati Quattroporte

Combined consumption : 14,7 l/100 km (4,2) - 15,7 l/100 km (4,7) - CO2 emissions : 340 g/km (4,2) - 365 g/km (4,7) - www.maserati.com

artwork for connoisseurs.

Maserati Quattroporte S 4,7 litres 430 CV and Quattroporte 4,2 litres 400 CV. V8 engine, PininFarina design.

079-Quattroporte-UK.indd 1 26/01/09 17:01:54

http://www.maserati.com/

http://www.maserati.com/

clouds TRADER MAGAZINE 2393 trading tecHniques on tHe forex How sHould a successful trader work...

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