Currency Trader Magazine (08-2006) [Finance Forex Trading Review Analysis Commentary]

download Currency Trader Magazine (08-2006) [Finance Forex Trading Review Analysis Commentary]

of 46

Transcript of Currency Trader Magazine (08-2006) [Finance Forex Trading Review Analysis Commentary]

  • 8/11/2019 Currency Trader Magazine (08-2006) [Finance Forex Trading Review Analysis Commentary]

    1/46

    Business

    Advertising Branding Business Management Business Ethics Careers, Jobs & Employment Customer Service Marketing Networking Network Marketing Pay-Per-Click Advertising Presentation Public Relations Sales Sales Management Sales Telemarketing Sales Training Small Business Strategic Planning Entrepreneur Negotiation Tips Team Building Top Quick Tips

    Internet & Businesses Online

    Affiliate Revenue Blogging, RSS & FeedsDomain Name E-Book E-commerce Email Marketing Ezine Marketing Ezine Publishing

    Forums & Boards Internet Marketing Online Auction Search Engine Optimization (SEO) Spam Blocking Streaming Audio & Online Music Traffic Building Video Streaming Web Design Web Development

    Web Hosting Web Site Promotion

    Finance

    Credit Currency Trading Debt Consolidation Debt Relief Loan Insurance Investing Mortgage Refinance Personal Finance Real Estate TaxesStocks & Mutual Fund Structured Settlements

    Communications

    Broadband Internet Mobile & Cell Phone VOIP Video Conferencing Satellite TV

    Reference & Education

    Book Reviews

    College & University Psychology Science Articles

    Food & Drinks

    Coffee Cooking TipsRecipes & Food and Drink Wine & Spirits

    Home & Family

    Crafts & Hobbies

    Elder Care Holiday Home Improvement Home Security Interior Design & Decorating Landscaping & Gardening Babies & Toddler Pets Parenting Pregnancy

    News & Society

    Dating Divorce Marriage & Wedding PoliticalRelationships Religion

    Computers & Technology

    Computer Hardware Data Recovery & Computer Backup Game Internet Security Personal Technology Software

    Arts & Entertainment

    Casino & Gambling Humanities Humor & Entertainment Language Music & MP3 Philosophy Photography Poetry

    Shopping & Product Reviews

    Book Reviews Fashion & Style

    Health & Fitness

    Acne Aerobics & Cardio Alternative Medicine Beauty TipsDepression Diabetes Exercise & Fitness Fitness Equipment Hair Loss Medicine Meditation Muscle Building & Bodybuilding Nutrition Nutritional SupplementsWeight LossYoga

    Recreation and Sport

    Fishing Golf Martial Arts Motorcycle

    Self Improvement & Motivation

    Attraction Coaching Creativity Dealing with Grief & LossFinding HappinessGet Organized - Organization Leadership Motivation Inspirational Positive Attitude Tips Goal Setting Innovation Spirituality Stress ManagementSuccess Time Management

    Writing & Speaking

    Article Writing Book Marketing

    Copywriting Public Speaking Writing

    Travel & Leisure

    Aviation & Flying Cruising & Sailing Outdoors Vacation Rental

    Cancer

    Breast Cancer Mesothelioma & Asbestos Cancer

    http://www.findbeststuff.com/showarticles.php?cat=101http://www.findbeststuff.com/showarticles.php?cat=114http://www.findbeststuff.com/showarticles.php?cat=176http://www.findbeststuff.com/showarticles.php?cat=144http://www.findbeststuff.com/showarticles.php?cat=118http://www.findbeststuff.com/showarticles.php?cat=130http://www.findbeststuff.com/showarticles.php?cat=177http://www.findbeststuff.com/showarticles.php?cat=189http://www.findbeststuff.com/showarticles.php?cat=188http://www.findbeststuff.com/showarticles.php?cat=202http://www.findbeststuff.com/showarticles.php?cat=205http://www.findbeststuff.com/showarticles.php?cat=203http://www.findbeststuff.com/showarticles.php?cat=212http://www.findbeststuff.com/showarticles.php?cat=213http://www.findbeststuff.com/showarticles.php?cat=214http://www.findbeststuff.com/showarticles.php?cat=215http://www.findbeststuff.com/showarticles.php?cat=222http://www.findbeststuff.com/showarticles.php?cat=227http://www.findbeststuff.com/showarticles.php?cat=143http://www.findbeststuff.com/showarticles.php?cat=187http://www.findbeststuff.com/showarticles.php?cat=233http://www.findbeststuff.com/showarticles.php?cat=235http://www.findbeststuff.com/showarticles.php?cat=103http://www.findbeststuff.com/showarticles.php?cat=112http://www.findbeststuff.com/showarticles.php?cat=138http://www.findbeststuff.com/showarticles.php?cat=139http://www.findbeststuff.com/showarticles.php?cat=140http://www.findbeststuff.com/showarticles.php?cat=142http://www.findbeststuff.com/showarticles.php?cat=146http://www.findbeststuff.com/showarticles.php?cat=147http://www.findbeststuff.com/showarticles.php?cat=151http://www.findbeststuff.com/showarticles.php?cat=168http://www.findbeststuff.com/showarticles.php?cat=106http://www.findbeststuff.com/showarticles.php?cat=219http://www.findbeststuff.com/showarticles.php?cat=219http://www.findbeststuff.com/showarticles.php?cat=224http://www.findbeststuff.com/showarticles.php?cat=107http://www.findbeststuff.com/showarticles.php?cat=107http://www.findbeststuff.com/showarticles.php?cat=236http://www.findbeststuff.com/showarticles.php?cat=239http://www.findbeststuff.com/showarticles.php?cat=242http://www.findbeststuff.com/showarticles.php?cat=243http://www.findbeststuff.com/showarticles.php?cat=244http://www.findbeststuff.com/showarticles.php?cat=221http://www.findbeststuff.com/showarticles.php?cat=127http://www.findbeststuff.com/showarticles.php?cat=129http://www.findbeststuff.com/showarticles.php?cat=133http://www.findbeststuff.com/showarticles.php?cat=134http://www.findbeststuff.com/showarticles.php?cat=174http://www.findbeststuff.com/showarticles.php?cat=166http://www.findbeststuff.com/showarticles.php?cat=169http://www.findbeststuff.com/showarticles.php?cat=183http://www.findbeststuff.com/showarticles.php?cat=194http://www.findbeststuff.com/showarticles.php?cat=208http://www.findbeststuff.com/showarticles.php?cat=232http://www.findbeststuff.com/showarticles.php?cat=226http://www.findbeststuff.com/showarticles.php?cat=229http://www.findbeststuff.com/showarticles.php?cat=116http://www.findbeststuff.com/showarticles.php?cat=182http://www.findbeststuff.com/showarticles.php?cat=240http://www.findbeststuff.com/showarticles.php?cat=238http://www.findbeststuff.com/showarticles.php?cat=216http://www.findbeststuff.com/showarticles.php?cat=110http://www.findbeststuff.com/showarticles.php?cat=122http://www.findbeststuff.com/showarticles.php?cat=206http://www.findbeststuff.com/showarticles.php?cat=217http://www.findbeststuff.com/showarticles.php?cat=121http://www.findbeststuff.com/showarticles.php?cat=123http://www.findbeststuff.com/showarticles.php?cat=209http://www.findbeststuff.com/showarticles.php?cat=246http://www.findbeststuff.com/showarticles.php?cat=125http://www.findbeststuff.com/showarticles.php?cat=141http://www.findbeststuff.com/showarticles.php?cat=159http://www.findbeststuff.com/showarticles.php?cat=160http://www.findbeststuff.com/showarticles.php?cat=161http://www.findbeststuff.com/showarticles.php?cat=167http://www.findbeststuff.com/showarticles.php?cat=170http://www.findbeststuff.com/showarticles.php?cat=109http://www.findbeststuff.com/showarticles.php?cat=196http://www.findbeststuff.com/showarticles.php?cat=193http://www.findbeststuff.com/showarticles.php?cat=204http://www.findbeststuff.com/showarticles.php?cat=132http://www.findbeststuff.com/showarticles.php?cat=137http://www.findbeststuff.com/showarticles.php?cat=178http://www.findbeststuff.com/showarticles.php?cat=200http://www.findbeststuff.com/showarticles.php?cat=210http://www.findbeststuff.com/showarticles.php?cat=211http://www.findbeststuff.com/showarticles.php?cat=158http://www.findbeststuff.com/showarticles.php?cat=131http://www.findbeststuff.com/showarticles.php?cat=131http://www.findbeststuff.com/showarticles.php?cat=152http://www.findbeststuff.com/showarticles.php?cat=218http://www.findbeststuff.com/showarticles.php?cat=195http://www.findbeststuff.com/showarticles.php?cat=223http://www.findbeststuff.com/showarticles.php?cat=119http://www.findbeststuff.com/showarticles.php?cat=162http://www.findbeststuff.com/showarticles.php?cat=163http://www.findbeststuff.com/showarticles.php?cat=171http://www.findbeststuff.com/showarticles.php?cat=186http://www.findbeststuff.com/showarticles.php?cat=197http://www.findbeststuff.com/showarticles.php?cat=198http://www.findbeststuff.com/showarticles.php?cat=199http://www.findbeststuff.com/showarticles.php?cat=110http://www.findbeststuff.com/showarticles.php?cat=148http://www.findbeststuff.com/showarticles.php?cat=100http://www.findbeststuff.com/showarticles.php?cat=102http://www.findbeststuff.com/showarticles.php?cat=104http://www.findbeststuff.com/showarticles.php?cat=111http://www.findbeststuff.com/showarticles.php?cat=135http://www.findbeststuff.com/showarticles.php?cat=136http://www.findbeststuff.com/showarticles.php?cat=145http://www.findbeststuff.com/showarticles.php?cat=150http://www.findbeststuff.com/showarticles.php?cat=156http://www.findbeststuff.com/showarticles.php?cat=180http://www.findbeststuff.com/showarticles.php?cat=181http://www.findbeststuff.com/showarticles.php?cat=117http://www.findbeststuff.com/showarticles.php?cat=190http://www.findbeststuff.com/showarticles.php?cat=231http://www.findbeststuff.com/showarticles.php?cat=245http://www.findbeststuff.com/showarticles.php?cat=249http://www.findbeststuff.com/showarticles.php?cat=149http://www.findbeststuff.com/showarticles.php?cat=154http://www.findbeststuff.com/showarticles.php?cat=179http://www.findbeststuff.com/showarticles.php?cat=185http://www.findbeststuff.com/showarticles.php?cat=105http://www.findbeststuff.com/showarticles.php?cat=120http://www.findbeststuff.com/showarticles.php?cat=126http://www.findbeststuff.com/showarticles.php?cat=155http://www.findbeststuff.com/showarticles.php?cat=157http://www.findbeststuff.com/showarticles.php?cat=191http://www.findbeststuff.com/showarticles.php?cat=172http://www.findbeststuff.com/showarticles.php?cat=184http://www.findbeststuff.com/showarticles.php?cat=165http://www.findbeststuff.com/showarticles.php?cat=201http://www.findbeststuff.com/showarticles.php?cat=153http://www.findbeststuff.com/showarticles.php?cat=164http://www.findbeststuff.com/showarticles.php?cat=225http://www.findbeststuff.com/showarticles.php?cat=228http://www.findbeststuff.com/showarticles.php?cat=230http://www.findbeststuff.com/showarticles.php?cat=234http://www.findbeststuff.com/showarticles.php?cat=248http://www.findbeststuff.com/showarticles.php?cat=113http://www.findbeststuff.com/showarticles.php?cat=124http://www.findbeststuff.com/showarticles.php?cat=207http://www.findbeststuff.com/showarticles.php?cat=247http://www.findbeststuff.com/showarticles.php?cat=108http://www.findbeststuff.com/showarticles.php?cat=128http://www.findbeststuff.com/showarticles.php?cat=192http://www.findbeststuff.com/showarticles.php?cat=237http://www.findbeststuff.com/showarticles.php?cat=115http://www.findbeststuff.com/showarticles.php?cat=175http://www.findbeststuff.com/showarticles.php?cat=175http://www.findbeststuff.com/showarticles.php?cat=175http://www.findbeststuff.com/showarticles.php?cat=175http://www.findbeststuff.com/showarticles.php?cat=115http://www.findbeststuff.com/showarticles.php?cat=237http://www.findbeststuff.com/showarticles.php?cat=192http://www.findbeststuff.com/showarticles.php?cat=128http://www.findbeststuff.com/showarticles.php?cat=108http://www.findbeststuff.com/showarticles.php?cat=247http://www.findbeststuff.com/showarticles.php?cat=207http://www.findbeststuff.com/showarticles.php?cat=124http://www.findbeststuff.com/showarticles.php?cat=113http://www.findbeststuff.com/showarticles.php?cat=248http://www.findbeststuff.com/showarticles.php?cat=234http://www.findbeststuff.com/showarticles.php?cat=230http://www.findbeststuff.com/showarticles.php?cat=228http://www.findbeststuff.com/showarticles.php?cat=225http://www.findbeststuff.com/showarticles.php?cat=164http://www.findbeststuff.com/showarticles.php?cat=153http://www.findbeststuff.com/showarticles.php?cat=201http://www.findbeststuff.com/showarticles.php?cat=165http://www.findbeststuff.com/showarticles.php?cat=184http://www.findbeststuff.com/showarticles.php?cat=172http://www.findbeststuff.com/showarticles.php?cat=191http://www.findbeststuff.com/showarticles.php?cat=157http://www.findbeststuff.com/showarticles.php?cat=155http://www.findbeststuff.com/showarticles.php?cat=126http://www.findbeststuff.com/showarticles.php?cat=120http://www.findbeststuff.com/showarticles.php?cat=105http://www.findbeststuff.com/showarticles.php?cat=185http://www.findbeststuff.com/showarticles.php?cat=179http://www.findbeststuff.com/showarticles.php?cat=154http://www.findbeststuff.com/showarticles.php?cat=149http://www.findbeststuff.com/showarticles.php?cat=249http://www.findbeststuff.com/showarticles.php?cat=245http://www.findbeststuff.com/showarticles.php?cat=231http://www.findbeststuff.com/showarticles.php?cat=190http://www.findbeststuff.com/showarticles.php?cat=117http://www.findbeststuff.com/showarticles.php?cat=181http://www.findbeststuff.com/showarticles.php?cat=180http://www.findbeststuff.com/showarticles.php?cat=156http://www.findbeststuff.com/showarticles.php?cat=150http://www.findbeststuff.com/showarticles.php?cat=145http://www.findbeststuff.com/showarticles.php?cat=136http://www.findbeststuff.com/showarticles.php?cat=135http://www.findbeststuff.com/showarticles.php?cat=111http://www.findbeststuff.com/showarticles.php?cat=104http://www.findbeststuff.com/showarticles.php?cat=102http://www.findbeststuff.com/showarticles.php?cat=100http://www.findbeststuff.com/showarticles.php?cat=148http://www.findbeststuff.com/showarticles.php?cat=110http://www.findbeststuff.com/showarticles.php?cat=199http://www.findbeststuff.com/showarticles.php?cat=198http://www.findbeststuff.com/showarticles.php?cat=197http://www.findbeststuff.com/showarticles.php?cat=186http://www.findbeststuff.com/showarticles.php?cat=171http://www.findbeststuff.com/showarticles.php?cat=163http://www.findbeststuff.com/showarticles.php?cat=162http://www.findbeststuff.com/showarticles.php?cat=119http://www.findbeststuff.com/showarticles.php?cat=223http://www.findbeststuff.com/showarticles.php?cat=195http://www.findbeststuff.com/showarticles.php?cat=218http://www.findbeststuff.com/showarticles.php?cat=152http://www.findbeststuff.com/showarticles.php?cat=131http://www.findbeststuff.com/showarticles.php?cat=131http://www.findbeststuff.com/showarticles.php?cat=158http://www.findbeststuff.com/showarticles.php?cat=211http://www.findbeststuff.com/showarticles.php?cat=210http://www.findbeststuff.com/showarticles.php?cat=200http://www.findbeststuff.com/showarticles.php?cat=178http://www.findbeststuff.com/showarticles.php?cat=137http://www.findbeststuff.com/showarticles.php?cat=132http://www.findbeststuff.com/showarticles.php?cat=204http://www.findbeststuff.com/showarticles.php?cat=193http://www.findbeststuff.com/showarticles.php?cat=196http://www.findbeststuff.com/showarticles.php?cat=109http://www.findbeststuff.com/showarticles.php?cat=170http://www.findbeststuff.com/showarticles.php?cat=167http://www.findbeststuff.com/showarticles.php?cat=161http://www.findbeststuff.com/showarticles.php?cat=160http://www.findbeststuff.com/showarticles.php?cat=159http://www.findbeststuff.com/showarticles.php?cat=141http://www.findbeststuff.com/showarticles.php?cat=125http://www.findbeststuff.com/showarticles.php?cat=246http://www.findbeststuff.com/showarticles.php?cat=209http://www.findbeststuff.com/showarticles.php?cat=123http://www.findbeststuff.com/showarticles.php?cat=121http://www.findbeststuff.com/showarticles.php?cat=217http://www.findbeststuff.com/showarticles.php?cat=206http://www.findbeststuff.com/showarticles.php?cat=122http://www.findbeststuff.com/showarticles.php?cat=110http://www.findbeststuff.com/showarticles.php?cat=216http://www.findbeststuff.com/showarticles.php?cat=238http://www.findbeststuff.com/showarticles.php?cat=240http://www.findbeststuff.com/showarticles.php?cat=182http://www.findbeststuff.com/showarticles.php?cat=116http://www.findbeststuff.com/showarticles.php?cat=229http://www.findbeststuff.com/showarticles.php?cat=226http://www.findbeststuff.com/showarticles.php?cat=232http://www.findbeststuff.com/showarticles.php?cat=208http://www.findbeststuff.com/showarticles.php?cat=194http://www.findbeststuff.com/showarticles.php?cat=183http://www.findbeststuff.com/showarticles.php?cat=169http://www.findbeststuff.com/showarticles.php?cat=166http://www.findbeststuff.com/showarticles.php?cat=174http://www.findbeststuff.com/showarticles.php?cat=134http://www.findbeststuff.com/showarticles.php?cat=133http://www.findbeststuff.com/showarticles.php?cat=129http://www.findbeststuff.com/showarticles.php?cat=127http://www.findbeststuff.com/showarticles.php?cat=221http://www.findbeststuff.com/showarticles.php?cat=244http://www.findbeststuff.com/showarticles.php?cat=243http://www.findbeststuff.com/showarticles.php?cat=242http://www.findbeststuff.com/showarticles.php?cat=239http://www.findbeststuff.com/showarticles.php?cat=236http://www.findbeststuff.com/showarticles.php?cat=107http://www.findbeststuff.com/showarticles.php?cat=107http://www.findbeststuff.com/showarticles.php?cat=224http://www.findbeststuff.com/showarticles.php?cat=219http://www.findbeststuff.com/showarticles.php?cat=219http://www.findbeststuff.com/showarticles.php?cat=106http://www.findbeststuff.com/showarticles.php?cat=168http://www.findbeststuff.com/showarticles.php?cat=151http://www.findbeststuff.com/showarticles.php?cat=147http://www.findbeststuff.com/showarticles.php?cat=146http://www.findbeststuff.com/showarticles.php?cat=142http://www.findbeststuff.com/showarticles.php?cat=140http://www.findbeststuff.com/showarticles.php?cat=139http://www.findbeststuff.com/showarticles.php?cat=138http://www.findbeststuff.com/showarticles.php?cat=112http://www.findbeststuff.com/showarticles.php?cat=103http://www.findbeststuff.com/showarticles.php?cat=235http://www.findbeststuff.com/showarticles.php?cat=233http://www.findbeststuff.com/showarticles.php?cat=187http://www.findbeststuff.com/showarticles.php?cat=143http://www.findbeststuff.com/showarticles.php?cat=227http://www.findbeststuff.com/showarticles.php?cat=222http://www.findbeststuff.com/showarticles.php?cat=215http://www.findbeststuff.com/showarticles.php?cat=214http://www.findbeststuff.com/showarticles.php?cat=213http://www.findbeststuff.com/showarticles.php?cat=212http://www.findbeststuff.com/showarticles.php?cat=203http://www.findbeststuff.com/showarticles.php?cat=205http://www.findbeststuff.com/showarticles.php?cat=202http://www.findbeststuff.com/showarticles.php?cat=188http://www.findbeststuff.com/showarticles.php?cat=189http://www.findbeststuff.com/showarticles.php?cat=177http://www.findbeststuff.com/showarticles.php?cat=130http://www.findbeststuff.com/showarticles.php?cat=118http://www.findbeststuff.com/showarticles.php?cat=144http://www.findbeststuff.com/showarticles.php?cat=176http://www.findbeststuff.com/showarticles.php?cat=114http://www.findbeststuff.com/showarticles.php?cat=101
  • 8/11/2019 Currency Trader Magazine (08-2006) [Finance Forex Trading Review Analysis Commentary]

    2/46

    AUSSIE AND KIWI DOLLARS:Whats the play?

    JAPAN HIKES,yen says, Yikes!

    TRADING WITH THEadaptive moving average

    COMMITMENT OFTraders report

    THE DOLLARShidden risks

    August 2006Volume 3, No. 8

    http://www.findbeststuff.com/http://www.findbeststuff.com/http://www.findbeststuff.com/http://www.findbeststuff.com/http://www.findbeststuff.com/http://www.findbeststuff.com/http://www.findbeststuff.com/http://www.findbeststuff.com/http://www.findbeststuff.com/http://www.findbeststuff.com/http://www.findbeststuff.com/http://www.findbeststuff.com/http://www.findbeststuff.com/
  • 8/11/2019 Currency Trader Magazine (08-2006) [Finance Forex Trading Review Analysis Commentary]

    3/46

    Contributors . . . . . . . . . . . . . . . . . . . . 6

    Global MarketsAussie/dollar shrugs offvolatile first half . . . . . . . . . . . . . . . . . 8Whats in store for the Aussie dollarafter its roller-coaster first half?

    By Currency Trader Staff

    New Zealand: Kiwi dollar losingits high-yield luster . . . . . . . . . . . . . 10The other currency down under facesa few economic challenges inthe coming months.By Currency Trader Staff

    Bi g Picture . . . . . . . . . . . . . . . . . . . . 12Gauging trader commitmentIs this a good breakout or a false move?The Commitment of Traders report canhelp currency traders fill in some of theholes left by the absence of traditionalvolume data in forex.By Barbara Rockefeller

    Trading Strategies . . . . . . . . . . . . . 16The adaptive moving averageHow do you improve on a moving average?Make it responsive to volatility changes.By Currency Trader Staff

    Advanced Strategies . . . . . . . . . . . 22The dollar and its hidden risks

    A look at the dollar in light of its recentperformance vs. the yen and the euro.

    By Howard L. Simons

    C urrency System Analysis . . . . . . 28HLR breakout

    CONTENTS

    2 August 2006 CURRENCY TRADER

    continued on p. 4

  • 8/11/2019 Currency Trader Magazine (08-2006) [Finance Forex Trading Review Analysis Commentary]

    4/46

    http://www.fxcmtr.com/
  • 8/11/2019 Currency Trader Magazine (08-2006) [Finance Forex Trading Review Analysis Commentary]

    5/464 August 2006 CURRENCY TRADER

    CONTENTS

    Have a question about something youve seen inCurrency Trader ?

    Submit your editorial queries or comments [email protected] .

    Looking for an advertiser?Consult the list below and click on the company name for a direct link to the ad in this months

    issue of Currency Trader .

    Index of advertisers

    FXCM MetaStock Currency Trader BookstoreInterbankFX Dynamic Trend

    Forex.comForex Capital InvestorsThe Forex Trading Expo

    Currency Basics . . . . . . . . . . . . . 32Trading forex the mini wayMini forex trading is a lower-cost

    alternative to full-sized futures andspot forex.By Darrell Jobman

    InternationalMarket Summary . . . . . . . . . . . . . . . 34

    Global News Briefs . . . . . . . . . . . . . 36

    Currency Futures . . . . . . . . . . . . . . 37News and data from the currencyfutures world.

    Industry NewsJapan endszero interest-rate policy . . . . . . . . . . 38For the first time in more than 15 years,the Bank of Japan is committed toraising the countrys interest rates.

    RefcoFX finds a new suitor . . . . . . . 39In limbo since the bankruptcy of its parent company, RefcoFX.comhas a new owner in Gain Capital.

    Global Economic Calendar . . . . . . 40Key dates for currency traders.

    Events . . . . . . . . . . . . . . . . . . . . . . . . 42Conferences, seminars, and other events.

    Key Concepts . . . . . . . . . . . . . . . . . . 42References and definitions.

    Forex Trade Journal . . . . . . . . . . . . 44 A dollar/yen trade gets a boost froman important bit of economic news.

    mailto:[email protected]:[email protected]
  • 8/11/2019 Currency Trader Magazine (08-2006) [Finance Forex Trading Review Analysis Commentary]

    6/46

    About the authorEdward Ponsi is the President of FXEducator LLC and is the former ChiefTrading Instructor for Forex Capital Markets (FXCM). An experienced traderand mentor, Ed gives personal, one-on-one trading instr uction to studentsaround the world, and has advised hedge funds, Inter bank traders, andindividuals of all levels of skill and experience.

    What is FOREX? Why is it the fastest growingsegment for individual investors and manyformer equity and futures traders?

    MetaStock , the leading creator of technical analysis software, is excited about the FOREXmarket and for good reason. Its one of the best ways for YOU to get started in investing.To help you along, we want to give you a FREE copy of Successful FOREX Trading. Writtenby the former Chief Trading Instructor for FOREX Capital Markets. This book explainstechnical analysis as it relates to currency trading. This valuable information is FREE, nostrings attached. To get your copy, visit our web site , or give us a call at (800) 432-4917

    and mention the promotion code CT36. Click Herefor your FREE Book

    This is neither a solicitation to buy or sell any type of nancial instruments, nor intended as investment recommendations. All investment trading involves multiple substantial risks of mon -etary loss. Dont trade with money you cant afford to lose. Trading is not suitable for everyone. Past performance, whether indicated by actual or hypothetical results or testimonials are noguarantee of future performance or success. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT,

    THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS OR TESTIMONIALS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULARTRADING PROGRAM. Furthermore, all internal and external computer and software systems are not fail-safe. Have contingency plans in place for such occasions. Equis International assumesno responsibility for errors, inaccuracies, or omissions in these materials, nor shall it be liable for any special, indirect, incidental, or consequential damages, including without limitationlosses, lost revenue, or lost pro ts, that may result from the reliance upon the information materials presented.

    http://www.equis.com/ct36?wt.mc_id=060607_Equis_ct36http://www.equis.com/ct36?wt.mc_id=060607_Equis_ct36http://www.equis.com/ct36?wt.mc_id=060607_Equis_ct36http://www.equis.com/ct36?wt.mc_id=060607_Equis_ct36http://www.metastock.com/ct36http://www.metastock.com/ct36http://www.equis.com/ct36?wt.mc_id=060607_Equis_ct36http://www.equis.com/ct36?wt.mc_id=060607_Equis_ct36http://www.equis.com/ct36?wt.mc_id=060607_Equis_ct36http://www.metastock.com/ct36http://www.equis.com/ct36?wt.mc_id=060607_Equis_ct36
  • 8/11/2019 Currency Trader Magazine (08-2006) [Finance Forex Trading Review Analysis Commentary]

    7/466 August 2006 CURRENCY TRADER

    Editor-in-chief: Mark [email protected]

    Managing editor: Molly [email protected]

    Contributing editor: David [email protected]

    Contributing editor: Jeff Ponczak [email protected]

    Contributing Writers:Marc Chandler, Barbara Rockefeller

    Editorial assistant andWebmaster: Kesha Green

    [email protected]

    Art director: Laura [email protected]

    President: Phil Dorman [email protected]

    Publisher,Ad sales East Coast and Midwest:

    Bob [email protected]

    Ad salesWest Coast and Southwest only:

    Allison [email protected]

    Classified ad sales: Mark Seger [email protected]

    Volume 3, Issue 8. Currency Trader is published monthly by TechInfo, Inc.,150 S. Wacker Drive, Suite 880, Chicago, IL 60606. Copyright 2006TechInfo, Inc. All rights reserved. Information in this publication may not bestored or reproduced in any form without written permission from the publisher.

    The information in Currency Trader magazine is intended for educational pur-poses only. It is not meant to recommend, promote or in any way imply theeffectiveness of any trading system, strategy or approach. Traders are advisedto do their own research and testing to determine the validity of a trading idea.Trading and investing carry a high level of risk. Past performance does notguarantee future results.

    For all subscriber services:www.currencytradermag.com

    A publication of Active Trader

    CONTRIBUTORSCONTRIBUTORS

    Howard Simons is president of Rosewood TradingInc. and a strategist for Bianco Research. He writes andspeaks frequently on a wide range of economic and finan-cial market issues.

    Barbara Rockefeller (www.rts-forex.com ) is aninternational economist with a focus on foreign exchange.She has worked as a forecaster, trader, and consultant atCitibank and other financial institutions, and currentlypublishes two daily reports on foreign exchange.Rockefeller is the author of Technical Analysis for Dummies(2004), 24/7 Trading Around the Clock, Around the World(John Wiley & Sons, 2000),The Global Trader(John Wiley &Sons, 2001), and How to Invest Internationally , published in Japan in 1999. A book tentatively titled How to Trade FXisin the works.

    Darrell Jobman is editor-in-chief of www.tradinge -ducation.com , a Web site providing free information and

    education to traders. He is an acknowledged authority onthe financial markets and has been writing about them formore than 35 years.

    Jos Cruset ( [email protected]) is a private trad-er, software engineer, and trading system researcher. Hehas an MBA and a NASD-Series 3 certificate and hasworked many years in the banking industry.

    http://www.rts-forex.com/http://www.tradingeducation.com/http://www.tradingeducation.com/http://www.tradingeducation.com/mailto:[email protected]:[email protected]:[email protected]://www.tradingeducation.com/http://www.tradingeducation.com/mailto:[email protected]://www.rts-forex.com/
  • 8/11/2019 Currency Trader Magazine (08-2006) [Finance Forex Trading Review Analysis Commentary]

    8/46

    http://www.forex.com/linkc.html?src=ccytradermagAUG06
  • 8/11/2019 Currency Trader Magazine (08-2006) [Finance Forex Trading Review Analysis Commentary]

    9/46

    A fter massive volatility rockedthe Australian dollar/U.S. dol-lar pair (AUD/USD) fromFebruary through May, the cur-rency is trading around 0.7660 at the end of July, just slightly higher than at the beginningof 2006.

    Several factors whipped the Aussie/dol-lar to a low at 0.7015 in late March and back to a peak at 0.7795 in mid-May establish-ing the current 52-week low and 52-week high in little more than a month but indi-cate the remainder of the year may bringmore steadiness to the currencys trade(Figure 1).

    Looking back, the Aussie/dollar entered 2006 with aslightly bearish bias; the currency pair had been zig-zagginglower off the March 2005 peak at 0.7986 (Figure 2). The inter-est rate outlook was fairly steady, as the Reserve Bank of

    Australia (RBA) had been on hold since March 2005. In mid-March 2006, however, the pace of selling accelerated and the

    currency plunged to 0.7015, the current low for the year.The March sell off was caused by a massive unwinding

    of Japanese yen-funded Aussie dollar long positions, andalso declining Uridashi issuance, says Prakriti Sofat, econ-omist at Ideaglobal Ltd. It also coincided with the Japanese

    fiscal year-end, a time when Japanese investors repatriatefunds home. (Uridashi is referring to debt issued to Japanese retail investors in a foreign currency.)

    The pace of Aussie and New Zealand issuance hasslowed, agrees Rhonda Staskow, regional director FXAmericas at Thomson Financial-IFR Markets. Japaneseinvestors have begun looking elsewhere for yield, includ-ing the U.S., Mexico, and South Africa.

    Rate hike bolsters Aussie dollar The Aussie/dollar rebounded strongly from the 0.7015region its lowest trade since September 2004 and

    soared to 0.7795 in mid-May. Gains in commodity pricesand new expectations that the RBA would hike rates sup-ported the currency. At its May 3 meeting, the RBA did, infact, hike rates by 0.25 basis points, bringing the cash ratetarget to 5.75 percent. The central bank pointed toincreased inflationary risks from domestic and interna-tional trends when announcing the adjustment. On July 5,however, the RBA kept monetary policy steady.

    After subsequently topping out at 0.7795 on May 11, theAussie/dollar was hit with another round of steady sell-ing, pressuring the currency to its late-June low of 0.7268.Analysts pointed to the mini-emerging market crisis(see From emerging to submerged, Active Trader,

    GLOBAL MARKETS

    In less than six weeks this spring, the Aussie/dollar pair swung upand down strongly enough to establish its current 52-week highand low levels.

    FIGURE 1 RECENT AUSSIE VOLATILITY

    AUSSIE DOLLAR/U.S. DOLLAR AT A GLANCE

    Daily range (past 40 days): Average: 0.0065 Median 0.0063Weekly range (past 26 weeks): Average: 0.0154 Median 0.015552-week high/low: 0.7792/0.7015

    AUS U.S.Prevailing interest rates (%): 6.00 5.25Next central bank meetings: Sept. 6 Aug. 8

    Sept. 20GDP (annualized growth) Q2 2006* Q1 2006 Q4 2005

    AUS U.S. AUS U.S. AUS U.S.0.5 2.5 3.1 5.6 2.7 1.8

    *Estimate All data as of July 31

    The Australian dollar staged a strong rally from its nearly two-year low vs. the U.S. dollar in May an

    promptly sold off again. The economic fundamentals paint a mixed picture for the Aussie dollars futu

    Aussie/dollarshrugs off volatile first half

    BY CURRENCY TRADER STAFF

    Source: TradeStation

    8 August 2006 CURRENCY TRADER

  • 8/11/2019 Currency Trader Magazine (08-2006) [Finance Forex Trading Review Analysis Commentary]

    10/46CURRENCY TRADER August 2006 9

    October 2006) that plagued global markets during May and June as a factor in the Aussie/dollar sell off. During thattime, global portfolio managers tugged assets out of emerg-ing markets as a wave of risk aversion and expectationsof higher interest rates across the industrialized world spread through the marketplace.

    [The Australian dollar/Swiss franc] tends to be an indi-cator of risk aversion, Staskow says.

    Huge selling occurred in that cross rate in the late spring.Traders were going long the Swiss as a safe haven and get-ting out of high-yield carry trades [such as the Aussie dol-lar], Staskow says.

    RBA action ahead?The next RBA meeting is scheduled for Aug. 2 and someanalysts see the potential for another interest-rate adjust-ment.

    Australia will hike rates, Staskow predicts. She points tothe strong June Australian employment data, whichrevealed the overall unemployment rate is at a 30-year low of 4.9 percent, while 52,000 new jobs were

    created when an increase of only 10,000 was expect-ed.

    Also, higher petrol prices and Aussie dollarweakness early in the year may have boostedimport inflation, she adds.

    Sean Callow, senior currency strategist atWestpac Institutional Bank, also expects a rate hikeAug. 2 with the potential of a move to 6.25 percentin the fourth quarter. Another meeting will followon Sept. 6.

    Economic growth and inflation

    Overall, Australias economic outlook remainsstrong. Callow forecasts a 3.5 percent year-over-yeargross domestic product (GDP) reading in 2006, upfrom 2.5 percent in 2005.

    The pace into 2007 could accelerate to 4 percentor higher, bolstered by commodity exports, whichcould cut the trade deficit, and also from supportivefiscal policy and a resilient housing sector, heexplains.

    The inflation picture has heated up with headline CPI post-ing a 3-percent year-over-year rise in the first quarter 2006.

    Cross ratesSeveral analysts view the long Aussie dollar/short NewZealand dollar as a favored play on the crosses. With thepair currently trading around 1.2150 (Figure 3), Callow seespotential for a move to around 1.30 by the years end.

    This cross is an attractive play whenever there is a sub-stantial divergence in the macro fundamentals of Australiaand New Zealand, he explains. During the second half,all the momentum seems to be in Australias favor, as theRBA tightens policy further into a strong economy, whileNew Zealand struggles.

    Ideaglobals Sofat agrees this trade has bullish potentialtoward 1.30 by year-end amid narrowing interest-rate dif-

    ferentials and terms of trade favoring the Aussie.

    Looking aheadMost analysts see relative stability for the Aussie dollar,

    though some risks remain on the horizon.A repeat of the May-June global risk aversion sell off could impact the Aussie dollar negatively.

    The Australian economy remains vulnerable to globalgrowth expectations and a slowdown in commodityprices, says Kathleen Stephansen, head of global econom-ics at Credit Suisse.

    However, most expect smooth sailing between now andthe end of the year for the Aussie dollar. Callow does notexpect AUD/USD to revisit the March low at 0.7015 andlooks for the pair to end the year around 0.7400. Similarly,Ideaglobals Sofat pegged her year-end target for theAussie/dollar at 0.7500 very close to the mid-July level.

    Some analysts see the potential for the Aussie dollar/New Zealand dollar (kiwi) rate to rise in the second half this year if Australia can maintaineconomic momentum.

    FIGURE 3 THE AUSSIE-KIWI CROSS

    Source: ADVFN (www.advfn.com)

    Although the March 2006 sell off was sharp, the Aussie/dollar pair had been declining since March 2005.

    FIGURE 2 LONGER-TERM DOWNTREND

    Source: TradeStation

  • 8/11/2019 Currency Trader Magazine (08-2006) [Finance Forex Trading Review Analysis Commentary]

    11/4610 August 2006 CURRENCY TRADER

    The New Zealand dollar has taken a hit thisyear, driven lower by narrowing global inter-est-rate differentials and bearish sentimentregarding the New Zealand economy. The

    New Zealand dollar/U.S. dollar rate (NZD/USD) hasplunged from a high around 0.7000 in mid-January to a late- June low around 0.5927 (Figure 1).

    Analysts point to New Zealands huge current accountdeficit, which recently hit 10.5 percent of GDP, as a drag onthe countrys economy and currency (the kiwi), and aprominent factor driving the currency sharply lower in theearly months of 2006.

    The current account deficit was clearly unsustainableand it was only a matter of time before the kiwi suffered a

    correction, says Glenn Levine, economist at MoodysEconomy.com.This factor, along with narrowing interest-rate differen-

    tials vs. Europe, Japan, and the U.S., as well as slowingdomestic growth, triggered a massive selling of kiwi dollarsduring the first three months of the year.

    Growth expectations have dropped dramatically because of higher rates, notes Rhonda Staskow, regionaldirector FX Americas at Thomson Financial-IFR Markets.New Zealands cash rate currently stands at 7.25 percent,the level it has been at since December2005. Analysts say the high short-term

    rates are finally impacting the econo-my in a negative fashion.

    Yields not as attractive atfirst glanceDespite boasting yields at 7.25 percent the highest in the industrializedworld analysts say global invest-ment flows havent been a bullish fac-tor for the kiwi.

    You only get 7.25 percent by invest-ing very short term, because the yieldcurve remains steeply inverted, says

    Sean Callow, senior currency strategist at WestpacInstitutional Bank. Two-year bonds are around 6.50 per-

    cent and the 10-year is around 5.85 percent not so tanta-lizing compared to a liquid T-note.

    Grim GDP forecastsNew Zealands economic picture isnt helping the dampen-ing outlook for its currency. Economists at Westpac forecasta 1.5-percent gross domestic product (GDP) reading for2006 vs. 2.3 percent in 2005. Westpac expects growth toremain weak, with 2007 figures to come in at 1.2 percent.

    Economy.coms Levine also projects weak (1.4 percent)growth for 2006.

    The economy is headed for a hard landing this year, he

    says. The domestic economy is in real trouble, weighteddown by elevated interest rates, record levels of householddebt, a stagnant housing market and plummeting businessand consumer confidence.

    Levine doesnt think relative global economic strengthwill be enough to keep the New Zealand economy afloat.

    With the currency weakening and the global economystill in pretty good shape, exports should start to pick up inthe second half of the year, but this wont be enough to pre-vent a sharp slowing in 2006 growth, he says.

    GLOBAL MARKETS continued

    New Zealand:Kiwi dollar losing its high-yield luster

    As it flirts with three-year lows, economic red flags are cutting into the kiwis prospects.

    BY CURRENCY TRADER STAFF

    NEW ZEALAND DOLLAR/U.S. DOLLAR AT A GLANCE

    Daily range (past 40 days): Average: 0.0071 Median: 0.0066Weekly range (past 26 weeks): Average: 0.0168 Median 0.017352-week high/low: 0.7197/0.5927

    NZ U.S.Prevailing interest rates (%) 7.25 5.25Next central bank meetings Sept. 14 Aug. 8

    Sept. 20GDP (annualized growth) Q2 2006* Q1 2006 Q4 2005

    NZ U.S. NZ U.S. NZ U.S.2.2 2.5 2.2 5.6 2.2 1.8

    *Estimate All data as of July 31

  • 8/11/2019 Currency Trader Magazine (08-2006) [Finance Forex Trading Review Analysis Commentary]

    12/46CURRENCY TRADER August 2006 11

    Inflation worriesThe latest inflation data out of NewZealand sparked concerns among mar-ket watchers. Consumer prices surgeda higher-than-expected 1.5 percent forthe second quarter, which put theannualized rate at 4 percent. This datalends credence to the idea the ReserveBank of New Zealand (RBNZ) willhave to keep monetary policy steady,despite the slowing growth prospects,analysts say.

    The second-quarter data confirmedthere is absolutely no scope for a near-term rate cut, says Levine.

    He expects the central bank toremain on hold until the first quarterof 2007, when he expects a drop in theinflation rate, back within the RBNZs

    target 1-3 percent band.Callow agrees monetary policy was

    likely on hold throughout 2006.We expect they wont cut rates

    until first quarter 2007, though of course the market will price it in,which should hurt NZD/USD, hesays.

    The RBNZ most recently met on July27 and left monetary policyunchanged. The next meeting will beSept. 14.

    Looking into 2007, Credit Suisseforecasts 1.25 points of interest-rateeasing through 2007, with potential fora 2007 year-end cash rate at 6.00 per-cent.

    Looking aheadAnalysts believe further tighteningmoves from other central banks willput downward pressure on the kiwidollar. Global risk appetite will be key,as well.

    A rise in risk aversion is bad newsfor the illiquid kiwi, as New Zealandtries to fund its huge current accountdeficit, Callow explains. We wouldlike to sell NZD/USD on any rallies to0.6300. Key support is at 0.5930.

    By year-end, Callow sees a possibleretreat to 0.5700, which would be thecurrency pairs lowest level since June 2003 (Figure 2).

    Tim Mazanec, senior FX strategist at Investors Bank &Trust, says 0.6300 and 0.6425 are key resistance levels, not-ing the latter level represented resistance in April and May.If gains push the currency through that resistance, he says,

    it would open the door to 0.6685, a Fibonacci retracementtarget from the 2006 high to low. However, he favors aweaker kiwi dollar in the weeks ahead, given his bias forhigher U.S. rates. If the resistance zone holds, though,Mazanec expects a retest of the 0.5927 low.

    Although it has rebounded slightly since spiking to a new major low in lateJune, the NZD/USD pair must contend with a weakening New Zealandeconomy in the months to come.

    FIGURE 1 STEEP HILL TO CLIMB

    Source: TradeStation

    Having punctured the 2004 and 2005 bottoms, the kiwi dollar is flirting withthree-year lows. The most recent bottom occurred at 0.5927.

    FIGURE 2 TESTING RESISTANCE?

    Source: TradeStation

  • 8/11/2019 Currency Trader Magazine (08-2006) [Finance Forex Trading Review Analysis Commentary]

    13/4612 August 2006 CURRENCY TRADER

    You can be the best chart reader on the planetand still lose money trading. Losses are gener-ally a function of bad money management,

    such as setting a profit target unreasonablyhigh or a stop too low.

    But losses can also be a function of not having the feelof the market. Lets define feel as a grasp of what the mainplayers are thinking and doing. You may think that othertraders are in buying mode, but are they? You know only if

    you can see the actual buying volume.As technical analyst and author Joe Granville and others

    have noted, a real rally is accompanied by rising volume. If

    prices are rising but volume is flat or falling, watch out.New buyers fresh blood are not joining the rally, andit may not last.

    Very high volume at a market high may mean the top isin. If volume is extremely high and price is making newrecord highs, many traders have a lot at stake and any

    significant price drop cancause a stampede of cov-ering. As in price analy-sis, an extreme often pre-cedes a reversal.

    Finally, if volume is

    building during a consol-idating or sideways peri-od, we expect a breakout but we dont necessar-ily know in which direc-tion.

    Volume changes are adandy supplement totechnical indicators andfundamentals. Forextraders are severely hand-icapped by not having

    good volume informa-tion, as stock tradershave. In the spot market,there is no volume infor-mation, because everytrade is a private transac-tion between customerand bank. Wire servicereports tell us that vol-ume is heavy or themarket is thin, but thatsnot very specific and doesus little good.

    THE BIG PICTURE

    Gaugingtrader commitment

    Analyzing the euro with Commitment of Traders data sheds lighton the strength or weakness of price moves.

    BY BARBARA ROCKEFELLER

    Traders from all groups downsized their positions prior to the trading-range breakout in early August. Commercial traders (blue), who had been net long, changed to net short by the time thebreakout occurred. The breakout rally quickly failed.

    FIGURE 1 AWAITING A BREAKOUT, EURO JULY 2005

    Source: chart MetaStock; data Reuters

  • 8/11/2019 Currency Trader Magazine (08-2006) [Finance Forex Trading Review Analysis Commentary]

    14/46CURRENCY TRADER August 2006 13

    In futures, the ex-change doesnt publishvolume until after theclose. For real-timeanalysis, all thats avail-able is tick volume,which is less than ideal.You get a change in thetick whether the newtrade was one contractor a hundred, and whileyou can check Time &Sales to see the actualvolume, its a cumber-some process. If you aretrading in an intradaytime frame, by the timeyou see big volume

    developing, its proba- bly too late.

    What traders arereally doingInstead of looking atraw volume, though,you can look at theCommitment of Traders(COT) report and makesome educated guesses about how to trade certain situa-tions. You wont get a price forecast, but you will get infor-

    mation that is directly relevant to your trading.Take, for example, the period in July 2005 when the eurofutures (EC) were trading sideways in a range from 1.1980to 1.2290 (Figure 1). Every three to five days, the pricereversed. In the first week of August the euro rose above theranges resistance line. Breakouts must always be respected,and a long trade executed in the next six days probably pro-duced a profit, since the euro put in a new high at 1.2505 onAug. 12.

    But look at the top window of the chart. This shows thenet long or short positions held by three types of tradersdefined by the Commodity Futures Trading Commission

    (CFTC): the commercials (blue); the large non-commer-cials (green), otherwise known as large speculators; andthe small non-commercials (red), who are mostly smallspeculators (i.e., retail traders).

    The green non-commercials are net short 24,842 contractsthe first week of July, while the red small speculators are netshort 2,522 contracts. Offsetting the two short groups arethe blue commercials, who are net long 27,394 contracts.

    Now look at the next week. Everyone has downsizedtheir positions, and they continue to do so until the firstweek of August, when the total number of contracts is only2008, or 10 percent of the level the month before.

    Yes, breakouts must be respected, but in this case we see

    they cant always be trusted. If the green speculators reallythought the euro rally was going to continue, they would

    have bought more contracts. They did go from net short tonet long, but only for one week as price was peaking, andthen they went short again. Accordingly, the feel of themarket is not really all that bullish. In fact, nobody seems tohave much sentiment at all. Also, liquidity is low, meaningif you make an off-market bid or offer, it will probably justsit there and not get filled, whereas in a highly liquid mar-ket, there is always somebody who will shoot at anythingthat moves.

    Market activityFutures volume is a little tricky. Because every buyer has a

    counterpart on the short side, the two together constitute asingle contract. Total contract volume in the example aboveis 27,394. Volume is not the same thing as liquidity, which is better measured by open interest.

    Open interest is the total number of contracts still out-standing i.e., open positions that have not yet been offset.If a new buyer is creating a fresh long position and buys acontract, and the seller is also opening a fresh short posi-tion, open interest increases by one contract. However, if the buyer is just replacing a different long party who is selling,no new long position is being created; rather a change of ownership of an existing position is occurring. Open inter-

    continued on p. 14

    Open interest was flat throughout the entire period. The new high on Aug. 12 is suspect becausea big upside move that is not accompanied by higher volume and an increase in open interest lacks real support.

    FIGURE 2 JUDGING THE BREAKOUT

    Source: chart MetaStock; data Reuters

  • 8/11/2019 Currency Trader Magazine (08-2006) [Finance Forex Trading Review Analysis Commentary]

    15/4614 August 2006 CURRENCY TRADER

    THE BIG PICTURE continued

    est is still one because the number of open contractsremains the same.Now look at Figure 2, which contains the same informa-

    tion as Figure 1, plus open interest in the center window.Open interest was flat through the entire period, at levelsaround 150,000. The new high on Aug. 12 is fishy, as it is notconfirmed by a rise in open interest. A big upside move thatis not accompanied by higher volume and an increase inopen interest lacks real support; a significant amount of new money is not flowing into the market.

    As a rule, when volume and open interest are rising, aprice move will probably continue in the same direction.

    When they are flat or declining, the trend is probably goingto end.

    Understanding the COT reportThe COT report is issued late every Friday afternoon by theCFTC for trading during the week ending the previousTuesday. That means the data is stale by three businessdays, but dont let that bother you you can still get pow-erful information from it.

    You can bet that a lot of others are studying it over theweekend, too. Interest in the COT report has risen since thepublication last fall of Larry Williams book, Trade Stocks &Commodities with the Insiders: Secrets of the COT Report

    (Wiley, 2005) andstepped-up reporting bythe financial press.

    The COT report breaksdown open interest bythe categories of com-mercial and non-com-mercial, with commer-cials defined as marketparticipants having anunderlying cash businessfor which their futurespositions provide ahedge. In other words, if Company X sells BlueWidgets to Germany, it

    expects to be long euros by the amount of quarter-ly sales, and will take ashort position to offset orhedge the upcomingreceipt of euros. Firmsregistered as commer-cials get somewhat bettermargin rates becausethey tend to be less activetraders and thus take lessrisk.

    Non-commercials are mostly large speculators such as com-modity funds and pools, and sometimes banks and brokers.The balance of open interest is derived and assumed to

    consist of both small speculators and small commercialhedgers, which do not have to register with the CFTC.

    One of the reasons the COT report is neglected by manytraders is that its hard to read and to use. Take a look atwww.cftc.gov/cftc/cftccotreports.htm . The CFTC hasimproved the reports formatting (and speeded up itsrelease to every week and for data covering the most recentweek), but the information is still presented in a raw format.Youd at least have to download it to a spreadsheet to con-

    duct any analysis.Fortunately, an outfit named Shatterfield ( www.shatter -field.com) makes it easy to capture the data and analyze itin graphic form. For a small fee, you can get their down-loader and display charts like the ones shown here (inMetaStock), or in Excel, TradeStation, and other chartingpackages. Anumber of other services are also available, butShatterfields program contains a special proprietarystrength indicator that shows the long/short percentage of each trader category. Figure 3 shows the most recent COTdata in July this year.

    The highlighted middle window shows the strength indi-cator, which is scaled in percentage points. The number rep-

    The highlighted middle window shows the percentage of traders in each category that are long.Eighty percent of large specs were long euro futures as of the latest available reading in July,while 78 percent (100 minus the 22-percent long position shown here) of commercials were short.

    FIGURE 3 EVALUATING STRENGTH

    Source: chart MetaStock; data Reuters

    http://www.cftc.gov/cftc/cftccotreports.htmhttp://www.cftc.gov/cftc/cftccotreports.htmhttp://www.shatterfield.com/http://www.shatterfield.com/http://www.shatterfield.com/http://www.cftc.gov/cftc/cftccotreports.htmhttp://www.shatterfield.com/http://www.shatterfield.com/
  • 8/11/2019 Currency Trader Magazine (08-2006) [Finance Forex Trading Review Analysis Commentary]

    16/46

    resents the percentage of traders in each category that arelong. Eighty percent of large speculators are long euros,while 78 percent (100 minus 22 percent) of blue commer-cials account for the offsetting shorts. The high large-specposition denotes a real commitment to the trend, while thehigh participation rate by the blue commercials indicates asimilar commitment.

    Now check out open interest in the window below that.During the second week of June, the large specs reducedtheir outstanding contracts, meaning they cashed in netlong positions. A week later the small specs cashed in, anda week after that, the blue commercials. Because the Junecontract had already rolled to the September contract by thetime the commercials reduced their holdings, its likelysome of this is profit-taking. Notice that the week before,price fell quite a bit from 1.2992 to 1.2534 before rising

    again somewhat. Commercials are supposed to be hedgersand immune to the lure of profit-taking, so this may not bethe correct interpretation.

    The real point is that total open interest fell and thestrength indicator contracted a little in each trader category, but total net positions (top window) remained at near-recordhigh levels 76,569 contracts the week of June 20 after theall-time high of 88,196 the week before. (The record highnumber of contracts that week made all the press reports.)

    Uh-oh, here we go again a very high volume figurethat is not accompanied by higher price highs, with openinterest falling and the percentage of participants in each

    category on the consensus side of the trade beingreduced. This is extreme volume not being confirmed andvalidated by higher prices, and with commercials removingabout half their previous level of interest, as shown in theopen-interest drop from 217,570 contracts theweek of June 20 to 112,183 the next week.Commercial interest rose a little in each of the fol-lowing weeks, but they basically cleared out of the market.

    As in July last year, we cant really expect ahigher high unless the commercials come back.What can we deduce from this about price direc-

    tion? First, there are a lot of speculators who arelong euros in a falling market. At some point, theymay hit stops or otherwise decide to bail out. Theeuro is thus at risk of a technical correction,only this time its market-action technical and notthe charting kind. Or, the commercials couldcome back, providing the engine for additionalopposing trades by the specs assuming thecommercials do not switch sides.

    The commercials do switch sides from time totime, which offers a tremendous opportunity forsmall traders. The commercials are not alwaysright in terms of making profit from their long or

    short positions, but they should always be watched for their behavior.

    For information on the author see p. 6. You can get a free 2-week free trial of Barbara Rockefeller's daily forex commentary atwww.rts-forex.com.

    CURRENCY TRADER August 2006 15

    Volume: The ultimate guide to sentiment,by Barbara Rockefeller (Currency Trader, January 2006).

    A previous discussion on interpreting volume and usingthe COT report in forex.

    Larry Williams looks inside futures( Active Trader , January 2006).Larry Williams discusses his book on the COT reportand his techniques for using COT data in futures andstocks.

    Floyd Upperman: Digging into COT data( Active Trader , February 2006).

    A commodity trading advisor shares his insights oninterpreting the COT report and the methods he out-lines in his book on the subject.

    Barbara Rockefeller Big Picture Collection,Vol. 1: 2004-2005.

    This 11-article collection contains forex market analysisand commentary Barbara Rockefeller wrote for Currency Trader between October 2004 and December 2005. (This article set is available at a 30-percent dis-count.)

    You can purchase and download past articles atwww.activetradermag.com/purchase_articles.htm .

    Related reading

    http://www.rts-forex.com/http://www.activetradermag.com/purchase_articles.htmhttp://www.activetradermag.com/purchase_articles.htmhttp://www.forexcapitalinvestor.com/http://www.rts-forex.com/http://www.activetradermag.com/purchase_articles.htm
  • 8/11/2019 Currency Trader Magazine (08-2006) [Finance Forex Trading Review Analysis Commentary]

    17/4616 August 2006 CURRENCY TRADER

    TRADING STRATEGIES

    The adaptivemoving average

    Making a moving average responsive to volatility changes results

    in a dynamic, more accurate indicator.

    BY CURRENCY TRADER STAFF

    M oving averagessmooth price data,simplifying the upand downs of a mar-ket into a more understandable line thathighlights the trend. However, thesmoothing process introduces lag: The

    longer a moving averages look-back period, the more the average trails behind changes in price direction. Onthe other hand, moving averages withshort look-back periods respond morequickly to price changes but, becausethey reverse direction on minor pricemoves, they can lead to whipsaw losses.

    A moving average length that wasappropriate last week might be inap-propriate next week as market condi-tions change. One potential solution to

    this problem is to use a moving aver-age that adjusts to market volatility bylengthening when the market is mov-ing sideways and trading in a choppyfashion (making it less responsive) andshortening when the market is trend-ing (making it more responsive).

    In his book Smarter Trading (McGraw-Hill, 1995), PerryKaufman detailed a method for calculating an adaptivemoving average that fit this role. To see how it works, thefollowing examples compare it to a simple moving average(SMA). First, two SMAs with different look-back periodswill be compared to highlight the attributes of each. In this

    case, price crossing the moving average is not important;rather, it is the direction of the moving average that identi-fies the trend.

    Starting out simpleFigure 1 is a 45-minute bar chart of the euro/U.S. dollar pair(EUR/USD) with a five-bar SMA (red) and 30-bar SMA(blue).

    The five-bar SMA (red) and 30-bar SMA (blue) turned up at point A. At the peak (point B), the five-bar SMA turned down while the 30-bar SMA kept rising.However, the five-bar SMA turned down two times before the peak.

    FIGURE 1 ADAPTIVE MOVING AVERAGE

    Source: CQGNet (www.cqg.com)

  • 8/11/2019 Currency Trader Magazine (08-2006) [Finance Forex Trading Review Analysis Commentary]

    18/46CURRENCY TRADER August 2006 17

    Both moving averages turned up quickly in reaction tothe dramatic rise at point A. The market advanced to pointB and then turned down. Notice the longer 30-bar movingaverage continued to rise during the uptrend, but did notturn down following the peak point B. At the end of thechart the 30-bar SMA was still indicating the trend was up.By contrast, the five-bar SMA turned down almost immedi-ately after the peak at point B however, it also turneddown twice before the actual peak in the market, which the30-bar average did not.

    Figure 2 shows the same prices with an adaptive movingaverage (AMA) added. The AMA adapts to market volatil-ity and trend by switching to a shorter-term look-back peri-od when the market is trending up or down and changingto a longer-term look-back period when the market beginsto move sideways.

    At point A, the AMA joined the five-bar SMA during theinitial advance. Then when the market

    corrected to point B, the five-bar SMAturned down while the AMA stayednearly flat and the 30-bar SMA contin-ued to rise.

    When the market began to advanceagain, all the moving averagesclimbed. At point C, the market pulled back and consolidated and the five-barSMA turned down; the AMA and the30-bar SMA, however, kept rising.

    When the market peaked at point D,the five-bar SMA turned down, the

    AMA went flat, and the 30-bar SMAkept rising. At point E the market wastrending lower. The AMA joined thefive-bar SMA to the downside, but the30-bar SMA was still reflecting anuptrend.

    Figure 2 illustrates how the AMAresponded as the market changedfrom trend to consolidation and back.Overall the AMA showed a tendencyto stay with the trend better thaneither the five-bar SMA and the 30-bar

    SMA.Lets look at how the AMA is con-structed.

    From exponentialKaufman designed the AMA to track the degree of noise inthe trend. For example, if a market is advancing with verysmall countertrend moves, there is very little noise and youwould want the moving average to closely track the trend,which would require a moving average with a short look- back period.

    However, if the market is moving sideways and the clos-es are tending to simply reverse from one period to the

    next, the degree of noise is high and you would want amoving average with a longer look-back period to filter outthis noise and avoid false signals. Kaufmans technique wasto modify the exponential moving average (EMA) with analgorithm that would adjust the averages smoothing con-stant (SC) according to the ratio of market direction tovolatility.

    The formula for the EMA is:

    EMA = SC * (close-EMA(-1)) + EMA(-1)

    where:SC = smoothing constantclose = close of the barEMA(-1) = previous bars EMA reading

    The smoothing constant is a value between 0 and 1 that

    determines the length of the EMA. (Typically, to begincalculating an EMA, you use the SMA value for the initialreading.) To convert an SMA look-back period into an EMAsmoothing constant, the following formula can be used:

    SC = 2/(n+1)

    Where n is the look-back period in an SMA.continued on p. 18

    The green line is an adaptive moving average (AMA). During the uptrend that started at A, the AMA advanced like the two SMAs but it did not turn down at

    points B and C the way the five-bar SMA (red) did. Also, the AMA turned downat point E, although the 30-day SMA (blue) did not.

    FIGURE 2 ADAPTIVE MOVING AVERAGE

    Source: CQGNet (www.cqg.com)

  • 8/11/2019 Currency Trader Magazine (08-2006) [Finance Forex Trading Review Analysis Commentary]

    19/4618 August 2006 CURRENCY TRADER

    TRADING STRATEGIES continued

    For example, a 10-period SMAequates to an EMA with a smoothingconstant of 0.1818 (SC = 2/[10+1]).

    One difference between the EMAand the SMA is the EMA calculation isthe difference between the close andthe EMA. Therefore, if the close isabove the EMA, even for the first time,the difference is positive and the EMAwill turn up. Similarly, if the close is below the EMA, even for the first time,the difference is negative and the EMAwill turn down.

    An SMA does not necessarilychange direction because of this rela-tionship, because the close is just oneof many used in the average calcula-

    tion. For a 10-period SMA, for exam-ple, the current close is only one-tenthof the 10 closes used to calculate theindicator. As a result, the SMAis not asresponsive to quick price changes. TheEMA is better suited to deal with theseattributes of the market.

    to adaptiveThe AMA builds on the EMA by making it responsive totrend and volatility. The formula is:

    AMA = C * (closet-AMA(t-1)) + AMA(t-1)

    The difference between the AMA and EMA calculationsis the adaptive aspect of the smoothing constant, which isdesignated in the formula by the letter C. There are a fewsteps involved to arriving at C. The first is calculating theefficiency ratio (ER), which is the ratio of price direction toprice volatility.

    1. Direction = closet - closet-n

    where:

    closet = current closecloset-n = close n bars ago.

    2. Volatility = sum (absolute value (close t close(t-1)),n)(This formula sums the absolute values of the one-bar

    close-to-close differences over n bars. Kaufman suggest-ed n equal 10.)

    For example, if a currency closed up 10 bars in a row, theER would equal 1 because the direction and the volatilitywould be equal. If the market moved up and down to closeunchanged after 10 bars, the ER would equal zero.Therefore, the more the market is trending, the higher the

    ER, and the more the market moves sideways, the smallerthe ER value.

    The ratio is used as a scaling constant based on the degreeof trend between 0 and 1, but not trend in reference to up ordown. Because direction could be a negative number, we

    will take the absolute value of direction/volatility to nothave the ratio scale between -1 and 1.The next step is to establish boundaries for the length of

    the AMA i.e., the shortest (fast) and longest (slow) look- back periods it will reflect (since, technically, these could beunlimited). The following formula is used to create a rangefor the averages smoothing constant (SSC):

    SSC = ER * (FastSC SlowSC) + SlowSC

    where:ER = efficiency ratio

    FastSC = fast EMA smoothing constantSlowSC = slow EMA smoothing constant

    Recall the EMA smoothing constant uses the formula2/(n+1) to approximate the number of bars in an n-barSMA. Kaufman suggested the AMA range from a two-barlook-back period (fast) to a 30-bar look-back period (slow).In this case, the resulting smoothing constants would be:

    Fast = 2/(2 + 1) = 0.6667Slow = 2/(30 + 1) = 0.0645

    During the decline to point C the AMA (green) closely followed the marketsswings, but not as jaggedly as the five-day SMA. The AMA went flat during sideways periods.

    FIGURE 3 RESPONSIVE, BUT NOT TOO RESPONSIVE

    Source: CQGNet (www.cqg.com)

    continued on p. 20

  • 8/11/2019 Currency Trader Magazine (08-2006) [Finance Forex Trading Review Analysis Commentary]

    20/46

    http://www.interbankfx.com/
  • 8/11/2019 Currency Trader Magazine (08-2006) [Finance Forex Trading Review Analysis Commentary]

    21/4620 August 2006 CURRENCY TRADER

    TRADING STRATEGIES continued

    Therefore, SSC = ER * (0.6667 - 0.0645) + 0.0645.If the market is trending, then the ER will be near 1 and

    the SSC will be weighted toward the fast smoothing con-stant. If the market is moving sideways, then the ER will benear 0 and the SSC will be weighted toward the slowsmoothing constant.

    Finally, Kaufman noted if the market was trading side-ways, which would push the AMA to behave like a 30-dayEMA, the AMAwould still edge up and down. Squaring thesmoothing constant reduces this effect. Therefore:

    C = SSC2

    and finally,

    AMA = C * (closet-AMA(t-1) ) + AMA(t-1)

    Now that the math is finished, lets look at more exam-ples using the AMA in the Euro/U.S. dollar pair.

    Figure 3 continues the price action from Figure 2. Themarket trended down to point A and then rallied to point B.The 30-bar SMA continued to rise and did not turn downuntil well after the second, lower peak at B. The market thenstair-stepped its way down to point C. The 30-bar SMAtrended lower during this period while the five-bar SMAzig-zagged up and down with each price swing. The AMAfollowed the markets shorter-term swings as price movedgradually lower, and it also went flat during sideways price

    action (which the five-day SMA did

    not do). Overall, the AMA was a bettersmoothed representation of the mar-ket.

    Figure 4 jumps ahead in time. Themarket rallied dramatically, and againthe AMA moved horizontally whenEUR/USD moved sideways aroundpoint A. The five-bar SMA began toturn slightly lower.

    Flexibility and responsivenessThe adaptive moving averages

    strength is its ability to respond tochanging market conditions, which isa problem for studies that use fixedlook-back periods.

    Using a fixed look-back period islike trying to fit the market to a tem-plate. Because the market is alwayschanging, static approaches are likelyto have limited success. Using adap-tive studies is a potential way toimprove results. Also, the AMA might be appropriate for smoothing otherindicators.

    The AMA tracked the trend upward, but went flat at point A when the market moved sideways. It turned up again quickly when the uptrend resumed.

    FIGURE 4 TRACKING THE TREND

    Source: CQGNet (www.cqg.com)

    Related reading

    Weighted and exponential moving averages

    Currency Trader , January 2005. A detailed introduction to weighted and exponentialmoving averages that includes performance compar-isons to the simple moving average.

    Measuring trend momentum by Tushar Chande Active Trader , June 2001.

    Most technical analysis indicators monitor either pricedirection or price momentum. Here's an indicator thatdoes both, changing its behavior with the dynamics of the market.

    Thom Hartle Trading Strategy and Analysiscollection, Vol. 1: 2001-2004

    In this collection of 15 Active Trader articles from 2001to 2004, trader, analyst, and contributing editor ThomHartle tackles various aspects of strategy, analysis, andtrade execution. (This collection is available for a 30-percent discount through the Active Trader store.)

    You can purchase and download past articles atwww.activetradermag.com/purchase_articles.htm .

    http://www.activetradermag.com/purchase_articles.htmhttp://www.activetradermag.com/purchase_articles.htmhttp://www.activetradermag.com/purchase_articles.htm
  • 8/11/2019 Currency Trader Magazine (08-2006) [Finance Forex Trading Review Analysis Commentary]

    22/46

    Introducing

    a NEW product of

    Dynamic Trend Pro lemakes me feel like a genius.*

    http://www.dynamictrend.com/dtct86http://www.dynamictrend.com/dtct86http://www.dynamictrend.com/dtct86http://www.dynamictrend.com/dtct86http://www.dynamictrend.com/dtct86http://www.dynamictrend.com/dtct86http://www.dynamictrend.com/dtct86http://www.dynamictrend.com/dtct86
  • 8/11/2019 Currency Trader Magazine (08-2006) [Finance Forex Trading Review Analysis Commentary]

    23/4622 August 2006 CURRENCY TRADER

    L ets say you are a hunter confronted with acharging rhinoceros. You take careful aim,squeeze the trigger of your suitably heavy gun,and hit the rhino square in the forehead. Hekeeps coming.

    Who has the problem now?Currency traders face a similar if less dramatic dilemma

    on occasion. The fundamentals, or in this discussion thequantitative indicators, behind a given market may look tofavor a given currency, but the marketstarts moving in the other direction.Such was the case for the U.S. dollar(USD) vis--vis both the euro (EUR)and the Japanese yen (JPY) by the latespring of 2006. Both currencies werestrengthening against the USD and fornon-parallel reasons based on the threeseparate quantitative indicators below.

    Short-term interest rateexpectationsThe standard three-month non-deliv-erable forward can be described inlarge part as a short-term interest ratearbitrage. The buyer of the JPY is bor-rowing the USD, selling the USD, and buying the JPY at the spot rate andthen lending the JPY. In three months,the trade can be unwound or rolledover for another three months. Therollover rates can be locked in usingforward rate agreements; this is why

    the forward rate ratio (FRR) for various currencies LIBORover the six-nine month horizon is such a useful tool. ThisFRR is the rate at which borrowing costs can be locked infor three months starting six months from now, divided bythe nine-month rate itself. The more the number exceeds1.00, the steeper the yield curve; numbers less than 1.00indicate inversion.

    The USD FRR6,9 fell sharply in the two years of FederalReserve tightening beginning in mid-2004 (Figure 1). By

    ADVANCED STRATEGIES

    The dollarand its hidden risks

    What are historical market relationships telling us about the dollars prospects?

    BY HOWARD L. SIMONS

    The USD six-month/nine-month FRR dropped sharply in the two years of Fedrate tightening beginning in mid-2004. However, the 6/9 FRRs for both theEUR and JPY steepened beginning in June and November 2005, respectively.

    FIGURE 1 SIXNINE MONTH LIBOR FORWARD RATE RATIOS

  • 8/11/2019 Currency Trader Magazine (08-2006) [Finance Forex Trading Review Analysis Commentary]

    24/46CURRENCY TRADER August 2006 23

    contrast, the FRR 6,9 for both the EURand JPY steepened beginning in Juneand November 2005, respectively. Allelse held equally, we should think theflatter USD money market curvewould support the greenback in 2006as it did in 2005. But all else is neverheld equal.

    Linking comparative curvesto currenciesNow lets restate the information inthese FRR curves into differences andsee whether the courses of the twocurrencies can be related to them.

    If we map the difference between theUSD and USD FRR6,9 against thecourse of the EUR itself, we see twopatterns emerge (Figure 2). First, thereis a defined leading relationship. TheFRR spread leads the EUR by 31 weeks.

    We should expect FRR changes madetoday to be reflected in the exchangerate seven months from now. Second,the spread is as negative as it ever has been; never before in the history of theEUR has its FRR6,9 been as steep rela-tive to the USDs. The only other peri-od of prolonged negativity occurred between mid-1999 and the end of 2000,a time of EUR weakness. Finally, thetrend which began in 2004 actuallyaccelerated after Ben Bernanke was

    appointed to be chairman of theFederal Reserve in October 2005; thisdefies the popular belief Bernanke is aneasy-money inflationist.

    What happens if we repeat theexercise with the JPY? As was thecase with the EUR, the steepness of the JPY relative to the dollar is near itshighest level since the advent of theEUR (Figure 3). And as was the casewith the EUR, the FRR spread leadsmovements in the currency, in this

    continued on p. 24

    As was the case with the EUR in Figure 2, the FRR spread leads movementsin the JPY, in this case by 19 weeks. Also, the steepness of the JPY relative tothe dollar is near its highest level since the advent of the EUR. The rectangleshows a previous period when divergent FRRs preceded a significant sell off inthe JPY.

    FIGURE 3 SHORT-TERM RATE EXPECTATIONS SHOULD FAVOR DOLLAR

    Two characteristics emerge when comparing the difference between the USDand EUR six-month/nine-month FRRs to the EUR: The FRR spread leads theEUR by 31 weeks and the spread is currently as negative as it ever has been.

    FIGURE 2 SHORT-TERM RATE EXPECTATIONS FAVOR DOLLAR

  • 8/11/2019 Currency Trader Magazine (08-2006) [Finance Forex Trading Review Analysis Commentary]

    25/4624 August 2006 CURRENCY TRADER

    ADVANCED STRATEGIES continued

    case by 19 weeks. Past performancedoes not predict future results, butnote how a previous period of diver-gent FRRs in 2000 (Figure 3, magentarectangle) preceded a significant sell-off in the JPY. The assumption thenwas the Federal Reserve would begincutting interest rates aggressively inthe aftermath of the burst stock mar-ket bubble and this would stimulateeconomic growth in the U.S. vis--vis

    Japan. The ability of the JPY to rally insuch an environment suggests the cur-rency market is making the opposite bet today that the long string of ratehikes in the U.S. will slow the pace of U.S. growth while Japan continues toprosper in the general Asian econom-ic boom.

    VolatilityIf exchange rates were nothing morethan short-term interest rate arbitrage,

    we would have to conclude the USDshould be much stronger than it is. Isthis conclusion supported by theoptions market? The implied volatili-ty of a currency forward represents themarkets assessment of future uncer-tainty and the willingness to payinsurance against this uncertainty.

    The three-month volatility of USDforwards for a EUR-domiciled buyergenerally falls as the EUR strengthens(Figure 4). The average lead time is 13

    weeks, or one quarter. The most recentdata shows volatility rising as the EURrallies, which indicates those goinglong the EUR are also buying USDoption protection. This is a marketuncomfortable with its own trend.

    The JPY exhibits a different relation-ship. The three-month volatility for a JPY forward for a USD-domiciled buyer falls as the JPY strengthens(Figure 5). The average lead time hereis 23 weeks, or nearly six months. Themost recent data shows volatility ris-

    In contrast to Figure 4, the three-month volatility for a JPY forward for a USD-domiciled buyer falls as the JPY strengthens. The average lead time here is 23weeks. The most recent data shows volatility rising, which indicates anincreased demand for protection by USD holders against a stronger JPY.

    FIGURE 5 HIGHER PRICE OF INSURING AGAINST JPY APPRECIATION

    The three-month volatility of USD forwards for a EUR-domiciled buyer general-ly falls as the EUR strengthens (the average lead time is 13 weeks). The most recent data shows volatility rising as the EUR rallies.

    FIGURE 4 DECLINING ACCEPTANCE OF A STRONGER EURO

  • 8/11/2019 Currency Trader Magazine (08-2006) [Finance Forex Trading Review Analysis Commentary]

    26/46

    ing, which indicates an increaseddemand for protection by USD hold-ers against a stronger JPY. Unlike thecase of the EUR, the JPY marketappears quite comfortable with thenotion of a stronger JPY.

    Stock market indicationsWhile we do not normally think of equity markets containing informa-tion on relative currency movements,they in fact are quite useful in thisregard. Stock prices discount informa-tion on future returns, and in a globalmarket those future returns reflect thecurrency-adjusted competitiveness of the country in question. In addition,global stock investors have to converttheir funds into the local currency toparticipate in the local stock market.Both of these factors combine to injecta vital element of expected returns oncapital into the currency equation.

    The relative performance of the U.S.stock market as measured by theRussell 3000 index to the MorganStanley Capital International Euroindex led movements in the EUR byan average of 22 weeks, or fivemonths, until the end of 2005 (Figure6). We can summarize the observedcounterintuitive relationship by say-ing capital appeared to flow to thestock market with the weakestprospective currency as if both sides

    of the Atlantic were somehow able todevalue themselves to prosperity. Thesituation reversed significantly in2006. The EUR strengthened even asthe European equity markets outper-formed the U.S. Did something simi-lar occur in Japan?

    Not at all; in fact, the lead-lag rela-tionship reverses here. Relative stock market performance between theRussell 3000 and the Nikkei 225 leadmovement in the JPY by 20 weeks

    continued on p. 26

    CURRENCY TRADER August 2006 25

    Relative stock market performance between the Russell 3000 and the Nikkei225 lead movement in the JPY by 20 weeks i.e., the currency leads therelative stock market performance when it comes to the JPY.

    FIGURE 7 THE YEN LEADS RELATIVE STOCK MARKET PERFORMANCE

    The relative performance of the U.S. stock market led movements in the EURby an average of 22 weeks, or five months, until the end of 2005. In 2006, theEUR strengthened even as the European equity markets outperformed the U.S.

    FIGURE 6 RELATIVE STOCK PERFORMANCE AND THE EURO

  • 8/11/2019 Currency Trader Magazine (08-2006) [Finance Forex Trading Review Analysis Commentary]

    27/4626 August 2006 CURRENCY TRADER

    (Figure 7). In other words, the currency leads the relativestock market performance when it comes to the JPY. Astronger JPY often is the sign of Japanese investors andfirms repatriating JPY for whatever reason and parkingthese funds in the Japanese stock market.

    Risk as the missing variableMuch has been made of the ability of certain physical com-modity markets, gold and crude oil among them, to riseunder the weight of investor funds regardless of funda-mentals. In the case of crude oil in particular, futures mar-kets cannot be regarded as inventory scorecards as much asthe fully insured forward costs of a replacement barrel. Itsas if the market is daring you to go short in the face of sup-ply risk.

    We now see this operating in the currency market.Despite the messages sent from these key quantitative indi-cators and others reflecting sounder fundamentals for theUSD, the market is convinced the U.S. will undertake arepudiation of its substantial international debts by debas-ing the USD. After all, this was the official policy of the U.S.in 1985-1986 and again in 1993-1995. With the U.S. twindeficits claiming an ever-larger share of world savings, therisk of debasement is huge.

    But there is no need to simply dwell on the oft-stated

    negatives for the USD. In the case of the JPY in particular, itwould be simplistic to state the USD is going to weakenagainst the JPY. A far better description is the currency andequity markets together agree Japans relative growthprospects are stronger than those for the U.S. at this pointin the cycle. This will increase both Japanese interest ratesand demand for yen-denominated assets. While the neteffect is going to be the same a stronger JPY we shouldnot regard it ipso facto as a repudiation of the dollar.

    And, of course, the vagaries of the European politicaleconomy should give pause to those who might like to seethe EUR emerge as a reserve currency. The last two years

    have seen the rejection of the EU constitution and a widen-ing of French and Italian sovereign debt spreads vis--visGermany.

    The conclusion we reach is there are no single rules forthe currency world. Each situation, each market environ-ment is different in critical aspects, and what worked welllast year can fail spectacularly today. There is a name forwatching the market and making decisions: Speculation,derived from the Latin word to watch. It is an honorableendeavor, one we should all recommend to others in anuncertain world.

    For information on the author see p. 6.

    ADVANCED STRATEGIES continued

    Of commodities and currenciesCurrency Trader , July 2006.

    Analyzing historic market relationships reveals someinteresting facts about movements in many so-calledcommodity currencies.

    The yen carry trade, currencies, and U.S. bondsCurrency Trader , June 2006.The latest source of anxiety for bond traders has somesurprising connections to the currency market. Find outthe story behind U.S. Treasuries, the Japanese yen, andthe Chinese yuan.

    The euro index: The dollar index meets its matchCurrency Trader , May 2006.

    A look at the development of a viable and tradable euro index.

    The index approach to currency risk managementCurrency Trader , April 2006.Using dollar index futures to hedge non-dollarinvestments.

    The yen stands aloneCurrency Trader , March 2006.The usual rules of the currency world havent necessarilyapplied to the Japanese yen. Will that continue to bethe case?

    Remember the forgotten currencyCurrency Trader , February 2006.Its often labeled a commodity currency, but theCanadian dollar tends to be ruled by other factors.Heres a look at the factors impacting Canadiandollar movements.

    What drives the dollar index?Currency Trader , January 2006.Market watchers often point to deficits and interest-rate differentials to explain the dollars behavior, but

    analysis shows these factors might not be in thedrivers seat after all.

    The dollar index and firm exchange ratesCurrency Trader , December 2005.The majority of currency traders are familiar only with thecurrent floating-rate system. Are we about to enter anew firm exchange rate era dominated by the dollarand euro?

    You can purchase and download past articles atwww.activetradermag.com/purchase_articles.htm .

    Related readingOther Howard Simons articles:

    http://www.activetradermag.com/purchase_articles.htmhttp://www.activetradermag.com/purchase_articles.htmhttp://www.activetradermag.com/purchase_articles.htm
  • 8/11/2019 Currency Trader Magazine (08-2006) [Finance Forex Trading Review Analysis Commentary]

    28/46

  • 8/11/2019 Currency Trader Magazine (08-2006) [Finance Forex Trading Review Analysis Commentary]

    29/46

    Market: Currencies.

    System concept: Typical channel breakout systems go

    long when price hits an x-day high and go short when pricehits an x-day new low in hopes the trend will continue.However, such approaches usually detect trends quite late

    and thus give up a large part of their profits.

    The following system tries toaddress this problem by enter-ing positions a bit before priceactually penetrates a breakoutlevel. The tool used to do this isthe HighestLowestRange (HLR)indicator, which shows pricesrelative location within thehigh-low range of the past x

    bars. If price is at the bottom of the range (a new low), the indi-cators value is 0; if price is atthe top of this range (a newhigh), its value is 1 (or, 100 per-cent); if price is exactly betweenthese boundaries, the HLR indi-cator value is 0.5 (50 percent).

    This system enters long whenthe HLR indicator moves above0.8 and reverses position whenthe HLR indicator drops below

    0.2. In other words, if pricereaches the upper or lower 20percent of the current chan-nel, it takes action. The testwill apply these parametersto an HLR based on a 40-day breakout system.

    Figure 1 shows two tradesin the British pound (BP).The lower window showsprice, along with the 40-dayhigh and 40-day low break-

    out levels. The upper win-dow shows the HLR indica-tor with its two thresholdlines in red. On Feb. 7, thesystem went short when theHLR indicator dropped below 0.2. The next dayprice crossed the lower boundary of the Donchianchannel. The system stayedin this trade until July 19,when the HLR indicatorclimbed above 0.8. The sys-

    CURRENCY SYSTEM ANALYSIS

    The system caught a downtrend in the British pound and reversed direction much earlier than a system based on a standard 40-day breakout channel.

    FIGURE 1 SAMPLE TRADES

    Source for all figures: Wealth-Lab Inc. ( www.wealth-lab.com )

    HLR breakout

    28 August 2006 CURRENCY TRADER

    Equity increased consistently during almost the entire 15-year test period, but system performance was volatile toward the end.

    FIGURE 2 EQUITY CURVE

    http://www.wealth-lab.com/http://www.wealth-lab.com/
  • 8/11/2019 Currency Trader Magazine (08-2006) [Finance Forex Trading Review Analysis Commentary]

    30/46CURRENCY TRADER August 2006 29

    tem made 3.4 points on this trade. Using the standard breakout levels, the profit would have been only 2 points.

    Rules:1. Go long the next day at the market when the HLR indi-cator rises above 0.8.2. Exit long and go short the next day at the market when

    the HLR indicator drops below 0.2.

    Test data: The system was tested on the following cur-rency futures portfolio: British pound (BP), euro (EC), Japanese yen (JY), and Swiss franc (SF). Data source:Pinnacle Data Corp. ( www.pinnacledata.com ).

    LEGEND: Starting capital Equity at the beginning of thesimulation period Ending capital Equity at the end of thesimulation period Net profit Profit at