CT200905

Strategies, analysis, and news for FX traders
May 2009
Volume 6, No. 5
THE INFLATION SCENARIO:

What it means for
the FX market p. 8
INTRADAY
pattern trader p. 18
THE EURO/YEN
as a risk
barometer p. 22
CHINA:
Currency
manipulator or not?
p. 30
NFA CHANGES
forex “hedge” rules p. 28
FORECASTING
and time frame p. 14
CONTENTS
Trading Strategies
Trading by the hour . . . . . . . . . . . . . . . . .18
Analyzing the odds highlights possibilities,
pitfalls for intraday pattern setup.
By Currency Trader Staff
Advanced Strategies
Contributors . . . . . . . . . . . . . . . . . . . . . . . . . . .6 A cross-rate to bear . . . . . . . . . . . . . . . . .22
The Euro/yen pair isn’t just a currency
Global Markets cross-rate — it’s a gauge of global risk.
Does U.S. spending spree By Howard L. Simons
spell inflation? . . . . . . . . . . . . . . . . . . . . . .8
Some analysts contend massive U.S. Forex News
stimulus spending will doom the economy to New rules ban forex “hedges” . . . . . . . .28
inflation and batter the dollar. U.S. forex dealers will no longer be able to
By Currency Trader Staff allow simultaneous long-short positions in the
same currency pair.
On the Money By Chris Peters
Forecasting follies . . . . . . . . . . . . . . . . .14
The only technicals that provide tradable continued on p. 4
forecasts are patterns — but you have to be
on the correct time frame and you can’t
forget about the fundamentals.
By Barbara Rockefeller
2 May 2009 • CURRENCY TRADER

ads0708 5/12/08 5:05 PM Page 39
CONTENTS
Forex News
Treasury backs down from China
currency manipulation stance . . . . . . . .30
Despite comments made by
the U.S. Treasury secretary earlier
this year, the Treasury’s biannual report on
international foreign exchange policies fails
to label China a currency manipulator.
By Chris Peters
FX volume continued
to grow in 2008 . . . . . . . . . . . . . . . . . . . .31
Despite a severe drop in hedge-fund generated Key concepts . . . . . . . . . . . . . . . . . . . . . . .38
volume, forex activity expanded in 2008.
Unfortunately, so did spreads. New products & services . . . . . . . . . . . . . .39
International Markets . . . . . . . . . . . . . .34 Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39

Numbers from the global forex, stock, Conferences, seminars, and other events.
and interest-rate markets.
Forex Journal . . . . . . . . . . . . . . . . . . . . .40
Global Economic Calendar . . . . . . . . . . . .37 Right on the market, but too-tight stop
Important dates for currency traders. smothers trade’s potential.
Have a question about something you’ve seen in

Currency Trader?
Submit your editorial queries or comments to
webmaster@currencytradermag.com.
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Consult the list below and click on the company name for a direct link
to the ad in this month’s issue of Currency Trader.
dbFX IG Markets PFGBEST.com
eSignal Institute of Higher Earning RS of Houston
FXCM InterbankFX Traders Expo
fxKnight.com NinjaTrader Tsunami Trading

CONTRIBUTORS
CONTRIBUTORS
A publication of Active Trader ®
For all subscriber services:

www.currencytradermag.com
Editor-in-chief: Mark Etzkorn

metzkorn@currencytradermag.com
Managing editor: Molly Goad

mgoad@currencytradermag.com
Associate editor: Chris Peters

cpeters@currencytradermag.com
Contributing editor:
Howard Simons
Contributing writers:
Barbara Rockefeller, Marc Chandler
Editorial assistant and

Howard Simons is president of
webmaster: Kesha Green
Rosewood Trading Inc. and a strategist for
kgreen@currencytradermag.com
Bianco Research. He writes and speaks fre-
Art director: Laura Coyle
lcoyle@currencytradermag.com quently on a wide range of economic and
President: Phil Dorman financial market issues.

pdorman@currencytradermag.com
Publisher, Barbara Rockefeller (http://www.rts-forex.com) is

Ad sales East Coast and Midwest:
Bob Dorman an international economist with a focus on foreign
bdorman@currencytradermag.com
exchange. She has worked as a forecaster, trader, and con-
Ad sales
sultant at Citibank and other financial institutions, and
West Coast and Southwest only:
Allison Chee currently publishes two daily reports on foreign exchange.
achee@currencytradermag.com
Rockefeller is the author of Technical Analysis for Dummies
Classified ad sales: Mark Seger
seger@currencytradermag.com (For Dummies, 2004), 24/7 Trading Around the Clock,
Around the World (John Wiley & Sons, 2000), The Global
Volume 6, Issue 5. Currency Trader is published monthly by TechInfo, Inc.,
161 N. Clark St., Suite 4915, Chicago, IL 60601. Copyright © 2009 TechInfo,
Inc. All rights reserved. Information in this publication may not be stored or Trader (John Wiley & Sons, 2001), and How to Invest
reproduced in any form without written permission from the publisher.
The information in Currency Trader magazine is intended for educational pur- Internationally, published in Japan in 1999. A book tenta-
poses only. It is not meant to recommend, promote or in any way imply the
effectiveness of any trading system, strategy or approach. Traders are advised
to do their own research and testing to determine the validity of a trading idea. tively titled How to Trade FX is in the works. Rockefeller is
Trading and investing carry a high level of risk. Past performance does not
guarantee future results.
on the board of directors of a large European hedge fund.

GLOBAL MARKETS
Does U.S. spending spree

spell inflation?
Opinions differ whether the U.S. is headed inexorably down a path toward high inflation,
and what the impact on the dollar will be.
BY CURRENCY TRADER STAFF
A
lthough recent U.S. economic data has not global credit crisis and economic slowdown.
shown signs of inflation — in fact, it’s been As of April 9, Japan’s stimulus package totaled $154 bil-
quite the opposite — a debate is raging within lion, or 3.1 percent of GDP. In the U.S., the package totals
the economic community about whether the $787 billion, or about 5.5 percent of GDP. China’s package
U.S. federal government’s unprecedented spending spree comes in at about $586 billion, or roughly 13.3 percent of
will ultimately explode into an inflationary bubble down GDP. Germany has rolled out packages totaling about $110
the road — taking the dollar down with it. billion (3.25 percent of GDP), while Great Britain has
Such a prospect could have a dramatic impact on the U.S. approved a $29-billion package (just more than 1 percent of
dollar, which has enjoyed, ironically, its strongest rally in GDP), with more expected this spring. Canada has
years in recent months as the financial panic unfolded approved a $33-billion package, or 2.5 percent of GDP,
(Figure 1). while Russia has committed $61-62 billion, or just more
For now, inflation remains a “what-if” scenario, with the than 5 percent of GDP.
total March consumer price index (CPI) posting a 0.4-per- In the U.S. at least, the party line regarding the stimulus
cent annual decline, the first annual drop since 1955; the efforts seems to be the government and the Federal Reserve
“core” CPI rate, which excludes food and energy, gained were backed into a corner, with little choice but to attempt
0.2 percent. to pump lifeblood into a system that was seizing up.
However, with the asset side of the
U.S. Federal Reserve’s balance sheet FIGURE 1 — BEEN DOWN SO LONG...
now bloated to a historic nearly $2.2
Although the U.S. dollar is still much closer to its recent historical lows than its
trillion mark as of mid-April, and with highs, the rally over the past year has been the currency’s best run since the
the door open for it to expand to $3 or rally that ended in 2001-2002.
$4 trillion before the economic recov-
ery and stimulus efforts conclude,
inflation remains a real issue for
traders to consider.
Stimulus and monetary policy

Fiscal stimulus has ramped up in
recent months as countries around the
world have attempted to combat the
global recession. The World Bank fore-
cast a 1.7-percent contraction in global
GDP in 2009, which would be the first
worldwide decline on record. (Real
GDP growth was 1.9 percent in 2008,
according to the World Bank.)
Despite the Obama administration’s
inability to get other G20 nations to
commit to increased stimulus spend-
ing, major economies have nonetheless
engaged in a great deal of fiscal and
Source: TradeStation
monetary policy actions to counter the

“What was the alternative? Do nothing and see another this before. In the last 13 recessions before this, which
Great Depression? Doing nothing is not acceptable for most includes the Great Depression, the total expansion of the
people,” says Dave Gilmore, partner at Foreign Exchange Fed’s balance sheet was a collective 6 percent of GDP.”
Analytics. “This is unprecedented,” concurs David Jones, a 35-year
Central banks in many developed nations have also Wall Street veteran and president and CEO of DMJ
aggressively slashed interest rates in recent months. The Advisors, a Denver-based consulting firm. “There has
U.S. federal funds target rate currently stands at 0.00-0.25 never been a time when the Fed’s balance sheet has been
percent and most market watchers expect it to remain near continued on p. 10
zero through 2009.
By contrast, the European Central
Bank (ECB) has been seen by some as
dragging its feet on rate cuts, but
Europeans have long memories and
remain sensitive to the potential for
the type of hyperinflation that
occurred in Germany after World War
I (see “The European inflation per-
spective”). The ECB’s repo rate was
1.25 percent as of late April, but many
expect a 0.25-percent cut at its May 7
meeting. Meanwhile, Japan’s
overnight rate stands at 0.10 percent,
while the UK’s base rate is 0.50 per-
cent; Canada’s is 0.50 percent as well.
Deflation now, inflation later?

Most economists seem to agree defla-
tion is actually worse than inflation.
After all, the Japanese battled it for
nearly a decade in the 1990s and some
say the country has never fully
emerged from that vicious falling-
price cycle.
“The argument is that we cannot
allow deflation, and now we are stim-
ulating to a degree we’ve never seen
before,” says Jim Bianco, president of
Bianco Research LLC in Chicago. He
notes the asset side of the U.S. Fed’s
balance sheet, which stood at $880 bil-
lion in September 2008, has surged to
nearly $2.2 trillion as of April 2009 as a
result of the massive spending by the
Fed to purchase mortgage-backed
securities, agency securities, long-term
Treasury securities, and the TARP and
TARF programs.
Make no mistake, it is the largest-
scale U.S. government involvement in
the financial system ever seen.
“Currently, the Fed’s balance sheet
has increased to 18 percent of GDP,”
Bianco says. “They are inventing
money out of thin air. They make
money and it is considered monetary
policy. We’ve never seen anything like
CURRENCY TRADER • May 2009 9

GLOBAL MARKETS
FIGURE 2 — INITIAL REACTION
pushed up this much.” The red vertical line marks the Fed’s Nov. 25 announcement that it
Bianco believes the current policy is pointing would take extraordinary measures to bolster the financial markets
the country down a road it doesn’t need to trav- through purchases of mortgage-back securities, agency securities, and
other assets. The Euro/dollar pair initially surged — reflecting a dollar
el. “There is a big debate — deflation or infla-
sell-off.
tion,” Bianco notes. “I think it is a little of both,
and a lot of inflation later.
“They are trying to create inflation. They are
going to create hyperinflation. If we create 25-
percent inflation we have just made things
equally worse in the opposite direction.
Inflation will destroy the bond market, wages,
and everything else. I definitely think the Fed is
running the risk of taking out the 1980 12- to 14-
percent inflation high.”
And what would this mean for the U.S. dol-
lar? Bianco says that while “normally” inflation
would destroy the dollar, the current scenario
ahead for the greenback is an unknown because
he expects to see “similar types of inflation
around the world. It won’t be like we have infla-
tion and they don’t.”
What does Bianco see now? Source: TradeStation
“Too much money chasing too few goods,”
he says. “That is the basic monetarist definition
the Fed. Once they start it, it is going to become a monster,
of inflation. I’m in the camp that inflation is definitely com-
and they can’t micro-manage it.”
ing back. I’m very worried this is going to get away from
Although it embarked in a sharp uptrend last July, peak-
The European inflation perspective

At the Group of 20 (G20) meeting in London in early April, one “Germany, the largest economy in the Eurozone, has a his-
of President Barack Obama’s presumptive goals was to con- tory of hyperinflation, following the first World War, which led to
vince other major economies to engage in more forceful and debasement of its currency. In countries experiencing hyperin-
unified economic stimulus. Although he was widely credited flation, the central bank often prints money in larger and larger
with leaving a favorable personal impression and mending denominations as the smaller denomination notes become
some political fences at the meeting, his call for more govern- worthless. For example, by late 1923, Germany was issuing
ment spending was, among most European allies, politely two-trillion deutsche mark banknotes and postage stamps with
refused. a face value of 50 billion. Subsequently the German
Many European powers, including Germany and France, Bundesbank was always sensitive to signs of rising prices.
have a much different take than the U.S. on massive govern- “The lessons and stories of that era have been passed down
ment stimulus and its attendant inflation risks. The German from generation to generation, and Germany is still very infla-
Bundesbank, the predecessor to the European Central Bank tion-phobic, even when its economy is slowing,” Webster con-
(ECB), had a reputation as one of the staunchest inflation- tinues. “Certainly both Stark and Weber, the German repre-
fighting central banks in the world. sentatives on the ECB Governing Council, have been very
Memories of the German experience with inflation in the first vocal about the risks of inflation from overdoing the fiscal stim-
half of the 20th century — namely, the hyperinflation that rav- ulus and central bank credit extension measures, and no doubt
aged the nation and is associated in part with the ascendancy they were both very influential when the ECB raised rates in
of Adolf Hitler — greatly influenced the Bundesbank, and those July 2008 when the Eurozone economy was slowing and the
views have arguably colored the ECB’s perception of the credit crisis was escalating.”
issue. And the ramifications of hyperinflation?
“Some monetarists fear that when the velocity of [money] “It effectively makes private and public savings worthless. It
circulation revives, the inflation risk will proliferate,” says also encourages extreme consumption and hoarding of real
Stephen Webster, a London-based independent international assets, inflicts extreme hardship on the population, and is polit-
economist. ically and socially destabilizing,” Webster says.

ing once in late November before pulling back sharply and working on ‘exit strategies’ … and believes a significant
rallying again, the U.S. dollar has essentially been in a high- shrinking of the balance sheet can be accomplished rela-
ly volatile trading range for nearly six months. tively quickly,” he says. “Yes there are risks of a post-reces-
The greenback initially sold off after the Fed’s Nov. 25, sion inflation surge, and even another larger and deeper
2008 announcement that it would engage in unconvention- global recession after that, but I believe we have to trust in
al actions to stimulate the economy, including buying the current generation of policymakers and the generation
agency securities and mortgage-backed securities. The after that to face whatever challenges face us.”
Euro/dollar pair moved from $1.2565 on Nov. 24 to as high
as $1.4718 by Dec. 18 (Figure 2). continued on p. 12
“The moral of the story is that when
the Fed began its unconventional eas-
ing, the dollar fell sharply,” Jones
says.
Thinking the unthinkable

Some economists believe the Federal
Reserve will be able to back-pedal
quickly from the massive liquidity
injections into the U.S. financial sys-
tem, but there is a dark cloud on the
other side if these unconventional and
unprecedented measures go awry.
“If hyperinflation did emerge in a
major trading nation, there would
likely be major global market chaos
and dislocation,” Webster says. “The
currency of the country or trading
bloc in which the hyperinflation
occurred would be shunned. In other
words, it is something which is almost
too shocking to even contemplate.”
However, contemplate we must, he
says.
“Given what has happened in the
last two years, it is not something we
should be complacent about,” he says.
“Confidence would take a big dive
and a ‘flight to quality’ would ensue.
Gold and precious metals would no
doubt benefit as investors searched
for vehicles with intrinsic value. If we
are talking about high inflation as
opposed to hyperinflation, then the
currency of the country where interest
rates have to rise the fastest would,
within limits, probably strengthen.”
Will the Fed’s spending lead to
inflation?
“The answer is yes, unless the Fed
[starts unwinding what they’ve
already bought],” Jones says.
London-based Webster offers a
more positive view. “In a January lec-
ture at the London School of
Economics, Fed Chairman Ben
Bernanke indicated the Fed is already

GLOBAL MARKETS
“They need to balance inflation con-

FIGURE 3 — THE TREASURY BAROMETER
cerns against the desire to not prolong
The Treasury market doesn’t appear to be immediately worried about high the recession,” Jones says. “In 1937, the
inflation. Ten-year T-note yields are still near multi-decade lows. Fed tightened too soon and it made the
Great Depression even longer.”
Right now, Jones says banks are
hoarding this liquidity.
“It is very difficult to know when
banks start to lend it out,” he says.
“Then this huge supply of new liquid-
ity could become inflationary.”
Maybe not this year, but at some
point, the Fed will try to pull back and
reduce the asset side of its balance
sheet.
However, as all seasoned traders are
well aware, markets react quickly and
often violently to shifts in trends or
policies.
“If you are a trader in agencies or
Source: http://www.barchart.com long-term Treasuries the Fed has been
buying, guess what happens on the
Managing the scenario day the Fed starts to sell those back?
Finance professor James R. Lothian at Fordham University All hell breaks loose and rates go up sharply,” Jones says.
says the key question is whether the Fed can drain this mas- “It will be felt particularly in markets that benefited from
sive amount of bank reserves. the Fed’s unconventional actions, like mortgage-backed
“If they drain reserves, which will raise the federal funds securities.”
rate, they will come under political pressure,” he says. “The But if the Fed manages its way correctly out of this tricky
question is whether there is political will if interest rates situation, the dollar could do well.
start rising.” “If the Fed is successful in its actions and avoids inflation,
Jay Bryson, global economist at Wachovia, says the Fed’s the dollar will spike because [long-term] rates will spike,”
independence will play a critical role in how the scenario Jones says.
unfolds in the months and years ahead. On the flip side, “if we get inflation there won’t be
“At the end of the day, with the Federal Reserve buying demand for our fixed-income instruments, and that will be
government securities and the Bank of England buying bad for the dollar,” Jones says.
government securities, the important thing to remember is
that the governments did not mandate that,” he says. Stay tuned
Bryson points to the Argentine central bank, which was In general, analysts say the U.S. dollar and Treasury mar-
forced by the government to buy debt in the late 1980s, with kets aren’t pricing in an inflation threat right now.
disastrous inflation consequences. Zimbabwe, with its cur- “If the current markets were really worried about a
rent runaway inflation, is another cautionary tale of a cen- hyperinflation situation in the U.S., the dollar would be get-
tral bank held hostage to the government. ting crushed and that is not happening,” Bryson says.
By contrast, if the Fed does not succumb to political pres- Ken Tower, senior vice president of institutional sales at
sures and continues to operate independently — as it is Quantitative Analysis Service Inc. says the U.S. Treasury
designed to — it can adjust its actions to avoid hyperinfla- 10-year yield chart is a good barometer for signs of inflation
tion, Bryson argues, and pursue its dual mandate of stable (Figure 3).
inflation and maximum employment. “Ten-year yields have been in a downtrend since 1981,”
“The Fed is independent. As long as the objectives of the he says. “They’ve come down from 15 percent to about 2.5
Fed remain the same (a dual mandate of stable inflation and percent in late 2008. That is an incredible long-term down-
maximum employment) and price stability remains one of the trend. When you start to make higher highs, then and only
mandates, I don’t worry,” Bryson says. then do you start worrying about inflation.”
Of recent comments by Bernanke, Jones notes, “He says Ken Goldstein, economist at the Conference Board in
the Fed will simply push up the funds rate and will pull New York admits the current path could lead the U.S. into
back on its side of the balance sheet once the economy inflation.
begins to recovery.” “When we get down the road, we’ll worry about that,” he
However, this could be easier said than done. says. “Right now, we need to get down the road.”

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ON THE MONEY
Forecasting follies In forecasting, time frame

is everything.
FIGURE 1 — SPOT EURO 360-MINUTE TIME FRAME
The top-most hand-drawn trendline bisects the big green breakout bar near the middle
of the upswing, and duplicating it for the next up move resulted in the same result.
BY BARBARA ROCKEFELLER
T raders get discour-

aged using technical
analysis because it is
often wrong. No
sooner do you get a juicy breakout
than price turns around and
slumps under the breakout bar —
the so-called “false breakout.” The
most reliable indicator, the moving
average, lags price action so much
you often are already in the second
move before the moving average
has confirmed the first one.
One idea is to divide technical
indicators into two camps: those
Source: data — eSignal and Reuters Online; chart — eSignal that tell you what is happening
and those that tell you what is like-
FIGURE 2 — SPOT EURO DAILY TIME FRAME ly to happen next. Here’s one way to do
Several standard indicators on the daily time frame point to buying the that.
Euro, not selling it. First, let’s define technical analysis as
the measurement of market sentiment by
manipulation of price data. All math-
based indicators rearrange the price-bar
components (open, close, high, low) to
produce a slightly different view of the
price — they don’t have any real forecast-
ing capability, and all of them lag to some
extent. You can fiddle with the inputs and
adjust the parameters, but they are all
past data and the best you are ever going
to get is a more accurate reading of what
is happening now — i.e., a coincident
indicator, not a forecasting indicator.
The only indicators that have forecast-
ing capability are pattern indicators,
starting with support and resistance and
moving up to different kinds of double
tops and bottoms, head-and-shoulders,
and so on. Candlestick analysis is a form
of pattern analysis that has some limited
Source: data — eSignal and Reuters Online; chart — MetaStock forecasting capability, too — “limited”

FIGURE 3 — EURO DAILY TIME FRAME WITH MESA CYCLE
The MESA sine wave cycle also indicates price is still rising.
because the forecasting component is
very short-lived (usually only a day or
two) and because pattern analysis is
often wrong.
In support of support
(and resistance)
Despite this drawback, pattern indica-
tors, particularly plain old support
and resistance, are superior to math-
based indicators as forecasting tools.
These lines can be formed many ways
beyond connecting lows or connecting
highs. Tools such as Bollinger Bands
and the linear regression channel,
which is formed by drawing lines two
standard deviations above and below
a straight linear regression line, are
also useful measures of support and
resistance.
You can’t always get a linear regres- Source: data — eSignal and Reuters Online; chart — MetaStock
sion line that looks right. In fact, when
you draw a true linear regression line it closed below the open. It was also Of these three, the most important
using software, it’s sometimes a sur- the last bar on a Friday. This crosses one is choosing the right time frame to
prise to see its slope. Here’s a trick that the top of the big, down-sloping chan- view price data. Figure 2 shows sever-
sometimes works: Draw a trendline by nel that is a true linear regression al standard indicators on the daily
eye that approximates a linear regres- channel, but it closes just inside the continued on p. 16
sion line. Of course, drawing a trend- channel.
line sometimes requires more judg- We can view the red bar as the usual
ment than we would like. Do you start end-of-day and end-of-week position-
it at an exact high or low, or at the first paring, or we can imagine the Euro is
up bar after a bottom, or what? overbought at this level and “should”
Regression lines can be drawn only retreat back inside the down-sloping
when there is enough data for a repre- channel. Sure enough, the stochastic
sentative sample, and that isn’t always oscillator in the lower window shows
available. This is in keeping with the Euro is overbought, and price did
math-based indicators always being indeed retreat back inside the mini-
backward-looking. channel on the following Monday.
In Figure 1, the topmost upward- Anyone who sold the Euro at the open
sloping blue line is a hand-drawn Sunday night with a stop just above
guess of the trend line. The true linear the highest high and a target at the
regression is somewhat different. But center channel or channel bottom
this is a 360-minute time frame chart should have made a nice profit.
with only four days of data, justifying There are three lessons here. First,
the hand drawing. Note that the line we used the right time frame to identi-
bisects the big green breakout bar near fy a cycle effect: See how nicely the
the middle of the upswing. Copying see-saw pattern lines up with the sto-
and pasting this line to the next up chastic oscillator? Second, we created
move resulted in, miraculously, the our own pattern based on the idea of
line once again bisecting the big green linear regression and the linear regres-
breakout bar. sion channel but used hand-drawn
The third time we copied the line we lines. Third, the right technical idea
drew an imaginary channel around it, delivered a sane and reasonable expec-
guessing at the width. The bar with the tation of profit and loss, and thus a
highest high is also a red bar, meaning logical place to set a stop and target.

ON THE MONEY
FIGURE 4 — DOLLAR/YEN, 360-MINUTE TIME FRAME

time frame, and they all suggest we
In this case the fundamentals argue against a countertrend trade. Sentiment in should buy the Euro, not sell it. The
dollar/yen is “sticky”: Traders get an idea of risk aversion and stick to it for long close is above the 20-day moving
periods.
average. The last daily bar breaks
the linear regression channel top.
The stochastic oscillator is still ris-
ing.
The point here is that if there is a
cycle, these indicators are not iden-
tifying it on the daily chart. To con-
firm, see Figure 3, which shows the
MESA sine wave cycle. It, too, indi-
cates price is still rising.
MESA stands for maximum
entropy spectrum analysis. The
MESA indicator offers an adaptive-
period filter to define and project
cycles or waves. The filter aspect
minimizes whipsaws whether the
price series is cycling or trending.
The MESA indicator tends to be
accurate as to peaks and valleys
when the market is in a cycling
mode — it looks like a sine wave.
Source: data — eSignal and Reuters Online; chart — eSignal When the market is trending, the
indicator is flat or wandering. The
FIGURE 5 — DOLLAR/YEN, WEEKLY TIME FRAME indicator is the only oscillator that
anticipates turning points, and that
The long dollar/yen downtrend from the summer of 2007 spells “risk aversion.”
makes it like a pattern indicator in
Is it wise to buck that trend?
having forecasting capability. It
does, however, lack the capability
to indicate the power of the moves,
i.e., momentum.
It’s not always possible to dis-
play charts in a time frame that
yields the neat and tidy cyclical
pattern that appeared in the Euro.
In Figure 4, the first correction line
is a true linear regression line,
copied and pasted to the succeed-
ing up moves in the context of an
overall dollar/yen downtrend.
Again, we used a 360-minute time
frame. Price has broken the channel
bottom and “should” be ready for a
corrective up move like the previ-
ous ones. As was the case with the
Euro, the stochastic oscillator is in
an extreme condition (and so is the
MACD). But would we dare to buy
Source: data — eSignal and Reuters Online; chart — MetaStock the dollar/yen on an expected pop
up in this case? Probably not, in

Related reading: Other Barbara Rockefeller articles
“Listening to the chart” “Crisis of confidence,” Currency Trader, October 2008.
Currency Trader, April 2009. As Wall Street and Washington prove themselves equally inept, the
While everyone debates the ramifications of various policy dollar suffers.
measures, what is the Euro/dollar chart saying?
“The dollar-oil connection,” Currency Trader, September 2008.
“Rational fear and the forex market” As oil broke, so did the Euro/dollar pair. What can we learn from
Currency Trader, March 2009. analyzing bursting bubbles?
Analysis of several intermarket relationships suggests the role of
risk aversion in the forex market is no cut-and-dried issue. “Horizontal patterns in foreign exchange”
Currency Trader, August 2008.
“Competitive devaluations, the EMU, and the yen”
The Euro’s price action lends itself well to dissection with
Currency Trader, February 2009.
the Darvas Box.
Currency devaluation never works in the long run — just ask Japan
— but that doesn’t mean panicky governments won’t use it to try to
“Are the summer doldrums here?” Currency Trader, July 2008.
stem the flow of blood in the near term.
If market myth is true, the season will bring a sideways
“The Euro: Prosperity or perdition?” market. But the myth warrants some analysis.
Currency Trader, January 2009.
“Manias and crashes: Where will oil lead the dollar?”
The belief the Euro sell-off has ended may be based on some false
Currency Trader, June 2008.
assumptions about how the U.S. and Europe are handling the
Although some analysts argue a falling dollar is helping to push up
economic crisis.
oil prices, it might be the other way around. The question is, when
“The six Ds of depression,” Currency Trader, December 2008. will the bubble-go-round stop?
The buck has gotten a bounce from the recent financial panic, but
“Is the Euro going to the moon?” Currency Trader, May 2008.
the longer-term picture isn’t quite as bullish.
A look at the Euro’s recent gravity-defying performance.
“Euro and dollar at parity?” Currency Trader, November 2008.
A few short months ago the world was contemplating Euro $2. Now, You can purchase and download past articles at
the talk is all about Euro $1. What are the odds it will happen? http://store.activetradermag.com.
part because the earlier corrections are dollar/yen, the hand-drawn blue line
ragged and relatively brief. shows the long dollar/yen downtrend
In this case, the real reason not to be from the summer of 2007, which spells
too eager to trade countertrend is not a “risk aversion,” albeit punctuated by
lack of faith in the appearance of bursts of risk preference that saw the
something that looks like cycle behav- re-emergence of carry trades.
ior on the chart, but rather because we This is a very long-lasting trend.
know something about the fundamen- Based on the fundamentals of the
tals. The dollar/yen tends to form Japanese economy, the dollar/yen
trends lasting three to five months and probably should be more like 110 than
exhibits only minor corrections (how- 90. In short, we have a super-big-pic-
ever violent they may seem at the ture downtrend, it exists for a solid
time) because sentiment in dollar/yen reason, and it’s frightening to consider
is “sticky.” Traders get an idea of risk bucking that trend.
aversion and stick to it for long peri- In the end, the only technicals that
ods. As the global financial crisis has deliver a forecast you can trade on are
played out, traders enter and exit the pattern technicals — if you can find
yen based on perception of the overall them. For that you need the right time
environment. When the environment frame, and you also need to be aware
is full of scared people, the carry trade of big-picture reasons for trends and
goes away and the yen rises. When countertrends to exist in the first place.
people are spooked, they speculate You can’t be a good technical trader
less in things like the Euro/yen and without some fundamentals.
yen/Aussie dollar. This has an Well, you can, but you would be
inevitable spillover effect into the dol- taking excessive risks.
lar/yen.
In Figure 5, a weekly chart of the For information on the author see p. 6.

TRADING STRATEGIES
Trading by the hour

Analysis shows modest expectations, tight risk control necessary to profit
from this short-term reversal technique.
FIGURE 1 — INVERSION REVERSAL

A commonly sought out pattern — a bar that inverts the price action
of the preceding bar — fails once and succeeds a second time. BY CURRENCY TRADER STAFF
I n trading, “confirmation” is commonly

bandied about as a positive, but it has
distinct drawbacks, especially for
traders with a countertrend bent. For
example, a typical reversal pattern might con-
sist of a sharp down move of some kind, fol-
lowed by an up move — say, a higher close or
a close above the high of the preceding bar —
that “confirms” the downthrust is over and
buyers are coming back in.
Such a pattern might have value, but it’s
also true that by waiting for confirmation, you
are automatically giving up some of the price
Source: TradeStation move you’re hoping to capture. Also, there’s
always the chance the confirmation
move is a fake-out — a bounce that
FIGURE 2 — WIN SOME, LOSE SOMEA MIXED BAG
occurs just before the market turns
Some of the signals (blue dots) capture swing bottoms, while others are back down — in which case, if you’ve
followed by strong selling. gone long on the confirmation, you’ve
just bought the top.
But assuming a reversal is taking
place, wouldn’t you rather have gotten
in while the market was still moving
down, as close to the bottom as possi-
ble? Of course, but the unavoidable
problem is that doing so is very diffi-
cult psychologically, and regardless,
the market is unlikely to keep blasting
lower. Unfortunately, a truism in mar-
kets is that, broadly speaking, during
strong uptrends, that pullback/rever-
sal pattern you’re looking to trade
won’t occur all that often, while in
strong downtrends, it will occur again
and again — and be followed by more
selling.
Let’s look at a simple pattern that
resulted from analyzing a certain type
Source: TradeStation of reversal pattern: a bar that closes

strongly in one direction is followed
immediately by a bar that is similar in
size but closes strongly in the opposite
direction. The analysis indicated that
such patterns occurred conspicuously at
some tops and bottoms (with price mov-
ing in the direction of the second bar’s
close) but were much more frequent in
the middle of moves, where they were
camouflaged by the fact that they did not
signal reversals.
Figure 1 shows two instances of this
type of pattern on the daily time frame in
the U.S. dollar/Swiss franc pair
(USD/CHF). Both instances consist of a
bar that opens near the day’s high and
close toward the day’s low, followed by a
bar that opens near the low and closes
near the high. The first instance (in May)
was followed by selling; the second was
followed by the “expected” rally
(although, note the next day closed
lower).
Since the second bar of this pattern
represents a reversal of the first bar, why
not see if there’s a way to enter the mar-
ket on the first bar of the pattern and ben-
efit from the second bar’s immediate
reversal?
The pattern
Easier said than done, of course, but we
identified some basic parameters and
analyzed the results of 60-minute bars in
the dollar/Swiss pair. The pattern defini-
tion is:
1. The current low is at least 0.0020

below the previous low.
2. The open is in the top 30 percent
of the bar’s range.
3. The close is in the bottom 30 percent
of the bar’s range.
In formula form, these rules are:
1. L[1]-L >= .0020

2. (O-L)/(H-L) > = 0.70
3. (C-L)/(H-L) < = 0.30
Because these rules are intended to

identify the first bar of the previously
continued on p. 20

TRADING STRATEGIES
FIGURE 3 — CHOPPY RIDE

Even some of the less-desirable signals
Overall, the post-pattern price action was bullish, but it was also very volatile. are followed by at least a minimal
amount of upside price action. For
example, the April 7 signal occurred in
a pullback that continued for a dozen
more bars, but price nonetheless ral-
lied the bar immediately after the sig-
nal, pushing 27 pips higher and clos-
ing up.
Judging from this chart, though, the
pattern has an obvious weakness: In
sharp, multi-bar down moves — like
the one that occurred on April 13 —
price is likely to keep dropping, often
triggering a succession of bad signals.
A chart is just a picture, however.
Let’s look at some of the numbers
behind the signals.
described two-bar reversal pattern, the the bottom of the bar’s range, as Mild bias
parameters are representative, and no opposed to waiting for a rebound that Figure 3 compares the median close-
effort was made to optimize them. The would confirm renewed buying pres- to-close gains and losses for the first 12
drop from the previous bar’s low to sure. By doing so, the pattern offers the bars after the pattern to the one- to 12-
the current low was included because potential for a short-term “scalp” even bar returns for all 60-minute bars from
of the observation that price often if price eventually turns lower. Feb. 6 to April 30, 2009 (approximately
snapped back after a relatively sharp Figure 2 shows a 60-minute 1,400 bars). The pattern occurred 82
down move. The pattern thus tries to USD/CHF chart. Several of the signals times during this period.
identify a buying point when the mar- occur near the bottom of down swings On a closing price basis, the post-
ket is thrusting lower and closes near and are followed by notable bounces. pattern price action was ultimately
more bullish than the overall market,
but also much more volatile.
Figure A
Table 1 highlights why. It shows the
average, median, maximum, and min-
Understanding Table 1 imum moves from the close of the pat-
tern to the closes, highs (LUM), and
Table 1 summarizes the price behavior for different pat- lows (LDM) of each the 12 subsequent
tern scenarios. It shows the average, median, maximum, hourly bars. Standard deviations of the
and minimum price changes from: moves and the percentage of times
price was higher than the closing price
1. The pattern’s closing price to the closing price of the pattern (%>0) are also included.
of the next day (+1, +2, etc.). (For more information about these sta-
tistics, see “Understanding Table 1.”)
2. The pattern’s closing price to the next day’s The (mostly) positive median close-
highest high (largest up move, or “LUM”). to-close moves highlight the bullish
bias, but the negative average close-to-
3. The pattern’s closing price to the next day’s close moves (except for day 1) suggest
lowest low (largest down move, or “LDM”). sizable losers also occurred — most
likely the result of the kind of down
Also, the standard deviations (StD) are included, as well as the percentage of moves that unfolded on April 13 in
times the close-to-close change was positive (%>0). Figure 2. The percentage of positive
Figure A shows the close-to-close moves, LUMs, and LDMs from the initial bar close-to-close moves (peaking at
to the two subsequent bars. around 56 percent on days 10 and 12)
suggest there was more up movement

TABLE 1 — PATTERN STATISTICS
The discrepancy between the positive median moves and negative average moves is the result of a smaller number of large
losing trades.
+1 LUM LDM +2 LUM LDM +3 LUM LDM +4 LUM LDM
Avg. 0.0001 0.0016 -0.0019 -0.0002 0.0015 -0.0018 -0.0003 0.0015 -0.0019 -0.0005 0.0010 -0.0020
Med. 0.0001 0.0013 -0.0014 0.0000 0.0013 -0.0014 0.0005 0.0015 -0.0007 0.0005 0.0015 -0.0006
Max. 0.0040 0.0049 0.0000 0.0091 0.0097 0.0035 0.0073 0.0101 0.0060 0.0089 0.0096 0.0058
Min. -0.0073 0.0000 -0.0141 -0.0127 -0.0069 -0.0188 -0.0171 -0.0112 -0.0238 -0.0224 -0.0167 -0.0285
StD 0.0018 0.0012 0.0020 0.0032 0.0023 0.0031 0.0041 0.0034 0.0043 0.0049 0.0043 0.0051
%>0 51.22% 100.00% 2.44% 50.00% 73.17% 19.51% 57.32% 73.17% 30.49% 54.88% 70.73% 37.80%

Avg. -0.0002 0.0009 -0.0019 -0.0006 0.0012 -0.0021 -0.0007 0.0009 -0.0021 -0.0007 0.0007 -0.0022
Med. 0.0005 0.0016 -0.0008 0.0004 0.0015 -0.0010 -0.0001 0.0013 -0.0011 0.0001 0.0011 -0.0013
Max. 0.0096 0.0100 0.0072 0.0156 0.0164 0.0094 0.0141 0.0169 0.0136 0.0131 0.0142 0.0120
Min. -0.0214 -0.0209 -0.0253 -0.0231 -0.0212 -0.0260 -0.0240 -0.0204 -0.0259 -0.0234 -0.0208 -0.0244
StD 0.0051 0.0050 0.0052 0.0058 0.0053 0.0059 0.0064 0.0060 0.0063 0.0065 0.0063 0.0064
%>0 56.10% 68.29% 34.15% 53.66% 65.85% 39.02% 48.78% 63.41% 36.59% 51.22% 58.54% 41.46%
Avg. -0.0007 0.0009 -0.0023 -0.0009 0.0005 -0.0021 -0.0007 0.0005 -0.0021 -0.0006 0.0007 -0.0019
Med. 0.0008 0.0014 -0.0010 0.0007 0.0017 -0.0003 0.0003 0.0018 -0.0005 0.0012 0.0018 -0.0006
Max. 0.0126 0.0137 0.0121 0.0127 0.0142 0.0113 0.0139 0.0139 0.0119 0.0135 0.0143 0.0108
Min. -0.0280 -0.0224 -0.0331 -0.0312 -0.0275 -0.0330 -0.0306 -0.0280 -0.0316 -0.0321 -0.0296 -0.0335
StD 0.0076 0.0067 0.0075 0.0077 0.0075 0.0079 0.0081 0.0079 0.0080 0.0084 0.0082 0.0082
%>0 54.88% 60.98% 45.12% 56.10% 63.41% 48.78% 53.66% 63.41% 47.56% 56.10% 59.76% 48.78%
than down movement, but big down progressive decline in LUMs and
moves outnumbered big up moves. increase in LDMs — another reminder
The implications are that, at the very that losing trades must be clipped
least, a risk-control rule would be early to avoid overwhelming the prof-
needed to cut the losses on losing its.
trades before they became too big. Nonetheless, the “good” signals
However, the LUM numbers for the (those not immediately followed by
first few days are interesting. The per- more big down bars), when they
centage of gains for the day 1 LUM is appear, seem to be followed by only
100 percent, meaning, after each pat- marginal selling in the first two bars
tern instance (82 times) the after the pattern. There’s some evi-
dollar/Swiss pair traded higher than dence bar 1’s performance might be
the closing price of the pattern during helpful in determining whether to
the next bar. This percentage remained hold a position longer. Table 2 shows
above 70 percent through day 4. That’s the odds of a higher close (i.e., above
the good news. the pattern’s closing price) in the six
The bad news is revealed in Figure subsequent bars if bar 1 closes higher.
4, which sorts the day 1 LUMs and The odds of a higher close on bar 1
shows these moves varied greatly, were a little better than 50 percent, but
from 0.0001 to 0.00049. To have a very after a bar-1 up close, the odds of a
high expectation of capturing a profit higher close were above 70 percent for
— say, 85 percent — you would have the next four bars. This, of course, goes
to sell with a 0.0005 profit. The LUM back to the original discussion of wait-
was 0.0010 or larger 54 times, so the ing for a confirming move to enter the
odds of capturing a move that size market.
would be approximately 67 percent. To benefit from positive action on
Another troublesome statistic is the continued on p. 33

ADVANCED STRATEGIES
A cross-rate to bear
Simple, yes. But until conditions change,
the JPY/EUR pair is a surprisingly accurate measure of risk appetite.
BY HOWARD L. SIMONS
T
he admonition, “If it sounds too good to be what do you think propelled the inflation of that credit bub-
true, it probably is” applies to market indica- ble? Investor access to cheap funding currencies had been
tors as well as investments. For any given part of the economic landscape from 1995 onward in the
development in financial affairs, it is always too case of the Japanese yen (JPY), and from 2001 onward for
easy to find something that correlates well. Spurious corre- the U.S. dollar (USD) and Swiss franc (CHF).
lation is the bane of the data analyst; the trick is to make If the world is divided into two great currency blocs dom-
sure indicators have some defensible, not merely plausible, inated by the U.S. dollar and the Euro (“The dollar index
fundamental explanation behind them. and ‘firm’ exchange rates,” December 2005), then the cross
Carry trades meet this test, including the yen carry trade rate between the JPY and Euro (EUR) expressed in yen per
(see “A closer look at the carry trade,” June 2007), the U.S. Euro (JPY/EUR going forward) should be at least as impor-
dollar carry trade (“The short, awful life of the dollar carry tant as the yen/dollar rate.
trade, August 2008) or the Swiss franc carry trade (“Franc- It is, and with a cruel and perverse twist: While both the
ly, my dear, I don’t give a carry,” September 2008). If the yen/dollar and Euro/dollar rates conform reasonably well
unwinding of the great global credit bubble defined the to relative interest-rate expectations (the Euro more so than
downturn in various asset markets from mid-2007 onward, the yen), the JPY/EUR exhibits virtually no relative interest-
rate content whatsoever. It
appears to be nothing more than
FIGURE 1 — YEN PER EURO HIGH-LOW-CLOSE VOLATILITY an artifact of carry trade demand
SURGED DURING RALLY and, by extension, a barometer of
High-low-close volatility surged as the JPY/EUR rose, reflecting a significant increase global risk appetite.
in the riskiness of risk. Restated, when the JPY/EUR is
rising — that is, the yen is weak-
ening relative to the Euro — the
world’s risk appetite is rising.
When it is falling, as it did precip-
itously during the global market
rout of September-October 2008,
the world’s risk appetite is
falling. This might seem too good
to be true, but it certainly meets
the defensibility test.
Volatility indicators
A key date in the history of the
JPY/EUR is July 15, 2008, when
Fannie Mae and Freddie Mac
were effectively nationalized by
the U.S. government (marked
with a green vertical line in all
accompanying charts). The
importance of this date is reflect-
continued on p. 24

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ADVANCED STRATEGIES
FIGURE 2 — EXCESS VOLATILITY INITIALLY FELL DURING

ed in the high-low-close (HLC)
YEN’S RALLY AGAINST EURO
volatility of JPY/EUR. This meas-
ure, which accounts for intraday Excess volatility (implied volatility/HLC volatility ratio) initially fell after July 15, 2008.
range as well as interday change,
surged as JPY/EUR rose, indicating
a substantial increase in the uncer-
tainty of the JPY/EUR rate (Figure
1). If this cross-rate is a barometer of
global risk appetite, such a move
indicates a second-order increase in
the risk of risk, as it were.
How did the HLC volatility com-
pare to the JPY/EUR’s implied
volatility? The ratio of implied to
HLC volatility, or excess volatility,
measures how much “insurance” is
being purchased against a subse-
quent price move. Figure 2 shows
excess volatility initially fell after
July 15, 2008, which indicates a cer-
tain measure of indifference by mar-
ket participants. Even though the
JPY/EUR rate was moving violent-
ly, participants either were willing
FIGURE 3 — SHORT-TERM RATE EXPECTATIONS NOT
A MAJOR FACTOR IN CROSS-RATE
The fact that the FRR differential did nothing in 2008 to signal the explosive
to accept these movements as quasi- increase in the JPY/EUR rate means the JPY/EUR pair is not driven by relative
normal or as a short-lived artifact of short-term interest-rate expectations.
crisis conditions.
Short-term interest-rate
expectations
Now let’s turn to relative short-term
interest-rate expectations. As our
metric, we will use the forward rate
ratio (FRR) between six- and nine-
month LIBOR (FRR6,9), which is the
rate at which we can lock in bor-
rowing for three months starting six
months from now, divided by the
nine-month rate itself. The more the
FRR6,9 exceeds 1.00, the higher those
three-month rates are expected to be
six months from now.
The difference between two
FRR6,9 numbers reflects the relative
rate at which two short-term inter-
est rates are expected to move over
that horizon. In a normal relation-
continued on p. 26
ADVANCED STRATEGIES
FIGURE 4 — THE CROSS-RATE AND NOTE-RATE DIFFERENTIALS
The normalized rate gaps between the Eurozone and Japan have correlated extremely
well to the JPY/EUR since the mid-2006 withdrawal of liquidity by the Bank of Japan
(magenta vertical line).
ship, the higher the differential

between currencies X and Y, the
more currency X is expected to
rise relative to currency Y.
This relationship is interest-
ing in the case of JPY/EUR. The
JPY has had a persistently high
FRR6,9 for years, as few have
believed its minuscule interest
rates could persist. As a result,
we must look more at the trend
of the JPY FRR differential.
While the FRR differential leads
the movement of the JPY/EUR
by 10 weeks on average, noth-
ing in its course during 2008
signaled the explosive increase
in the cross rate (Figure 3). This
tells us, loud and clear, the
JPY/EUR must be determined
by something other than rela-
tive short-term interest-rate
expectations.
FIGURE 5 — RELATIVE EQUITIES ALIGNED WITH CURRENCY IN TIME
Long-term interest-rate
Comparing the returns of Eurozone and Japanese equity indices to the JPY/EUR shows
differentials
once the JPY/EUR fell, so did the relative performance of European equities.
Relative expected returns on
assets are a determinant of cur-
rency rates, too. Global
investors will shift funds to
countries with high expected
asset returns and remove them
just as quickly, as many emerg-
ing markets have discovered to
their sorrow over the years.
If we normalize the rate gaps
between the Eurozone and
Japan at the two-, five-, and 10-
year horizons (i.e., the differ-
ence between the Euro and yen
rates divided by the Euro rates),
we find it has correlated
extremely well to the JPY/EUR
pair since the mid-2006 with-
drawal of liquidity by the Bank
of Japan, marked with a magen-
ta vertical line in Figure 4.
The fundamental logic
behind this correlation is sound.

Related reading:
Other Howard Simons articles
“And it’s one, two, three — what are we trading for?”
Currency Trader, April 2009.
They don’t call them frontier markets for nothing. A look at Vietnam’s currency
and stock market over the past few years.
“Sovereign credit risk and currencies”
Currency Trader, March 2009.
Government actions are perversely rewarding the guilty: As a nation’s credit
Euro yields rose in 2006-2007 as the rating deteriorates, its borrowing costs fall and its currency, at least temporarily,
inflation-averse European Central rises.
Bank kept credit tight in the Eurozone “Minor trends make minor friends”
in the face of strong growth. This Currency Trader, February 2009.
strong growth and high-return envi- Do minor currencies offer trading opportunities the majors don’t? Find
ronment attracted risk-seeking yen out what the numbers say.
lenders, and the JPY/EUR weakened.
“Let the trend be your friend: The majors”
The process reversed in 2008 as eco-
Currency Trader, January 2009.
nomic weakness enshrouded Europe, If currencies trend so much, why do trend followers usually have such blah
leading to risk-averse yen lenders performance? This and other questions are answered in this study of currency
closing out their carry trades. trends.
Stock market confirmation “The rupee and emerging markets”

Currency Trader, December 2008.
If the JPY/EUR is driven by relative
Analysis suggests India’s status as a global economic power is no accident.
asset returns, then European equities
should outperform Japanese equities “Nordic currency confusion”
when the cross-rate is weakening, and Currency Trader, November 2008.
vice versa. Get a handle on the dynamics of the Northern European currencies.
Comparing the total returns on the “The Swiss franc’s commodity connection”
MSCI Eurozone and Japanese equity Currency Trader, October 2008.
indices (both expressed in USD terms) How can the Swiss currency be, of all things, a commodity currency?
to the JPY/EUR shows this relation- “Franc-ly, my dear, I don’t give a carry”
ship in action (Figure 5). Once the Currency Trader, September 2008.
JPY/EUR fell, so did the relative per- Investigating the Swiss franc carry trade, and what might change its dynamics.
formance of European equities. As an
“The short, awful life of the dollar carry trade”
aside, this is one more piece of evi-
Currency Trader, August 2008.
dence that international diversifica-
The implications of the weak-dollar policy and the dollar’s role as a funding currency.
tion in equities is something of a
chimera: It is all a currency trade in “Currencies and commitments”
disguise (see “Currencies and stock- Currency Trader, June 2008.
index performance,” April 2008). Find out what COT data conveys about forex price action.
Veteran market analysts may be “Getting carried away with the kiwi”
shaking their heads in amusement Currency Trader, July 2008.
right now, thinking to themselves, What’s driving the New Zealand dollar, and how long is it likely to last?
“Yes, a pattern works until it is recog- “Currencies and stock-index performance”
nized.” This cannot be dismissed out Currency Trader, April 2008.
of hand; markets never allow any- Find out how stock indices relate to the performance of their currencies.
thing so straightforward as a single
“What’s down with the Australian dollar?”
indicator, such as the JPY/EUR, to be
Currency Trader, March 2008.
a simple indicator of risk.
Traders have many assumptions about the nature of the Australian dollar, but only one
Here’s a bet: This indicator will of these preconceptions appears to have any impact on the currency.
cease to operate when Japanese inter-
est rates rise to the relative level at “Currencies and U.S. stock-sector returns”
which carry trades are no longer prof- Currency Trader, January 2008.
This exhaustive analysis challenges some common assumptions about the relationship
itable. Then the indicator will fail, and
between currency moves and stocks.
fail badly. Until then, keep it on your
screen. “Howard Simons: Advanced Currency Concepts, Vol. 1”
A discounted collection that includes many of the articles listed here.
For information on the author see p. 6.
You can purchase and download past articles at http://store.activetradermag.com

FOREX NEWS
New rules ban forex “hedges”

Brokers, traders faced with new rules regarding dual positions
BY CHRIS PETERS
O n May 15 the National Futures Association (NFA)

will implement a new rule, approved by the CFTC
in April, banning forex traders from holding opposing posi-
calculating interest charges. According to the NFA’s letter,
“In fact, at least one commenter seems to suggest that NFA
should require this treatment.”
tions in the same currency. One major forex dealer said the change has much larger
For traders using most U.S.-based forex dealers, this implications regarding order-handling technology, and will
means they will no longer be able to use a technique known require the alteration of the firm’s entire trading platform.
as “hedging,” or taking an equal but opposite position in a “I don’t think they realized how long it will take dealers to
currency when price moves against your initial trade, fix their platforms to comply, along with educating our
instead of exiting the position and taking the loss. After clients on the new ways of managing their risk,” said the
May 15, offsetting trades will cancel each other out on a spokesperson.
first-in, first-out (FIFO) basis.
In its letter to the CFTC proposing the change, the NFA
said there are two reasons it proposed the rule. “First, [car- All of these costs are to the benefit
rying offsetting positions in an account] essentially elimi-
nates any opportunity to profit on the transaction.” of the dealer and the detriment of
However, the hedge is often used because it also eliminates
the opportunity for further losses. The NFA’s second reason
is holding two opposite positions increases the cost to the
the customer. Part of the NFA’s
customer. With this type of hedge position, a customer pays
twice the commissions because of the two separate trades.
defense for the rule is it feels dealers
Also, according to the NFA’s letter, “a forex customer will
pay the entire spread twice (buying at the high end of the
could promote it to unwitting customers
spread and selling at the low end) rather than paying half
on entry and half on exit.” Increased carrying charges when in an attempt to make additional profits
a position rolls over when held overnight add to the cost as
well. of the increased costs.
All of these costs are to the benefit of the dealer and the
detriment of the customer. Part of the NFA’s defense for the Other issues
rule is it feels dealers could promote it to unwitting cus- Aside from the change regarding offsetting positions, the
tomers in an attempt to make additional profits of the NFA has also set stricter limitations on how and when deal-
increased costs. The NFA also claims the practice could be ers are allowed to change order prices after they have been
used to launder money by using the carrying charge to executed and reported to the customer.
accept intentional losses. Changes are usually attributed to Internet errors, incor-
The NFA’s letter cited pros and cons presented to them rect data feeds, and other technical errors. However, the
through comments received on the proposed ban before it NFA found that most of the errors were directly related to
was approved. systems under the dealer’s control. The NFA decided deal-
However, as acknowledged by the NFA, forex brokers ers should “bear the burden” of these price changes, and are
initially began offering the option of holding two opposite only allowed to make changes when it is to the benefit of
positions, and in some cases advertising its availability, the customer, or when the dealer operates a “straight
because of customer demand. Many of the dissenting voic- through” service (one that is completely electronic and
es have said the NFA has no business dictating what strate- offers direct access to a counterparty), and the straight-
gies a trader can use. through dealer receives bad data from the counterparty. In
Some commenters acknowledged the fact that the tech- this case, the dealer has 15 minutes to notify the customer of
nique incurred greater costs, but said this could be taken the change in case they decide to cancel or adjust the order.
care of if dealers counted the trade as a single position when This change takes effect on June 12.

FOREX NEWS
Treasury backs down from China currency

manipulation stance FIGURE 1 — U.S. DOLLAR/CHINESE YUAN
Yuan appreciation vs. the dollar halted abruptly in July
New Treasury report doesn’t claim China 2007 as the economic downturn spread across the globe.
is a currency manipulator.
BY CHRIS PETERS
I n its biannual report to congress on international

economies and exchange-rate policies released on
April 15, the U.S. Treasury found none of its major partners
fit the bill of “currency manipulator” as defined in the
Omnibus Trade and Competitiveness Act of 1988.
The report signals a retreat from statements made by
Treasury Secretary Timothy Geithner during his confirma-
tion hearing earlier this year regarding China’s foreign
exchange policies.
“President Obama — backed by the conclusions of a
broad range of economists — believes that China is manip-
ulating its currency,” Geithner said in January.
If the report had found any country to be manipulating Source: eSignal
its currency in an effort to gain an advantage over other
countries in international trade, it would have triggered rate, shown in Figure 2, has, for the most part, steadily
diplomatic efforts by the Treasury to attempt to resolve the increased since 2005, gaining 29.3 percent from January
issue. More severe methods such as trade tariffs and duties 2005 through March 2009.
could then be implemented if diplomacy fails. Despite the Treasury’s findings, some in Congress remain
In five reports from 1992 to 1994, the Treasury identified skeptical of China’s currency policy and would like to see a
the Chinese government as a currency manipulator, the last stronger stance taken against what they see as unfair trade
time a country has acquired the label. Taiwan and Korea are practices. Following the release of the treasury’s report, Sen.
the only other countries to be named since the report began Debbie Stabenow (D-Mich.) announced plans to propose
in 1988, but neither has made the list since 1992. legislation providing the U.S. Department of Commerce
While the report did not call out China as a manipulator, with a framework to identify currency manipulators and
it did state its currency, the yuan (renminbi), remains “punish countries that manipulate their currency,” accord-
undervalued. However, the report cited the appreciation of ing to a statement released on her Web site.
the yuan since it depegged from the dollar in 2005
as a sign of progress. Figure 1 shows the FIGURE 2 — BIS REAL EFFECTIVE EXCHANGE RATE
dollar/yuan (USD/CNY) rate fell 17.2 percent Even though the yuan has held steady against the dollar since July
from July 2005 through June 2008, meaning the 2008, it has continued to increase against the currencies of other
yuan strengthened vs. the dollar. But as the global trade partners.
economic outlook worsened, China again began to
strictly manage its currency, halting its apprecia-
tion, which is reflected in the sideways price action
since last summer.
However, the report noted that “while the
[yuan] has been stable against the U.S. dollar in
recent months, the appreciation of the dollar
against many other currencies has caused the ren-
minbi to strengthen against these other curren-
cies.”
The Bank for International Settlements (BIS) cal-
culates indices of exchange rates that weigh the
price of one country’s goods and services against
its trading partners’ prices, called the “real effec-
tive exchange rate.” China’s real effective exchange
CURRENCY FUTURES SNAPSHOT The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of each market’s
as of April 28 liquidity, direction, and levels of momentum and volatility. See the legend for explanations of the different fields.
Market Symbol Exchange Volume OI 10-day move/% rank 20-day move/% rank 60-day move/% rank Volatility ratio/rank
Eurocurrency EC CME 164.5 109.0 -1.05% / 27% -0.14% / 0% 2.83% / 83% .25 / 48%
Japanese yen JY CME 66.6 75.3 2.47% / 63% 0.63% / 20% -6.82% / 39% .24 / 48%
British pound BP CME 68.8 79.3 -2.06% / 100% 2.96% / 62% 1.23% / 15% .39 / 70%
Australian dollar AD CME 44.0 64.5 -2.46% / 33% 4.47% / 35% 11.30% / 100% .26 / 25%
Canadian dollar CD CME 43.2 56.6 -0.51% / 43% 3.69% / 70% 0.89% / 35% .46 / 52%
Swiss franc SF CME 30.3 28.6 -0.71% / 33% 0.49% / 9% 1.66% / 38% .30 / 75%
Mexican peso MP CME 10.6 44.4 -4.69% / 80% 4.18% / 29% 3.80% / 27% .50 / 82%
U.S. dollar index DX ICE 5.4 21.5 0.47% / 15% -1.13% / 5% -1.34% / 64% .33 / 55%
New Zealand dollar NE CME 2.0 14.6 -4.09% / 57% 0.00% / 0% 10.60% / 100% .25 / 55%
E-Mini eurocurrency ZE CME 1.8 1.5 -1.05% / 27% -0.14% / 0% 2.83% / 83% .25 / 48%
Note: Average volume and open interest data includes both pit and side-by-side electronic contracts (where applicable). Price activity is based on pit-traded contracts.
LEGEND:
Volume: 30-day average daily volume, in thousands. direction. For example, the % rank for 10-day move by the long-term volatility (100-day standard deviation
shows how the most recent 10-day move compares to of prices). The % rank is the percentile rank of the
OI: 30-day open interest, in thousands.
the past twenty 10-day moves; for the 20-day move, volatility ratio over the past 60 days.
10-day move: The percentage price move from the the % rank field shows how the most recent 20-day
close 10 days ago to today’s close. move compares to the past sixty 20-day moves; for This information is for educational purposes only.
20-day move: The percentage price move from the the 60-day move, the % rank field shows how the most Currency Trader provides this data in good faith, but
close 20 days ago to today’s close. recent 60-day move compares to the past one-hun- assumes no responsibility for the use of this infor-
60-day move: The percentage price move from the dred-twenty 60-day moves. A reading of 100% means mation. Currency Trader does not recommend buy-
close 60 days ago to today’s close. the current reading is larger than all the past readings, ing or selling any market, nor does it solicit orders to
The “% rank” fields for each time window (10-day while a reading of 0% means the current reading is buy or sell any market. There is a high level of risk
moves, 20-day moves, etc.) show the percentile rank lower than the previous readings. in trading, especially for traders who use leverage.
of the most recent move to a certain number of the Volatility ratio/% rank: The ratio is the short-term The reader assumes all responsibility for his or her
previous moves of the same size and in the same volatility (10-day standard deviation of prices) divided actions in the market.
FX volume continued to grow in 2008

Forex volume expanded last year, thanks in part to small traders.
A report released in April by

Connecticut-based financial
advisory firm Greenwich Associates
the growth to an “influx of investors
seeking liquid markets and a ‘plain
vanilla’ asset class.”
found that 2008 foreign exchange vol- However, it also claims bid-ask
ume increased 15 percent over 2007. spreads have increased. And despite
The growth is surprising considering the argument investors may have fled
the 28-percent contraction of hedge the turmoil in other markets across the
fund activity in the forex market last globe, the forex market hasn’t
year. Volume generated by hedge remained unaffected in this respect.
funds nearly tripled from 2006 to 2007, Higher volatility and fewer dealer
and at the time represented 20 percent desks have widened spreads, and
of total global forex volume. growing concerns over counterparty
However, trading volume generat- risk have made dealers wary of doing
ed by other market participants business with each other.
increased, including a 43-percent jump According to the report: “New cred-
in the retail space and 21-percent it charges imposed on sell-side FX
growth by pension funds. Electronic desks also are making it more compli-
foreign exchange volume received a cated for banks to quote prices on
boost in 2008 as well, growing 37 per- large FX trades, a shift that appears to
cent year-over-year to comprise 53 be slowing the process of getting
percent of total global exchange vol- quotes from dealers.”
ume. The report attributes much of

FOREX NEWS
IMF economic outlook worsens for 2009-10

The World Economic Outlook lowers projections for world economic growth,
but expects emerging economies to outperform their industrial counterparts.
D espite an improvement in sen-

timent following the G20 sum-
mit of industrialized nations in April,
highlights the IMF’s year-over-year
projections for 2009 and 2010.
According to the IMF’s World
and Central and Eastern Europe were
also expected to shrink this year, most
emerging economies are still forecast-
the International Monetary Fund Economic Outlook report released on ed for growth. Developing countries in
(IMF) lowered its estimates for eco- April 22, not a single advanced econo- Asia have weathered the economic
nomic growth across the board for my, including the U.S., Japan, UK, downturn relatively well and are
both 2009 and 2010, suggesting an eco- Canada, Germany, France, Italy, and expected to significantly outpace the
nomic recovery may be even further Spain, was expected to grow in 2009 rest of the world in 2010. China and
off than initially projected. Table 1 on a year-over-year basis. Although India, for instance, although dropping
advanced economies as a whole considerably from their 2007 and 2008
FIGURE 1 — IMF YEAR-OVER-YEAR were expected to remain stagnant growth rates, are projected to grow 7.5
WORLD GROWTH OUTLOOK
in 2010, Canada was expected to and 5.6 percent in 2010, respectively,
Although advanced economies continue to grow 1.2 percent, which is more continuing to expand at faster paces
struggle, emerging economies are poised to than double its 2008 rate. than most countries enjoyed before the
outpace growth in the rest of the world. However, while Russia, Mexico, downturn hit.
Year over year % change
2009 2010
Advanced economies -3.8 0 Managed money: Barclay Trading Group’s
U.S. -2.8 0
currency trader rankings for March 2009
Eurozone -4.2 -0.4
Germany -5.6 -1 Top 10 currency traders managing more than $10 million
France -3 0.4 as of March 31, ranked by March 2009 return.
Italy -4.4 -0.4
Spain -3 -0.7 2009 $ Under
Rank Trading March YTD mgmt.
Japan -6.2 0.5 advisor return return (millions)
UK -4.1 -0.4
Canada -2.5 1.2 1. Stonehenge Capital Mgmt (CM1) 4.42% 3.44% 32.0
Other advanced 2. JB Currency Hedge (Discr Seg Port) 4.23% 8.32% 14.8
economies -4.1 0.6 3. JCH Capital Mgmt (Global Currency) 3.87% 11.41% 42.0
Newly industrialized 4. Quattro Capital Institut AG (Curr) 3.25% -3.77% 52.0
Asian economies -5.6 0.8 5. DynexCorp Ltd. (Currency) 3.15% -4.29% 53.5
6. Gain Capital Mgmt (MAC 4X) 3.07% 6.53% 16.1
Emerging market and 7. QFS Asset Mgmt (QFS Currency) 2.71% -0.16% 529.0
developing economies 1.6 4 8. Alder Cap'l (Alder Global 20) 2.60% 8.79% 188.0
Africa 2 3.9 9. First Quadrant (Managed Currency) 2.57% 2.37% 429.0
Sub-Saharan Africa 1.7 3.8 10. Capricorn Advisory Mgmt (fxST Aggres.) 2.47% 4.08% 62.0
Central
Top 10 currency traders managing less than $10 million and more than
and eastern Europe -3.7 0.8
$1 million as of March 31, ranked by March 2009 return.
Commonwealth of
Independent States -5.1 1.2 1. Wealth Builder FX Group 26.00% 36.18% 1.5
Russia -6 0.5 2. Astor Capital Mgmt (Gibraltar FX) 14.54% 26.52% 1.7
Excluding Russia -2.9 3.1 3. Sagacity (HedgeFX100) 10.83% 10.60% 1.3
Developing Asia 4.8 6.1 4. Spot Forex Mgmt. (Lausanne) 3.60% 8.84% 5.0
China 6.5 7.5 5. Hyman Beck (FastTrac) 2.81% -0.29% 1.7
India 4.5 5.6 6. Ketch Capital Management (Tack Fund) 1.82% -0.01% 5.0
ASEAN-5 0 2.3 7. Spot Forex Mgmt. (Zurich) 1.80% 4.36% 6.5
Middle East 2.5 3.5 8. IMFC FxVol 1.26% 0.85% 1.8
Western Hemisphere -1.5 1.6 9. Marek D. Chelkowski (Forex) 1.20% 1.66% 2.1
Brazil -1.3 2.2 10. Rove Capital (Dresden) 1.10% 0.19% 2.2
Mexico -3.7 1 Source: BarclayHedge (http://www.barclayhedge.com). Based on estimates of the composite of all
Total world output -1.3 1.9 accounts or the fully funded subset method. Does not reflect the performance of any single account.
Source: International Monetary Fund PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE.

TRADING
continued STRATEGIES continued from p. 21
FIGURE 4 — DAY 1 LUM

USD/CHF had at least some upside price action in the first bar after all 82 pattern
instances, but some of those moves were very small.
bar 1 and capture more of the pat-
tern’s potential profit, we need to
find the answers to a few basic
questions. How low does price tend
to drop in bar 1 and still close up? If
we know that, we might be able to
determine if there is an appropriate
point at which to exit trades with
low probabilities of continued suc-
cess. Also, we could expand that
analysis to see how far price tends
to drop over the first x bars but
while still producing a profit after y
bars. For example, perhaps when
price drops more than 30 pips
below the entry price (or the low
of the entry bar), the odds of a TABLE 2 — ODDS OF SUCCESSIVE HIGHER CLOSES IF BAR 1 CLOSES HIGHER
winning trade after 12 bars are A higher close on bar 1 pointed to favorable odds of a continued gain over the next
greatly reduced. four bars.
We will follow up on these points in Bar (1) 2 3 4 5 6 7

an upcoming issue of Currency No. of times (42) 31 32 30 31 27 26
Trader. Percentage (51.22%) 73.81% 76.19% 71.43% 73.81% 64.29% 61.90%
INTERNATIONAL MARKETS
CURRENCIES (vs. U.S. DOLLAR)
Current
price vs. 1-month 3-month 6-month 52-week 52-week Previous
Rank* Country Currency U.S. dollar gain/loss gain/loss gain/loss high low rank
1 1 South African rand 0.11539 8.83% 17.29% 28.57% 0.1391 0.0841 7
2 Indian rupee 0.02019 3.64% -0.93% 5.38% 0.03974 0.01843 17
3 Australian dollar 0.7238 3.30% 10.32% 16.16% 0.9849 0.6005 3
4 Brazilian real 0.46224 3.22% 6.90% 5.36% 0.6414 0.3751 5
5 Canadian dollar 0.82704 1.69% 1.57% 5.59% 1.018 0.7653 11
6 Russian ruble 0.03048 1.57% 0.00% -17.11% 0.04334 0.02695 4
7 Thai baht 0.02867 1.24% -2.22% -2.15% 0.03161 0.0262 13
8 Singapore dollar 0.67105 1.23% 0.86% 1.09% 0.7434 0.6 12
9 Japanese yen 0.0103 0.98% -8.36% -3.01% 0.01148 0.00904 16
10 British pound 1.4684 0.88% 6.67% -0.39% 2.0148 1.3501 10
11 Taiwanese dollar 0.02972 0.27% 0.24% -1.88% 0.03312 0.02835 9
12 Chinese yuan 0.14669 0.07% 0.18% 0.10% 0.1466 0.1424 14
13 Hong Kong dollar 0.12906 0.02% 0.12% 0.03% 0.129 0.1279 15
14 New Zealand dollar 0.57294 -0.28% 8.51% 2.74% 0.7935 0.4892 1
15 Swedish krona 0.12365 -0.74% 0.17% -1.66% 0.1701 0.1068 2
16 Swiss franc 0.87827 -1.34% 1.44% 2.44% 0.9987 0.813 8
17 Euro 1.32469 -2.41% 1.93% 4.90% 1.6038 1.2329 6
As of April 27 *based on one-month gain/loss
ACCOUNT BALANCE
Rank Country 2007 Ratio* 2006 2008+ Rank Country 2007 Ratio* 2006 2008+
1 Singapore 39.209 23.486 35.383 26.983 13 Mexico -8.171 -0.797 -4.375 -15.527
2 Hong Kong 25.529 12.332 22.936 30.621 14 India -11.285 -1.024 -9.299 -33.33
3 China 371.833 10.993 253.268 440.011 15 France -26.915 -1.038 -12.835 -45.327
4 Switzerland 43.109 10.094 56.382 44.847 16 UK -80.722 -2.879 -82.975 -45.392
5 Sweden 39.099 8.615 33.804 40.429 17 U.S. -731.214 -5.296 -788.115 -673.266
6 Taiwan 32.975 8.57 26.3 25.024 18 Australia -57.129 -6.28 -40.384 -42.833
7 Germany 250.263 7.536 178.837 235.257 19 South Africa -20.707 -7.307 -16.284 -20.53
8 Netherlands 47.376 6.095 55.874 38.339 20 Spain -145.141 -10.079 -110.14 -154.036
9 Russia 76.241 5.89 94.34 102.331
Totals in billions of U.S. dollars
10 Japan 210.967 4.812 170.437 157.079 *Account balance in percent of GDP +Estimate
11 Canada 12.726 0.886 17.838 9.652 Source: International Monetary Fund, World Economic Outlook
12 Brazil 1.551 0.116 13.643 -28.3 Database, April 2009.

NON-U.S. DOLLAR FOREX CROSS RATES
Currency 1-month 3-month 6-month 52-week 52-week
Rank pair Symbol April 27 gain/loss gain/loss gain/loss high low Previous
1 Aussie $ / Euro AUD/EUR 0.54664 5.86% 8.27% 10.80% 0.623 0.4725 12
2 Real / Euro BRL/EUR 0.3492 5.84% 4.93% 0.40% 0.4197 0.2941 15
3 Aussie $ / Franc AUD/CHF 0.82484 4.76% 8.81% 13.35% 1.0023 0.712 8
4 Canada $ / Euro CAD/EUR 0.6248 4.27% -0.30% 0.62% 0.6745 0.5799 19
5 Pound / Euro GBP/EUR 1.10918 3.42% 4.70% -12.06% 1.2996 1.0195 20
6 Aussie $ / Pound AUD/GBP 0.49326 2.44% 3.45% 25.79% 0.4933 0.3786 5
7 Aussie $ / Yen AUD/JPY 70.35438 2.40% 20.45% 19.65% 104.448 55.1876 1
8 Real / Pound BRL/GBP 0.31501 2.36% 0.24% 14.10% 0.339 0.2441 7
9 Real / Yen BRL/JPY 44.9363 2.34% 16.72% 8.54% 69.3981 36.0109 2
10 Aussie $ / Canada $ AUD/CAD 0.8759 1.61% 8.64% 9.97% 104.448 55.1876 4
11 Real / Canada $ BRL/CAD 0.55937 1.54% 5.27% -0.25% 0.6719 0.4726 6
12 Franc / Euro CHF/EUR 0.66317 1.12% -0.48% -2.37% 0.6992 0.6106 18
13 Canada $ / Pound CAD/GBP 0.56362 0.85% -4.76% 14.35% 0.5918 0.4874 16
14 Canada $ / Yen CAD/JPY 80.40095 0.83% 10.90% 8.78% 106.673 70.6656 11
15 Real / Aussie $ BRL/AUD 0.63951 0.03% -3.03% -9.41% 0.7391 0.5991 17
16 Pound / Yen GBP/JPY 142.732 0.00% 16.46% -4.94% 215.863 118.782 10
17 Franc / Pound CHF/GBP 0.59838 -2.19% -4.90% 10.95% 0.661 0.4769 14
18 Franc / Yen CHF/JPY 85.37561 -2.20% 10.75% 5.50% 105.071 74.698 9
19 Franc / Canada $ CHF/CAD 1.06283 -2.95% -0.11% -3.02% 1.1583 0.939 13
20 Euro / Yen EUR/JPY 128.725 -3.28% 11.23% 8.16% 169.958 112.045 3
GLOBAL STOCK INDICES
1-month 3-month 6-month 52-week 52-week
Rank Country Index April 27 gain/loss gain/loss gain/loss high low Previous
1 Italy MIBTel 14,897.00 13.58% 5.15% 0.30% 26,458.00 10,347.00 14
2 India BSE 30 11,371.85 13.17% 26.30% 33.64% 17,735.70 7,697.39 3
3 Germany Xetra Dax 4,694.07 11.67% 8.57% 8.29% 7,231.86 3,588.89 11
4 Brazil Bovespa 45,820.00 9.34% 18.40% 31.50% 73,920.00 29,435.00 4
5 France CAC 40 3,102.43 9.22% 5.01% 1.14% 5,142.10 2,465.46 12
6 Mexico IPC 21,827.11 7.44% 11.27% 29.22% 32,211.50 16,480.00 2
7 UK FTSE 100 4,167.00 6.88% -0.65% 8.16% 6,377.00 3,460.70 15
8 Canada S&P/TSX composite 9,394.80 6.50% 7.25% 10.04% 15,154.80 7,479.96 7
9 Switzerland Swiss Market 5,176.00 6.23% -3.23% -5.91% 7,785.20 4,235.00 13
10 Hong Kong Hang Seng 14,840.42 5.11% 12.82% 34.72% 26,387.40 10,676.30 8
11 U.S. S&P 500 857.51 5.09% 1.40% 1.01% 1,440.24 666.79 6
12 Singapore Straits Times 1,818.61 4.18% 2.97% -90.10% 3,269.88 1,455.47 10
13 Australia All ordinaries 3,690.00 2.06% 8.78% -2.08% 6,059.50 3,090.80 9
14 Japan Nikkei 225 8,726.34 1.15% 8.25% 21.83% 14,601.30 6,994.90 1
15 South Africa FTSE/JSE All Share 20,281.10 -1.84% -1.75% 10.44% 33,232.81 17,814.42 5
GLOBAL SHORT-TERM INTEREST RATES
Country Interest rate Rate (%) Last change Oct. 08 April 08
U.S. Fed funds rate 0-0.25 0.5 (Dec. 08) 1 2
Japan Overnight call rate 0.1 0.2 (Dec. 08) 0.3 0.5
Eurozone Refi rate 1.25 0.25 (April 09) 3.75 4
UK Repo rate 0.5 0.5 (March 09) 4.5 5
Canada Overnight funding rate 0.25 0.25 (April 09) 2.25 3
Switzerland 3-month Swiss Libor 0.25 0.25 (March 09) 2.5 2.75
Australia Cash rate 3 0.25 (April 09) 6 7.25
New Zealand Cash rate 3 0.50 (March 09) 6.5 8.25
Brazil Selic rate 11.25 1.50 (March 09) 13.75 11.75
Korea Overnight call rate 2 0.5 (Feb. 09) 4.25 5
Taiwan Discount rate 1.25 0.25 (Feb. 09) 3 3.5
India Repo rate 4.75 0.25 (April 09) 8 7.75
South Africa Repurchase rate 9.5 1.00 (March 09) 12 11.5
GLOBAL BOND RATES
Rank Country Rate April 27 1-month 3-month 6-month High Low Previous
1 UK Short sterling 98.68 0.19% 0.26% 3.42% 98.72 93.60 2
2 Australia 10-year bonds 95.535 0.09% -0.29% 0.65% 96.16 93.18 4
3 Germany BUND 122.78 -0.66% 0.05% 4.84% 126.53 109.65 1
4 U.S. 10-year T-note 122.3 -0.84% -1.93% 6.23% 128.65 111.15 3
5 Japan Government Bond 136.7 -1.16% -1.62% -1.08% 141.60 132.09 5

INTERNATIONAL MARKETS
Gross Domestic Product*

Release 1-year Next Release 1-year Next
Period date Change change release Period date Change change release
AMERICAS AFRICA
Argentina Q4 3/18 5.0% 21.4% 6/18 S. Africa Q4 2/24 0.8% 11.0% 5/26
Brazil Q4 3/10 0.0% 8.8% 6/9
Canada Q4 3/2 -3.5% 1.0% 6/1 ASIA AND SOUTH PACIFIC
EUROPE Australia Q4 3/4 -0.5% 0.3% 6/3
France Q4 2/13 -0.9% 0.9% 5/15 Hong Kong Q4 2/25 1.5% -2.6% 5/15
Germany Q4 2/13 -1.2% 0.6% 5/15 India Q4 2/27 11.1% 14.0% 5/29
UK Q4 3/27 1.0% 0.0% 6/30 Japan Q4 2/16 -1.7% -6.6% NLT 5/20
Singapore Q4 2/27 -0.5% -5.6% NLT 5/22
* Final estimates, at current prices, seasonally adjusted
Unemployment
Period date Rate Change change release Period date Rate Change change release
AMERICAS
Argentina Q4 4/27 7.3% -0.5% -0.2% 6/12 ASIA AND SOUTH PACIFIC
Brazil March 4/24 9.0% 0.5% 0.4% 5/21 Australia March 4/9 5.4% 0.2% 1.3% 5/7
Canada March 4/9 8.0% 0.3% 1.9% 5/8 Hong Kong Jan.-March 4/20 5.2% 0.2% 1.8% 5/19
EUROPE Japan Feb. 3/31 4.4% 0.3% 0.5% 5/1
France Q4 3/5 8.2% 0.6% 0.3% 6/4 Singapore Q1 4/30 3.2% 0.7% 1.3% 7/31
Germany March 4/30 7.6% 0.2% 0.2% 5/28
UK Dec.-Feb. 4/22 6.7% 0.5% 1.5% 5/13
CPI
AMERICAS AFRICA
Argentina March 4/14 0.7% 6.3% 5/13 S. Africa March 4/29 1.3% 8.5% 5/27
Brazil March 4/8 0.2% 5.6% 5/8
Canada March 4/17 0.2% 1.2% 5/20 ASIA AND SOUTH PACIFIC
EUROPE Australia Q1 4/23 0.1% 2.5% 7/22
France March 4/10 0.2% 0.3% 5/13 Hong Kong March 4/23 1.2% 0.3% 5/21
Germany March 4/9 -0.1% 0.5% 5/12 India Feb. 3/31 0.0% 9.6% 4/30
UK March 4/21 0.2% 2.9% 5/21 Japan Feb. 3/27 -0.3% -0.1% 5/1
Singapore March 4/23 1.6% -0.4% 5/25
PPI
AMERICAS AFRICA
Argentina March 4/14 1.0% 6.9% 5/13 S. Africa March 4/30 0.1% 5.3% 5/28
Brazil March 4/7 -0.3% 5.0% 5/7
Canada March 4/30 0.3% -0.1% 6/1 ASIA AND SOUTH PACIFIC
EUROPE Australia Q1 4/20 -0.4% 4.0% 7/20
France March 4/30 -0.5% -6.6% 5/29 Hong Kong Q4 3/13 0.4% 3.9% 6/12
Germany March 4/21 -0.7% -0.5% 5/20 India March 4/10 -0.3% 0.7% 5/8
UK March 4/9 0.1% 2.0% 5/8 Japan March 4/13 -0.2% -2.2% 5/15
Singapore March 4/29 0.7% -18.0% 5/29
LEGEND:
Change: Change from previous report release. NLT: No later than. Rate: Unemployment rate.
As of April 30.

GLOBAL ECONOMIC CALENDAR MONTH
MAY/JUNE
Legend
May
CPI: Consumer price index 1 U.S.: April ISM index 20 Canada: April CPI
ECB: European Central Bank Japan: March employment report Germany: April PPI
FDD (first delivery day): The and CPI Japan: Q1 GDP
first day on which delivery of a
commodity in fulfillment of a 2 21 U.S.: April leading indicator
futures contract can take place.
Brazil: April employment report
FND (first notice day): Also 3
known as first intent day, this is Hong Kong: April CPI
the first day on which a clearing- 4 South Africa: April CPI
house can give notice to a buyer
of a futures contract that it 5 22 Mexico: May 15 CPI
intends to deliver a commodity in Japan: Bank of Japan
fulfillment of a futures contract. 6
The clearinghouse also informs interest-rate announcement
the seller. 7 Australia: April employment report
Brazil: April PPI 23
FOMC: Federal Open Market
Committee Mexico: April 30 CPI; April PPI 24
GDP: Gross domestic product UK: Bank of England
ISM: Institute for supply interest-rate announcement
25 Mexico: Q1 GDP
management
LTD (last trading day): The final
ECB: Governing council 26 U.S.: April durable orders
day trading can take place in a interest-rate announcement Mexico: April employment report
futures or options contract.
PMI: Purchasing managers
8 U.S.: April employment report 27 South Africa: April CPI
index Brazil: April CPI
28 Germany: April employment report
PPI: Producer price index Canada: April employment report
South Africa: April PPI
Economic Release time South Africa: April PPI
release (U.S.) (ET) LTD: May currency options; 29 U.S.: Q1 GDP (prelim.)
GDP 8:30 a.m. May U.S. dollar index options (ICE) France: April PPI
CPI 8:30 a.m.
Japan: April employment report
ECI 8:30 a.m. 9
PPI 8:30 a.m.
and CPI
ISM 10:00 a.m. 10
30
Unemployment 8:30 a.m.
11
Personal income 8:30 a.m. 31
Durable goods 8:30 a.m. 12 U.S.: March trade balance
Retail sales 8:30 a.m.
Germany: April CPI
Trade balance 8:30 a.m. June
Leading indicators 10 a.m. 13 U.S.: April retail sales
1 U.S.: April personal income;
MAY 2009 France: April CPI
May ISM index
26 27 28 29 30 1 2 UK: March employment report
Canada: Q1 GDP; April PPI
3 4 5 6 7 8 9 14 U.S.: April PPI
10 11 12 13 14 15 16 2
15 U.S.: April CPI
17 18 19 20 21 22 23 3 Australia: Q1 GDP
France: Q1 GDP
24 25 26 27 28 29 30
Germany: Q1 GDP 4 France: Q1 employment report
31 1 2 3 4 5 6
Hong Kong: Q1 GDP Canada: Bank of Canada
Japan: April PPI interest-rate announcement
JUNE 2009
31 1 2 3 4 5 6 16 5 U.S.: April employment report
7 8 9 10 11 12 13 Canada: May employment report
17
14 15 16 17 18 19 20 South Africa: May PPI
21 22 23 24 25 26 27 18 LTD: June currency options;
June U.S. dollar index (ICE)
28 29 30 1 2 3 4 19 U.S.: April housing starts
Hong Kong: February-April
The information on this page is
subject to change. Currency Trader employment report
is not responsible for the accuracy of South Africa: Q1 GDP
calendar dates beyond press time.
May 2009 • CURRENCY TRADER 37

KEY CONCEPTS
Bollinger Bands: Bollinger Bands are a type of trading and allows you to calculate a formula for the straight line.
“envelope” consisting of lines plotted above and below a The “best-fit” line is the line for which the sum of the
moving average, which are designed to capture a market’s squared differences between each price and the straight line
typical price fluctuations. are minimized.
The indicator is similar in concept to the moving average The formula for a straight line (y) is:
envelope, with an important difference: While moving average y = a + b*t where,
envelopes plot lines a fixed percentage above and below the t = time
average (typically three percent above and below a 21-day sim- a = the initial value of the line when “t” is equal to zero
ple moving average), Bollinger Bands use standard deviation to (sometimes called the “intercept” value — i.e., the point at
determine how far above and below the moving average the which the line intercepts the vertical y-axis) or the point at
lines are placed. As a result, while the upper and lower lines of which a specific line begins.
a moving average envelope move in tandem, Bollinger Bands b = the slope of the line, which is the rate at which the line
expand during periods of rising market volatility and contract rises or falls (e.g., 0.75 points per day).
during periods of decreasing market volatility.
Bollinger Bands were created by John Bollinger, CFA, CMT, London Interbank Offered Rate (LIBOR): A bench-
the president and founder of Bollinger Capital Management mark short-term interest rate established daily by the British
(see Active Trader, April 2003, p. 60). By default, the upper and Bankers’ Association. It represents the rate at which banks
lower Bollinger Bands are placed two standard deviations can can borrow funds in the London interbank market.
above and below a 20-period simple moving average.
Upper band = 20-period simple moving average Moving average convergence-divergence (MACD):
+ 2 standard deviations Although it is often grouped with oscillators, the MACD is
Middle line = 20-period simple moving average more of an intermediate-term trend indicator (although it can
of closing prices reflect overbought and oversold conditions).
Lower band = 20-period simple moving average The default MACD line (which can also be plotted as a his-
- 2 standard deviations togram) is created by subtracting a 26-period exponential
moving average (EMA) of closing prices from a 12-period
Bollinger Bands highlight when price has become high or EMA of closing prices; a nine-period EMA is then applied to
low on a relative basis, which is signaled through the touch the MACD line to create a “signal line.”
(or minor penetration) of the upper or lower line. MACD = EMA(C,12)-EMA(C,26)
However, Bollinger stresses that price touching the lower Signal line = EMA(MACD,9)
or upper band does not constitute an automatic buy or sell
signal. For example, a close (or multiple closes) above the Stochastic oscillator: A technical tool designed to high-
upper band or below the lower band reflects stronger upside light shorter-term momentum and “overbought” and “over-
or downside momentum that is more likely to be a breakout sold” levels (points at which a price move has, theoretically
(or trend) signal, rather than a reversal signal. Accordingly, at least, temporarily exhausted itself and is ripe for a correc-
Bollinger suggests using the bands in conjunction with other tion or reversal).
trading tools that can supply context and signal confirmation. Calculation: The stochastic oscillator consists of two lines:
%K and a moving average of %K called %D. The basic sto-
Carry trades involve buying (or lending) a currency with chastic calculation compares the most recent close to the price
a high interest rate and selling (or borrowing) a currency with range (high of the range - low of the range) over a particular
a low interest rate. Traders looking to “earn carry” will buy a period.
high-yielding currency while simultaneously selling a low- For example, a 10-day stochastic calculation (%K) would
yielding currency. be the difference between today’s close and the lowest low of
the last 10 days divided by the difference between the high-
Linear regression (“best-fit”) line: A way to calculate est high and the lowest low of the last 10 days; the result is
a straight line that best fits a set of data (such as closing prices multiplied by 100. The formula is:
over a certain period) — that is, a line that most accurately %K = 100*{(Ct-Ln)/(Hn-Ln)}
reflects the slope, or trend, of the data. where
A regression line is calculated using the “least squares” Ct is today’s closing price
method, which refers to finding the minimum squared (x*x, Hn is the highest price of the most recent n days
or x2) differences between price points and a straight line. For (the default value is five days)
example, if two closing prices are 2 and 3 points away (the Ln is the lowest price of the most recent n days
distance being calculated vertically) from a straight line, the
squared differences between the points and the line are 4 and The second line, %D, is a three-period simple moving
9, respectively. average of %K. The resulting indicator fluctuates between 0
The squared differences are used (instead of just the differ- and 100.
ences) because some differences are negative (for points Fast vs. slow: This formula is sometimes referred to as
below the line) and others are positive (for points above the “fast” stochastics. Because it is very volatile, an additionally
line). Squaring all the differences creates all-positive values continued on p. 39

NEW PRODUCTS & SERVICES
FXCM launched its new Active Trader platform. Active GFT unveiled a new Web site — http://www.
Trader displays an ECN-type view of total liquidity available FX360.com — for currency market news, analysis, and com-
through the platform, providing transparency in execution mentary. FX360 offers real-time, market information and
and a short-term market direction indicator. Other features analysis 24 hours per day at no cost. The site was created by
include a five-level display of market depth, a view of the liq- Kathy Lien and Boris Schlossberg, GFT’s directors of curren-
uidity available at each price level, Web-based trading, one- cy research. Along with their team of technical analysts Roger
click trading, and preset stops and limits. Also, in coopera- Stojsic and Brandon Gareiss, Lien and Schlossberg use tech-
tion with DailyFX.com, FXCM released its forex trading sig- nical and fundamental analysis to highlight and breakdown
nals in English, Spanish, Arabic, French, Russian, Chinese, economic policies and their potential effect on the markets.
and Japanese. Exclusively available to FXCM’s live clients
through the DailyFX+ Web site, forex Trading Signals offers MTPredictor (http://www.mtpredictor.com) an-
interactive trading alerts that update automatically in real nounced lower pricing to purchase both the standalone
time, 24 hours a day, on a dynamic basis. Trading Signals MTPredictor v6.0 (primarily for daily/weekly charts) and the
tracks six technical strategies across 14 currency pairs, con- Real-time RT add-ons (for live, intraday trading). The Combo
sisting of two focused on range-bound markets, two breakout Package costs $2,745, a $500 discount from the original price
strategies, and two momentum strategies. and a $1,745 discount from the value of both separately. The
firm has also confirmed the publication of its updated
Zecco Holdings, Inc. and GAIN Capital launched Trading Course (Parts 1 and 2) as full-color paperback books.
Zecco Forex, a new online foreign exchange trading service
for individual traders. Zecco Forex customers have access to Note: New Products and Services is a forum for industry businesses to
streaming real-time data and charts, technical indicators, and announce new products and upgrades. Listings are adapted from press releas-
daily research updates, and can trade 37 currency pairs, comes and are not endorsements or recommendations from the Active Trader
mission free. Traders can test drive the Zecco Forex service by Magazine Group. E-mail press releases to editorial@currencytradermag.com.
registering for a free 30-day practice account at Publication is not guaranteed.
http://www.zecco.com/forex.
EVENTS
Event: Epiphany Trading conference featuring Steve Niso Event: International Traders Expo
Date: May 16, 10:30-3:00 ET Date: June 3-6
Location: Two River Theatre, Red Bank, N.J. Location: Los Angeles
For more information: http://www.epiphanytrading.com or For more information: http://www.tradersexpo.com
e-mail conference@epiphanytrading.com
Event: International Derivatives Expo
Event: Securities Operations World 2009 Date: June 9-10
Date: May 27 Location: The Brewery, Chiswell Street, London
Location: New York City For more information: http://www.idw.org.uk
For more information: http://www.fmwonline.com
Event: International Investors’ Trade Fair
Event: The 15th Forbes Cruise for Investors Date: Sept. 4-6
Date: June 2-14 Location: Düsseldorf, Germany
Location: Lisbon to Venice For more information: http://www.mdna.com
For more information: Go to http://www.moneyshow.com
Event: International Traders Expo
and click on “Events”
Date: Nov. 18-21
Location: Mandalay Bay Resort & Casino, Las Vegas
For more information: http://www.tradersexpo.com
KEY CONCEPTS continued from p. 38
smoothed version of the indicator –– where the original %D ings of 80 and 20 or 70 and 30 are common, but different mar-
line becomes a new %K line and a three-period average of ket conditions and indicator lengths will dictate different lev-
this line becomes the new %D line –– is more commonly els.
used (and referred to as “slow” stochastics, or simply “sto-
chastics”). Volatility: The level of price movement in a market.
Any of the parameters –– either the number of periods Historical (“statistical”) volatility measures the price fluctua-
used in the basic calculation or the length of the moving aver- tions (usually calculated as the standard deviation of closing
ages used to smooth the %K and %D lines –– can be adjusted prices) over a certain time period — e.g., the past 20 days.
to make the indicator more or less sensitive to price action. Implied volatility is the current market estimate of future
Horizontal lines are used to mark overbought and over- volatility as reflected in the level of option premiums. The
sold stochastic readings. These levels are discretionary; read- higher the implied volatility, the higher the option premium.

FOREX TRADE JOURNAL
Raising a stop protects profits,

but also cuts them short.
TRADE
Date: Monday, April 13.
Entry: Long the dollar-Swiss pair

(USD/CHF) at 1.1329.
Reason(s) for trade/setup: This

paper trade was based on the pattern
analysis that started with research on
whether “symmetrical reversal” days —
bars that invert the price action of the
previous bar — offered good setup
Source: TradeStation
points for short-term day trades.
Research found certain behavior —
namely, wide-range days with strong up
or down closes — often preceded such two-day reversals. Outcome: The market did what it was supposed to do
The big down day and low close on April 13 met the (mostly), but the trade missed out because we raised the
requirements for some of the more successful setups found stop (early) to 1.1382 on April 14 when price rallied above
in the analysis, triggering a long trade on the close. 1.1400. Unfortunately, the pair pulled back — eventually, all
the way to 1.1351 — stopping out the position with a small
Initial stop: 1.1274, 0.0027 below the low of the entry bar. profit but leaving us out of the market when price reversed
and pushed above the initial profit target on April 16.
Initial target: 1.1500. Exit half, raise stop, and exit remain- Given the initial strong move in the direction of the trade,
der at 1.1600. raising the stop to the breakeven point would have been
conservative enough, and would have kept the position
alive.
RESULT
Note: Initial trade targets are typically based on things such as the historical per-
formance of a price pattern or a trading system signal. However, because indi-
Exit: 1.1382.
vidual trades are dictated by immediate circumstances, price targets are flexible
and are often used as points at which to liquidate a portion of a trade to reduce
Profit/loss: +.0053 (.47 percent). exposure. As a result, initial (pre-trade) reward-risk ratios are conjectural by
nature.
TRADE SUMMARY
Date Currency Entry price Initial stop Initial target IRR Exit Date P/L LOP LOL Trade length
Point %
4/13/09 USD/CHF 1.1329 1.1274 1.1500 3.11 1.1382 4/14/09 0.0053 0.47% .0190 -.0009 1 day
Legend: IRR — initial reward/risk ratio (initial target amount/initial stop amount); LOP — largest open profit (maximum available profit
during lifetime of trade); LOL — largest open loss (maximum potential loss during life of trade).

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Strategies, analysis, and news for FX traders

THE INFLATION SCENARIO:

2 May 2009 • CURRENCY TRADER

International Markets . . . . . . . . . . . . . .34 Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39

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A publication of Active Trader ®

For all subscriber services:

Editor-in-chief: Mark Etzkorn

Managing editor: Molly Goad

Associate editor: Chris Peters

Editorial assistant and

President: Phil Dorman financial market issues.

Publisher, Barbara Rockefeller (http://www.rts-forex.com) is

6 May 2009 • CURRENCY TRADER

Does U.S. spending spree

BY CURRENCY TRADER STAFF

Stimulus and monetary policy

8 May 2009 • CURRENCY TRADER

Deflation now, inflation later?

CURRENCY TRADER • May 2009 9

The European inflation perspective

10 May 2009 • CURRENCY TRADER

Thinking the unthinkable

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“They need to balance inflation con-

12 May 2009 • CURRENCY TRADER

Gain up to 700:1 leverage.

Free market commentary

Free professional level

Standard and mini contracts

Forex traders. Five unique

090301_273x206_CurrencyTrader.indd 1 25/02/2009 09:29:21

Forecasting follies In forecasting, time frame

T raders get discour-

14 May 2009 • CURRENCY TRADER

CURRENCY TRADER • May 2009 15

FIGURE 4 — DOLLAR/YEN, 360-MINUTE TIME FRAME

16 May 2009 • CURRENCY TRADER

CURRENCY TRADER • May 2009 17

Trading by the hour

FIGURE 1 — INVERSION REVERSAL

I n trading, “confirmation” is commonly

18 May 2009 • CURRENCY TRADER

1. The current low is at least 0.0020

In formula form, these rules are:

1. L[1]-L >= .0020

Because these rules are intended to

CURRENCY TRADER • May 2009 19

FIGURE 3 — CHOPPY RIDE

20 May 2009 • CURRENCY TRADER

+5 LUM LDM +6 LUM LDM +7 LUM LDM +8 LUM LDM

CURRENCY TRADER • May 2009 21

22 May 2009 • CURRENCY TRADER

I execute trades confidently and more profitably from

Los Angeles | June 3-6, 2009

John Person Alexander Elder

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