INSIDE MONTH SETUP IN THE CANADIAN DOLLAR P.

33
Strategies, analysis, and news for FX traders

March 2014 Volume 11 No. 3

Scandinavian currencies seek to recapture Viking spirit p. 6

Excess volatility and minor currencies p. 22 Adding a time-based stop to an FX system p. 18

Current forex dynamics dont favor dollar p. 12

CONTENTS

Contributors..................................................4 Global Markets Scandi currencies poised for gains...........6

Some analysts see potential for Scandinavian strength after a soft 2013. By Currency Trader Staff

Global Economic Calendar......................... 28

Important dates for currency traders.

Events ........................................................28
Conferences, seminars, and other events.

Currency Futures Snapshot.................. 29 BarclayHedge Rankings......................... 29

Top-ranked managed money programs

On the Money What we know now................................... 12

With tapering set to proceed unchecked, European sovereign debt crises in the rearview mirror, and emerging market turmoil well-contained, dont expect a surge of dollar buying anytime soon. By Barbara Rockefeller

International Markets............................. 30
Numbers from the global forex, stock, and  interest-rate markets.

Forex Journal............................................33
Inside month and week prompts short trade in the dollar/Canada pair.

Yuan makes a move.................................. 17

A teaching moment or a policy shift? By Marc Chandler

Trading Strategies Time-dependent stops.............................. 18

Improving performance with a rule that gets you out of trades after a certain amount of time in unfavorable market conditions. By Daniel Fernandez

Looking for an advertiser?

Click on the company name for a direct link to the ad in this months issue. Ablesys FXCM Interactive Brokers NinjaTrader

Advanced Concepts When excess becomes predictable: The minors................................................ 22

Patterns manifested by major and minor currencies suggest the financial crisis and its policy aftermath have saddled the majors with more improvised monetary policies than the minors. By Howard L. Simons

Questions or comments?
Submit editorial queries or comments to webmaster@currencytradermag.com
2 March 2014 CURRENCY TRADER

CONTRIBUTORS
q Howard Simons is president of Rosewood Trading Inc. and a strategist for Bianco Research. He writes and speaks frequently on a wide range of economic and financial market issues.
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 Contributing editor: Howard Simons

q Daniel Fernandez is an active trader with a strong interest in calculus, statistics, and economics who has been focusing on the analysis of forex trading strategies, particularly algorithmic trading and the mathematical evaluation of long-term system profitability. For the past two years he has published his research and opinions on his blog Reviewing Everything Forex, which also includes reviews of commercial and free trading systems and general interest articles on forex trading (http://mechanicalforex.com). Fernandez is a graduate of the National University of Colombia, where he majored in chemistry, concentrating in computational chemistry. He can be reached at dfernandezp@unal.edu.co. q Barbara Rockefeller (www.rts-forex.com) is an international economist with a focus on foreign exchange. She has worked as a forecaster, trader, and consultant at Citibank and other financial institutions, and currently publishes two daily reports on foreign exchange. Rockefeller is the author of Technical Analysis for Dummies, Second Edition (Wiley, 2011), 24/7 Trading Around the Clock, Around the World (John Wiley & Sons, 2000), The Global Trader (John Wiley & Sons, 2001), The Foreign Exchange Matrix (Harriman House, 2013), and How to Invest Internationally, published in Japan in 1999. A book tentatively titled How to Trade FX is in the works. Rockefeller is on the board of directors of a large European hedge fund. q Marc Chandler (marc@terrak.com) is the head of global foreign exchange strategies at Brown Brothers Harriman and an associate professor at New York Universitys School of Continuing and Professional Studies. Chandler has spent more than 20 years analyzing, writing, and speaking about global capital markets. He is the author of Making Sense of the Dollar: Exposing Dangerous Myths about Trade and Foreign Exchange (Bloomberg Press, 2009).

Contributing writers: Barbara Rockefeller, Marc Chandler, Chris Peters Editorial assistant and webmaster: Kesha Green kgreen@currencytradermag.com

President: Phil Dorman pdorman@currencytradermag.com Publisher, ad sales: Bob Dorman bdorman@currencytradermag.com Classified ad sales: Mark Seger seger@currencytradermag.com

Volume 11, No. 3. Currency Trader is published monthly by TechInfo, Inc., PO Box 487, Lake Zurich, Illinois 60047. Copyright 2014 TechInfo, Inc. All rights reserved. Information in this publication may not be stored or reproduced in any form without written permission from the publisher. The information in Currency Trader magazine is intended for educational purposes only. It is not meant to recommend, promote or in any way imply the effectiveness of any trading system, strategy or approach. Traders are advised to do their own research and testing to determine the validity of a trading idea. Trading and investing carry a high level of risk. Past performance does not guarantee future results.

March 2014 CURRENCY TRADER

Forex. How profitable are you?

Percentage of profitable and unprofitable accounts as reported to the NFA Q4 2013 % Profit % Loss Total Accounts Spread Markups

Interactive Brokers
OANDA FXDD ILQ Gain Capital IBFX/TradeStation FXCM CitiFX Pro MB Trading

45.3%
32.5% 29.9% 23.1% 27.0% 30.2% 28.0% 42.0% 26.8%

54.7%
67.5% 70.1% 76.9% 73.0% 69.8% 72.0% 58.0% 73.2%

24,935
20,246 4,941 958 10,819 8,201 22,674 632 3,181

NO
YES YES YES YES YES YES YES YES

Data provided by forexmagnates.com, includes the impact of any commissions

There is a substantial risk of loss in foreign exchange trading. Past performance is not necessarily indicative of future results. The same philosophy and technology that enables our clients to achieve superior forex trading results also drives our clients trading and investing of stocks, options, futures, and bonds worldwide on over 100 markets.

Interactive Brokers
LOWER YOUR COSTS TO MAXIMIZE YOUR RETURN

For more information visit

ibkr.com/protable

Member - NYSE, FINRA, SIPC. Lower investment costs will increase your overall return on investment, but lower costs do not guarantee that your investment will be profitable Supporting documentation for any claims and statistical information will be provided upon request. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets. 03-IB14-743

GLOBAL MARKETS

Scandi currencies poised for gains

Some analysts see potential for Scandinavian strength after a soft 2013.

BY CURRENCY TRADER STAFF

Although the Scandinavian currencies might not be on every FX traders radar screen, some forex strategists say they might be positioned for gains, especially in the second half of the year. Sweden and Norway are widely seen as small, but open economies that are strongly correlated to global growth. During the global financial crisis, their currencies gained a certain safe-haven cache, especially for investors looking to diversify away from the Euro. Across the G-10, one of the positive growth stories that stands out are the Scandinavian economies, says Vassili Serebriakov, FX strategist at BNP Paribas. But 2013 brought weakness in the Swedish krona (SEK) and the Norwegian krone (NOK) vs. the Euro, in part due to unwinding of haven-seeking flows (Figure 1). Most forex traders and analysts monitor the SEK and NOK more vs. the Euro than the U.S. dollar. Because the Eurozone is a large trading partner, these pairs are considered more liquid than their dollar counterparts. Both Sweden and Norway are large exporters. Norway, of course, is a major energy producer and oil exporter, and its economy is driven in part by the price of oil. Sweden is a diversified export economy whose products include machinery, automobiles, and pharmaceuticals. Both Norway and Sweden are running current account surpluses they are exporters to the rest of the world, says Josh OByrne, G-10 FX strategist London, Citigroup

Markets. While these countries may lie far to the north, they are not isolated from global events and, similar to emergingmarket currencies, are often tied to global risk appetite. The Swedish and Norwegian economies do experience spillover from the sluggish growth in the Euro area; Sweden in particular is sensitive to growth in the emerging-market countries to which it exports. The Scandi economies are far from transcending Europes recession, says Bradley Turner, associate economist at Moodys Analytics. Debt-led domestic growth and strong banking sectors have insulated Norway and Sweden from the worst of the trouble, but the countries remain starved for demand, and exports and industrial production contracted in 2013. Turner says that since 2009 Norway has distinguished itself as a safe haven that is virtually immune to the double-dip malaise in the rest of Europe. It grew because foreigners invested heavily in the economy low interest rates and strong income growth led consumers to borrow and spend, he says. However, Turner also notes this domestic ramp-up came at a price. Oil output and the external economy in general were hurt by high interest rates, he says. And house prices and household debt both crept up at alarming rates even while inflation stayed within target. Consumers realized this was happening amid a peppering of domestic

March 2014 CURRENCY TRADER

FIGURE 1: A SOFT 2013

Source: TradeStation

and national stories about a potential housing bubble, and pulled back on their own. Lets take a look at the economic outlook for these countries, key drivers for FX trade, and what monetary policy shifts might occur in 2014.

Sweden

Swedbank forecasts a 3.2% (calendar-adjusted) GDP rate for Sweden in 2014. The Swedish economy and labor market have been fairly stable during 2012 and 2013, says Anna Fellnder, chief economist at Swedbank. Sweden has, because of its safehaven status strong public finances and well-capitalized banks faced low interestrates, and Swedish households have been the main drivers for growth. Sweden benefits from economic diversification, though it is largely oriented toward foreign trade. They are exporting wood and wood products, machinery, electronics, telecommunications, and pharmaceuticals, to name a few, says Marius Gonsholt Hov, macroeconomist at Handlesbanken Capital Markets. By international standards they also have a large public sector.

cern in Sweden, warns Arne Lohmann Rasmussen, chief analyst at Danske Bank Markets. We believe Swedish inflation will turn out much lower than the Riksbank (the Swedish central bank) expects. According to Hov, core inflation is currently at 0.4% year over year, which is substantially below the Riksbanks 0.7% forecast. The Riksbank eased its official policy rate from 1% to 0.75% in December. The reduction tugged the rate to its lowest level since late 2010, when the economy was emerging from the 2008-09 financial crisis. The Riksbank cited the unexpectedly low inflation rate as the primary factor behind the rate cut. The central bank has a CPI inflation target of around 2%. Fellnder says the strong krona and low-wage pressures are keeping inflation low. But when demand starts to pick up, I believe prices will start climbing and it will stop being a headache for the Riksbank, she says.

Conflicting views

Inflation and monetary policy

Currently, a major challenge facing the Swedish economy is the inflation rate. Deflation or [inflation thats too low] is a major conCURRENCY TRADER March 2014

There is a debate about the direction of central bank policy between another cut, steady policy, or even a rate hike this year. Riksbank policy will be a key factor for the currency. Further rate cuts could still be in the works, but it will depend on how much pass-through occurs from the December rate cut to the economy. The market is pricing
7

GLOBAL MARKETS

FIGURE 2: DOLLAR/KRONA

Source: TradeStation

in a 30% probability of a rate cut in April, according to Fellnder. The Riksbank has signaled a rate hike during the first quarter 2015, whereas we expect the first hike this autumn, Hov says. However, inflation has fallen significantly below the Riksbanks estimate, which has triggered some speculation the rate hike will be postponed. But we feel its too early at this stage to revise estimates. Meanwhile, Turner expects the Riksbank to hold its benchmark interest rate steady for the remainder of 2014. The bank has raised its 2014 inflation forecast from negative to flat, but it expects inflation to take years to return to its 2% target, so low interest rates are certain, he says. The bank cut its main rate in December for the first time in more than a year, implicitly prioritizing real growth over the risk of rising household debt and house prices. The ongoing threat of the latter will keep the bank from making another cut.

Currency outlook

The EUR/SEK rate was trading around 8.90 in late February, and some strategists see potential for krona appreciation, which would translate into a EUR/SEK down move. We are positive on these currencies. We have a bullish forecast for both SEK and NOK to strengthen vs. the

Euro, Serebriakov says, adding his firm has a year-end forecast of EUR/SEK at 8.60. Fellnders also expects gains for the krona, with a 12-month EUR/SEK target of 8.50 and a 12-month target for USD/SEK at 6.80 (Figure 2). Rasmussen is also positive on the SEK outlook, with a 12-month target of 8.50, seeing a positive interest-rate differential supporting the krona vs. the Euro steady monetary policy from the Riksbank vs. more easing from the Eurozone. Positive growth differentials should also support the EUR/SEK rate as the Eurozone continues to struggle. Indicators point to a pickup in GDP in Sweden, and we are expecting growth at 3% this year, up from 0.9% last year, Hov says. Sweden, with its export-oriented manufacturing sector, should get a boost from increasing growth in Germany, which is one of their main export markets. Highlighting the diverging growth scenario, Fellnder says the Swedish economy is heading toward a recovery, with strong households and increasing investments driving growth and leading to above-trend GDP growth this year. The Eurozone is still in a fragile situation with a bleeding banking sector and big negative output gaps, she says. However, the Riksbanks actions will be a key factor for the SEKs outlook. The key question is Swedish inflation

March 2014 CURRENCY TRADER

FIGURE 3: CRUDE OIL

Source: TradeStation

and ECB (European Central Bank) policy, Fellnder says. If Swedish inflation continues to surprise on the negative side and (ECB chief) Mario Draghi is forced to act with a rate cut, the Riksbank will probably have to lower its repo rate and the krona will weaken somewhat. But in the medium-term the growth outlook is different and the krona will be supported by stronger economic fundamentals.

Norwegian economy

Crude oil and energy in general are major drivers of Norways growth outlook, as the country exports both natural gas and oil. Norway diverts state petroleum revenues into a large sovereign-wealth fund it uses to fund public expenses. The price of oil drives total real output and industrial production, Turner says. We expect the price of Brent crude oil to be flat in 2014, holding back overall growth in the economy. The structural changes in the global petroleum industry are impacting Norways GDP numbers. We forecast GDP growth at 1.7% this year, down from 2% in 2013 and 3.4% in 2012, the main driver being less growth stimulus from the important oil and gas industry, Hov says. We now see oil investments leveling out, and thus the Norwegian economy is losing speed.

Hov explains a common rule of thumb regarding the price of oil (Figure 3). Investment activity will hold up as long as the price stays above $100 per barrel, he says. However, as the Norwegian Continental Shelf has gotten so expensive, we have seen oil companies scaling back their investment plans, even if the oil price has stayed above $100 over the past year. Hov says the Norwegian Petroleum Directorate expects investment growth to be roughly zero in coming years. Needless to say, the situation will become more dramatic if we get a substantial drop in oil prices, which could very well happen if China goes in for a hard landing, he says. On the domestic front, OByrne advises traders to also watch the housing market, which is a potential risk. Weve seen real prices decline from September-January in real terms, he says. The Norges Bank (Norways central bank) has highlighted this as a risk. If real estate prices fall a lot further, declining net worth could see consumers increase precautionary savings and potentially slow demand.

Monetary policy

While most market watchers expect Norges Bank to maintain the status quo, some analysts warn theres a chance of a rate change this year. Norges Bank has signaled they will keep the key policy

CURRENCY TRADER March 2014

GLOBAL MARKETS

FIGURE 4: THE NORWAY/SWEDEN CROSS

Source: www.advfn.com

rate unchanged at 1.5% throughout 2014, and we dont expect they will revise their plans at the upcoming March meeting, Hov says. That said, we are slightly more bearish than Norges Bank when it comes to the growth outlook. We believe theyll cut interest rates by 25 basis points in the fall, and theyll signal this in their June monetary policy report.

Price action

Like the SEK, favorable growth and interest-rate differentials are expected to support the NOK vs. the Euro this year. The NOK currently stands at 8.33 vs. the Euro, and we believe in a gradual strengthening toward 8.10 over the next 12 months, Hov says. The Euro area is struggling with sluggish growth and weak underlying price pressures, whereas Norges Bank is signaling a rate hike by the next summer. Thus, holding all else equal, interest-rate differentials point to a strengthening of the NOK unless we experience a negative shock to the real economy. And, of course, the price of oil will remain a factor to
10

watch. Until recently, the big story for Norway has been the sunset of the commodity supercycle, OByrne says. While energy prices have resurged more recently, investors saw slower demand from China and increased energy supply from the U.S. shale oil as NOK negatives. But the market has been very bearish on NOK and fair value is higher. Too much bearishness was priced in. BNP Paribas put a year-end target at 7.50 for the EUR/ NOK, again primarily due to macroeconomic divergences. We expect growth in Sweden and particularly Norway to outperform the Eurozone, Serebriakov says.

The Norway/Sweden cross

The NOK/SEK pair has also seen some action in recent weeks (Figure 4). Weve seen interest pick up in NOK on the back of valuation metrics, which put NOK/SEK at the 1.10-1.12 area, OByrne says. Interest rate differentials point to 1.09-1.10. Swedish inflation has been a big driver, he says. Inflation came in pretty low in January. It was the lowest annualized core inflation number since 2004. y
March 2014 CURRENCY TRADER

I work hard at my trading and want a platform that works as hard as I do. Thats why

I chose NinjaTrader.
It not only lets me execute like a pro - their Ecosystem, support and training have me thinking like a pro too.

I may not be a pro, but I trade like one.

Professional traders move through the markets with confidence and precision. NinjaTraders extensive video library, partner Ecosystem and live training webinars provide you with the foundation to become a more confident trader. Our award winning software lets you execute trades with professional precision, and the best part is that getting started with NinjaTrader is FREE.

So what are you waiting for? Start trading like a pro today!

ninjatrader.com/AT

futurestradingcoach.com

orderflowanalytics.com

fxcm.com

Featured Ecosystem Partners | to view more go to ninjatrader.com/partners CURRENCY TRADER March 2014

11

On the Money ON THE MONEY

What we know now

With tapering set to proceed unchecked, European sovereign debt crises in the rearview mirror, and emerging market turmoil well-contained, dont expect a surge of dollar buying anytime soon.
BY BARBARA ROCKEFELLER

We can seldom say we know something for sure, but this time, we can move two or three from the uncertainty basket to the almost-certain basket. Risk appetite should be on the upswing. First, the Feds tapering process will proceed as planned and will not be reduced, delayed, suspended, or halted. Quantitative easing will be over by October of this year. Second, deflationary tendencies in Europe are a worry, but more than offset by splendid new developments in Spain and Italy. Spain will be issuing new notes and bonds to high demand, and Italys new prime minister wants to end government gridlock once and for all with constitutional change, to be followed by structural reform. Third, the emerging market crisis waxes and wanes, with some countries barely affected, some getting a minor reprieve, and others in the permanent failure and national tragedy camp (Argentina and probably Russia). Defaults and other miseries are on the near horizon, but we may avoid a tipping point into full contagion meltdown.

High hurdle to change Fed tapering

The minutes of the Jan. 28-29 FOMC meeting released Feb. 19 and comments from Fed officials indicate tapering is a done deal. It would take a catastrophe to deter the Fed from tapering at a fixed pace of $10 billion per month until the unorthodox policy is dead and buried. After $10 billion at the March 18-19 meeting, that leaves $55 billion to go. At $10 billion per month in April through August, the schedule leaves $5 billion in September. Only a few members expressed doubt at the January meeting. Atlanta Fed President Dennis Lockhart said, As long as the outlook remains solid and does not deviate dramatically from the path we believe its on, I would expect the tapering of asset purchases to continue over the balance of the year. San Francisco Fed President John
12

Williams was even firmer: [T]he hurdle is pretty high on changing the pace of the step-downs in our purchases that we started back in December. Establishing that tapering is on a fixed schedule is an important departure from earlier statements in May and September when the expected first taper was postponed. The Fed has asserted itself free to alter the amount and timing of purchases, and even reverse the cutback altogether, if thats what the data called for. No one is saying conditionality is removed the Fed remains data-dependent and could still reconsider but the probability is high it will not. Now that we know the Feds true attitude toward tapering, a big chunk of uncertainty has been removed. As always, some mavericks like to say that we will never be rid of QE, that QE is as addictive as heroin and the Fed will chicken out. This is the view of famed investor Jim Rogers, who says when markets react really badly to having their fix taken away, the Fed will some back with another dose of accommodation. Marc Faber, publisher of The Gloom, Boom and Doom Report, thinks the U.S. equity market is due for the massive 20-40% pullback that always comes at the end of a very long bull market. Then there was the ill-fated effort by The Wall Street Journal to sell a few newspapers by pointing out the minutes of the January FOMC meeting included the ominous sentence that a few participants suggested the Fed would need to start raising interest rates relatively soon. The stock market got dizzy for half a day but then analysts realized there was nothing new here, not to mention that relatively soon has no meaning. Rising rates were always on the radar screen, if off in a distant corner, and nothing said at the FOMC puts them front and center. Rate hikes are not imminent and old-timers wonder if the story wasnt blown up a bit to scare the weak hands away so big
March 2014 CURRENCY TRADER

fish could scoop up assets at lower prices. Later it emerged that St. Louis Federal Reserve Bank President James Bullard was one of the two FOMC members at the January meeting who foresaw a rate hike as early as late 2014, but now that additional data has come in on the weak side, he will reconsider that guess at the March meeting. He is now inclined to postpone a likely hike until 2015. Atlanta Fed President Lockhart had already said he remains comfortable with the Fed not raising interest rates until the second half of next year. So, of the two big uncertainties tapering at risk because of bad data and/or financial market meltdowns, and the timing of the first rate hike only the first has been eliminated. We still have a high level of uncertainty about when rates will be boosted. How do analysts forecast when rates will rise? One technique is to look at Fed funds futures (a pretty much discredited idea by now), and another is to look at the spread between regular Treasuries and TIPS (inflation-protected Treasuries). Near the end of February, the 10-year T-note was yielding 2.74% and the equivalent maturity TIPS was yielding 0.59%, implying an inflation forecast of 2.15%. More importantly, the yield is unchanged from the month before and only a little higher than 0.58% a year ago. In other words, the market does not see inflation as a press-

ing issue if anything, we are still worried about deflation and curbing inflation is the topmost reason central banks raise rates. Theres no rate hike hiding in the Feds own projections for growth and inflation, either. Lower for longer has a strong foundation. The Feds favored inflation indicator, the real personal consumption expenditure price index (PCE), was up a mere 0.2% month over month in December and less than 0.6% in November. PCE inflation is under 1% year over year and likely to rise to only 1.4% to 1.6% in 2014, not creeping up to the Feds target inflation rate of 2% until 2016. We cant discard GDP growth and unemployment, but inflation is what drives interest rate forecasts. According to The Wall Street Journal, the Feds official projections call for the rates to rise only modestly when they do increase, with 10 of 17 officials forecasting rates to stay at or below 0.75% through the end of 2015. A majority of policymakers say rates will stay below 2% through the end of 2016. Its hogwash to talk about rising rates choking off investment plans and other scare stories. Rising U.S. rates will be a modest and prolonged process, so to speak of U.S. rates sucking capital out of emerging markets is hogwash, too, except for those that are already in trouble. So far this year, Bloomberg reports EPFR Global (www.epfr.com)

You can conquer that fear if you know where the Objective Support And Resistance Levels Are!
Many times, markets just test support levels before resuming the trend on a large scale. If you know where the support levels are, you can watch the market as it tests the support levels with ease. You will not be scared and prematurely exit the market, but will be able to continue to profit as the market goes up. Thats exactly what AbleTrend provides. Award-winning AbleTrend support levels are dynamic and automatically adjusted by the software as prices change. Because they are determined by the actual market conditions, they are: 1. Objective 2. Back-testable 3. Visual and easy to use and 4. Reliable in real trading.

How many times has fear made you exit the market too soon and miss the big move?

Award Winning Trading Software

1997 - 2013
For Stocks, Futures, FOREX, and Options

AbleTrend 7.0

Risk Free AbleTrend 30-Day Trial Start Today! $20 Discount Code: ACTM14

REGISTERED WITH THE

SINCE 1995

CTA

Get Started Today! www.ablesys.com/ACT

Ablesys Corp. 20954 Corsair Blvd. Hayward, CA 94545 Tel: 510-265-1883 Fax: 510-265-1993
THESE RESULTS ARE BASED ON SIMULATED OR HYPOTHETICAL PERFORMANCE RESULTS THAT HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE THE RESULTS SHOWN IN AN ACTUAL PERFORMANCE RECORD, THESE RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, BECAUSE THESE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THESE RESULTS MAY HAVE UNDER-OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED OR HYPOTHETICAL TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THESE BEING SHOWN. THE TESTIMONIAL MAY NOT BE REPRESENTATIVE OF THE EXPERIENCE OF OTHER CLIENTS AND THE TESTIMONIAL IS NO GUARANTEE OF FUTURE PERFORMANCE OR SUCCESS. TECHNICAL ANALYSIS OF STOCKS & COMMODITIES LOGO AND AWARD ARE TRADEMARKS OF TECHNICAL ANALYSIS, INC.

CFTC

Readers Choice Awards 1997-2013 in Stock Trading System; Futures Trading System & Option Trading System

CURRENCY TRADER March 2014

13

ON THE MONEY

data shows emerging markets have seen about $21 billion pulled out the window. But capital flight this year is not the mindless contagion of 1997-98. Some of the hardest hit emerging markets were already on the ropes Thailand, Turkey, Hungary, Argentina, India, Russia, and Ukraine. Other emerging markets Vietnam, the Philippines, Indonesia, and Malaysia are weathering the storm fairly well. The ones being tarred with the hot-money brush include South Africa and Brazil, which are not without debt problems, and South Korea and Taiwan, which serve as proxies for China. In fact, because China is an important source of demand for emerging markets, most analysts would rank Chinese data far higher on the list of contagion events than Fed tapering or interest-rate expectations. This is why both the U.S. and UK were blowing a raspberry (politely, of course) to emerging markets complaining about the end of QE at the G20 summit in Sydney in late February. The next country likely to default is Ukraine, according to Standard and Poors: In our view, the political situation in Ukraine has deteriorated substantially. We believe that this puts the governments capability to meet debt service at increasing risk, and raises uncertainty regarding the continued provision of Russian financial support over the course of 2014. We now believe it is likely that Ukraine will default in the absence of significantly favorable changes in circumstances, which we do not anticipate. We are therefore lowering our long-term foreign currency sovereign credit rating on Ukraine to CCC from CCC+. The negative outlook reflects our view that the Ukrainian government has yet to secure sufficient external funding to avoid a selective default or distressed exchange. But Ukraine is a special case. Contagion runs to and from Russia and influences other names in the former Soviet sphere of influence, such as Hungary and Romania, but for much the same economic reasons and not solely as a knee-jerk effect. At the same time the S&P was downgrading Ukraine and predicting default, Turkeys currency (the lira) and stock market were getting a respite, presumably from bottom-fishers. Can we say the days of mindless contagion are over? Probably not, but we are seeing a more discriminating eye this time. Of course, the real problem with contagion is that you can see wreckage all around and still not have a meltdown until you do. Nobody can put a finger on exactly what constitutes critical mass.

Europe redux

Right after S&P downgraded Ukraine, Moodys upgraded Spain by one notch to Baa2, above junk status. This came
14

at the end of a week in which Spain reported a jump in exports and a much-reduced trade deficit, as well as the intention to tap the private market with new government debt before a major maturing redemption in March. The yield on Spanish 10-years dipped to 3.55%, or 0.82% over German Bunds. In contrast, at year-end 2012 the Spanish 10-year yielded 5.31% and had a 4% spread over Bunds. Moodys cited improved competitiveness in both trade and finance as key reasons for the upgrade, with underlying progress in structural reform, especially in the labor market. Spain reformed its public pension system, among other fiscal improvements, and fixed its banks. Bankia, the biggest nationalized bank that was recapitalized with EU bailout money in 2012, will be privatized probably this year, although the government has until 2017 to sell its share. This is precisely the outcome that European Central Bank (ECB) chief Mario Draghi wanted in July 2012 when he said whatever it takes in announcing the ECB would buy sovereign bonds to prevent a peripheral sovereign bond meltdown. Draghi was aiming to save the Euro, not Spain, but the announcement was the single biggest catalyst in financial markets since Fed Chairman Paul Volcker announced in 1979 that U.S. rates would go up until inflation was tamed, not incidentally proving that expectations are a key tool in the central bank arsenal. At the time of the Draghi bombshell, Spanish bonds had just hit a record high yield of 7.69% which, upon Draghis remarks, dropped to 6.91%. In the end, Spain declined to request the ECB intervention because it didnt want to accept oversight by the bank and scrambled to resolve its crises on its own. The cost was unemployment rising to 27% and remaining elevated at 26% even today. But Spain can now contemplate returning to the bond market at reduced costs. Across the Mediterranean, Italy brought forth a surprise challenge to the establishment in the form of Florence Mayor Matteo Renzi, who convinced leading politicians to step aside and allow him to become, at age 39, the youngest prime minister in Italian history. Renzi seeks constitutional change that will eliminate the influence of the many small political parties that have contributed to legislative gridlock and executive mismanagement. Once the prime minister gets the authority to lead, structural reform will be next on the agenda. The new cabinet, including the MIT-educated finance minister, is comprised of relative youngsters, a far cry from the superannuated and sometimes literally clownish political leadership of just last year (former prime minister and perpetual thorn in the side Silvio Berlusconi is 77 and Italys president, Giorgio Napolitano, is 87).
March 2014 CURRENCY TRADER

Again, this is the outcome Draghi must have desired from the sovereign debt crisis a robust push-back against austerity, but not in the usual populist-socialist form. Its almost as though governments and voters have come to accept conventional capitalist financial reality. Bottom line, the European peripheral sovereign debt
Barbara Rockefeller Currency Trader Mag March 2014 Figure 1: Oil and (Black) CRB Index (Green)

FIGURE 1: OIL (BLACK) AND CRB INDEX (GREEN)

114 113 112 111 110 109 108 107 106 105 104 103 102 101 100 99 98 97 96 95 94 93 92 91 90 89 88 87 86 85 84 83 82

2012

November December 2013

February March April

May

June

July

August September October November December 2014

Source: Chart Metastock; data Reuters and eSignal

crisis remember the acronym PIIGS (Portugal, Italy, Ireland, Greece, and Spain)? is over. Ireland basically exited the bailout program in December 2013 and is able to issue its own paper again. Portugal is due to exit in May 2014. According to Brussels-based think tank Bruegel, Greece is nearing another bailout crisis and will need an additional 40 billion, but the country has left the headlines. So has Cyprus, which got its 10 billion bailout a year ago in March 2013. Overall, the troika of the EU, IMF, and ECB succeeded in 310 three or four of six bailout countries Ireland, 305 Portugal, Spain, and possibly Italy, which are the big countries in terms of size and influence. 300 We may say that in comparison, the sovereign debt crisis of Turkey, Russia, et al., may be 295 equivalent in population size to the peripheral Europeans, but not economic and financial influ290 ence. The Euro is one half of the benchmark currency today, while the ruble and lira are relatively 285 minor in the grand scheme of global trade and investment. This is not to say that over-indebt280 edness, mismanagement, and political travails in 275 emerging markets cannot spill over to the developed world as it did in the 1997-98 Asian crisis, 270 but improvements in economic and fiscal condiFebruary Ma tions in the developed world, including the U.S., may provide insulation against contagion.

The correlation conundrum

Barbara Rockefeller Currency Trader Mag March 2014 Figure 2. 10-year Note Yield Index vs. Dollar Index (Red, Inverted)
16.5 17.0 17.5 18.0 18.5 19.0 19.5 20.0 20.5 21.0 21.5 22.0 22.5 23.0 23.5 24.0 24.5 25.0 25.5 26.0 26.5 27.0 27.5 28.0 28.5 29.0 29.5 30.0 30.5 31.0

FIGURE 2:  10-YEAR NOTE YIELD INDEX VS. DOLLAR INDEX (RED, INVERTED)
85.0 84.5

84.0 83.5

83.0

82.5

82.0 81.5

81.0

80.5

80.0 79.5

79.0

6 13 20 27 3 10 17 24 1 8 June July y

78.5 15 22 29 5 12 19 26 2 9 16 23 30 7 14 21 28 4 11 18 25 2 9 16 23 30 6 13 20 27 3 10 17 24 3 August September October November December 2014 February Marc

Source: Chart Metastock; data Reuters and eSignal

What should we think about the emergence of correlation confusion? Heres one line of reasoning: developed economies and China are putting in tepid growth, so emerging market economies are strung along with tepid growth, too, meaning demand for commodities like oil and metals is weak. Well, no. Both oil and the CRB index rallied like crazy in the first two months of the year, despite disappointing Chinese data and the U.S. getting closer to self-sufficiency in crude oil (Figure 1). As for the correlation between the 10-year yield and the dollar index, see Figure 2. The reasoning is that when U.S. yields are rising, the dollar is relatively more attractive, so they should move in sync. But Figure 2 inverts the dollar index. The overall appearance of correlation is that the dollar index moves inversely with the yield, which doesnt make any sense. When the dollar index is falling as the yield is rising, as shown in Figure 2, the inversion means they are moving together.

CURRENCY TRADER March 2014

15

ON THE MONEY

Barbara Rockefeller Currency Trader Mag March 2014 Figure 3. Gold Futures

FIGURE 3: GOLD FUTURES

1850 1800

1750

1700

1650

1600

1550

1500

1450

1400

1350

1300

1250

1200

1150

2012

November December 2013

February

March

April

May

June

July

August

September October

November December 2014

February

March

Source: Chart Metastock; data Reuters and eSignal

Barbara Rockefeller Currency Trader Mag March 2014 Figure 4. Gold (Black) and Emerging Markets EFT (EEM, Blue)

FIGURE 4:  GOLD (BLACK) AND EMERGING MARKETS ETF (EEM, BLUE)

1850 1800

1750

1700

1650

1600

1550

1500

1450

1400

1350

1300

Therefore, the supposed correlation is an exception, not the rule. Other factors are often more important than yield in setting the dollar index. Gold is one of the more interesting stories today, with a recovery that looks like a double bottom (Figure 3). If so, price needs to break the red resistance line and also surpass the intermediate high (gold line at $1,432.50). Gold may be rising because of emerging market distress, demand from China, returning hedge fund managers, or perhaps inflation fear from one-note Johnnies. The emerging-market story doesnt hold up. Figure 4 is the gold chart from Figure 3 with the emerging markets ETF superimposed. We see plenty of correlated moves but also inversely correlated moves, including in February, when both are rising. In a nutshell, you can run gold against every other asset class or security and not find a solid relationship. Therefore, while the bountiful commentary on gold available today is certainly entertaining, it offers no investment guide nor a guide to the FX market. For the immediate future a month or so its hard not to expect the Euro to benefit from the joyful new mood in Europe now that Spain is coming out of despair and there is hope for Italy. Unless the emerging markets crisis blows up (always a possibility), the dollar will not be needed as a safe haven, and the slow process of tapering will not lift rates enough to make the dollar more attractive than the Euro and other currencies, such as the pound sterling. y
Barbara Rockefeller (www.rts-forex.com) is an international economist with a focus on foreign exchange, and the author of the new book The Foreign Exchange Matrix (Harriman House). For more information on the author, see p. 4.
March 2014 CURRENCY TRADER

1250

1200

1150

2012

November December 2013

February

March

April

May

June

July

August

September October

November December 2014

February

March

Source: Chart Metastock; data Reuters and eSignal

16

ON THE MONEY

Yuan makes a move

A teaching moment or a policy shift?
BYMARC CHANDLER

One of the recent dominate issues in the forex market, 0.35% (though financials slipped) on Feb. 26, snapping a Chinese yuan weakness, was still in effect at the end of last four-day decline. The PBOC helped by playing down the month. The yuan weakened for seven of the last eight sessignificance of the price action, suggesting it was primarsions in February, with the U.S. dollar/Chinese yuan rate ily a reflection of market forces and should not be over(USD/CNY) gaining 1.64% from the Feb. 17 close to the interpreted. Feb. 28 high (Figure 1). It appears the most common interpretation of the CNY After eight consecutive days of the People s Bank of developments is the PBOC is introducing two-way risk as China (PBOC) setting the dollar s reference rate (fix) a prelude to widening the currencys 1% band vs. the U.S. higher, on Feb. 28 the PBOC finally fixed the dollar/yuan dollar. Although this is possible, its worth noting the past lower (CNY 6.1214 from CNY 6.1224). Also, for the second two times the band was widened, the action was not proconsecutive session the key seven-day repo rate increased, ceeded by this type of tactic. As we have seen with money having previously fallen to just below 3.1%, to its lowest market squeezes, Chinese officials seem more interested in level since May 2013. teaching lessons than changing policy. y There is some speculation the PBOC was buying dollars and selling yuan. The figures released by the PBOC on Feb. This article was adapted from Marc Chandlers blog, Marc to Market 25 suggested Chinese banks bought a record $73 billion of (www.marctomarket.com). Chandler is head of global foreign exforeign currency in the onshore market in January, reflectchange strategies at Brown Brothers Harriman. For more informaing clients demand for yuan. This represented a marked tion on the author, see p. 4. acceleration of the already heady pace established in the second half of 2013 when PBOC reserves jumped by nearly $500 billion. FIGURE 1: DOLLAR/YUAN However, the PBOC actions have triggered a response one we suspect is not wholly undesired by officials to unwind some highly speculative and leveraged plays. For the first time since July 2012, the dollar has traded to the upper band permissible by Chinese officials, near CNY 6.1760. It has since eased back to around CNY 6.1450. The Wall Street Journal reported some of this money was invested in target redemption forwards, which in essence reward (as in pay out per month) for yuan appreciation, but punish severely for yuan weakness. The approximate level to begin triggering some of these losses may be around CNY 6.15 (the rate topped out at 6.1329 on Feb. 28). The decline in money market rates and the first decline in 10-year yields in six sessions helped calm nerves and the Shanghai Composite rose Source: TradeStation
CURRENCY TRADER March 2014 17

TRADING STRATEGIES

Time-dependent stops
Improving performance with a rule that gets you out of trades after a certain amount of time in unfavorable market conditions.

BY DANIEL FERNANDEZ

Traders typically think of stoploss orders in terms of price moves (if the Euro drops 1.25 below the entry price, a long position is closed, etc.), but there are also stops that trigger regardless of price level. Trailing stops, curtailing losses (Currency Trader, February 2014) detailed the value of the trailing stop as a tool for improving trading system characteristics when incorporated as an initial condition in the system-generation process. However, one of the biggest problems with trailing stops is they dont offer a way to exit a position (with a smaller loss) when a market doesnt necessarily move against you, but simply fails to move in your favor. A trailing stop can remain dormant if price moves sideways for a prolonged period of time, not reaching the profit threshold required to activate it, in which case the system is at risk of hitting the initial stop-loss even though a prolonged sideways period forecasts an increased probability of a losing trade. To ensure a trades odds of reaching a worst-case loss (the initial stop-loss) is progressively reduced regardless of

price level, lets explore a function that adjusts a stop-loss order as a function of time.

Defining a time stop

There are many ways to design a time-based stop. In this case well use a linear function, which represents the simplest scenario. To define a time-dependent linear stop-loss function, the only thing we need to know is the future point in time (defined in terms of the number of price bars) when a trade should be at the break-even price. We can then generate a function with the following equation:

SL(B)=SL0 - (SL0/BEp) B where, SL(B) = the stop-loss after B bars SL0 = the initial stop-loss amount BEp = the desired number of bars until break-even
For example, if a trade has an initial stop-loss of 120

18

March 2010 2014 CURRENCY TRADER October

FIGURE 1: SYSTEM EQUITY CURVE

ticks and you want the BEp to be 10 bars, the stop-loss value at bar 5 would be 120-(120/10)*5 = 60, while at bar 15 the stop-loss value would be -120-(120/10)*15 = -60. For a long trade this means after five bars the stop-loss value should be 60 ticks below the entry price, while after 15 bars it should be 60 ticks above the entry price. Using a linear function introduces a fundamental constraint that forces the trade to evolve in a certain way profitably, but with no extended sideways periods or be closed at the determined stop-loss level. This provides protection from directionless price action, ensuring you dont remain in unfavorable market conditions for too long or risk a move to the initial stop-loss, given the reduced odds of achieving a profitable outcome implied by sideways price action.

2.  The high 34 days ago is greater than the close 20 days ago (High[34] > Close[20]). Short entry (long exit): 1.  The close six days ago is less than the close 54 days ago (Close[6] < Close[54]). 2.  The low 34 days ago is less than the close 20 days ago (Low[34] < Close[20]) where [0] is the last closed bar. A trade is reversed whenever a signal in the opposite direction occurs, and whenever there are multiple entry signals in the same direction (e.g., more than one buy signal before an offsetting sell signal triggers) the stop-loss is reset as if a new entry had occurred at the current bar (i.e., B is reset to 0). The system was tested on daily USD/JPY data from Jan. 1, 1988 to Jan. 1, 2014 using a spread cost of 3 ticks (0.03). Data used for simulations had a GMT +1 (+2 DST) time stamp, with each week opening on Monday at 4 (4 a.m.) and closing on Friday at 19 (7 p.m.). The simulation used a starting balance of $100,000 and risked 1% of account equity per position on the initial stop-loss value for each trade.

System example

The following strategy was created to illustrate the use of a linear time-dependent stop-loss function. The system trades daily price bars in the U.S. dollar/Japanese yen pair (USD/JPY) and uses an initial stop-loss (SL0) with a value of 90% of the 20-day average true range (ATR), which is adjusted linearly against a breakeven (BEp) of 12 bars. The system uses two price-based rules for trade entry and exit. Long entry (short exit): 1.  The close six days ago is greater than the close 54 days ago (Close[6] > Close[54]).

System results

The equity curve in Figure 1 shows the trading strategy was very stable, with good results through the entire test

CURRENCY TRADER March 2014

19

TRADING STRATEGIES

FIGURE 2: DRAWDOWNS

period especially during recent market conditions. The system suffered its worst drawdowns in the early part of the past decade (2000-2001) and hasnt had a drawdown period above 5% since 2011, as shown in Figure 2. The performance statistics in Table 1 imply the system is primarily a trend-following strategy; it has a rewardto-risk ratio of 2.03 and a winning percentage of 42%. However, a salient characteristic of the strategy is its short TABLE 1: SYSTEM PERFORMANCE
No. of years Average annual return Total return Maximum drawdown Maximum drawdown length Ulcer Index Reward-to-risk ratio Winning percentage Profit factor Total trades Average trades/week 27 8.98% 801.46% 12.90% 548 days 4.29 2.03 42% 1.49 632 0.5

(548-day) maximum drawdown length; systems with similar characteristics typically have maximum drawdowns in the 700-day neighborhood. The system also boasts an impressive mathematical expectancy a prerequisite for profitability when using a linear stop-loss function. Figure 3 shows the mathematical expectancies for both long (blue) and short (yellow) trades are very positive and increase linearly for both types of trades up to approximately bars 12-14, where the BEp value for the strategy is located. The shape of the mathematical expectancy plot is, in fact, dictated by the stop-loss function because a system with an entry that does not partner well with the linear stop-loss function would produce an inferior mathematical expectancy plot. This time-based stop technique also allows the system to produce stable results (from a profit/drawdown ratio perspective) even if market conditions become less favorable. Figure 4 shows the strategys yearly performance. Although returns have declined since the strongest period in the late 1990s, the strategy has managed to maintain a constant profit-to-drawdown ratio because of its ability to exit unfavorable conditions before a move toward the initial stop-loss occurs. Its worth noting the system has had no losing years since 2005; drawdown periods have been
March 2014 CURRENCY TRADER

20

FIGURE 3: SYSTEM EXPECTANCY

reduced proportionally to profits since the late 1990s (i.e., there has been an overall reduction in strategy volatility).

FIGURE 4: ANNUAL RETURNS

Escape sideways markets, impose favorable expectancy

Incorporating a time-dependent stop-loss in the system-design process will allow you to find entries that have a good mathematical expectancy, with the added benefit of cutting trades short during sideways market conditions, thus avoiding unnecessary losses when the probability of a favorable outcome is reduced. This doesnt mean this type of rule will benefit any strategy, only that finding systems that perform well with such functions will result in more stability and fewer losses in unfavorable market conditions. Finally, while the example here represents the initial implementation of a linear stop-loss, more imaginative functions, such as those incorporating parabolic, logarithmic, or exponential functions, might also help generate systems with distinct characteristics. y
Daniel Fernandez is an active trader focusing on forex strategy analysis, particularly algorithmic trading and the mathematical evaluation of long-term system profitability. For more information on the author, see p. 4.
CURRENCY TRADER March 2014 21

ADVANCED TRADING STRATEGIES CONCEPTS

When excess becomes predictable: The minors

Patterns manifested by major and minor currencies suggest the financial crisis and its policy aftermath have saddled the majors with more improvised monetary policies than the minors.

BY HOWARD L. SIMONS

FIGURE 1:  THE BRAZILIAN REAL AND 90-DAY EXCESS VOLATILITY

FIGURE 2:  THE INDIAN RUPEE AND 90-DAY EXCESS VOLATILITY

Last months examination of whether major currencies excess volatility (and trading strategies based thereon) was a function of the shape of the money-market yield curve and previous carry returns from the U.S. dollar into those currencies was encouraging despite the understandable inability to formulate mechanical trading rules. As a refresher, excess volatility is defined as the ratio of 90-day implied volatility to 90-day realized volatility, minus 1.00. As was done last month (see When excess becomes predictable: The majors, February 2014) the first section of the following discussion will be devoted to mapping returns of several minor currencies as the common logarithm of the total carry return from the U.S. dollar into those currencies, reindexed to January 2006. This both approximates the return path of a continuous currency futures contract and allows for the more intuitively appealing rising line depicting a stronger currency. The second section will look at this measure of excess volatility as a function of the carry return over the past three months and the lagged value of the money-market yield curve, as measured by the minor currencies forward rate ratios between six and nine months (FRR6,9). The FRR6,9 is the rate at which we can lock in borrowing for three months starting six months from now, divided by the nine-month rate itself. The steeper the yield

22

October March 2010 2014 CURRENCY TRADER

FIGURE 3:  THE SOUTH AFRICAN RAND AND 90-DAY EXCESS VOLATILITY

curve, the more this ratio exceeds 1.00; an inverted yield curve has an FRR6,9 below 1.00.

Excess volatility and returns

The Brazilian reals (BRL) excess volatility path involves a relatively symmetric pattern of spikes both higher and lower (Figure 1). While several of the spikes higher are aligned with downturns in the carry return for the BRL three months prior, the overall record in this regard is spotty. The same applies for negative excess volatility returns and upturns in the carry return. More consistency would be needed for this picture to be intriguing. The Indian rupee (INR), on the other hand, does have a more consistent, very asymmetric pattern of excess volatility. The markets become nervous about INR strength and start bidding implied volatility higher; once the INR sells off, as it did for much of 2013, excess volatility declines rapidly. The South African rand (ZAR) would have a similarly clean pattern were it not for a large and prolonged spike higher in excess volatility during the second half of 2010 (Figure 3). This spike occurred as the ZAR rallied against both the USD and EUR, but it turned lower well before the carry return into the ZAR did. Its as if the markets suddenly lost their anxiety about ZAR strength and abandoned protective option positions. The Turkish liras (TRY) carry return has been dominated for years by its interest-rate spread component rather than its spot-rate component (Figure 4). As a result, the TRYs carry return has largely moved separately from the option markets focused on spot-rate return. While excess volatility for the TRY has been symmetric, it appears to convey little relationship to the carry return.
CURRENCY TRADER March October 2014 2010

FIGURE 4:  THE TURKISH LIRA AND 90-DAY EXCESS VOLATILITY

FIGURE 5:  THE THAI BAHT AND 90-DAY EXCESS VOLATILITY

23

ON ADVANCED THE MONEY CONCEPTS

FIGURE 6:  THE MEXICAN PESO AND 90-DAY EXCESS VOLATILITY

FIGURE 7:  THE TAIWAN DOLLAR AND 90-DAY EXCESS VOLATILITY

FIGURE 8:  EXCESS VOLATILITY FOR THE BRAZILIAN REAL

A similar disconnection is visible for the Thai baht (THB) (Figure 5). Here, excess volatility surged on an order of magnitude scale in 2007 and by a lesser (but still large) amount in late 2009. Moreover, excess volatility for the THB has been highly asymmetric; its last negative value occurred in 2008. While the visual interpretation of the Mexican pesos (MXN) map may appear as lopsided as the Thai bahts, the rise and fall of excess volatility has mirrored the carry return into the MXN reasonably well since the 2008 financial crisis (Figure 6). It was that event and a large but short-lived spike in excess volatility that distorted this picture. Finally, excess volatility for the Taiwan dollar (TWD) has been very asymmetric over its history; the last negative readings here were seen in 2006 (Figure 7). Even though the carry return for the TWD has moved higher steadily since the March 2009 adoption of quantitative easing by the U.S., the option market keeps overpricing insurance against this obvious trend. Tellingly, a sharp downturn in the carry return during late 2011 was followed by a quick drop in excess volatility.

Leading indications of excess volatility

Now lets look at excess volatility for each of the minor currencies as a function of the previous three months carry return and three-month-ago values of its FRR6,9. Positive levels of excess volatility are depicted with green bubbles, negative levels with red bubbles; the diameter of the bubble corresponds to the absolute magnitude of the

24 24

October March 2010 2014 CURRENCY CURRENCY TRADER TRADER

FIGURE 9:  EXCESS VOLATILITY FOR THE INDIAN RUPEE

excess volatility level. The last datum used is highlighted and the late-November 2013 environment is depicted with a crosshair. While the map for the Brazilian real has large and coherent zones of positive and negative excess volatility values, they are too interspersed with each other to suggest a uniform approach to volatility trading (Figure 8). The Indian rupee presents an interesting case (Figure 9). While the map is dominated by positive excess volatility readings, the region with previous carry returns of less than -3% is overwhelmingly green i.e., a 2013-style selloff in the INR is an open invitation to take a long position in implied volatility for the rupee. The South African rand has an almost opposite picture (Figure 10). Here positive previous carry returns along with a flat-to-inverted yield curve lead to nothing but negative excess volatility readings. Here, too, the strategy response is straightforward: Rallies in the ZAR should be met with short implied volatility positions. No such direct strategies appear possible for the Turkish lira (Figure 11). As noted above, the carry return for the TRY is only a small function of its spot-rate changes relative to its interest-rate spread; this has separated the option markets from the carry return. The Thai baht, like the INR, presents an interesting case (Figure 12). While the map is a sea of green (if you want a Red Sea, one is available), please note the distribution of large and small bubbles. The large bubbles are concentrated in the region marked with an oval of positive previous carry returns in a flat yield curve environment. This sug-

FIGURE 10:  EXCESS VOLATILITY FOR THE SOUTH AFRICAN RAND

FIGURE 11:  EXCESS VOLATILITY FOR THE TURKISH LIRA

CURRENCY TRADER March October 2014 2010

25

ON ADVANCED THE MONEY CONCEPTS

FIGURE 12:  EXCESS VOLATILITY FOR THE THAI BAHT gests an obvious entry point for long volatility strategies. The Mexican peso also presents an interesting case once we get past the visual barrier of a few extreme FRR6,9 cases (Figure 13). Previous carry returns of less than -15% are followed by positive excess volatility readings; the opposite is largely true for previous carry returns greater than 15%. Finally, the Taiwan dollar, like the THB, essentially is a sea of green (Figure 14). Unlike the THB, however, nothing in the distribution of large and small carry return changes or FRR6,9 levels suggests any sort of trading strategy.

FIGURE 13:  EXCESS VOLATILITY FOR THE MEXICAN PESO

Majors, minors, and monetary policy

FIGURE 14:  EXCESS VOLATILITY FOR THE TAIWAN DOLLAR

Epithets are tossed about occasionally about a banana republic or Third World style of government. The different patterns seen between the major and minor currencies suggest the financial crisis and its policy aftermath have saddled the majors with more ad hoc monetary policies than observed for the minors. As a result, the trading responses for the minors are less direct than those seen for the majors. I have noted at other times how most financial innovation, if we may still call it that, derives from attempts to flee either taxes or regulations. Markets go offshore for good reasons. This thought can be extended to the insurance markets as well: Option protection against sharp currency moves and the differential levels of smiles, skews, and ratios examined in these pages over the past six months largely is protection against bad or erratic policy decisions. Someone should be embarrassed by this, although perhaps far too few are. y
Howard Simons is president of Rosewood Trading Inc. and a see p. 4.

strategist for Bianco Research. For more information on the author,

26 26

October March 2010 2014 CURRENCY CURRENCY TRADER TRADER

CURRENCY TRADER March 2014

27

GLOBAL ECONOMIC CALENDAR

March
CPI: Consumer price index ECB:European Central Bank FDD (first delivery day): The first day on which delivery of a commodity in fulfillment of a futures contract can take place. FND (first notice day): Also known as first intent day, this is the first day on which a clearinghouse can give notice to a buyer of a futures contract that it intends to deliver a commodity in fulfillment of a futures contract. The clearinghouse also informs the seller. FOMC:Federal Open Market Committee GDP: Gross domestic product ISM: I nstitute for supply management LTD (last trading day): The final day trading can take place in a futures or options contract. PMI: P urchasing managers index PPI: P roducer price index Economic release (U.S.) GDP CPI ECI PPI ISM Unemployment Personal income Durable goods Retail sales Trade balance Leading indicators Release time (ET) 8:30 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 10:00 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 8:30 a.m. 10:00 a.m.

16 17

1 2 3 4 5

U.S.: February ISM manufacturing report Canada: January PPI U.S.: Fed beige book Australia: Q4 GDP Canada: Bank of Canada interestrate announcement France: Q4 employment report UK: Bank of England interest-rate announcement ECB: Governing council interest-rate announcement U.S.: January trade balance and February employment report Canada: February employment report LTD: March forex options; March U.S. dollar index options (ICE)

18

19

20 21 22 23 24

7 8 9

Hong Kong: December-February employment report LTD: March forex futures; March U.S. dollar index futures (ICE) U.S.: February CPI and housing starts FND: March U.S. dollar index futures (ICE) U.S.: FOMC interest-rate announcement South Africa: February CPI UK: February employment report FDD: March forex futures; March U.S. dollar index futures (ICE) U.S.: February leading indicators Germany: February PPI Hong Kong: February CPI Canada: February CPI Hong Kong: Q4 GDP Mexico: February employment report

10 Mexico: Feb. 28 CPI and February 11 12

PPI Japan: Bank of Japan interest-rate announcement Brazil: February CPI South Africa: Q4 GDP U.S.: February retail sales Australia: February employment report France: February CPI Hong Kong: Q4 PPI Japan: February PPI U.S.: February PPI Germany: February CPI India: February PPI

Brazil: February PPI

25 UK: February CPI and PPI 26 UK: Q4 GDP

U.S.: Q4 GDP (third)

Mexico: March 15 CPI

U.S.: February durable goods

27 Brazil: February employment report 28 29 30

13

South Africa: February PPI U.S.: February personal income France: February PPI Japan: February employment report and CPI

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

14 15

31 India: February CPI

France: Q4 GDP

EVENTS
Event: 39th Annual International Futures Industry Conference Date: March 11-14 Location: Boca Raton Resort & Club, Boca Raton, Fla. For more information: Go to www.futuresindustry.org Event: The MoneyShow Las Vegas Date: May 12-15 Location: Caesars Palace, Las Vegas For more information: Go to www.moneyshow.com
28

Event: The MoneyShow San Francisco Date: Aug. 21-23 Location: San Francisco For more information: Go to www.moneyshow.com Event: The SRI Conference Date: Nov. 9-11 Location: The Broadmoor Hotel, Colorado Springs, Colo. For more information: Go to www.SRIConference.com
March 2014 CURRENCY TRADER

CURRENCY FUTURES SNAPSHOT as of Feb. 28

Market EUR/USD JPY/USD GBP/USD AUD/USD CAD/USD MXN/USD CHF/USD U.S. dollar index NZD/USD E-Mini EUR/USD Sym EC JY BP AD CD MP SF DX NE ZE Exch CME CME CME CME CME CME CME ICE CME CME Vol 205.8 160.9 110.7 88.0 60.4 38.7 30.4 20.1 11.9 5.0 OI 258.2 202.6 212.7 118.6 150.2 109.6 44.6 46.9 21.0 5.1 10-day move / rank 1.08% / 55% 0.49% / 50% 0.64% / 23% -0.57% / 20% -0.78% / 40% 0.07% / 0% 1.83% / 100% -0.57% / 36% 0.64% / 31% 1.08% / 55% 20-day move / rank 2.01% / 83% 0.89% / 25% 1.73% / 79% 1.84% / 40% 1.07% / 100% 1.04% / 47% 2.84% / 83% -2.07% / 100% 3.31% / 100% 2.01% / 83% 60-day move / rank 2.08% / 56% 1.29% / 33% 2.50% / 30% -1.89% / 21% -3.89% / 63% -0.50% / 10% 3.48% / 74% -1.13% / 47% 2.63% / 37% 2.08% / 56% Volatility ratio / rank .34 / 37% .10 / 10% .15 / 13% .12 / 13% .21 / 28% .22 / 2% .38 / 37% .37 / 37% .48 / 77% .34 / 37%

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.

The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of each markets liquidity, direction, and levels of momentum and volatility. See the legend for explanations of the different fields. Note: Average volume and open interest data includes both pit and side-byside electronic contracts (where applicable). LEGEND: Volume: 30-day average daily volume, in thousands. OI: 30-day open interest, in thousands. 10-day move: The percentage price move from the close 10 days ago to todays close. 20-day move: The percentage price move from the close 20 days ago to todays close. 60-day move: The percentage price move from the close 60 days ago to todays close. The % rank fields for each time window (10-day moves, 20-day moves, etc.) show the percentile rank of the most recent move to a certain number of the previous moves of the same size and in the same direction. For example, the % rank for the 10-day move shows how the most recent 10-day move compares to the past twenty 10-day moves; for the 20-day move, it shows how the most recent 20-day move compares to the past sixty 20-day moves; for the 60-day move, it shows how the most recent 60-day move compares to the past one-hundred-twenty 60-day moves. A reading of 100% means the current reading is larger than all the past readings, while a reading of 0% means the current reading is smaller than the previous readings. Volatility ratio/% rank: The ratio is the shortterm volatility (10-day standard deviation of prices) divided by the long-term volatility (100-day standard deviation of prices). The % rank is the percentile rank of the volatility ratio over the past 60 days.

BarclayHedge Rankings: Top 10 currency traders managing more than $10 million
(as of Jan. 31 ranked by January 2014 return) January return 6.33% 5.59% 5.08% 4.19% 3.64% 3.21% 3.09% 1.94% 1.70% 1.50% 6.83% 5.78% 1.86% 1.50% 1.20% 0.415 0.34% 0% -0.20% -0.65% 2014 YTD return 6.33% 5.59% 5.08% 4.19% 3.64% 3.21% 3.09% 1.94% 1.70% 1.50% 6.83% 5.78% 1.86% 1.50% 1.20% 0.41% 0.34% 0% -0.20% -0.65% $ Under mgmt. (millions) 3000.0 40.1 54.0 3000.0 135.0 904.4 759.6 3000.0 2837.0 10.0 1.5 6.1 4.3 10.0 2.0 4.1 2.1 1.0 1.9 1.1

Trading advisor 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 P/E Investments (FX Aggressive) Friedberg Comm. Mgmt. (Curr.) 24FX Global Advisors P/E Investments (FX Standard) Premium Currency (Curr. Plus) Civic Capital (Curr. Fund Ltd) Premium Currency (Currencies) P/E Investments (FX Conservative) First Quadrant (TAA L/S USD) Rhicon Currency Mgmt (Sys. Curr.) MFG (Bulpred USD) KSA Consulting Network (Delta FX) Fornex (Foyle) Rhicon Currency Mgmt (Sys. Curr.) Blue Fin Capital (Managed FX) Altus Trading (Managed Forex A) MDC Trading Seneca (Willowdale Fund) Monolith Capital (Curr Opportunities) Hartswell Capital Mgmt (Athena)

Top 10 currency traders managing less than $10M & more than $1M

Based on estimates of the composite of all accounts or the fully funded subset method. Does not reflect the performance of any single account. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE.

CURRENCY TRADER March 2014

29

INTERNATIONAL MARKETS

CURRENCIES (vs. U.S. DOLLAR)

Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Currency Australian Dollar South African rand Brazilian real New Zealand dollar Indian rupee Great Britain pound Singapore dollar Thai baht Swiss franc Euro Japanese yen Taiwan dollar Hong Kong dollar Canadian dollar Chinese yuan Swedish krona Russian ruble Feb. 27 price vs. U.S. dollar 0.89912 0.092905 0.426545 0.832095 0.016165 1.667045 0.79054 0.03071 1.12524 1.37223 0.00977 0.03296 0.128865 0.90126 0.163205 0.153705 0.027865 1-month gain/loss 3.56% 3.02% 2.29% 1.30% 1.28% 1.13% 1.07% 0.87% 0.65% 0.32% 0.05% 0.05% 0.03% -0.07% -0.38% -0.99% -3.83% 3-month gain/loss -1.77% -6.07% -2.30% 1.30% 0.56% 3.09% -1.06% -1.59% 2.36% 1.33% -0.91% -2.40% -0.10% -5.01% 0.05% 0.95% -8.17% 6-month gain/loss -0.44% -4.64% 1.03% 6.23% 4.22% 7.04% 1.17% -1.93% 3.81% 2.58% -3.65% -1.33% -0.06% -5.28% 0.52% -0.02% -7.99% 52-week high 1.0545 0.1131 0.5137 0.8619 0.0187 1.6748 0.8136 0.0348 1.1277 1.3802 0.0109 0.0341 0.129 0.9968 0.1642 0.1583 0.0327 52-week low 0.8677 0.0888 0.4082 0.7704 0.0147 1.4877 0.7792 0.0302 1.0274 1.2798 0.0095 0.0326 0.1288 0.8945 0.1589 0.1464 0.027865 Previous 13 16 14 2 12 4 9 8 11 10 1 5 7 15 6 3 17

GLOBAL STOCK INDICES

Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
30

Index CAC 40 FTSE MIB S&P/TSX composite All ordinaries Swiss Market S&P 500 FTSE 100 Hang Seng FTSE/JSE All Share Xetra Dax BSE 30 Straits Times Bovespa Nikkei 225 IPC

Feb. 27 4,396.39 20,321.00 14,214.70 5,421.00 8,470.90 1,854.29 6,810.30 22,828.18 47,049.79 9,588.33 21,120.12 3,096.74 47,607.00 14,923.11 38,912.93

1-month gain/loss 6.08% 5.43% 4.66% 4.49% 4.16% 4.08% 3.96% 3.88% 2.84% 2.56% 1.99% 1.79% -0.20% -0.55% -4.77%

3-month gain/loss 2.41% 7.38% 6.38% 1.80% 2.73% 2.60% 2.42% -4.11% 5.58% 2.54% 3.43% -2.37% -8.20% -3.41% -7.07%

6-month gain loss 10.78% 22.56% 12.89% 5.66% 7.42% 13.73% 5.73% 4.36% 15.83% 16.33% 17.54% 2.07% -4.96% 10.20% -1.87%

52-week high 4,420.94 20,478.50 14,278.60 5,471.80 8,544.10 1,858.71 6,875.60 24,111.60 47,452.24 9,794.05 21,483.70 3,463.79 59,472.00 16,320.20 44,466.70

52-week low 3,575.17 15,056.60 11,759.00 4,610.60 7,247.30 1,501.48 6,023.40 19,426.40 37,801.67 7,418.36 17448.70 2,953.01 44,107.00 11,392.60 37,034.30

Previous 6 1 2 9 3 7 8 13 5 4 10 11 15 14 12

France Italy Canada Australia Switzerland U.S. UK Hong Kong South Africa Germany India Singapore Brazil Japan Mexico

March 2014 CURRENCY TRADER

NON-U.S. DOLLAR FOREX CROSS RATES

Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Currency pair Aussie $ / Canada $ Aussie $ / Yen Aussie $ / Franc Aussie $ / New Zeal $ Aussie $ / Real New Zeal $ / Yen Pound / Canada $ Pound / Yen Euro / Yen Franc / Canada $ Franc / Yen Pound / Franc Euro / Canada $ Canada $ / Yen Euro / Franc Euro / Pound Euro / Real Yen / Real Canada $ / Real Pound / Aussie $ Euro / Aussie $ Symbol AUD/CAD AUD/JPY AUD/CHF AUD/NZD AUD/BRL NZD/JPY GBP/CAD GBP/JPY EUR/JPY CHF/CAD CHF/JPY GBP/CHF EUR/CAD CAD/JPY EUR/CHF EUR/GBP EUR/BRL JPY/BRL CAD/BRL GBP/AUD EUR/AUD Feb. 27 0.99763 92.01 0.79905 1.08052 2.10791 85.15 1.849685 170.585 140.42 1.24852 115.145 1.48149 1.522575 92.225 1.21949 0.82315 3.217075 0.02291 2.112925 1.854085 1.526185 1-month gain/loss 3.63% 3.49% 2.89% 2.24% 1.23% 1.23% 1.20% 1.08% 1.00% 0.72% 0.60% 0.49% 0.40% -0.14% -0.33% -0.82% -1.93% -2.20% -2.31% -2.34% -3.12% 3-month gain/loss 3.41% -0.92% -4.03% -3.03% 0.54% 2.18% 8.53% 3.98% 2.21% 7.76% 3.25% 0.71% 6.68% -4.19% -1.00% -1.70% 3.72% 1.46% -2.78% 4.95% 3.16% 6-month gain loss 5.11% 3.32% -4.10% -6.28% -1.45% 10.25% 13.01% 11.09% 6.46% 9.60% 7.74% 3.11% 8.30% -1.70% -1.18% -4.16% 1.54% -4.62% -6.24% 7.51% 3.04% 52-week high 1.0685 105.05 0.9942 1.2643 2.1995 87.15 1.8542 174.35 145.12 1.2518 118.41 1.504 1.5272 100.65 1.256 0.8747 3.3165 0.0248 2.3271 1.9013 1.5744 52-week low 0.9224 87.02 0.7755 1.0548 1.9633 75.57 1.5286 138.9 119.64 1.0528 98.38 1.4089 1.3005 89.5 1.2136 0.8174 2.5251 0.0196 1.8879 1.4439 1.2251 Previous 6 20 13 17 7 14 2 16 18 4 19 9 3 21 11 15 5 1 12 8 10

GLOBAL CENTRAL BANK LENDING RATES

Country United States Japan Eurozone England Canada Switzerland Australia New Zealand Brazil Korea Taiwan India South Africa Interest rate Fed funds rate Overnight call rate Refi rate Repo rate Overnight rate 3-month Swiss Libor Cash rate Cash rate Selic rate Korea base rate Discount rate Repo rate Repurchase rate Rate 0-0.25 0-0.1 0.25 0.5 1 0-0.25 2.5 2.5 10.75 2.5 1.875 8 5.5 Last change 0.5 (Dec 08) 0-0.1 (Oct 10) 0.25 (Nov 13) 0.5 (Mar 09) 0.25 (Sep 10) 0.25 (Aug 11) 0.25 (Aug 13) 0.5 (Mar 11) 0.25 (Feb 14) 0.25 (May 13) 0.125 (Jun 11) 0.25 (Jan 14) 0.5 (Jan 14) August 2013 0-0.25 0-0.1 0.5 0.5 1 0-0.25 2.5 2.5 9 2.5 1.875 7.25 5 February 2013 0-0.25 0-0.1 0.75 0.5 1 0-0.25 3 2.5 7.25 2.75 1.875 7.75 5
31

CURRENCY TRADER March 2014

INTERNATIONAL MARKETS
GDP AMERICAS
Argentina Brazil Canada France Germany UK S. Africa Australia Hong Kong India Japan Singapore Argentina Brazil Canada France Germany UK Australia Hong Kong Japan Singapore Argentina

Period
Q3 Q4 Q4 Q3 Q4 Q3 Q4 Q3 Q4 Q4 Q4 Q4

Release date
12/20 2/27 2/28 12/24 2/14 12/20 2/25 12/4 2/26 2/28 2/17 2/21

Change
-6.7% 0.1% 0.8% -0.1% 0.7% 0.8% 2.8% 0.6% 6.3% 3.1% 0.4% 2.9%

1-year change
24.2% 1.9% 3.7% 0.1% 3.4% 1.9% 8.1% 2.3% 4.6% 12.5% 1.6% 4.7%

Next release
3/20 5/30 5/30 3/28 5/13 3/26 5/27 3/5 5/16 5/30 5/15 NLT 5/23

EUROPE AFRICA ASIA and S. PACIFIC

Unemployment AMERICAS

Period
Q4 Jan. Jan. Q3 Jan. Oct.-Dec. Jan. Nov.-Jan. Jan. Q4

Release date
2/19 2/20 2/7 12/11 2/27 2/19 2/13 2/18 2/28 1/29 2/13 2/7 2/21 2/20 2/13 2/18 2/19 1/22 2/21 2/28 2/28 2/24

Rate
6.8% 4.8% 7.0% 10.5% 5.5% 7.2% 5.9% 3.1% 3.7% 1.8%

Change
-0.4% 0.5% -0.2% 0.1% 0.6% -0.4% 0.0% -0.1% 0.0% 0.1%

1-year change
-0.8% -0.6% 0.0% 0.6% -0.4% -0.6% 0.5% -0.3% 4.2% 0.0%

Next release
5/19 3/27 3/7 3/6 4/1 3/19 3/13 3/17 3/28 4/30

EUROPE

ASIA and S. PACIFIC CPI AMERICAS

Period
Q4 Jan. Jan. Jan. Jan. Jan. Jan. Q4 Jan. Jan. Jan. Jan. Brazil Canada France Germany UK S. Africa Australia Hong Kong India Japan Singapore

Release date

Change
3.7% 0.6% 0.3% -0.6% -0.6% -0.6% 0.7% 0.8% 0.5% 0.8% -0.2% 0.1%

1-year change
10.9% 5.6% 1.5% 0.7% 1.3% 1.9% 5.8% 2.7% 4.6% 7.2% 1.4% 1.4%

Next release
3/14 3/12 3/21 3/13 3/14 3/25 3/19 4/23 3/20 3/31 3/28 3/24

EUROPE AFRICA ASIA and S. PACIFIC

PPI AMERICAS EUROPE AFRICA ASIA and S. PACIFIC

Argentina Canada France Germany UK S. Africa Australia Hong Kong India Japan Singapore

Period
Jan. Jan. Jan. Jan. Jan. Jan. Q4 Q3 Jan. Jan. Jan.

Release date
2/14 2/3 2/28 2/20 2/18 2/27 1/31 12/12 2/19 2/13 2/28

Change
4.9% -0.3% -1.5% -0.1% 0.3% 1.0% 0.2% -2.6% 0.2% 0.1% 0.3%

1-year change
19.2% 0.8% -6.5% -1.1% -3.1% 7.0% 1.9% -5.2% 5.0% 2.4% 0.9%

Next release
3/14 3/3 3/28 3/20 3/25 3/27 5/2 3/13 3/14 3/12 3/28

As of Feb. 28 LEGEND: Change: Change from previous report release. NLT: No later than. Rate: Unemployment rate.

32

March 2014 CURRENCY TRADER

FOREXTRADE JOURNAL

Inside month and week prompts short trade in the dollar/Canada pair.
TRADE
Date: Feb. 28 Trade: Short the U.S. dollar/Canadian dollar pair (USD/CAD) at 1.1064. Reason for trade/setup: The USD/CAD pair formed an inside month in February (lower high and higher low than January). Visually, both the monthly and weekly charts (see insets) appear poised for further upside: Price on the monthly chart has broken out convincingly above both the 2010 and 2011 highs, and the February low even retraced almost exactly to the 2010 high. However, analyzing dollar/Canadas price action after inside months and inside weeks indicates more potential for downside price movement, especially in the first few weeks after the patterns. The 54 previous inside months since 1974 have been followed (in the subsequent six months) by more sideways to lower price action than the USD/CAD pairs historical upside bias; a downside bias was more pronounced in the 25 inside months that closed below both the previous months close and the current months open, as did February. A similar, and stronger pattern emerged for inside weeks: While price action after the 228 previous inside weeks was only minimally more bearish than the pairs typical price action, the 74 inside weeks that closed below both their open and the previous weeks close were followed by a much stronger downside bias for three weeks after the pattern: The close three weeks later was below the close of the inside week 62% of the time, with an average decline of -0.0031 vs. the USD/CADs overall median three-week move of -0.0002. Given these statistics (which imply relatively quick TRADE SUMMARY
Date 2/28/14 Currency pair USD/CAD Entry price 1.1064 Initial stop 1.1169 Initial target 1.0916 IRR 1.41 MTM 1.1083 Date 3/3/14 P/L point -0.0019 % -0.17% LOP 0.0026 LOL -0.0045 Trade length 1 day Source: TradeStation

downside follow through), the stop will be fairly tight on the trade. Initial stop: 1.1169. Initial target: 1.0916.

RESULT
Exit: Trade still open. Profit/loss: -0.0019, marked-to-market at 12:42 p.m. CT on March 3. Outcome: Early trading on March 3 was non-committal, with an upside bias that might have been partially attributable to nervousness over the Ukraine crisis: Equity markets around the world mostly turned lower and the U.S. dollar, Japanese yen, and Swiss franc all seemed to benefit from some mild defensive buying. An escalation of the conflict would almost certainly knock the trade out of the box. y
Note: Initial trade targets are typically based on things such as the historical performance of a price pattern or a trading system signal. However, because individual trades are dictated by immediate circumstances, price targets are flexible and sure. As a result, initial (pre-trade) reward-risk ratios are conjectural by nature. are often used as points at which to liquidate a portion of a trade to reduce expo-

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). Trade length: duration of trade in calendar days. MTM: marked to market (the trades open profit or loss at a given point in time).
CURRENCY TRADER March 2014 33