Strategies, analysis, and news for FX traders

November 2012 Volume 9, No. 11

Time-filter FX strategy p. 14 Making sense of the yen p. 10

All the tea in China: The yuan’s big push p. 6 Asian currencies: Surprising performance p. 18


Contributors .................................................4 Global Markets Chinese yuan hurtles higher, but economic risks remain ........................6
Does China have the flu or just a cold? By Currency Trader Staff

Currency Futures Snapshot ................ 23 . BarclayHedge Rankings ....................... 23 .
Top-ranked managed money programs

International Markets ............................ 24
N umbers from the global forex, stock, and interest-rate markets.

On the Money Deciphering the yen................................. 10
How much confidence should be placed in the current breakout? By Barbara Rockefeller

Forex Journal ...........................................28
The virtue of patience.

Trading Strategies Improving moving average signals with time filtering ........................ 14
Putting trade signals through a time filter can improve performance, but it’s a technique that needs to be applied logically and without curvefitting. By Daniel Fernandez

Looking for an advertiser?
Click on the company name for a direct link to the ad in this month’s issue. Ablesys eSignal FXCM

Advanced Concepts Schadenfreude is not an Asian shtick ................................... 18
Asia’s economic ascendancy isn’t expressed in its currencies the way you might think. By Howard L. Simons

Global Economic Calendar ........................ 22
Important dates for currency traders.

Questions or comments?

Submit editorial queries or comments to

November 2012 • CURRENCY TRADER


A publication of Active Trader ®

For all subscriber services:

Editor-in-chief: Mark Etzkorn Managing editor: Molly Goad Contributing editor: Howard Simons

q Howard Simons is president of Rosewood

Trading Inc. and a strategist for Bianco Research. of economic and financial market issues.

He writes and speaks frequently on a wide range

q Barbara Rockefeller ( is an international forecaster, trader, and consultant at Citibank and other financial

economist with a focus on foreign exchange. She has worked as a institutions, and currently publishes two daily reports on foreign

Contributing writers: Barbara Rockefeller, Marc Chandler, Chris Peters Editorial assistant and webmaster: Kesha Green

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), and How to Invest Internationally, published in Japan in 1999. A book tentatively titled How to Trade FX European hedge fund. is in the works. Rockefeller is on the board of directors of a large

q Daniel Fernandez is an active trader with a
President: Phil Dorman Publisher, ad sales: Bob Dorman Classified ad sales: Mark Seger

strong interest in calculus, statistics, and economtrading strategies, particularly algorithmic trad-

ics who has been focusing on the analysis of forex ing and the mathematical evaluation of long-term published his research and opinions on his blog “Reviewing Everything Forex,” which also includes reviews of commercial and ( Fernandez is a graduate of the free trading systems and general interest articles on forex trading National University of Colombia, where he majored in chemistry, concentrating in computational chemistry. He can be reached at system profitability. For the past two years he has

Volume 9, Issue 11. Currency Trader is published monthly by TechInfo, Inc., PO Box 487, Lake Zurich, Illinois 60047. Copyright © 2012 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.


November 2012 • CURRENCY TRADER

Trade like a pro with eSignal the platform the pros use

“eSignal delivers the industry’s best quality data at lightning fast speeds – even on your smart phone or mobile device.”
TODD HARRISON CEO and Founder, Minyanville Media, Inc.

eSignal – connecting the best in technical analysis software with your choice of broker
eSignal offers the serious trader everything you need to turn your market strategy into profit, all from one easy-to-use platform. Lightning-fast data: futures, stocks, options, Forex Real-time stock market scanners Advanced Charting with customizable indicators Trading integration with multiple brokers

Access the world's markets anywhere with eSignal’s mobile version, QuoTrek, offering streaming quotes, charts and news on-the-go.

Buy Online or Call Now * for your 30-day, risk-free trial. 800.245.9432 |

Award-Winning Products eSignal products have consistently been voted #1 by users worldwide

smarter trading tools

eSignal, an Interactive Data company. *If you’re not completely satisfied during the trial, cancel the service, and we will refund your subscription fees. Exchange fees are non-refundable.


Chinese yuan hurtles higher, but economic risks remain
Does China have the flu or just a cold?

China — now the world’s second largest economy — has stolen center stage in recent months amid much discussion about a hard vs. soft landing and what impact it could have on the rest of the global economy. In the meantime, the usually sluggish Chinese yuan has bumped higher in a surprising trend of appreciation, hitting its strongest level since the beginning of the modern FIGURE 1: DOLLAR/YUAN

Chinese currency trading system in 1994. Over the past two months, the yuan has gained about 2% vs. the U.S. dollar, a big move especially given the ongoing global economic uncertainty and recessionary growth conditions in Europe, a major trading partner for China. What is the latest economic data showing? Have the Chinese authorities managed to engineer a soft landing? Also, what’s behind the latest yuan strength and will this trend continue? Let’s take a look.

Recent numbers

Despite concerns about an economic slowdown in China, the Chinese yuan has rallied briskly vs. the dollar, reflected here in the USD/CNY downtrend.

Chinese third-quarter gross domestic product (GDP) slowed to a 7.4% yearover-year rate. That comes after an 8.1% GDP figure for the first quarter and a 7.6% reading in the second quarter. “Signs are coming out that third quarter will be the slowest point of growth,” says James Pressler, economist at Northern Trust Bank. “New investment programs were being initiated that would result in substantial activity in the fourth quarter. Last year their capital formation [grew] at 17.2%. They have kept a very strong
November 2012 • CURRENCY TRADER


investment level.” Capital formation includes money spent building and fixing factories, he noted. “The most recent data shows clear signs to date that economic activity may be stabilizing, but at a pace that is substantially below the norm of the past few decades,” says Francisco Larios, chief emerging markets economist at Decision Economics. Throughout the year, most economists have been downwardly revising their overall 2012 China GDP forecast. Currently, Credit Suisse forecasts a 7.5% GDP rate for China in 2012, following 2010’s 10.3% pace and 2011’s 9.2% pace. In mid-October, Nomura downwardly revised its 2012 forecast to a 7.7% pace from a 7.9% pace. A key factor in its lower estimate was a downward revision to Euroarea growth to -0.9% from a previous 0.8%. “[China has] already achieved a soft landing,” says Jay Bryson, global economist at Wells Fargo. “But I don’t expect it to go back to double-digit growth anytime soon, if ever. Going forward, a 7.5% to 8.0% pace could be the new norm.”

Growth drivers

While China is often thought of as an export-led economy, Pressler explained that internal economic dynamics have been changing. In 2011 domestic consumption attributed for 48% of GDP. “[China is] trying to make a shift to a more consumerled focus. I see a soft landing, but don’t expect a huge acceleration any time soon,” Bryson says. That is an encouraging factor for the overall Chinese economy, especially since weakness has been seen recently in the export sector. “[Chinese] exports have slowed simply because the U.S. recovery is sluggish and the Eurozone is in recession,” Pressler says. “These are the two largest economic blocs in the world and neither of them are knocking down your door — that makes your export side weak.” Pressler noted that prior to 2008, Chinese exports to the U.S. totaled around 21% to 22% of its total export picture, while goods to Europe totaled about 19% to 20%. However, Pressler says that as of September, Chinese exports to Europe fell to 15% and the U.S. has held steady at about 17% to 18% since the crisis.

Larios says. “China is exposed to a potential worsening of the conditions in Europe and the U.S. The headwinds have been strong. China kept monetary policy too tight too long. The undoing of that monetary policy is triggering the recovery.” A key measure to follow is the rate of lending growth in China. Larios explains that for Chinese monetary policy, the key instrument is the amount of credit placed through the state-owned banking sector. “Lending was contracting for the past year and a half to two years, but then began to increase at a slow pace in the early part of this year,” he says. “Third-quarter growth of new loans was at a year-over-year 30% pace.” Additionally, while generally people think of Chinese exports heading to the U.S., the trade relationship works both ways. “The U.S. exports a lot of processed, higher-end goods to China. But, that number is going down as domestic demand is slowing,” Pressler says. He noted that during the 2000-2007 period, U.S. exports to China averaged a 22.4% growth rate and as of August 2012 that rate stood at 2.2%. “A lot of its economic drivers are beginning to bog down,” Pressler says. “A global slowdown is weighing on it too.” Another potential risk on the horizon is the real estate asset bubble. “A lot of banks have financed projects that cannot make a return,” Pressler says. “The big four banks in China are some of the largest banks in the world. The risk is these institutions could see a rapid rise in non-performing loans. An economic slowdown feeds into that. A lot of areas have been built up and financed, but there is no return coming in. What does it mean for the banks? Will the government bail them out? Are they too big to fail? There very well could be a banking crisis.”

Regime change

Not out of the woods

Despite signs suggesting a soft landing, some market watchers are still holding their breath. “The soft landing still depends on the government and central bank action and there’s not much room for error,”
CURRENCY TRADER • November 2012

A changing of the guard will be taking place with the Nov. 8 Communist Party Congress. At that time, a new Politburo will be announced and a new president will take charge. The current vice president Xi Jinping is expected to become president, though President Hu Jintao will remain in office until March 2013. Moody’s Analytics economist Alaistair Chan wrote in an Oct. 17 research note: “The short and medium term economic impact will be minimal. Potential policy changes by the new leadership team will be constrained by the current five-year economic plan, which is in place until 2015.”


Bryson agrees: “We think we will see more of the same going forward,” he says. “But there is political risk as well. I wouldn’t expect it to wholeheartedly change the way things are done. Things typically move at a glacial pace [there].” Weisheng He, Asia FX and rates strategist at Citi thinks the new regime will be very pro-reform. “It should be positive for the currency,” He says. “I think the key will be the government policy, especially after the National Party Congress. If there’s more policy easing and the sentiment on China could continue the improvement, then there is more scope for CNY to continue to strengthen.”

FX action

“The recent appreciation in the Chinese yuan has been eyecatching in mostly range-bound forex markets,” says Sean Callow, senior currency strategist at Westpac Institutional Bank. “The 0.8% rise in Chinese yuan vs. the U.S. dollar over the past month is second only to the Korean won, in contrast to the usual situation where CNY is among the slowest-moving Asian currencies. We cannot attribute this to greater confidence in China’s export prospects or overall growth, as Chinese officials remain very concerned about weak demand in key export markets. Inflation is also not a great concern at the moment, sitting close to three year lows.”

appreciation pressure on the yuan after capital outflows earlier in the year. This would be a promising sign for Asian and indeed world growth if confirmed in coming months.” Weisheng He believes QE3 is critical. “In Q2 and Q3 Chinese corporates have refrained from selling USD, with the expectation that it will strengthen against the CNY. In the first eight months, they only sold $24 billion for traderelated purposes while accumulating a total trade surplus of almost $130 billion. However QE3 reversing the expectation [for a] strong USD, the corporates started selling the accumulated USD starting from late September. This pushed the spot lower and more clients joined the selling after seeing the price action.” Barclays says the strength could be short-lived. “We do not think this pace of CNY appreciation will be sustained near term, with the risk tilted toward a move higher in the USD/CNY fix, given the negative impact on Chinese export competitiveness,” wrote Barclays analysts.

Big picture

Political bent

Foreign policy is casting a shadow on the Chinese currency, as well. “The suspicion is that faster yuan appreciation is being allowed in hopes of cooling the anti-China rhetoric of the U.S. presidential campaign,” Callow says. “In particular, Mitt Romney’s promise to label China a currency manipulator, for the first time since 1994, has been noted with concern in Asia. President Obama has also criticized China’s trade policies.” Barclay’s analysts agreed with this view. “CNY appreciation also helps China head off criticism ahead of November’s U.S. presidential election and provides a means of furthering the rebalancing of Chinese economic growth away from exports and investment toward private consumption,” wrote Barclays analysts in an Oct. 19 foreign exchange research note. Callow offers up another possibility as well behind the recent strength. “The recent rise in CNY, which admittedly is not huge, might also be a sign of improved capital inflows to China,” he says. “Certainly the headline trade surpluses have been large recently, averaging $27.7 billion per month in the third quarter, adding to underlying

Pressler believes the yuan is still undervalued at its 6.26 level seen in late October. He pegged a fair valuation in the 5.90 area. Nonetheless, Pressler concludes the “yuan is very much a managed currency and it will be for some time. It’s one of the instruments of control by the PBOC to maintain growth within its export-based economy. The government is in the process of trying to make it more internationally open, but it is still very much controlled.” Vassili Serebriakov, currency strategist at Wells Fargo, agrees. “The currency is still undervalued over the longterm and we would expect it to appreciate,” he says. His firm has a 12-month yuan forecast of 6.17.

Trading China

Serebriakov noted that trading is available in the yuan primarily via non-deliverable forwards, and that some retail shops offer trading in the currency as well. However, he warns, “It’s a currency one has to be careful with. It’s heavily managed so it doesn’t necessarily always respond to fundamentals like other currencies do.” He offered up an alternative, more liquid forex play. “The Australian dollar has moved very consistently with the Chinese stock market. If you want to play the China story, you could do so with the Australian dollar,” Serebriakov says. For example, “If you’re bullish on Chinese growth, you could play it with the Australian dollar, because it’s a currency that would benefit greatly from that.” y

November 2012 • CURRENCY TRADER

If You Knew The True Market Support Levels, You Could Cut Your Losses Short And Let Your Profits Run For Your Entire Portfolio.
Test Drive AbleTrend 7.0 and Discover the True Market Support Levels for the Markets You Trade
1. Small blue dots are T2 stops for buy positions 2. Small red dots are T2 stops for sell positions showing the market support levels showing market resistance levels

Award Winning Trading Software

1997 - 2012

For Stocks, Futures FOREX & Options
3. T2 stops helps to define the retracements 4. T2 stops helps to define the reversal

AbleTrend 7 .0

AbleTrend T2 offers the following advantages:
1. T2 stops are defined by the market’s own support and resistance levels and are therefore 100% objective. 2. The scientific calculations behind T2 stops are universal, not curve-fitted. 3. T2 stops can be back-tested to reveal the characteristics of individual markets. 4. T2 stops are updated with each new tick so there are no delays. 5. T2 stops are proprietary, not shareware, and are for the exclusive use of software owners. 6. Successful AbleTrend users around the world have relied on T2. Their common conclusion: “Never fight T2 stops.”





SINCE 1995


Get Started Today!

Ablesys Corp. • 20954 Corsair Blvd. • Hayward, CA 94545 • Tel: 510-265-1883 • Fax: 510-265-1993

Call Free (888) 272-1688

Reader’s Choice Awards 1997-2012 in Stock Trading System; Futures Trading System & Option Trading System


CTA Firm 9

On THE MONEY ON the Money

Deciphering the yen
How much confidence should be placed in the current breakout?


The Euro is in a hopeless muddle and the next moves are anyone’s guess. The International Monetary Fund (IMF) says the Eurozone has an 80% chance of recession next year. Capital outflow from the Eurozone may reach $2.8 trillion next year. One rating agency downgraded Spain to one notch above junk but another agency left the ratings alone on the grounds that the European Central Bank (ECB) will save Spain with bond-buying. But the October summit that was supposed to finalize the second Greek bailout and possibly bring Spain into the bailout fold failed

to do either. Spain is playing chicken with the ECB over conditionality that the ECB needs to show who is boss. The peripheral sovereign debt crisis is meandering along and will either continue to do so or blow up at any moment. Forecasts for the Euro range from parity to 1.4000. It’s hard to know how to think about the currency. It’s not surprising that attention turns elsewhere. In late October, the dollar/yen was breaking out to the upside and the Nikkei was following in lockstep. Analysts see the breakout as a big deal that will raise the dollar/yen (USD/ Barbara Rockefeller JPY) by as much as 10%. In Figure 1, Currency /Trader Mag Nov 2012 Figure 1. Upside Breakouts, USD/JPY the dollar/yen rose over hand-drawn FIGURE 1: UPSIDE BREAKOUTS, USD/JPY red resistance and over both the 20-day (red) and 200-day (green) mov84.5 ing averages. 84.0 The problem is that over the years, 83.5 we keep seeing dollar/yen breakouts 83.0 — lots and lots of breakouts — and 82.5 even when a new high surpasses the 82.0 previous intermediate high, they all 81.5 fail. None has been a game changer. 81.0 The dollar/yen has been on a falling trajectory since June 2007 (123.76). 80.5 Actually, it can be said the dollar/yen 80.0 has been falling since the 1970s — it 79.5 was 357.70 in January 1970 and 150 in 79.0 July 1987. 78.5 How much confidence should be 78.0 placed in the current breakout? Or 77.5 will the failure of the breakout be the 77.0 move that provides another — possibly better — trading opportunity? 20 27 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 1 8 15 22 29 5 Nov March April May June July August September October First, let’s look at the second most recent upside breakout. The breakout The dollar/yen rose over hand-drawn red resistance and over both the 20-day started Feb. 14 with a low of 77.37 and (red) and 200-day (green) moving averages. ended March 15 at a peak of 84.18, Source: Chart — Metastock; data — Reuters and eSignal or a dollar gain of 8.8% in a month.
November 2012 • CURRENCY TRADER



Barbara Rockefeller Currency /Trader Mag Nov 2012 Figure 2. Finonacci Fan







This was a big breakout but it failed to hold. By May, USD/JPY had returned to 77.67, within spitting distance of the breakout starting point. Something similar seemed to be happening at the end of October. From a low of 77.13 on Sept. 13, the dollar/ yen put in a breakout over hand-drawn resistance to just more than 80.00 as of Oct. 23. A 50% retracement of the previous down move would take the dollar/ yen to 80.63, or 4.5%. An 8.8% rise, equivalent to the March rise earlier in the year, would take it to 83.92, or more than the March high itself. Another projection technique is the Fibonacci fan (Figure 2). This fan starts at the August 2008 high and shows a breakout of the top-most resistance line. We expect the dollar/yen to rise to the horizontal gold line marking the low from December 2008 at 87.19, or a gain of 13%. The problem with a fan of any type is that the starting point is absolutely critical. Start the fan somewhere else, and you get a different resistance line. In Figure 3, the fan starts at 262.89 from Feb. 22, 1985. By this measure, the dollar/yen has been tracking resistance and breaking it multiple times, only to see the breakouts fail. But even a failed breakout offers a trading opportunity. Table 1 lists four of the biggest breakouts, marked as circles on Figure 3. It’s no wonder the idea of a major
CURRENCY TRADER • November 2012




70 O N D 2008 M A M J J A S O N D 2009 M A M J J A S O N D 2010 M A M J J A S O N D 2011M A M J J A S O N D 2012 M A M J J A S O N D

This fan starts at the August 2008 high and shows a breakout of the top-most resistance line.
Source: Chart — Metastock; data — Reuters and eSignal
Barbara Rockefeller Currency /Trader Mag Nov 2012 Figure 3. Longer Term Finonacci Fan

275 270 265 260 255 250 245 240 235 230 225 220 215 210 205 200 195 190 185 180 175 170 165 160 155 150 145 140 135 130 125 120 115 110 105 100 95 90 85 80 75 70 65 60 55 50 45 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2

The fan starts at 262.89 from Feb. 22, 1985. By this measure, the dollar/yen has been tracking resistance and breaking it multiple times, only to see the breakouts fail.
Source: Chart — Metastock; data — Reuters and eSignal



Barbara Rockefeller Currency /Trader Mag Nov 2012 Figure 4. Euro/Yen















90 2008 M A M J J A S O N D 2010 M A M J J A S O N D 2011 M A M J J A S O N D 2012 M A M J J A S O N D 2013 M A

The pullbacks are much bigger in Euro/yen than in dollar/yen.
Source: Chart — Metastock; data — Reuters and eSignal
Barbara Rockefeller Currency /Trader Mag Nov 2012 Figure 5. USD/JPY (Black) vs. Nikkei Stock Index (Red)

1700 1600 1500 1400 1300 1200 1100 1000 0900 0800 0700 0600 0500 0400 0300 0200 0100 0000 9900 9800 9700 9600 9500 9400 9300 9200 9100 9000 8900 8800 8700 8600 8500 8400 8300 8200 8100 8000 7900

96.5 96.0 95.5 95.0 94.5 94.0 93.5 93.0 92.5 92.0 91.5 91.0 90.5 90.0 89.5 89.0 88.5 88.0 87.5 87.0 86.5 86.0 85.5 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 78.5 78.0 77.5 77.0 76.5 76.0 75.5 75.0 74.5 74.0 Mar Apr MayJun Jul AugSepOct NovDec 2011 Mar Apr MayJun Jul Aug SepOct NovDec2012 MarApr MayJun Jul Aug SepOct NovDec2013 MarA

NovDec 2010

USD/JPY and the Nikkei move in sync, with similar linear regression lines.
Source: Chart — Metastock; data — Reuters and eSignal

upside breakout is so appealing. The gains are big for trades lasting from as little as five months. Once you know the upside bias, you can trade in and out repeatedly. The problem is that each of these upside moves has at least one big pullback and sometimes two, meaning even the best trailing stop will get hit. Another bet to trade the yen breakout (if that’s what it is) is Euro/yen (Figure 4). The pullbacks are much bigger in Euro/yen than in dollar/ yen, and this time we have logic on our side — fear of the ongoing peripheral sovereign debt crisis and possible Grexit were good reasons for Japanese investors and traders to shun the Euro, but they went overboard — the EUR/JPY got oversold. In Figure 4, the EUR/JPY has already surpassed the 200-day moving average and is headed for hand-drawn resistance around 106.27 in late November and thence to the 50% Fibonacci retracement level around 108.82. This would be a gain of about 5.1% from the midday quote at 103.54 on Oct. 23. We may suppose that fear of the Euro will come back and the pullback will end at some point, whereupon the Euro/ yen downtrend will resume. If so, we know the target — the last lowest low (94.12 from July 24). Another way to play the yen breakout is with the Nikkei. The correlation of the yen and the Nikkei is probably the highest of all the intermarket relationships touted today, and one of the longest lasting and consistent. The reason is simple — a weaker yen helps exporters and Japan has an export-driven economy (Figure 5). Not only do they move in sync, they both display the same amount of trendedness, as shown by the linear regression lines. How to trade the Nikkei? Seeking Alpha judges that the iShares Japan
November 2012 • CURRENCY TRADER


Dates 11/25/88-4/17/90 4/18/95-8/11/98 11/26/99-1/31/02 1/17/05-6/22/07 Starting (Low) 120.70 80.52 101.26 101.70 Ending (High) 160.16 147.65 136.16 124.15 Percentage Change 32.7% 83.4% 34.5% 22.1%

(EWJ) tracks the Nikkei the best of the exchange-traded directions. The yen has a sad tendency over an extraordifunds available. Figure 6 shows a triangle whose resisnarily long stretch of history to appreciate, i.e., to return to tance line lands at 9,433 at year-end. If an upside move in the starting point of the correction and then become even the dollar/yen continues, and assuming the correlation stronger than before the correction. In October, analysts with the Nikkei/EWJ is consistent, that would be a gain said the yen is weakening because the Bank of Japan (BOJ) of 1.76% from the Oct. 22 closing price of 9,270. This may is expected to introduce additional quantitative easing at seem like a small amount compared to FX changes, but it’s month-end, perhaps ¥5-10 trillion. But BOJ stimulus over also a short period of time and most importantly, doesn’t the past two decades has had only the most fleeting of require assuming a breakout. effects on the yen and this is only an excuse for a move Seeing upside breakouts is the bane of the yen trader’s that has, possibly, taken on a life of its own. We can’t use existence. An Internet search for “yen breakout” yields the history of yen pullbacks to guess at the extent of this more than 1 million entries. But type in “pound breakout” one because the data is all over the place for amount and and you get 2.5 million entries. Google has a nervous duration. But if this particular breakout is real and breakdown over “Euro breakout” but “Swiss franc breakkeeps going, we know what to do with it — trade it out” gets 5.9 million entries. We deduce from this not that both ways. y the Swiss franc has almost six times as many breakouts as the yen, but rather that the concept of “breakout” itself has For information on the author, see p. 4. lost its value. If just about any move can be viewed as a breakout over some technical measure, Barbara Rockefeller Currency /Trader Mag Nov 2012 how good is the essential idea? Figure 6. Nikkei Stock Index (Black) vs. iShares Japan (EWJ)- Blue FIGURE 6: NIKKEI STOCK INDEX (BLACK) VS. ISHARES JAPAN (BLUE) Recently an analyst spoke, with a 12.0 straight face, of a currency “breaking 150 out” over a 200-hour moving aver11.5 age. The 200-hour moving average is a 100 little less than the well-known 10-day 11.0 moving average. It so happens that the 050 10.5 10-day moving average is actually a pretty good seat-of-the-pants indica000 10.0 tor, serving as support or resistance in many cases. To cut it down to 8.3 days 950 9.5 is like any other effort to front-run a 900 9.0 standard indicator. Besides, a backtest of eight- and 10-day moving averages 8.5 850 fails to deliver more gains than losses in the USD/JPY or any other currency 8.0 800 we tested. 7.5 In other words, the 200-hour “bench750 mark” is bunk, and calling a move 7.0 over the 200-hour a “breakout” is 700 bunk, too. In fact, most breakouts in 6.5 FX are false. What’s not false is the 8 D 2009 M A M J J A S O N D 2010 M A M J J A S O N D 2011 M A M J J A S O N D 2012 M A M J J A S O N D 2013 M A tendency for the dollar/yen and Euro/ The iShares Japan (EWJ) tracks the Nikkei the best of the exchange-traded yen periodically to stage an upmove, funds available. with the Nikkei highly correlated, and Source: Chart — Metastock; data — Reuters and eSignal these can be profitable to trade in both

CURRENCY TRADER • November 2012



Improving moving average signals with time filtering
Putting trade signals through a time filter can improve performance, but it’s a technique that needs to be applied logically and without curve-fitting.

Moving average crossovers have long been one of the most popular trading techniques. The idea that price will continue to move in the same direction that a short-term moving average crosses a longer-term moving average has provided the basis of many indicators and trading systems over the past century. However, such simple trading techniques are rarely profitable by themselves; proper money management and other modifications are necessary for them to produce satisfactory historical test results. One such modification is acting only on signals that FIGURE 1: SMA CROSSOVER SYSTEM

occur during specific advantageous time periods. For example, when applying shorter-term (intraday) moving average crossover techniques to the Euro/U.S. dollar (EUR/USD) pair, it’s apparent that signals followed by price momentum generally occur when price is in periods of increasing volume and volatility but outside market opening times — e.g., near the end of the Asian trading session and the middle of the European trading session. Taking trades within such periods can significantly increase a trading system’s profitability (especially if a tight stop-loss is in place) because it improves the odds of catching longer-term trend moves. Let’s take a closer look at the impact a time filter can have on a moving average crossover technique.

Trading system rules

The system goes long or short based on upside or downside crossovers of 40-bar and 80-bar simple moving averages. An initial stop of half the 14-bar ATR is placed above or below the entry price.

The trading strategy we will test is a moving average crossover system traded on the one-hour (60-minute) time frame. The fast moving average is a 40-bar simple moving average (SMA) and the slow moving average is an 80-bar SMA (these values were not optimized). The system goes short on the last closed bar whenever the fast MA crosses below the slow MA and goes long whenever the fast MA crosses above the slow MA. All trades enter an initial stop-loss of 50% of the 14-period average true range (ATR), and trade size is adjusted to risk 1% of account equity per trade. If a trade is opened and another signal in the same direction triggers, the stop-loss level is updated to reflect the most recent signal; if an opposite signal occurs, the trade is closed and a trade
November 2012 • CURRENCY TRADER October 2010 • CURRENCY

in the new direction is opened. The strategy was tested on followed by a rally, but the position had given back all its the EUR/USD pair from January 2000 to July 2012, with a profits (and turned into a loss) by the time an offsetting two-pip (0.0002) trade cost assessed per signal, and a startsignal occurred. ing account balance of $100,000. The idea we will explore next is that limiting trades to Figure 1 shows a sample trade from May 2012. A short certain times of the day will increase the system’s profposition was opened at 1.3134 after the 40-bar SMA itability by reducing the number of entry signals and crossed below the 80-bar SMA. At the time of the trade sig- increase trade lengths. nal the 14-bar ATR was 0.0090, so a stop-loss for the trade was immediately entered at 1.3179 (1.3134 + 0.5*0.0090). Time filtering If the account balance at the time was $100,000, the trade Because volume and volatility increase in the EUR/USD size would have been 0.22: ((100,000*0.01/45)/100 = 0.22, at the opening of the European and U.S. forex trading seswhere 45 is the stop loss size in pips and 100 is the amount of USD won/ FIGURE 2: UNFILTERED SYSTEM EQUITY CURVE lost per pip per standard lot (if the account has a 100,000 USD contract size per standard lot). Figure 2’s equity curve shows the system was barely profitable by the end of the test, and it spent more than half the test period in the red — a massive 52% drawdown that lasted more than 3,000 calendar days. The strategy’s failure stems from taking an excessive number of entry signals because of the frequency of crossovers; trades were reversed very quickly and rarely closed with any substantial profit. Figure 3 shows two signals that typify many of the losing trades. The first trade, a short signal, was stopped out before price experienced any significant downside followThe system performed poorly, eking out a small profit by the end of the test through. The second trade, a buy, was period, but only after spending most of it in a huge drawdown.

CURRENCY TRADER • November 2012



Unfiltered Avg. annualized return Maximum drawdown Reward/risk ratio Win pct. Number of trades Ulcer Index 2.9% 52.3% 2.39 30% 1000 28.57 Filter 1 8.56% 18.16% 3.43 29% 364 7.88 Filter 2 11.6% 12.2% 4.64 31% 201 4.42

The time filters improved virtually all major aspects of system performance, and reduced the number of trades dramatically.


The system was very active and got knocked out of trades at inopportune times.


Both filter 1 (green) and filter 2 produced much smoother and more profitable equity curves than the original system.

sions, we can attempt to increase the significance of the entry signals by trading only those hours that precede these periods. This means we will alter the system to execute trade signals, including those triggered by the stop-loss, only during certain hours. The system was tested filtering hours based on the European session time (London time). Two time-filtering approaches were tested to assess the effect of trading the European session opening. The first approach took signals only between 3 a.m. and 12 p.m., while the second took signals between 3 a.m. and 5 a.m. and 10 to 12 p.m. The first filter allows trading during most of the Asian and European sessions, while the second avoids the European market open by excluding 5 a.m. to 10 a.m. Table 1 and Figure 4 show the results of using the time filters. The strategy’s characteristics improved significantly for both, although filter 2, which eliminated trades during the European market open, showed an even bigger increase in profitability. It’s interesting to note the winning percentage didn’t change significantly with the addition of the filters, suggesting the enhanced profitability does not come from filtering bad entries, but rather from much better exits. The most obvious confirmation of this comes from the reward-to-risk ratio, which increased dramatically with filtering. The maximum drawdown also shrank significantly, clearly because of the much larger average profitable trade. The number of trades dropped dramatically — nearly by 80% in the case of
November 2012 • CURRENCY TRADER


Related Reading
Daniel Fernandez Currency Strategy Collection This 20-article set contains forex trading strategy articles written by Currency Trader contributor Daniel Fernandez between November 2009 and December 2011. These articles cover trading ideas and systems based on everything from price patterns and indicators to seasonal tendencies and market relationships.


filter 2. Also, the dramatically lower Ulcer Index readings for the filtered versions of the system reflect the reduction in downside volatility, a fact underscored by the much smoother equity curves in Figure 4. All these improvements suggest exit signals that occur outside the filtered periods lead to prematurely aborted trades and additional losses. Figure 5 shows a specific example of how time filtering improved the system. This short trade from September 2011 (initiated at the upper left of the chart) was ultimately closed with a gain of more than 800 pips. In the absence of time filtering, however, it would have been closed much earlier (at the first upward moving average crossover). Instead, the position was allowed to continue and the stop-loss was adjusted according to new short signals that occurred during valid trading hours, leading to the final exit at the updated stop-loss price. Figure 6, which compares the annual returns of the different versions of the system, highlights how time filtering increased the smoothness of returns. Filter 2’s annualized profits had the lowest standard deviation.

The time filter prevented many trades from being closed before they could maximize their profits.


Use time filters, but avoid curve-fitting

Although we’ve seen how time filters can significantly increase the profitability of a simple moving average crossover system, it’s important to base such filters on rational ideas and filter larger blocks of time (e.g., several hours). Filtering single hours or attempting to filter only losing trades with hindsight will result in curvefitting. y For information on the author, see p. 4.
CURRENCY TRADER • November 2012

The annual returns also underscore the filtered systems’ great consistency and reduced volatility.



Schadenfreude is not an Asian shtick
Asia’s economic ascendancy isn’t expressed in its currencies the way you might think.


Of all the sentiments the human race embodies, schadenfreude, or a smug satisfaction at the misfortunes of others, is amongst the most lamentable. Yet it is so embedded in our expectations it seems natural the dollar’s travails, once joined by the Euro’s travails, had to redound to the benefit of someone else. A quick spin of the globe might suggest Australia or Canada as beneficiaries, but those two economies combined are not large enough to offset the losses elsewhere. The same holds for smaller European countries — Switzerland in particular, which has enough trouble absorbing flight capital out of the Eurozone let alone the United States, too. This leaves Asia by default. Bloomberg and J.P. Morgan have created an index of Asian currencies (other than TABLE 1: BLOOMBERG-J.P. MORGAN ASIAN CURRENCY INDEX
China Korea Singapore Hong Kong India Taiwan Malaysia Thailand Indonesia Philippines CNY KRW SGD HKD INR TWD MYR THB IDR PHP 36.05% 15.48% 9.64% 8.76% 7.81% 6.67% 5.16% 4.91% 3.19% 2.33%

Australia and Japan’s), the composition and weights of which are shown in Table 1. While its history goes back to September 1994, we will confine the analysis to the post-Sept. 27, 2005 period when the Chinese yuan (CNY) started to trade more freely in the interbank market. As an aside, the rise of Asia in general and China specifically might have been unthinkable in the previous culture; you are invited to watch the movie version of Pearl Buck’s The Good Earth to see how China was regarded during the 1930s.

Carry into the Asian index

Although in mid-2011 the Asian index hit its highest level against the USD since the Asian crisis of 1997-1998, this is not a universal experience against other major currencies. If we map the excess carry return into the index from a group of major currencies, an unmistakable conclusion emerges: Only the USD and GBP have been weakening consistently against the Asian index (Figure 1). The Australian dollar (AUD), Swiss franc (CHF), and Japanese yen (JPY) have strengthened rather substantially since the global market low in March 2009; all for different reasons. The AUD’s strength has been a function of its strong commodity-led export growth and campaign to fight imported inflation via higher short-term interest rates. The CHF has strengthened mostly as a sanctuary from the Euro (EUR), and the JPY has strengthened under a combination of persistent disinflationary pressures and the country’s current account surplus. We can sum up Figure 1 simply as, “The Asian index is not stronger; the USD is absolutely weaker.”


November 2012 • CURRENCY TRADER


The carry trades

125 120 Excess Carry Return, Sep. 27, 2005 = 100 115 110 105 100 95 90 85 80 75 70 65 60 Mar-06 Sep-05 55

Both the USD and JPY have been funding vehicles for carry trades into equity markets for years (see “The long, awful life of the dollar carry trade,” and “Requiem for a carry trade,” Currency Trader, January and February 2012, respectively). If we construct an equity index in the composition and weights of the Asian currency index, how does it relate to the carry trades from the USD and JPY into the currency basket? That reconstructed equity index is presented in Figure 2 in USD terms on both an absolute total return basis and relative to the MSCI World index. A breakpoint is superimposed on the March 14-17, 2008 weekend when Bear Stearns went under and was rescued by J.P. Morgan. Although this may not seem like the logical breakpoint in the data series given all the other candidates available, the relationship between the USD excess carry return and the absolute Asian equity index’ return seemed to change significantly at that point, as shown in Figure 3. Prior to March 2008, the absolute USD total return of the Asian equity index was a quadratic function of the excess carry return from the USD into the Asian currency index. A little bit of money went a long way in encouraging risk. After March 2008, the relationship switched to a more linear one; gains and losses on Asian equities rose and fell with gains and losses on the currency
CURRENCY TRADER • November 2012













Only the USD and GBP have been weakening consistently against the Asian index.

275% 250% 225% 200% 175% 150% 125%
Asian Index


Total Return, USD Terms, Sep. 27, 2005 = 100%

200% Relative Total Return, USD Terms Sep. 27, 2005 = 100%




100% 75%

Asia Vs. World
















The vertical line marks the March 14-17, 2008 weekend when Bear Stearns went under and was rescued by J.P. Morgan.






280% 270% 260% 250% Asian Index Performance, Sep. 27, 2005 = 100% 240% 230% 220% 210% 200% 190% 180% 170% 160% 150% 140% 130% 120% 110% 100% 95.0 97.5 100.0 102.5 90% Pre-March 17, 2008   Post-March 17, 2008  

Excess Carry Return, USD To Asian Basket, Sep. 27, 2005 = 100

Before March 2008, the absolute USD total return of the Asian equity index was a quadratic function of the excess carry return from the USD into the Asian currency index. After March 2008, the relationship was more linear.

210% 200% 190% 180% Relative Return, Asian To World Index Sep. 27, 2005 = 100% 170% 160% 150% 140% 130% 120% 110% 100% 95.0 97.5 100.0 102.5 105.0 107.5 110.0 112.5 115.0 90% Pre-March 17, 2008   Post-March 17, 2008  

Excess Carry Return, USD To Asian Basket, Sep. 27, 2005 = 100

The same analysis noted for Figure 3 generally holds (but with less statistical robustness) when the dependent variable is switched to the Asian equity index’s relative total return.

carry, but not at a turbocharged rate. The same analysis holds in general, but with less statistical robustness, for the post-March 2008 observations, when we switch the dependent variable to the Asian equity index’ relative total return (Figure 4). This is attributable to the large increase in volatility, both lower and then higher, over the two years following March 2008. Now comes the surprising part, and that’s the relative unimportance of the yen carry trade to the Asian equity index. If this analysis had been extended back to 1994 (had the data been available), the yen carry trade would have been the dominant factor, especially in the late 1990s. C’est la vie. However, Japan’s aborted attempt to end the carry trade by raising short-term interest rates and withdrawing excess reserves in May 2006 lowered its role in financing global financial fun-and-games. This role was assumed in 2008 by the dollar. The result is an odd combination of a weak negative relationship between the absolute performance of the Asian equity index and the excess carry return of the yen into the Asian currency index prior to March 2008, and an erratically positive relationship thereafter







November 2012 • CURRENCY TRADER

280% 270% 260% 250% Asian Index Performance, Sep. 27, 2005 = 100% 240% 230% 220% 210% 200% 190% 180% 170% 160% 150% 140% 130% 120% 110% 100% 75.0 77.5 80.0 82.5 85.0 87.5 90.0 92.5 95.0 97.5 100.0 102.5 105.0 107.5 110.0 90% Pre-March 17, 2008   112.5 115.0 117.5 120.0 122.5 122.5 125.0 125.0 Post-March 17, 2008  

(Figure 5). In addition, if we transform the dependent variable from absolute to relative performance, the relationship tightens up (Figure 6); it is almost as if causality shifts to the point where we have to wonder whether the absolute performance of Asian equities affects the yen carry trade more than vice versa. This is a highly plausible argument: A downturn in stock market performance could and probably did lead Japanese investors to cash in their shareholdings and repatriate the yen.

Excess Carry Return, JPY To Asian Basket, Sep. 27, 2005 = 100

The result of Japan’s aborted attempt to end the carry trade was a weak negative relationship between the absolute performance of the Asian equity index and the excess carry return of the yen into the Asian currency index prior to March 2008, and an erratically positive relationship after.

Going forward

Should we expect the problems of the Eurozone and U.S. to make the Asian basket, more than onethird of which is the CNY, a leading alternative in global finance and trade? Probably not. Until and unless China allows full convertibility of the CNY and ceases its on-again, off-again revaluation policies, the CNY will not become a reserve currency or a vehicle for pricing global trade. The other nine currencies in the basket are too small and unrelated to constitute a currency bloc. Finally, after the experience of the Euro, it may be a long time, if ever, before anyone carries the day with a “Let’s create a common currency” argument. y For information on the author, see p. 4.

210% 200% 190% 180% Relative Return, Asian To World Index Sep. 27, 2005 = 100% 170% 160% 150% 140% 130% 120% 110% 100% 75.0 77.5 80.0 82.5 90% Pre-March 17, 2008   85.0 87.5 90.0 92.5 95.0 97.5 100.0 102.5 105.0 107.5 110.0 112.5 115.0 117.5 120.0 Post-March 17, 2008  

Excess Carry Return, JPY To Asian Basket, Sep. 27, 2005 = 100

The relationship from Figure 5 tightens up when the dependent variable is changed from absolute to relative performance.

CURRENCY TRADER • November 2012



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: ross domestic product G ISM: nstitute for supply I management LTD (last trading day): The final day trading can take place in a futures or options contract. PMI: urchasing managers index P PPI: roducer price index P 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.

1 2 3 4 5 6 7

U.S.: October ISM manufacturing report Australia: Q3 PPI Canada: October employment report U.S.: October employment report


23 24 25 26

Canada: October CPI Mexico: Q3 GDP and October employment report

27 South Africa: Q3 GDP 28 U.S.: November fed beige book
Brazil: October CPI and PPI Australia: October employment report Mexico: Oct. 31 CPI and October PPI UK: Bank of England interest-rate announcement ECB: Governing council interest-rate announcement Germany: October CPI LTD: November forex options; November U.S. dollar index options (ICE)

U.S.: October durable goods





U.S.: Q3 GDP Canada: October PPI Germany: October employment report South Africa: October PPI U.S.: October personal income Brazil: Q3 GDP Canada: Q3 GDP France: September PPI India: Q3 GDP and October CPI Japan: October employment report and CPI

10 11 12 Japan: Q3 GDP and October PPI 13 PPI 14 15 16 17 18

1 2 3 4 5


UK: October employment, CPI, and U.S.: October PPI and retail sales France: October CPI India: October PPI UK: September employment report U.S.: October CPI Germany: Q3 GDP


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

19 employment report 20 21 22

Hong Kong: August-October U.S.: October housing starts Germany: October PPI Japan: Bank of Japan interest-rate announcement U.S.: October leading indicators South Africa: October CPI Brazil: October employment report Hong Kong: October CPI Mexico: Nov. 22 CPI


U.S.: November ISM manufacturing index Canada: Bank of Canada interestrate announcement Australia: Q3 GDP Australia: November employment report Brazil: November PPI France: Q3 employment report UK: Bank of England interest-rate announcement ECB: Governing council interest-rate announcement U.S.: November employment report Brazil: November CPI Canada: November employment report Mexico: November CPI and November PPI LTD: December forex options; December U.S. dollar index options (ICE)


November 2012 • CURRENCY TRADER

Market EUR/USD AUD/USD GBP/USD JPY/USD CAD/USD MXN/USD CHF/USD U.S. dollar index NZD/USD E-Mini EUR/USD Sym EC AD BP JY CD MP SF DX NE ZE Exch CME CME CME CME CME CME CME ICE CME CME Vol 240.5 114.6 98.2 82.5 75.6 31.8 28.8 18.0 14.6 4.1 OI 219.5 168.0 166.7 134.6 189.0 210.7 36.9 44.0 30.8 5.9 10-day move / rank -0.62% / 67% 1.12% / 40% -0.20% / 19% -0.89% / 53% -1.19% / 38% -1.46% / 92% -0.61% / 67% 0.66% / 92% 1.11% / 100% -0.64% / 67% 20-day move / rank 0.34% / 16% 1.40% / 45% -0.38% / 7% -1.89% / 81% -1.44% / 78% -1.07% / 73% 0.40% / 18% 0.20% / 23% -0.41% / 9% 0.32% / 16% 60-day move / rank 4.59% / 57% -1.98% / 37% 2.99% / 60% -1.74% / 75% -0.01% / 0% 0.36% / 5% 3.95% / 57% -2.75% / 40% 0.04% / 0% 4.56% / 57% Volatility ratio / rank .21 / 38% .21 / 30% .24 / 50% .54 / 67% .38 / 93% .28 / 78% .25 / 60% .24 / 65% .24 / 67% .21 / 38%

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 market’s 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 today’s close. 20-day move: The percentage price move from the close 20 days ago to today’s close. 60-day move: The percentage price move from the close 60 days ago to today’s 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 Sept. 30 ranked by September 2012 return) September return 5.90% 5.81% 5.36% 5.11% 4.90% 4.18% 3.95% 3.20% 2.96% 2.25% 7.26% 3.80% 1.87% 1.41% 1.39% 1.28% 0.92% 0.73% 0.63% 0.51% 2012 YTD return 24.03% 4.55% 0.71% 12.25% -0.07% 22% 7.58% 4.95% 6.32% 0.20% 37.59% 19.65% 11.65% -2.80% 7.70% 8.54% 8.69% 14.48% 2.72% 0.49% $ Under mgmt. (millions) 51.4 124.1 10.4 19.3 122 45 81.2 2662 65 150 1.2 5.3 10 9.4 6.5 9.5 1.5 5 2.5 1.6

Trading advisor 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 24FX Management Ltd Trigon (Foreign Exchange) Iron Fortress FX Mgmt Silva Capital Mgmt (Cap. Partners) Cambridge Strategy (Asian Mrkts) MIGFX Inc (Retail) Sharpe+Signa (Currency) FDO Partners (Emerging Markets) Cambridge Strategy (Emerging Mkts) Hathersage (Daily Currency) Exclusive Returns (Exodus) JarrattDavis (Managed FX) ROW Asset Mgmt (Currency) TMS (Arktos GCS II) GAM Currency Hedge (USD) Capricorn Currency Mgmt (FXG10 USD) Valhalla Capital Group (Int'l AB) KMJ Capital (Currency) Northbridge Park Asset Mgmt (Marco FX) Four Capital (FX)

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 • November 2012



Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Currency Chinese yuan Thai baht Singapore dollar Swiss franc Taiwan dollar Euro Hong Kong dollar Brazilian real New Zealand dollar Australian Dollar Russian ruble Great Britain pound Indian rupee Canadian dollar Swedish krona Japanese yen South African rand Oct. 26 price vs. U.S. dollar 0.159055 0.03258 0.819205 1.07266 0.034195 1.297615 0.129025 0.493615 0.82213 1.03666 0.03192 1.60884 0.01865 1.00693 0.149555 0.01249 0.114505 1-month gain/loss 0.76% 0.74% 0.50% 0.36% 0.35% 0.35% 0.03% 0.03% -0.24% -0.58% -0.75% -0.86% -1.01% -1.43% -1.88% -2.80% -5.86% 3-month gain/loss 0.58% 3.23% 3.18% 6.40% 3.14% 7.18% 0.09% 0.87% 4.68% 1.04% 4.81% 3.80% 4.78% 2.65% 4.29% -2.35% -2.96% 6-month gain/loss 0.44% 0.71% 2.02% -2.38% 0.81% -1.73% 0.12% -7.05% 1.13% 0.36% -6.26% -0.29% -0.59% -0.72% 0.72% 1.63% -10.99% 52-week high 0.159055 0.0329 0.8213 1.1599 0.0343 1.4168 0.129025 0.5917 0.8415 1.0808 0.0345 1.6261 0.0203 1.0334 0.1572 0.0132 0.1338 52-week low 0.1559 0.031 0.7612 1.0074 0.032 1.2099 0.1282 0.4801 0.7397 0.9681 0.0291 1.5308 0.0174 0.9534 0.1374 0.0119 0.113 Previous 15 12 8 4 6 2 14 16 9 17 7 3 1 11 13 10 5

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

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

Oct. 26 21,545.57 41,836.92 4,496.30 36,871.71 6,600.80 15,584.86 5,806.70 3,435.09 12,300.30 3,057.51 8,933.06 18,625.34 7,231.85 1,411.94 57,277.00

1-month gain/loss 4.96% 3.73% 2.60% 1.66% 0.92% 0.87% 0.67% 0.59% 0.55% 0.36% 0.30% -0.04% -0.61% -1.49% -5.29%

3-month gain/loss 14.04% 2.10% 7.73% 6.35% 5.15% 17.98% 4.19% 7.11% 5.67% 1.76% 5.80% 11.93% 9.86% 3.82% 6.06%

6-month gain loss 3.54% 6.69% 1.15% 7.19% 7.81% 7.41% 1.01% 6.37% 1.27% 2.55% -6.58% 8.73% 7.30% 0.85% -7.91%

52-week high 21,839.60 42,751.00 4,602.50 37,274.68 6,797.70 17,158.70 5,989.10 3,600.48 12,740.50 3,110.86 10,255.20 19,137.30 7,478.53 1,474.51 68,970.00

52-week low 17,613.20 34,573.00 4,033.40 30,956.19 5,307.80 12,295.80 5,076.20 2,793.22 11,280.60 2,606.52 8,135.79 15,135.90 5,366.50 1,158.66 52,213.00

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

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

November 2012 • CURRENCY TRADER

Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Account balance Singapore Norway Switzerland Taiwan Province of China Netherlands Sweden Germany Hong Kong SAR Korea Japan Ireland Belgium United Kingdom Australia Canada Czech Republic United States Italy Spain 2011 56.989 70.289 69.538 41.6 70.901 37.73 203.929 12.908 26.505 119.304 2.484 -5.119 -46.578 -33.522 -48.906 -6.348 -465.928 -71.67 -52.174 Ratio 21.932 14.48 10.524 8.919 8.46 6.927 5.653 5.297 2.375 2.034 1.123 -0.995 -1.916 -2.254 -2.812 -2.95 -3.091 -3.26 -3.526 2010 55.509 51.878 78.566 39.873 55.057 31.814 199.92 12.385 29.394 204.031 2.365 6.641 -57.645 -35.711 -49.375 -7.601 -441.952 -73.18 -62.928 2012+ 56.142 76.09 62.613 32.035 63.466 37.561 182.827 10.496 22.314 95.39 3.712 -0.623 -80.589 -62.969 -59.921 -4.63 -486.525 -29.222 -26.447

Source: International Monetary Fund, World Economic Outlook Database, October 2012

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 0.75 0.5 1 0-0.25 3.25 2.5 7.5 2.75 1.875 8 5 Last change 0.5 (Dec 08) 0-0.1 (Oct 10) 0.25 (July 12) 0.5 (March 09) 0.25 (Sept 10) 0.25 (Aug 11) 0.25 (Oct 12) 0.5 (March 11) 0.5 (Aug 12) 0.25 (Oct 12) 0.125 (June 11) 0.5 (Apr 12) 0.5 (July 12) April 2011 0-0.25 0-0.1 1.25 0.5 1 0.25 4.75 2.5 12 3 1.75 6.75 5.5 October 2011 0-0.25 0-0.1 1.5 0.5 1 0-0.25 4.75 2.5 11.5 3.25 1.875 8.5 5.5

CURRENCY TRADER • November 2012


Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Currency pair Franc / Yen Euro / Yen New Zeal $ / Yen Aussie $ / Yen Pound / Yen Franc / Canada $ Euro / Canada $ Canada $ / Yen Euro / Pound Euro / Aussie $ Aussie $ / Canada $ Pound / Canada $ Euro / Real Euro / Franc Pound / Aussie $ Aussie $ / New Zeal $ Aussie $ / Real Aussie $ / Franc Pound / Franc Canada $ / Real Yen / Real Symbol CHF/JPY EUR/JPY NZD/JPY AUD/JPY GBP/JPY CHF/CAD EUR/CAD CAD/JPY EUR/GBP EUR/AUD AUD/CAD GBP/CAD EUR/BRL EUR/CHF GBP/AUD AUD/NZD AUD/BRL AUD/CHF GBP/CHF CAD/BRL JPY/BRL Oct. 26 85.91 103.92 65.84 83.02 128.845 1.06528 1.28869 80.64 0.806555 1.251725 1.02953 1.597775 2.628805 1.2097 1.551945 1.26093 2.100145 0.966435 1.49985 2.03991 0.025295 1-month gain/loss 3.29% 3.28% 2.67% 2.32% 2.03% 1.82% 1.81% 1.44% 1.22% 0.94% 0.86% 0.58% 0.32% -0.02% -0.28% -0.35% -0.61% -0.95% -1.22% -1.46% -2.86% 3-month gain/loss 8.99% 9.78% 7.22% 3.49% 6.32% 3.66% 4.41% 5.14% 3.25% 6.07% -1.57% 1.12% 6.25% 0.72% 2.73% -3.48% 0.16% -5.05% -2.45% 1.76% -3.21% 6-month gain loss -3.90% -3.26% -0.45% -1.20% -1.84% -1.68% -1.02% -2.26% -1.44% -2.08% 1.08% 0.42% 5.72% 0.66% -0.65% -0.77% 7.97% 2.80% 2.14% 6.81% 9.27% 52-week high 91.90 110.83 68.81 88.31 132.81 1.1523 1.4082 84.49 0.8799 1.3764 1.0755 1.6321 2.6639 1.2406 1.6123 1.3229 2.1525 1.0328 1.5434 2.0835 0.0262 52-week low 78.81 94.65 57.23 75.04 117.58 1.0128 1.2164 73.69 0.7779 1.1614 0.9951 1.5515 2.2481 1.2003 1.4637 1.2436 1.7742 0.894 1.3877 1.6917 0.021 Previous 11 5 15 19 10 9 4 17 13 1 18 8 2 12 3 20 16 21 14 7 6


November 2012 • CURRENCY TRADER

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

Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2

Release date
9/21 8/31 8/31 9/28 8/14 9/27 9/11 9/5 8/10 8/31 8/13 8/24

21.2% 6.6% 0.1% 0.0% 0.7% 1.0% 1.2% 1.0% -1.5% 3.4% 0.3% -0.5%

1-year change
15.0% 5.6% 3.5% 0.5% 1.7% 2.2% 8.3% 3.2% 3.6% 12.0% 1.4% 4.1%

Next release
12/21 11/30 11/30 12/28 11/15 12/21 12/6 12/5 11/16 11/30 11/12 11/23


Unemployment AMERICAS

Q2 Sept. Sept. Q2 Sept. June-Aug. Sept. July-Sept. Sept. Q3

Release date
8/21 10/25 10/5 9/6 10/30 10/17 10/11 10/18 10/30 10/31

7.2% 5.4% 7.4% 9.7% 5.1% 7.9% 5.3% 3.3% 4.2% 1.9%

0.1% 10.0% 0.1% 0.1% -0.3% -0.3% 0.0% 0.1% 0.0% -0.1%

1-year change
-0.1% -0.6% 0.2% 0.6% -0.2% -0.8% 0.1% 0.1% 0.0% -0.1%

Next release
11/19 11/22 11/2 12/11 11/2 11/14 11/8 11/19 11/30 1/31



Argentina Sept. Sept. Sept. Sept. Sept. Sept. Sept. Q3 Sept. Sept. Sept. Sept. Brazil Canada France Germany UK S. Africa Australia Hong Kong India Japan Singapore

Release date
10/12 10/19 10/19 10/11 10/11 10/16 10/24 10/24 10/22 10/31 10/26 10/23

0.9% 0.6% 0.2% 0.3% 0.0% 2.2% 0.9% 1.4% 0.4% 0.5% 0.1% 0.6%

1-year change
10.0% 5.3% 1.2% 1.9% 1.2% 0.4% 5.5% 2.0% 3.8% 9.1% -0.3% 4.7%

Next release
11/14 11/7 11/7 11/14 11/23 11/13 11/21 1/23 11/22 11/30 11/30 11/23



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

Sept. Sept. Sept. Sept. Sept. Sept. Q2 Q2 Sept. Sept. Sept.

Release date
10/12 11/29 10/31 10/19 10/16 10/25 7/23 9/13 10/15 1/10 10/29

1.0% 0.5% 0.3% 0.3% 0.5% -4.0% 0.5% 1.5% 1.1% 0.3% 0.2%

1-year change
12.8% -0.3% 2.9% 1.7% 2.5% 4.2% 1.1% -0.7% 7.8% 0.3% 0.4%

Next release
11/29 11/29 11/30 11/20 11/13 11/29 11/2 12/13 11/14 11/12 11/29

As of Oct. 30 LEGEND: Change: Change from previous report release. NLT: No later than. Rate: Unemployment rate. CURRENCY TRADER • November 2012 27


The virtue of patience.
Date: Oct. 24 and 25, 2012. Entry: Long the British pound/U.S. dollar pair (GBP/USD) at 1.6004 and 1.6123. Reason for trade/setup: The pound/dollar pair, which arguably has been in a massive triangular consolidation since 2009 and certainly has been in a large trading range (between roughly 1.5270 and 1.6300) since late 2011, touched the top of that range on Sept. 21 and subsequently swung lower. Anticipating a move to test the lower boundary of the range, the break below short-term support around 1.6000 on Oct. 9 (which dropped the pair to 1.5913) signaled renewed short-term selling. A limit order was set to enter on the expected rebound and test of the breakdown level. Initial stop: 1.6076. Initial target: 1.5921; take partial profits and lower stop. Second target: 1.5794.

Source: TradeStation

Exit: 1.6076 (first trade); 1.6047 (second trade). Profit/loss: -0.0072 (first trade); +0.0076 (second trade). Outcome: The initial trade entry was a classic case of over-eagerness: Price rebounded as anticipated, but traded

right through the entry level and stopped out the trade the next day. A more logical trade entry would have been in the vicinity of the downtrend line shown in the daily chart inset — the point at which the upswing stalled out, in fact. As a result, after the market traded as high as 1.6143, we went short again at 1.6123 as upside momentum faded, with an initial target around 1.6050 and a second target at the original trade’s initial target level. This position hit its initial profit target two days later. As of Oct. 29, the stop had not been lowered, but strong move below 1.6000 would result in it being lowered to just above 1.6100. 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 are often used as points at which to liquidate a portion of a trade to reduce exposure. As a result, initial (pre-trade) reward-risk ratios are conjectural by nature.

TRADE SUMMARY Date 10/24/12 10/25/12 Currency pair GBP/USD Entry price 1.6004 1.6123 Initial stop 1.6076 1.6177 Initial target 1.5921 1.6047 IRR 1.15 1.41 Exit 1.6076 1.6047 Date 10/25/12 10/29/12 P/L point -0.0072 0.0076 % -0.45% 0.47% LOP 0.0003 0.0118 LOL -0.0139 -0.0017 Trade length 1 day 2 days

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).


November 2012 • CURRENCY TRADER

Sign up to vote on this title
UsefulNot useful