ASIA PACIFIC’S FIRST FOREX MAGAZINE

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Currency Outlook 2009
Dollar-Yen
A New

www.forexjournal.com

Volume 2, Issue 1

Historic Low In 2009
Gamma Trading Options On Forex Part II
ISSN 1793-8457 MICA(P) 274/04/2008
Bahrain - BD 2.0 Hong Kong - HK$68 Kuwait - KD 2.0 Oman - RD 2.0 Qatar - QR 20 Saudi Arabia - SR 20 Singapore - S$11.00 UAE - AED 20

Why Choosing A Forex Broker Is So Confusing

So You

Think You Can Trade

How To Trade

A News Breakout

A Declaration Of Independence

CONTENTS

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FROM THE EDITOR

10 LETTERS TO FOREX JOURNAL TECHNICAL ANALYSIS
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Chris Capre discusses a breakout strategy to employ when trying to trade Forex news events.
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HOW TO TRADE A NEWS BREAKOUT

PSYCHOLOGY
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Abdul Khan discusses things that successful traders do to be successful in their trading. He also looks at things that unsuccessful traders do that can cause them to be unsuccessful.

SO, YOU THINK YOU CAN TRADE

CURRENCY TRADING
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David Waring leads a discussion answering most of the many questions that are asked when selecting a Forex broker and trading platform. This is a ‘must read’ for anyone trying to separate fact from fiction and find the right place to trade foreign exchange markets.

WHY CHOOSING A FOREX BROKER IS SO CONFUSING

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Traders are constantly bombarded with tips and suggestions in a very sterilized format with the best looking chart used to convey the strategies. Paul Day opens a discussion on how to formulate ideas and trading strategies that suit your desired trading frequency and to employ a stringent risk management regime.

A DECLARATION OF INDEPENDENCE

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CONTENTS

OPTIONS TRADING
28 GAMMA TRADING OPTIONS ON FOREX – PART II: THE ART, SCIENCE, AND NUANCES OF DYNAMICALLY ADJUSTING EXPOSURE TO THE MARKET.

John Netto continues his series of articles on option trading using a gamma strategy. In this article, he discusses real world trades in the Japanese yen and gold futures using gamma strategies to compartmentalize risk and yield smoother returns.

MARKET OBSERVATIONS
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Ed Ponsi provides an outlook for the major currencies as we move into 2009.

2009 CURRENCY OUTLOOK

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Peter Pontikis looks back at sharp rally in the value of the U.S. dollar in the second half of 2008 and its impact on the values of other major currencies and their cross relationships.

THE AUSSIE & POUND IN 2008

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Ian Copsey takes a long-term look from a Fibonacci perspective at the USD/JYP currency pair.

DOLLAR/YEN … A NEW HISTORIC LOW IN 2009

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Our regular contributor, Dar Wong, provides his monthly commentary and outlook for the major currency markets as we trade into 2009.

THE OUTLOOK FOR MAJOR CURRENCIES IN 2009

60 UPCOMING EVENTS 61 ECONOMIC EVENTS CALENDAR 62 BROKERAGE FIRMS LISTING 

JANUARY 2009

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FROM THE EDITOR To Research and Educate
“The quality of a person’s life is in direct proportion to their commitment to excellence, regardless of their chosen field of endeavor.” Vince Lombardi

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appy New Year and welcome to the January 2009 issue of The Forex Journal!

Publisher & Managing Editor Dickson Yap dickson@forexjournal.com Associate Editor Roger Reimer roger@forexjournal.com Contributors Abdul Khan Dar Wong Ed Ponsi John Netto Peter Pontikis Chris Capre David Waring Ian Copsey Paul Day

This is the time of year that we make holiday resolutions to change our lives, our futures, or our ways of doing things. If you have a list of New Year Resolutions, please reread them and then reread our quote for this month and take the actions necessary to make your resolutions a reality. If you want to become more successful in your trading, consider the methods that you use and how you apply those methods to the markets. Does your trading approach fit your personality? Does it fit the amount of capital you have available to work with? Does your trading fit the market or markets that you are most interested in following? These are often difficult questions to honestly answer. Another thing to consider is that this short list is by no means complete. Time-tested trading rules that are simple often provide the most consistent profits. To enjoy a successful long-term trading career, it is vitally important to have a trading business plan and a systematic trading methodology that incorporates trade entry, trade exit, risk control and money management into a cohesive strategy. At The Forex Journal, it is our goal to deliver a balance of educational material to traders of all types and experience levels. I am sure that you will find each article informative and educational. In this issue: Our regular contributor, Dar Wong shares his views and commentary on the major currency pairs as we trade into a New Year. Abdul Khan discusses things that successful traders do to be successful in their trading. He also looks at things that unsuccessful traders do that can cause them to be unsuccessful. Chris Capre discusses a breakout strategy to employ when trying to trade Forex news events. Ed Ponsi looks at currency pair prospects in 2009. David Waring leads a discussion answering most of the many questions that are asked when selecting a Forex broker and trading platform. Peter Pontikis looks back at sharp rally in the value of the U.S. dollar in the second half of 2008 and its impact on the values of other major currencies and their cross relationships. Ian Copsey takes a long-term look from a Fibonacci perspective at the USD/JYP currency pair. John Netto continues his series of articles on option trading using a gamma strategy. In this article, he discusses real world trades in the Japanese yen and gold futures using gamma strategies.

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Copyright@2008 DPR International Pte Ltd. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the copyright holder. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the authors and the publisher are not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. In commodity trading, as in stock, and mutual fund trading, there can be no assurance of profit. Losses can and do occur. As with any investment, you should carefully consider your suitability to trade and your ability to bear the financial risk of losing your entire investment. It should not be assured that the methods, techniques, or indicators presented in this magazine will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples in this magazine are for educational purposes only. This is not a solicitation for any order to buy and sell. The information contained herein has been obtained from sources believed to be reliable, but cannot be guaranteed as to accuracy of completeness, and is subject to change without notice. The risk of using any trading method rests with the user.

Traders are constantly bombarded with tips and suggestions in a very sterilized format with the best looking chart used to convey the strategies. Paul Day opens a discussion on how to formulate ideas and trading strategies that suit you. Our highly qualified contributors provide valuable assistance by enabling us to provide you a broad range of material. We are always very grateful for their contributions. Each new article presents an opportunity to learn new lessons about the markets and the tools that are used to trade them. I hope The Forex Journal becomes a vital part of your trading education and your personal development. I wish you well in your personal life and in your trading journey. Here’s to Prosperous Trading!

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Roger Reimer Associate Editor
LETTERS TO THE EDITOR
The editors of The Forex Journal™ magazine would like to hear from you, our readers. Tell us what you think about the articles we publish. Tell us which people or companies you’d like to see us write about more—or less. Praise us, criticize us, and ask us questions. We regularly publish letters from our readers in the print version of our magazine, reserving the right to edit them for length and clarity. Please include your full name, address and telephone number. Thank you.

Dickson Yap (Managing Editor, The Forex Journal)

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TECHNICAL ANALYSIS

How to Trade a News Breakout
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CHRIS CAPRE

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Chris Capre discusses a breakout strategy to employ when trying to trade Forex news events.

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onsidering the effect of news announcements on the markets, traders often gravitate toward news events hoping to capture a portion of the market response. In Forex trading, this phenomenon has drawn speculators interest to trading news events like vultures to an about-to-be-corpse lying in a field. It is important to have specific methods when trading such events because of volatility and the unique order flow surrounding them. If a trader is going to trade a news event in the Forex markets, we recommend that they pick the most significant of all economic events. This list would include 1) Announcements from Central Banks such as the Federal Open Market Committee, European Central Bank, Bank of England, Bank of China etc. 2) NFP 3) Fed Minutes Meeting Other economic events move the market, but they have significantly less impact and probability to move the markets in such a stark fashion. So, we limit ourselves to the kings of the economic jungle. The methods best employed during such events are a ‘fade’ strategy or ‘breakout’ strategy. For the purposes of this article, we will focus on the breakout method, which is designed to give us an opportunity to take advantage of the announcement pushing the pair heavily in one direction due to the market response from the economic release. Figure 1.1 shows the 5-minute EUR/USD chart. We always want to have the 5-minute chart up for this stratJANUARY 2009

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TECHNICAL ANALYSIS

Figure 1.1 – EUR/USD egy. We will also want two sets of Bollinger Bands on the chart. 1) 2) a 2.5 standard deviation Bollinger band 2) a 1 standard deviation Bollinger band ment is made. The candle immediately moves sharply in one direction and makes lower lows for the next three candles. After 15-minutes, if the move has made lower lows with each 5-minute candle with the second candle closing outside of the wick of the first candle, we will trade in the direction of the move or breakout. The first horizontal line shows our market entry at 1.5522. Our first target

As you can see, price activity contracts leading up to the news announcement and surges when the news announce-

Figure 1.2 – AUD/USD

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Figure 1.3 : USD/JPY is always 30 pips and our initial stop is set at 30 pips. We will enter the position with two lots. After hitting the first target, the stop is moved to breakeven. From here, the Bollinger bands come into effect. We will use the space between the 1 and 2.5 standard deviation Bollinger bands to act as a pocket or level of exclusion for order flow. If the Bollinger bands are still pushing in the direction of the breakout and price is contained within them, we will stay short. The position exit will be directed by the price action relating to the Bollinger band pocket and either of these two conditions: 1) any candle has 60% of the body between the pair of 1 standard deviation Bollinger bands (Purple lines) or 2) the entire candle exists inside or in between both 1 standard deviation Bollinger bands Then, the trade is exited. In this case, 90 pips were locked in on the second lot with 30 pips on the first lot for a total of 120 pips profit within one hour. Figure 1.2 shows this method with the AUD/USD on the 5-minute chart. Price is well contained leading up to the announcement. Then, the candle breaks down with the second candle closing outside the first candle’s wick, and the third candle makes a lower low. The entry is on the open of the next candle at .9547. Our initial 30-pip target is achieved quickly at .9517. The second target comes when the price action spills out into the space between the 1 standard deviation Bollinger bands locking in another 26 pips. The profit total for this trade was 56 pips in less than an hour. Chart 1.3 shows our last example using USD/JPY. As you can see, the pair climbs very quickly with the second candle closing outside the first candle’s wick with the third candle making a higher high. The entry is at 105.02. The profit of 30 pips is taken on the first lot in 10-minutes and then the move fades about 45minutes later causing us to lock in another 32 pips for a 62-pip gain in one hour. In conclusion, wait for three 5-minute candles to close and make sure the second candle closes outside the low/high of the first candle depending in the direction of the breakout. Make sure to move the stop to breakeven after the first target is hit and watch for the move outside of the main pocket and into the space between the 1 standard deviation Bollinger bands.

Chris Capre is the current Fund Manager for White Knight Investments. He specializes in the technical aspects of trading, particularly using Ichimoku, momentum, Bollinger bands, pivot and price action models to trade the markets. He is considered to be at the cutting edge of Technical Analysis and is well regarded for his Ichimoku analysis, along with building trading systems and risk reduction in trading applications.
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PSYCHOLOGY

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So, You Think You Can Trade

Abdul Khan discusses things that successful traders do to be successful in their trading. He also looks at things that unsuccessful traders do that can cause them to be unsuccessful.
Introduction
When you are at a dinner party or having drinks with friends, how do you answer when they ask what you do? Is your answer? a) b) c) I’m a day trader I trade the markets I’m self-employed ing career. These days, brokerage has become so competitive that the gap between full-service and nil-advice brokering has become very blurry. For this reason, the advantages of using an experienced broker far outweigh the negatives. For so long, the biggest argument against using an advisory broker was “Why should I pay them?” or “Look at how much I can save by executing my own trades?” And the corollary should also be highlighted here – do not forget to take into account the hidden charges you are paying with a nil-commission broker. There is no such thing as a free lunch and the last time I looked, the likes of CMC were not registered as non-profit organizations. Of course, the hard part is to find a good advisor. You need to find someone who will not force you into trades, or who will not try to get you to trade for the sake of hitting his commission target for the month. You need someone who cares about your money almost as much as you do, someone who believes in money management rather than averaging down into a losing position. A good advisor will listen to your trading ideas and work as a sounding board for you. He should ask you about your risk/reward ratio, profit targets, the reasoning behind your ideas and trading methodology. He should not be an advisor who is keen to get the account open, but leaves you to sink or swim once you have been setup with a log in. As a client, you should be able to follow his recommendations easily, and should feel comfortable in asking him questions about a trade with the view to learning from the advisor, as opposed to second-guessing. When you find an advisor, talk to him about your objectives, and discuss what I call your “pain threshold” – the point at which you have lost so much money that you both need to re-evaluate the approach being taken. This threshold should be a percentage, such as 25%, 40%, or even 50%. An old argument used against full-service advice is that online trading allows trades to be executed instantly, as opposed to waiting on the phone for the order to be placed.
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If your answer to this question was option a) or b), take a good hard look at yourself. If your answer was c), well done, you are on your way to becoming a trader. Good traders do not broadcast what they do in terms of occupation, and also in terms of trading approach. Good traders seek advice, look to learn from other good traders, avoid placing large improbable bets and always respect the market. Good traders see trading as a business – they are looking to get advice from those that have been in the business longer than they have been. They are making sure they have adequate reserve working capital, they can admit when they have made mistakes, and they know that the market has a big enough paddle to spank anyone. Over the years, I have come across hundreds of individuals who have called themselves traders. Most I have seen fail, but the ones that were successful had some common characteristics. If I could bottle those characteristics, I would have myself a very special perfume! In the following pages, I have mentioned some of those characteristics for our readers to consider.

‘You don’t get somethin’ for nothin’!’
If you have been trading for less than 5 years, make a New Year’s resolution to find an advisor in 2009. Otherwise, I doubt that you will make it to the 5-year mark of your trad-

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PSYCHOLOGY
This argument no longer holds water. Today, most fullservice brokers offer online trading by developing their own trading platforms or through a White Label Partnership with an established online trading firm, such as Saxo Bank or ACM. This gives the client the best of both worlds – instant online trading, coupled with full advice if needed. The cost maybe slightly higher than that of a no-advice firm, but as I have detailed, the advantages far outweigh the drawbacks. Additionally, with a dedicated advisor, you are not just a number, but considered a client/customer/ human being, and treated as such. Instead of paying for education, I recommend traders use the funds for their trading account. There is no better way to learn about trading than actually pulling the trigger with live ammunition. This backs up my thinking about only going to seminars where the presenter trades live. Paper trading has limited use. After a couple of paper losses, you start to lie to yourself about being stopped out or taking an early profit. By trading live with real funds, you could look to just “dip a toe into the water” to get a feel for opening and holding positions or seeing how it feels to have the market go against you. Look to try a few different signals to come up with your trading style. A style that is distinctly yours, fitting your personality, your need for money, your trading time horizon, your outside commitments such as family, work, social etc. Another use for the funds set aside for education is to use them to buy books on trading. Particularly, books written by successful traders describing their style, or books where traders are interviewed. You want to be able to get into the mind of a successful trader to see how they work under pressure, how they find trades, what markets they like/dislike, and what traits you can adopt for your trading. Be sure to read these books, rather than using them to raise the height of your computer monitor! Today, there are so many online resources offering free education I am surprised that educators remain in business. Use these resources first, read plenty of books and have a go at firing a few shots yourself. After all of this, if you still think that you need to pay someone to teach you to trade, then please ask them if they trade live before you hand over any money.
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‘Don’t pay for education’
Okay, I know what you are probably saying – “this guy just told me that you don’t get something for nothing, and now he is saying don’t pay to learn.” Let me explain. Today, there are probably more trading educators out there than brokers, and most of them are teaching the same thing – Technical Analysis. The difference is that each put a different slant on it to make it look like they have come up with a new and improved mousetrap. I always tell my clients two things about educators – first, unless they are trading their methodology live in front of you, they are no good. If you find someone like Larry Williams who will trade live (not simulated) in front of an audience for several days, then by all means go for it. These guys will show you how they detect their trading signals, how they implement their trading methodologies and how they manage risk. All of this is done as the markets are trading, as opposed to using historical data that shows only big winners and small losers. If their methodology is so good, why are they not using it to trade? I know that if I had a new whiz-bang trading system that could return 50% every month by just checking a few signals for 30-minutes each day, I would be trading with it and using the results to raise trading capital for my own hedge fund. I would not waste my evenings doing 2-hour introductory sessions, followed by 2-day weekend workshops. Life is too short for things like that unless I was able to harness the power of good marketing and charge each seminar attendee US$5,000 to $10,000. If I could do that, I would not need to trade and could continue to make money off the attendees by charging them a monthly subscription for on-going trading signals. Since each person has paid thousands of dollars, they would need to continue paying the monthly fee for at least 12 months to justify that they had not been taken by a charlatan.

Be big or get out
I love my meat, and I particularly enjoy my roast dinners every week. But the number of times I have heard from new clients that they are looking to start with just $5,000 or $10,000 far out numbers the roast dinners I have had over the years. What about where clients have said if they only trade 2 lots each day, and take 15 or 20 pips a day out of the market? At the end of the year, they will have about $50,000. Because they only want to take 15 or 20 pips a day, the market will just hand them profits on a platter, and there will be no losers because the market will know they are in a position and will move their way. Why don’t they leave their money under the pillow and each night so the trading fairy can come along and add to it? C’mon folks, if you are serious about making it in trading, you need at least US$50,000 to start with. I am not saying that you need to invest the whole $50k, or leverage it up fully 200 times. By having a sizeable account, it helps

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to back you when you are wearing some pain in a position. It also helps you to work wider stops at decent levels, as opposed to having to work money-stops, based on how much you can afford to lose. I always tell my clients to avoid over-extending. That is, do not get into too large a position where when and if the market moves against you, you are forced into closing part of the position because of margin issues. A wise old broker once told me “the market will remain irrational longer than you can remain solvent.” Invariably, the market will turn around, but you will be back on the sidelines licking your wounds when this happens. Over the years, the guys I have seen make money out of trading are the ones who trade longer-term, trade a moderate size and who wear the pain when the market is against them. I could count on one hand, the number of traders who started with a small account (less than US$20,000) who have succeeded in trading. Stop-loss orders are an essential part of trading, but I tend to be fairly flexible in their use. With small accounts, you need to use them to prolong your trading life and to avoid turning a short-term trade into a long-term investment. In these cases, I suggest nothing less than a 40-pip stop-loss in the Forex market, but it needs to be based on a sound entry level around support or resistance levels. I will go further into stop-losses in future articles. For larger traders, I suggest stop-losses on breakouts or intra-day trades where I am looking for an explosive or small move that will run out of steam over the coming 18 to 24 hours. For longer-term trades, particularly those based on fundamental analysis, I rarely use a stop-loss, believing that if the market moves against the position, it will eventually come back, particularly in Forex. In these cases, I trade smaller, looking to add to the position when trend confirmation occurs. In some cases, I will work what I call a “Stop of Last Resort” that is far away from the market but at a point where if triggered the market is likely to continue for a prolonged time, and it is best for my clients to be out of the market. As you can see, larger accounts have more flexibility. They have more time on their side and they can see things more clearly. Small accounts are constantly worried about the next trade blowing them up. No matter how many times you read or hear the saying “cut your losses, and let your profits run,” human psychology works the opposite way. We all like to win, and we all hate to lose. We are reluctant to admit when we are wrong, and as a result, do not cut losses. We think that if the 15 to 20 pip winners can be maintained, a winning streak can be developed and the account will magically grow exponentially. The problem is that it only takes one big loss to wipe out this approach.

Believe me, big losses happen on a regular basis.

No one is bigger than the market
If you have had a good day, congratulations but tomorrow is another day! If you had a few losses, commiserations but tomorrow is another day! Do not let trading get you on a real high, but do not let it get you so down that you are ready to slit your wrists. Keep it real, and stay humble. Humility is the big thing I have seen in good traders over the years. They are careful not to over celebrate the winners, and rarely lose their cool if they get a bad fill, or are stopped out on the high or the low of the day. Good traders do not want pats on the back, they are happy to stay under the radar and just keep doing their thing. This is why so many of the good money managers around the world are hard to locate. They trade for a few select clients, charge them heaps, and continue to perform well above the average year in, year out. The good ones do not want to be found. They get clients by word of mouth as opposed to glossy ads in business magazines. Everyday is a new market. It is one of the things I love about trading – you never know what to expect when you turn on the computer screen first thing in the morning. If you had a bad day yesterday, keep in mind that today is a new market and it could all reverse today. Similarly, if you won big yesterday, keep in mind that it could all be taken away today and then some. In today’s age of the Internet, online trading and leverage of 500 times, there are more day traders than any other type of trader/investor. It makes sense that if you are a day trader, it is highly probable that another day trader will be taking the other side of your trade. For this reason, you need to be fully prepared with all the tools that make a good trader. You need the good backup of an advisor, you need to have some of the traits of great traders, and you need to have ample trading capital to do battle. Trading can be compared to war. If you do not do the tactical homework on your charts, if you do not show patience in pulling the trigger, if you do not try to squeeze every last dollar out of a winning trade, and if you cannot admit when you are wrong then be assured your opposition will.
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Abdul Khan is a Senior Client Advisor with Tricom Securities, Australia. He has been involved in the Forex and futures markets for over 15 years, advising beginner and hedge fund clients from all parts of the world. Abdul can be reached at abdul.khan@tricom.com.au.
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DAVID WARING

Why Choosing A Forex Broker Is So Confusing
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David Waring leads a discussion answering most of the many questions that are asked when selecting a Forex broker and trading platform. This is a ‘must read’ for anyone trying to separate fact from fiction and find the right place to trade foreign exchange markets.
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f you have looked around the Internet and/or talked to other Forex traders, you probably know that there is a wide variety of opinions as to which broker is the best to trade with. Message boards are full of horror stories about trading with pretty much every Forex broker out there. In this article, we will examine the reasons and try to identify the source of the confusion. This article will help traders develop a checklist, so they can determine which broker is right for them through a process that separates fact from fiction. In my opinion, the main reason there are so many horror stories about the Forex market, stems from the lack of regulation that existed (and to some extent still exists today) in the retail Forex market, when compared to equities and futures markets. Before the Internet, the over-the-counter Forex market was pretty much cut off limits to individual traders. The Internet opened up the Forex market to the
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Screen shot – nfa.futures.org

individual trader, but the regulations designed to protect traders from scams and shady dealing practices were slow to follow in many countries, and still have not caught up today in many cases. Early on, the Forex market got its reputation as the ‘Wild West’ of financial markets because many firms took advantage of individuals who came into the ‘new’ market, and used their lack of knowledge to rob them blind through shoddy execution and exorbitant fees. There is no question that some of the things that gave the Forex market its bad name still exist today, but luckily, there are several firms who offer a quality product and service to Forex traders, without the scams that have existed in the past. So, if several firms offer a quality product and service, why is it not obvious when reviewing all the message boards and review sites where people express their opinions on Forex brokers? In my opinion, there are three reasons for this: 1. The Forex market is over-the-counter and there is a lack of standardization across many of the aspects of trading that are standardized in centralized markets like futures and stocks. 2. Retail Forex trading is a relatively new market. There is not a lot of experience behind the comments made in forums and on review sites. Combine this with point #1 and you have people who angrily post site after getting slipped on a trade around a news event for example, instead of understanding that this is the way that the market works.

3. In my experience, the best firms tend to be much larger. The fact that larger firms have 10 times as many clients makes it look like they receive a larger percentage of complaints. As I see it, a firm that is ten times as large but has twice the complaints offers a much better service than the smaller firm receiving half the complaints.

Regulation and Financial Stability
By walking through how I would evaluate a U.S. brokerage firm, I am going to give a framework that traders can use to evaluate the regulatory environment in any country. For those who have knowledge of, or questions on, the regulatory environment in other countries, I encourage you to post in the ‘comments’ section on InformedTrades.com. The retail Forex market came under the jurisdiction of the Commodities Futures Trading Commission (CFTC) with the passing of the Commodity Modernization Act in 2000. It is currently going through some changes with the recent passing of the farm bill. The industry body that currently enforces the laws set by the CFTC is the National Futures Association (NFA). The National Futures Association is a regulatory service provider for the derivatives markets. On the NFA website (www.nfa.futures.org), you can read about the requirements that firms offering retail Forex trading in the United States have placed on them. In the upper right hand corner of the site, is a link that says “Broker/Firm Information.” If you click this link you can

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plenty of excess capital to meet current requirements, but also future requirements. If you are considering opening a Forex account with a nonU.S. firm, I strongly encourage you to do your research into what the regulatory environment is in that firm’s country. By doing so, you can make sure that the necessary protections are in place to protect your capital in the event that the firm you are trading with runs into financial difficulty.
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Screen shot – cftc.gov enter the name of a firm and see who the owners of the firm are, and any complaints or actions that the NFA and/ or CFTC has taken against the firm. One thing to keep in mind is that there are many firms with only a few clients who offer Forex trading. It is important to consider the size of a firm when researching complaints, so you can make sure you are comparing apples to apples. The next web page of interest when researching firms is the CFTC’s financial data page reporting how much capital each of the Forex brokers has. This is important because if the Forex broker you are trading with goes bankrupt, your account is not protected under current regulations unlike the stock and futures markets. On the CFTC web page (www.cftc.gov), you will find a section called “View Financial Data FCMs” on the right side of the page. Clicking this link gives a report with all the U.S. Futures and Forex firms listed on the left hand side. Across the top are 2 columns that are important to us. The first is the column that says “Net Capital Requirement,” which is the amount of funds that a firm is required to have in liquid assets that are easily convertible into cash. This number is set by the CFTC to make sure that a firm has enough cash on hand if something goes wrong. If a firm drops below this requirement, the CFTC will step in and shut the firm down in order to protect client funds. The next logical question that many traders will ask is – “How close is the firm they are trading with, or considering trading with, to falling below their “Net Capital Requirement?”” On this same page you should find a column that says “Excess Net “ which gives us the cushion that a firm has, before they would get into a potentially troubling position. The last thing that it is important to keep in mind is that the CFTC has recently upped the ‘Net Capital Requirement’ to a minimum of $20,000,000 for all Forex firms to be phased into effect. With this in mind, it is important to be sure that the firm you are trading with not only has

How to Evaluate Transaction Costs
When trading any market, transaction costs can have a significant effect on returns, especially for the active trader. Unlike other markets, where transaction costs outside of commissions are fairly standard, the Forex market is overthe-counter and transaction costs can very widely from broker to broker. There are generally four things that a trader should consider when reviewing the transaction costs of a broker that he or she is considering trading with. 1. Commissions, if any, that are charged by the broker. 2. The Spread for the currency pairs that they wish to trade. 3. The rollover rates for the currency pairs they wish to trade, assuming they will be holding positions past the rollover cut off. 4. The quality of the execution on live trades. The large majority of Forex brokers do not charge a commission. When analyzing those that do, most traders will add the spread for the currency pair that they are trading to the commission to calculate the total transaction cost for the trade. The important thing to keep in mind is that while commissions are normally fixed, the pip value for each currency pair varies depending on current market rates, and whether or not the U.S. dollar is the second currency in the pair or not. As an example, the current pip value when trading on a standard account for USD/JPY is $9.25, and the current spread with the broker I am looking at is 2.5 pips. So, if this broker were to charge a $10 commission on top of this, then my total transaction costs would be 9.25*2.5 + 10 or $33.13.
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One last thing to consider on commissions, when you inquire about the commission level, you want to know whether the commission rate a broker is quoting is ‘per side’ or ‘round trip.’ If the commission in the example I just gave were quoted ‘per side,’ this would mean there is a $10 commission to open the trade, and a $10 commission to close the trade, bringing the total commission for the trade to $20. If it is ‘round trip,’ this means the commission to open and close the trade is $10. A second factor to consider when evaluating transaction costs is what the spread is for the currency pairs that you will be trading. You can calculate the spread in dollars by taking the value of a 1-pip move in the currency that you are analyzing, and then multiplying it by the spread. It is important to keep in mind that the spread with many brokers will fluctuate throughout the day based on the liquidity of the currency pair that you are trading, and the volatility in the market at the time. With this in mind, it is important to consider the spreads during the timeframe(s) that you will be trading. While many traders like to inquire with a trader who is already trading live with the firm they are considering on this point, generally I have found that the demonstration platforms are a fairly accurate representation of the spreads you will see on a live account. A third factor to consider when evaluating transaction costs is the rollover rates that a firm deducts from your account when you are long a currency with the lower interest rate, and the rate that they pay into your account when you are long a currency bearing the higher interest rate. While this is not very important for active traders who rarely hold positions overnight, it is especially important for traders executing longer-term strategies, where the rollover rate can significantly affect the return of their strategy. The last factor that it is important to consider when looking at transaction costs is the execution that you receive on live trades. Unfortunately, demonstration accounts are not normally an accurate representation of live execution, so there is no way to know this for sure, without opening an account and executing some trades. From my experience here as well, the message boards (for the reasons I mentioned earlier) are not a good representation of reality in this regard. Once you have a live account, in normal market conditions you should be executed without slippage and the prices that you are being quoted should be in line with what other market makers are quoting (which you can see by pulling up their demo accounts). If you are being consistently slipped on trades and/or the rates that you are being quoted are consistently off-market, then you know there is a problem and can address it accordingly.

Trading Technology and Value Added Resources
After a trader has an understanding of the financial stability, regulatory environment and transaction costs of the firm they are considering, probably the next most important thing to understand is the trading technology and value added services that the firm offers. One thing that is universally important to all traders in terms of trading technology is platform stability. A trader’s platform is his lifeline to the markets. If the trading platform crashes, freezes up or experiences other technological difficulties, this obviously hinders the ability to perform. Where quality of trade execution is open to interpretation, whether a firm’s platform is stable or not is pretty straightforward. I have found that the broker review sections of forums such as Elitetrader.com are a pretty good indication of who is strong and weak in this area. Outside of platform stability, there are as many different priorities traders have for trading technology as there are trading styles and personalities. To help each individual trader go about this decision making process in as structured a manner as possible, I have come up with a list of features that traders can rank in order from highest to lowest priority. Remember that many firms offer multiple platforms, so do not assume that a firm does not have something, simply because it is not featured on their website. 1. Ease of use 2. Clarity of profit and loss report 3. Advanced order entry 4. Trading from charts 5. Backtesting 6. Web based platform versus downloaded platform 7. Platform customization 8. Mobile trading If you have other things that interest you, simply add them to the list in order of priority, before checking out the difTM

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ferent options that are available to you. From a value added services standpoint, there are many different options available depending on which firm you select. With this in mind, you should have a good understanding of what is important to you as a trader before beginning your search. I have included a list to assist you with this process. 1. In-house research 2. Third-party research 3. Real-time news 4. Trade signals and recommendations 5. Charting package options 6. Managed accounts 7. Trading education This discussion should give you a good understanding of the main things to consider from a trading technology and value added resources perspective when choosing a Forex broker. Now, we will look at what are in my opinion the last two major factors to consider – customer service and trading desk accessibility.

methods that can be used to contact them. Remember that the Forex market is a 24-hour market, so a firm’s support staff’s ability to perform overnight as well as during your daytime is much more important than in the equities and many futures markets. The four most common methods to contact a broker’s support staff are: 1. Telephone 2. Email 3. Live chat 4. Forums The last and perhaps most important thing to consider when selecting a Forex broker is to make sure a firm’s trading desk is reachable by telephone in the event of platform failure that may occur either on your end or theirs. While this is important in any market, it is especially important in the Forex market, as platform stability issues are more common here because the technology is newer and mostly proprietary.
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Evaluating Customer Service
The retail Forex market is a relatively new market. This means that many traders who have experience trading other markets do not have much experience with Forex. When you add to this the fact that much of the market has yet to be standardized, you can see the potential for many questions that need to be answered and the importance that a firm has an intelligent staff that is easily accessible to answer those questions. With this in mind, the first thing that I recommend when evaluating a broker’s customer service is calling and talking to one or two of the people there. Ask them to describe their offerings as well as any Forex questions that you may have. This should give a pretty good idea of the competency of the support staff and an indication of how they are going to perform when it really matters. The second thing I would recommend is getting an idea of the hours when those support people are available, and

David Waring is the founder and community host of www. InformedTrades.com, which is an online community devoted to helping traders of all experience levels find the quickest path to profitability. His site does this by organizing all of the best free video and text trading education and news from around the Internet, into one easy to navigate resource. Before starting InformedTrades, David gained valuable experience in the foreign exchange market as a Managing Director at Forex Capital Markets LLC (FXCM), one of the largest retail Forex trading firms in the world. During his 7 years at FXCM, David held multiple positions, helping grow the firm from 15 employees and 2,000 clients, to the over 600 employees and 120,000 clients that the firm has today. David also oversaw FXCM’s managed funds division, and the launch of its Sentiment Managed Funds Product, which had over $20 Million in assets and returned an impressive 32% during the first 11 months of live trading.

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PAUL DAY

A Declaration Of Independence
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Traders are constantly bombarded with tips and suggestions in a very sterilized format with the best looking chart used to convey the strategies. Paul Day opens a discussion on how to formulate ideas and trading strategies that suit your desired trading frequency and to employ a stringent risk management regime.
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here are many reasons for wanting to trade the Forex markets, especially at a time when bond yields remain historically low and equity market returns are in negative territory across the globe. The rise of the Internet and the surety of high-speed communication lines have opened the markets to new participants and the plethora of online Forex brokerage firms has vastly reduced the sum required to get oneself started and not to mention the narrowing of the bid/offer spreads in the major currency pairs. The independent trader has a huge arsenal of weaponry to use in making trading decisions. There are 24-hour financial news channels, trading magazines, blogs, independent and institutional research and trading portals that offer
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both black box construction software and highly sophisticated technical analysis programs. So much information can present a problem of overload that can lead to either trading paralysis or irrational behaviour. One must be able to separate the wheat from the chaff and apply consistent rules and behaviour patterns to stand more than a gambler’s chance of winning. In his highly acclaimed books, Fooled by Randomness and The Black Swan, Nassim Nicolas Taleb explains both the distortion that luck can have on the perception of one’s ability, and the fallibility of well-held beliefs – not just in trading but across all disciplines. I may walk into a Las Vegas casino, put $10,000 on number 17 at a roulette table and walk away with $360,000 but that does not mean I am a gambling genius, a professor of gaming theory or someone you would wish to take any advice from. Good fortune does not an analyst make. I also may tell you that debt underwritten by AMBAC and MBIA is AAA rated and safe as houses (pardon the pun) – I would have done this had I worked for most global bank credit risk departments or recognised ratings agencies in early 2007. The current financial crisis enveloping the globe is a perfect example of how badly analysts, traders, risk managers and central bankers can get it horribly wrong. I find it funny how the talk now is of the ‘inevitability’ of the situation from analysts who did not see it coming and their suggestion that Mr. Paulson and Mr. Bernanke are best placed to guide the economy out of the current predicament. After all, they both commented in late summer of 2007 that the sub prime crisis was well contained and would not spill over to the rest of the financial or wider communities. I guess the reasoning behind my tirade is that, as a trader, one is constantly bombarded with tips and suggestions in a very sterilized format where the best looking chart to convey said strategies are predominantly shown. I have a natural distrust of analysts and strategy salespeople that only show the winners – the game just is not like that – as many traders learn at their own expense. Though not a natural cynic, I have learned to disregard any commentator who suggests the product they are involved in is going up. A person bullish on gold who works for buysomebullionoffme.com or the analyst from wemakemoneywhenyoubuystocks.com who suggests banking stocks are a screaming buy get short shrift from me. They may be right, but how can I judge their impartiality? It is the same with any analyst – if you trade on their advice and they are wrong, it is you who loses money and not them. It is important to stand on your own, to be able to formulate ideas and trading strategies that suit your desired trading frequency and to employ a stringent risk management regime. It is not my intention to either put you off or to offer some golden panacea to immense fortune. What I would like to recommend are simple rules I employ to gain a level of consistency in my trading that can be directly applied to the Forex markets and are equally relevant to both novice and experienced traders.
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• Risk/Reward – Many traders run positions with terrible risk/reward profiles, often risking more than they stand to gain from an individual trade. Indeed, many trades are entered on an emotional basis with no stop loss in mind. This is the path to ruin. I recommend that you run at least a 3 to 1 profit/loss ratio – i.e. unless your target profit level for a trade is at least 3 times the distance from your entry level as your stop loss Do not do it! By employing a 3:1 strategy – and assuming you run the same risk per trade, a win ratio of just 25% will protect your trading capital over the long-run. Also, do not move your stop further away from your entry level if the trade moves against you. The market will not disappear if you get it wrong, but you might! • Leverage – Many online Forex platforms offer leverage of 200 to 1. This means a $1,000 margin account can be used to assume a $200,000 position. Taking such risk is not in the least sensible – do not forget at the start of 2008 there were 5 investment banks on Wall Street, rumoured to be running leverage of around 30 to 1. None of these firms exist in their original forms today. GBP/JPY routinely moves 1.5% to 2% a day and a 200:1 leverage on all your capital would see you margin called after a 0.5% move against you. I would suggest a maximum leverage employed of 20 to 1. • Capital deployment – Do not put all your eggs in one basket. Define a proportion of your trading capital you are comfortable in taking for each

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trade and stick with it. I would not risk more than 5% of my trading capital on any one trade. As your tradable capital increases, your position size grows accordingly. If your tradable capital diminishes, so should your exposure per trade. I rate Risk/Reward, Leverage and Capital Deployment as fundamental in my trading strategy and believe they would assist greatly in the longevity of a trader’s participation in the market. Despite maintaining an overall macro view of long-term market direction, my trading mechanism is predominantly technically based. In this guise, I offer four broad brush strokes that may stimulate one to try something new.

obviously interrelated. If you trade GBP/USD, it remains important to track other currency pairs – a sharp move higher in EUR/USD is likely to be cable bullish, while a carry-trade unwind often adversely affects the higher yielding currencies and may lead to pressure on Sterling. Also do not just stop at currencies – yield differentials, equity markets, individual commodity prices and the CRB index, levels of Baltic freight etc. can all affect currency movements and big moves in other markets are often a sign of risk aversion or margin calls, which is a warning sign that sharp reversals could occur in trending markets. • Trending versus Non-Trending markets. a. In trending markets, I use short-term (3 or 5 session) moving averages of the session lows to underpin a rally, and short-term moving averages of the session highs to cap a decline. When markets go into prolonged trends, it is amazing how often this simple strategy effectively captures a huge chunk of the move. b. In ranging markets, your risk reward is in favour of longs near the range bottoms and shorts near the range highs – this sounds like I am teaching you to suck eggs. But during consolidations, markets usually look magnificent at the top and awful at the bottom and your friendly analyst will probably be telling you to do the opposite of what is the best trade from a risk perspective. Try splitting a consolidation zone into 5 horizontal segments looking for a short-term mean reversion trade at the extremities and paring your risk in the central, neutral zone. Trading the currency markets can be an exciting and rewarding business. Setting consistent, effective rules and methodologies can help you in your trading life and I see it as a natural step in becoming a successful trader. Paul Day is Deputy Head of Research at MIG Investments SA. He was formerly Manager of Strategic Trading at HSBC Markets in London.
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• Avoid Multicolliniarity – This applies to both technical analysis and in positional trading. a. In technical analysis, oscillators such as stochastics, RSIs, MACD etc. are basically the same thing – a first derivative of price – and one should not be used to confirm another. If using them for negative or positive divergence (the only reason I ever use them) choose one oscillator and stick to it. b. In trading, if you have the view the yen will decline; deploy 5% or your capital to your overall JPY short. Do not sell USD/JPY, EUR/JPY, GBP/JPY, AUD/JPY and NZD/ JPY! This combination would equate to 25% of your tradable capital risked on, ostensibly, the same trade. Choose one currency pair and go with it. • Expand your Depth of Analysis – If trading from a technical perspective, always look at least one timeframe up and one timeframe down from your favoured chart period. If you predominantly trade off daily charts, also monitor hourly or 240-minute charts and weekly charts. If you trade on a shorter timeframe, say hourly charts, also monitor 15-minute and daily charts to see if they tell a different story. • Expand your Breadth of Analysis – Markets are

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OPTIONS TRADING

JOHN NETTO

Gamma Trading Options on Forex – Part II: The Art, Science, and Nuances of Dynamically Adjusting Exposure to the Market.
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John Netto continues his series of articles on option trading using a gamma strategy. In this article, he discusses real world trades in the Japanese yen and gold futures using gamma strategies to compartmentalize risk and yield smoother returns.

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ith a once in a lifetime move across all asset classes taking place in the Fall of 2008, there has never been a more important time to understand the importance and consequences of gamma trading options in the market. The first article published in the October 2008 issue highlighted some key points and benefits of gamma trading. It discussed how to implement a strategy to better compartmentalize risk and deliver smoother returns. As the Chief Investment Strategist for NetBlack Capital, a Commodity Trading Advisor, my performance assessment is not only based on the underlying performance of the accounts I manage, but also how skillfully I manage the risk by measuring the levels of volatility commensurate with the return. The idea being the less volatility generated in making a return, the more skillful a manager is. This acumen has never been more important in light of the recent market price action. In this article, I am going to delve further into the encyclopedia of potential gamma trading strategies to cover dynamic repair strategies and creative exposure in the market through calendar spreads and calendar butterflies. These strategies, when applied with the right amount of trading acumen, really open up the possibilities for a portfolio manager and trader. The USD/JPY market has been a particularly volatile currency cross in the past six months. It fell to 15-year lows in late October and has maintained a strong correlation with the major global equity indexes. We witnessed record volatility skews between front and subsequent month contracts. In this type of environment, a way to take on bullish posture is to put on a bullish calendar spread and build back month long portfolio gamma. A trade that I put on in the yen futures, (traded on the Chicago Mercantile Exchange), trading at .9400 during September 19, was selling the front month yen calls (Oct) that expired on October 3 for a credit of 72 ticks (or $900 a contract) and buying the November calls for 145 ticks (or $1,825). This let me take on a bullish posture in the position and still define my risk. This position created a debit in the account of $925 per contract.

On the downside, my breakeven was about 9350 and my breakeven on the upside was close to 9900. I was comfortable with both of these scenarios as I was particularly bearish the equity markets. Even if the stock markets rallied, I would feel comfortable owning the November 96 yen calls given they did not expire until November 7, or another 35 days of action past the time the October calls were to expire. (see Chart 1) Meanwhile, if the market rallied, I could conceivably hedge off my long yen exposure in the S&P 500 futures market, which is very deep and filled with tons of intraday volatility. When setting up trades, one thing I focus on and convey to investors are innovative ways to better structure positions to achieve superior risk-adjusted returns. The yen futures are not as liquid as the S&P and do not have the same flow. As a result, I build up my exposure on a longer-term basis on the market I have a viewpoint, such as the yen futures. Then, I synthetically hedge around it in a market having a high inverse correlation, in this case the S&P 500 futures to gain a structural edge.* As it turned out in this trade, the yen rallied to close at 9553 (see Chart 2) on Friday, October 3. The October calls sold for 72 ticks had expired worthless and the calls purchased for 145 ticks had risen in value to about 220 ticks. So, if this position is closed out at this point, we can take a 72 tick profit ($900 a contract) from the expired calls and a 70 tick profit ($875) from the calls that still have 35 days left until expiration, for a total of $1775 in profit from the trade. This move provided some nice profits and I opted to take them and move forward with the month of October. This is one way to play this move using different month options to build a longer-term view versus a shorter-term view, as well as take an opinion on volatility and define your risk. This was a slightly different dynamic than the next trade example where we took on a different exposure profile. The next position involves the black mamba of trading vehicles – gold. My meaning here is that “one trade can kill you.” Gold has been an enigmatic market for gold bulls and bears, as it will take on wild swings and function in an extremely capricious manner. It will sell hard in one direcJANUARY 2009

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Chart 1 tion appearing that it will never rally, followed by rocketlike ascensions that feel no resistance can contain the shiny stuff. In such an environment as described in gold, volatility between the ATM (at-the-money) front month calls (December calls had 4 days until expiration), which expired on Thursday, November 20 were sporting an implied volatility reading of 48. The January calls (expiration on December 26) showed implied volatility of 43 and the February calls showed an implied volatility of 41. My view at the time and the idea for setting up this trade was to get into some January calls, which in reality would give some exposure for the month of December. When I put this position on, the December gold contract was trading at $735 an ounce. As you will see from the options graph below selling the Dec 740 calls brought in a credit of 21.80, or $2,180 per contract. Buying twice the Jan 740 calls (which actually trades off of the February underlying contract) cost 47.10 x 2, or a debit of $9,420 for two contracts, and selling 1 of the Feb 740 calls took in a credit of 59.10, or $5,910. The net result of this “calendar butterfly spread” as I affectionately term them is about - $1,330 per unit (see Chart 3). My strategy and viewpoint behind this position is three fold. First, gold had headed into a consolidation phase in the short-term and I thought that late November and December could provide some nice trading opportunities and by fading the short-term positive volatility skew, there was some nice value. The second is my viewpoint on the volatility skew between the January and February options would expand as things got going during the above-mentioned timeframe. This would allow me to profit from both the underlying price action I would gain from gamma trading around the position and a relative expansion in volatility from the long volatility exposure (January calls) against my short volatility exposure (February calls). Finally, $740 is a key spot that gold has used over several years and I felt confident that even if gold were to move outside my short-term profit range over the first four days, I would be able to dynamically manage it from a three-dimensional perspective. Meaning even if the first four days of the position did not work out and we went above or below, I would have another 36 days to go to delta neutral, or whatever market viewpoint I take on at the time the December calls expire.

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Chart 2

Chart 3

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Chart 4 Clearly, the potential scenarios are too numerous to cover in this article. However, what needs to be taken away from this is an alternative approach to financing some of these options trades while still actively managing the risk and not getting hung on a bad position. On Thursday, November 20, December gold closed at $749 and I squared out the December leg of the position so that I was long twice the number of January calls as I was the February call. Then, I shorted enough of the February underlying gold contracts to put myself in a delta neutral position, meaning I was simply long volatility and looked to play the next move. Friday, November 21, a day that I was doing a live trading event at the Las Vegas Traders Expo, saw gold rally nearly $50 per ounce and I began to delta hedge out of some of the long exposure to gold that was developing as a result of the rally higher (remember from the first article that when you are long gamma, the more the market goes up the longer you become and the more the market goes down, the shorter you become). This move had the makings to test the $815 to $830 level, providing a nice spot for gold to sell down from based on the weekly chart. (see Chart 4). The following Monday, November 24, saw gold rally to $830 and I went short my full position using the Jan 740 calls as a backstop to hedge my shorts, or taking on a synthetic put position. My target back on the downside from this key inflection point rested at the level between $750 and $770. This level is a place gold had used for most of October and November as a resistance spot that would now offer good support as $750 was a .618 Fibonacci retracement of the move higher over the previous weeks. Such a retest seemed pretty likely in the wake of an environment of deflationary sentiment and technical weakness that has been pervasive across a number of markets. In a nutshell, this encapsulates the mindset behind those who professionally trade options and embrace the art of gamma trading. The portfolio posturing based on playing the flow of the market with predefined risk parameters and offsetting your delta of your options depending on your viewpoint is the third dimension of trading. On Monday, December 1, gold and the rest of the commodity markets pulled back severely offering an opportunity to begin phasing out of the shorts that had been initiated over the previous week until it hit $748 on Friday December 5 on a worse than expected Non-Farm Payrolls number. Again, being aware of what a key level $750 was, I went from being net short to delta neutral again and can play the move from there. Going forward, I am still working this position and by the time this article is published, the January call options will have expired. However by being delta neutral, my game plan going forward is to fade a gold move that rallies back above $800 for much less profit objectives than the $50 to $70 experienced on the last sell down. Should gold hit the $850 level, I would get fully short against my long call
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Chart 5 position. On the other hand, if gold cannot muster a rally and heads south, I will look to start selling rallies and use the calls as a cushion to reinitiate synthetic put positions again. Hopefully, doing all of this while outperforming the underlying time decay and implied volatility risk that can hasten one’s losses when long gamma. The trades are two possibilities that these positions could have been handled with and will hopefully open a discussion forum of conceivable ways to manage one’s trades. The beauty of options lies in this nuance and subtlety of position management. Money, Stocks and Commodities Magazine, The Forex Journal, ESPN Sports Radio Las Vegas, Fox Sports Radio Las Vegas, and many other media outlets. While he loves teaching, John’s passion lies in the trading arena and educating the public through a one-of-akind Web show “SniperScope Live! Hedge Fund Trading, Unplugged”. Viewers log in to watch, learn and interact with John as he trades the markets in real time with real positions, real working orders, and real money being made and lost in total transparency. Mr. Netto used his nine-year US Marine Corps career and travels to the Far East to learn to speak, read, and write Japanese and Chinese, allowing him to articulate his vision of trading to an international audience. When not engrossed in the markets, Mr. Netto spends his free time sharpening his intuition, discipline, and risk management skills as an avid poker player and sports handicapper. He appears regularly on both Las Vegas and national radio discussing the art of the trading, odds making and poker. John resides in San Francisco, Las Vegas and New York City. He posts free newsletters and audio blogs at his web site, www.osoktrading. com, on all of the aforementioned topics.

John Netto is Chief Investment Strategist of NetBlack Capital, LLC, a Commodity Trading Advisor, as well as a Market Maker on the US Futures Exchange for the Mini Dollar Dax. He is the author of “One Shot - One Kill Trading: Precision Trading through the Use of Technical Analysis” (McGraw-Hill, 2004) and President of One Shot - One Kill Trading, LLC. John is a regular contributor for The Money Show, The Traders Expo, The Forex Traders Expo, CME Group, Fox Business Channel, Interactive Brokers, International Securities Exchange, ICE, MSN

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MARKET OBSERVATIONS

ED PONSI

2009

Currency Outlook

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Ed Ponsi provides an outlook for the major currencies as we move into 2009.

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t is that time of year again – the time when traders tally up the gains and losses for the year and plan for the future. I am not going to bore you with the details that we are living in a historic time, or write about how volatile the markets have been in 2008. I am going to assume that you have not been living in a cave or have been stranded on a desert island for the past twelve months. Rather than a look through the rear view mirror, let’s look ahead to see what 2009 might hold for the currency markets.

of their ways and cut rates dramatically late in the year. Since rate cuts take months to work their way through an economy, this proves to be too little, too late; the markets voted on this by taking the pound down hard. The British pound fell persistently against the U.S. dollar throughout the second half of 2008, forming a series of flag formations as it stair-stepped lower (see Figure 1). The downward spiral of the British pound will continue into 2009. Look for cable to fall to at least 1.4000, a support level from early this decade, as scared money continues to rush into U.S. Treasuries in the early months of 2009. In 2009, the British pound should begin its long recovery, but it will lag behind the euro, the Australian dollar and other currencies that are better positioned to benefit from the eventual recovery of the world economy. Where will the pound go from here? A look at the monthly chart shows major support in the 1.40 area, last visited in early 2002. It is amazing how a decade’s worth of gains can be undone in a handful of months, but that is exactly what has happened (see Figure 2).

Great Britain Pound
The British pound had a terrible year in 2008, falling to multi-year lows against the Japanese yen and U.S. dollar. It reached its lowest point against the euro since the inception of that currency in 1999. Despite an oncoming economic slowdown, the Bank of England’s Monetary Policy Committee, led by Mervyn King, inexplicably kept the U.K’s benchmark Bank Rate too high for too long. As a result, the MPC damaged any possibility of an immediate economic recovery, but King and company realized the error

Figure 1 – GBP/USD forms bear flags in the fall/winter of 2008.

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Source: Saxo Bank
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Figure 2 – GBP/USD approaches old support at 1.40, unwinding years of gains.

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Source: Saxo Bank

Euro
The euro has certainly taken a detour in its quest to become the world’s dominant currency. However, despite the recent resurgence of the U.S. dollar, the euro is still positioned to eventually join, if not displace, the U.S. dollar as the world’s reserve currency. The euro may have taken a beating versus the U.S. dollar in 2008, but it also managed to reach a lifetime high versus the British pound. The euro has been far more stable than some of the independent European currencies, such as the Polish zloty and the Czech koruna. The zloty and koruna lost 21% and 13% respectively versus the euro from July through December.

Excessive volatility in 2008 damaged the hopes of those countries to qualify for euro adoption, which underscores the advantages of switching to the more stable euro. In Denmark and Sweden, support is increasing for euro adoption, and as more countries join over time, the European Union’s power and influence will increase. Right now, the euro appears to have established a base below 1.30 against the U.S. dollar. The downtrend appears to have dissolved into a range bound situation and the euro may be poised for a rebound. I expect the EUR/USD pair to climb back up to 1.40 in the New Year (see Figure 3).

Figure 3 – EUR/USD appears to be forming a bottom.

Source: Saxo Bank

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Figure 4 – AUD/USD ranges below resistance at .70.

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Source: Saxo Bank

Australian Dollar
Australia is a major supplier of commodities to China, a country that recently hit a speed bump on the road to dynamic growth. According to the World Bank, economic growth in China will decrease to 7.5% in 2009. While that figure represents a level of growth many countries can only dream about, it is a sharp decline from the nearly 12% growth experienced in China in 2007. Stock and real estate prices in China have fallen sharply, and construction has slowed drastically as economic growth has slowed. This can only spell bad news for Australia, a chief supplier of copper, aluminum and other base materials used in construction. To bolster its economy, Beijing has already announced a plan to spend nearly $600 billion over the next two years to help stimulate growth. It is sad that China has resorted to the same tactics as the bankrupt West; is it possible that the news is even worse than what we are hearing? If China is in deeper trouble than is currently believed, the Australian dollar will be faced with even greater problems. While China looms as a headache, another problem for the aussie is the general pullback in commodity prices. Australian mining behemoth BHP Billiton was recently forced to abandon its takeover attempt of rival Rio Tinto due to the unprecedented slide in demand for steel and related products. These mining companies have been hammered by the collapse in Chinese demand for iron ore and other minerals used in steel, as have producers of coal, which steelmakers consume rapidly. The current downturn is the sharpest and deepest for China’s steel industry in at least a decade with its output plunging 17% in October. One positive for the Australian dollar has been the recent

series of interventions by the RBA (Reserve Bank of Australia). The RBA has confirmed it spent a whopping $3.15 billion AUD (about $2 billion U.S. dollars) buying the Australian dollar in late October as the currency appeared on the verge of falling below 60 U.S. cents for the first time since April 2003. The RBA acted again on November 13 when the Australian dollar hit 63.50 U.S. cents. Each time, the RBA denied that it was defending a key level, telling the media instead that it was adding liquidity to the currency market. Much like the euro, the Australian dollar is forming a bottom and appears to be basing sideways. I believe that when the global recession finally ends, demand for commodities will explode and the Australian dollar will be back on the offensive. Wait for AUD/USD to break above 70 cents, at that point the bulls should be ready to run (see Figure 4).

U.S. Dollar
The U.S. dollar, along with the Japanese yen, was the darling of the second half of 2008. The incredible collapse of the credit markets drove money out of equities worldwide and into U.S. Treasuries, fueling demand for the dollar. As long as turmoil reigns in the markets, the U.S. dollar should perform well as risk-averse traders pile into Treasuries. The question is this – when the credit crisis ends – I know it seems endless but trust me, it will end someday – will the U.S. dollar hold on to the huge gains it racked up in 2008? In my opinion, the answer is ‘no.’ It could be said that the current demand for the U.S. dollar is based on panic buyJANUARY 2009

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MARKET OBSERVATIONS

Figure 5 – U.S. Dollar rally is about to encounter resistance.

ing rather than sound fundamentals and that the panic eventually will end. When it does and traders slowly begin to embrace risk again, money will move out of U.S. Treasuries and into various equity markets around the world. This exodus out of Treasuries will put the U.S. dollar right back on the path of weakness that has been so dominant this decade. It is important to remember that during this period of strength, the fundamentals of the U.S. economy have not improved. In fact, the fundamentals in the U.S. economy have deteriorated. With soaring debt due to massive bailouts in what is already the world’s largest debtor nation, look for the U.S. federal budget deficit to exceed 1 trillion U.S. dollars in 2009 alone. Perhaps the U.S. will benefit in the short run, but the policy of bailing out failed companies is going to weaken the U.S. economy for years to come. Under a capitalist system, weak companies are allowed to fail, and in the vacuum left behind, strong companies gain market share or enter new markets. For example, someone in the United States might be planning to create a new automobile manufacturing company right now, using state of the art manufacturing techniques, forward looking fuel efficient designs and a lean management structure. It would be much easier for such a company to achieve prominence in a market that had been vacated by failed companies such as General Motors, which is currently seeking a bailout from the U.S. government. If the U.S. government agrees to keep GM alive, it

will squelch potential competition in favor of spending tax dollars to support an inefficient, bloated company. It will damage the industry as a whole, and postpone the evolution of the American automotive manufacturing sector by putting a band-aid on a painful but important and necessary part of economic history. This will not only happen in the automotive sector, but potentially in many parts of the U.S. economy. Meanwhile, Bernanke will begin a policy of quantitative easing in 2009 – a fancy way of saying that he will direct the Federal Reserve to purchase 30-year U.S. Treasury Bonds to push their price higher, resulting in lower bond yields. Since 30-year mortgages key off of 30-year T-Bonds, this will have the effect of creating lower mortgage rates – at least for those in the U.S. who can still qualify for a loan. How to pay for all of this? The answer is simple – print money, borrow more money and raise taxes. When the world economy finally awakens from its slumber, the U.S. dollar will pay a hefty price for this orgy of bailouts. The USD Index is nearing a major Fibonacci resistance level near 90, which is the 38.2% retracement of the downward spiral that began in 2001 (see Figure 5).

Japanese Yen
After years of serving as the punching bag of the Forex world, the Japanese yen became the heavyweight champion

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Source: Saxo Bank

of major world currencies in the second half of 2008. The yen crushed everything in its path, even the resurgent U.S. dollar, and soared to a thirteen-year high versus the British pound and a six-year high versus the euro. After years of weakness, why did the yen suddenly become so strong? The key phrase for 2008 was risk aversion, an attitude among traders that has also served the U.S. dollar well. In a normal market, traders embrace risk by purchasing stocks and entering carry trades, collecting interest on currency trades that involve shorting low-yielding currencies like the yen. When traders are in a mode of risk aversion, they sell stocks and close carry trades. Since many carry trades include a short position on the yen, traders must purchase the JPY in order to close the trade. This led to a sudden burst for the yen as traders, now spooked by the subprime fiasco, closed their carry trades en masse. Momentum players joined in, causing the Japanese currency to surge even higher. This helps explain why a country can have such a dominant currency even in times of recession. Now that we are faced with a global recession, how will the Japanese yen perform in 2009? The answer depends on the depth of the global recession and the duration of the

bear market in equities. Yen pairs such as EUR/JPY and GBP/JPY fell along with global stock markets in 2008, and those pairs should rise when the stock market recovers. In other words, the mighty yen rally should end at the same time the next bull market in stocks is born. Savvy currency traders use this correlation, following stock markets to place trades in currency markets. That is all for now! I wish you all the best in 2009.
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Ed Ponsi is the President of EdPonsi.com and FXEducator.com. He is a dynamic public speaker who has appears regularly on CNBC, CNN and Fox Business Network. His book, Forex Patterns and Probabilities, is available at http://www.edponsi.com and from major book retailers. An experienced professional trader and money manager, Ed has advised hedge funds, institutional traders and individuals of all levels of skill and experience. Ed’s DVD series, FXEducator: Forex Trading with Ed Ponsi is available at www. fxeducator.com and from select distributors worldwide. For more information, email us at info@fxeducator.com

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JANUARY 2009

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MARKET OBSERVATIONS

PETER PONTIKI

The Aussie & Pound in 2008
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Peter Pontikis looks back at sharp rally in the value of the U.S. dollar in the second half of 2008 and its impact on the values of other major currencies and their cross relationships.
The Global Background
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An analysis of the Australian dollar’s sharp decline in the September quarter of 2008 must take into context the sharp appreciation of the U.S. dollar at the same time. This was a move that subsequently stalled as we moved into the end of the 2008 calendar year.

It was this sharp rally in the value of the U.S. dollar in the second half of 2008 that has primarily impacted the values of other major currencies and their ancillary cross relationships. This rally in the U.S. dollar happened at a time of profound financial market instability in the U.S. banking system seems counter intuitive and needs some explanation. To find the explanation, we need to visit longer timeframes for the value of the U.S. dollar. This is where it becomes apparent that the U.S. dollar was already ‘super low’ going into banking crisis of September 2008. (Defined here as being at its 40-year lows on a real trade weighted basis.) To this end, the U.S. dollar recovery of the past few months has not recouped 25% of its losses incurred during the 2000 to 2008 serial bear market. Indeed, this is technically not enough to confirm that the said bear market has finished.

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MARKET OBSERVATIONS
At this point, we can say that the recovery in the U.S. dollar at the very least represents partial relief from previously over-sold or ‘cheap’ levels prevailing into 2008. high domestic savings ratio and was never immediately exposed to the implications of the global rising cost of credit as a creditor economy. In fact, it could be argued that Japan was a beneficiary of the crisis on its capital account. On the other hand, by virtue of their deeper financial and economic links to the United States banking system and economy, the United Kingdom and European economies were and are far more exposed to both the financial market shocks and the spread of the U.S. economic slow down.
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The Result
The erstwhile ‘expensive’ euro (trading at record highs in mid 2008) was sold down as it normalised itself against an already oversold U.S. dollar, while at the same time the yen was bought up against the U.S. dollar. Further, it remains difficult to define the U.S. dollar rally of late 2008 as being a uniform run for the U.S. dollar. As the following chart shows, the U.S. dollar enjoyed divergent fates against its major counter party pairs – rising strongly against the euro, while falling sharply at the same time against the Japanese yen, as most currencies did during this period. The following euro/yen crossrate chart shows the full impact of this in the extraordinary collapse of the cross. EUR/JPY moved from record highs to decade lows in the space of a month as the euro abruptly returned to earth.

What did this mean for the Australian dollar? As a second tier traded currency, the Australian dollar is usually beholden to the movement in the major currency crosses as well the movements in the fearful commodities markets that fell in lock step with the darkening outlook into 2008’s end. That was the case in this move as well. As the next chart shows – the AUD/USD rate fall of late 2008 was basically a mirror of the fall in the EUR/USD rate. And so, the AUD suffered in late 2008, what most non-Yen

The history is still being written about these substantial market moves. With the volatile backdrop of the credit crunch inspired global financial market crisis, we can briefly explain the dichotomy of a U.S. dollar rally against the euro and other Anglophone currencies and its fall against the low yielding Japanese yen. For its part, the Japanese yen, like that of most large Asian economies, enjoys a substantial trade surplus as well as a

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405551115615 515151 5615 15 15 156 56 515165 1561 651 561 651 56 15 15 15 15 5 151 51 51 551515848488 848 44 84 84 84 88 978484 654 64 84 984 9 984 84 46 548 489 7 4 84 84 87 =7 94 984 97 7 405551115615 515151 5615 15 15 1 515165 1561 651 561 651 56 15 15 15 15 5 151 51 51 551515848488 848 44 84 84 84 84 84 88 978484 654 64 84 984 9 46 548 489 7 4 84 84 87 =7 94 984 97 7 405551115615 515151 5615 15 15 156 56

405551115615 515151 5615 15 15 156 56 515165 1561 651 561 651 56 15 15 15 15 5 151 51 51 551515848488 848 44 84 84 84 88 978484 654 64 84 984 9 984 84 46 548 489 7 4 84 84 87 =7 94 984 97 7 405551115615 515151 5615 15 15 1 515165 1561 651 561 651 56 15 15 15 15 5 151 51 51 551515848488 848 44 84 84 84 84 84 88 978484 654 64 84 984 9 46 548 489 7 4 84 84 87 =7 94 984 97 7 405551115615 515151 5615 15 15 156 56

405551115615 515151 5615 15 15 156 56 515165 1561 651 561 651 56 15 15 15 15 5 151 51 51 551515848488 848 44 84 84 84 88 978484 654 64 84 984 9 984 84 46 548 489 7 4 84 84 87 =7 94 984 97 7 405551115615 515151 5615 15 15 1 515165 1561 651 561 651 56 15 15 15 15 5 151 51 51 551515848488 848 44 84 84 84 84 84 88 978484 654 64 84 984 9 46 548 489 7 4 84 84 87 =7 94 984 97 7 405551115615 515151 5615 15 15 156 56

To advertise to the readers of

Call Dennis Yap at (65) 9040 4151 or email at dennis@forexjournal.com

405551115615 515151 5615 15 15 156 56 515165 1561 651 561 651 56 15 15 15 15 5 151 51 51 551515848488 848 44 84 84 84 88 978484 654 64 84 984 9 984 84 46 548 489 7 4 84 84 87 =7 94 984 97 7 405551115615 515151 5615 15 15 1 515165 1561 651 561 651 56 15 15 15 15 5 151 51 51 551515848488 848 44 84 84 84 84 84 88 978484 654 64 84 984 9 46 548 489 7 4 84 84 87 =7 94 984 97 7 405551115615 515151 5615 15 15 156 56

MARKET OBSERVATIONS
Of course, the decline in the Australian dollar did not occur in a vacuum and is consistent with pre-crisis correlations as mentioned in past articles of the relationship between the bench mark U.S. dollar cross, the Euro/USD, on the values of the AUD (among others).

As we go to press, the Australian dollar finds itself going into the end of 2008 in a holding range pattern bounded by the extremes of September and October between 60 and 72 U.S. cents. In the context of its recent sharp fall, the holding pattern represents a welcome respite and necessary consolidation that alas may be a little too early to confirm an end to the fall of 2008. Even the momentum of the September quarter fall is unlikely to be repeated. Needless to say, if the Reserve Bank of Australia’s buying of recent weeks suggests, it is an area that it at least finds value in buying.

currencies endured in the face of a substantial short squeeze in the U.S. dollar’s value. Falling from 25 year highs, the AUD quickly plumbed the decade’s lows in a move reminiscent of the euro, British pound and a host of first and second tier currency crosses. Falling from above 98 U.S. cent highs, the AUD dropped to 60 U.S. cent lows to date in a basic waterfall collapse as investors exited the previous carry trade commodity based favourite. The fall was indeed sharper and worse in proportion to those experienced by the other top currencies as the Australian dollar fell to multi-decade lows against the euro and Japanese yen as well hitting decade lows against the Sterling. It was at this low point that the central bank become concerned and entered the market with high profile defensive buying undertaken in an effort to stabilize what had become an unstable market.

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What about Sterling?
The sterling for its part suffered a fate little different from that of the Australian dollar in recent months. Falling as it did from ostensibly expensive multi-decade highs in the over 2 U.S. dollar range to something like 20-year lows near the 1.40 area as noted below. Once again, this precipitous decline should be read both as value and ranges of the sterling. (Mirroring as it does in part the overall short squeeze in the U.S. dollar). As the 25-year look chart implies, there is still some leeway for more marginal declines in the value of the sterling to which it has already bounced and taken back something like a 1/3 of its September quarter’s losses. The suggestion being that some consolidation will now be required of the cross, before any new trend can be discerned in this volatile cross. In summary, the sharp declines in the Australian dollar and the British pound in the September quarter of 2008 should be taken in the context of both a very sharp squeeze in the value of the then ‘cheap’ U.S. dollar as well the Australian dollar and Sterling’s multi-decade range high/expensive readings of the time. Going forward, the prognosis for both the U.S. dollar and other Anglophone currencies becomes more problematic. U.S. dollar rate. There is better support lying near the 1.30 to 1.35 band. Technically, it cannot be said that the decline in the British pound has actually troughed. [The market would need +1.65 levels to hint of that.] The main rationale for such a short hand summary relates to the nexus of declining rally peaks, that continues to step lower and the lack of an observed range that might suggest a base has even begun to form. What does this imply about the prospects for the AUD/ GBP rate? Having fallen to 5 year lows, the Australian dollar itself appears to be at the bottom of its range from
JANUARY 2009

As both sides of the respective currency equations have alternatively come due for a consolidation in the case of the U.S. dollar (its recent gains) and some like stability in the conversely severely and temporarily oversold commonwealth currencies. Currencies that are at/near ostensible cheap levels now at 1 to 2 decade lows.

Peter Pontikis is an investment management specialist for ANZ Private Bank and has authored a book on Foreign exchange. He is treasurer of the international federation of technical analysts (www.IFTA.org). The above opinions are strictly his own.

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fundamental and technical realignment of both perceived

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MARKET OBSERVATIONS

Dollar/Yen … A New Historic Low in 2009
IAN COPSEY

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I

t has been over 14 years since the 79.70 low in Dollar/Yen. Over the past 10 years, it has oscillated within the range from 101 to 135. This past year has seen the low of this range penetrated and reach within 11 yen of its historic low. So, what of the coming year? Have we seen the full extent of the weakness or will there be more losses to come? In my
JANUARY 2009

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Ian Copsey takes a longterm look from a Fibonacci perspective at the USD/JYP currency pair.

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Figure 1 – Monthly USD/JPY chart

view, it is the latter and indeed, a new historic low appears to be highly likely. This monthly chart extends back to around 1970. For the most part, the direction of the chart has been basically lower during the past 38 years. Since the peak at 277.50 in November 1982, the largest correction has been the one that moved from the 79.70 low finally stalling at 147.66. (see Figure 1) Since the 277.50 high, which is shown within the first quartile of the larger red cycle, we have seen lower lows develop. This coming year will see the first bottoming of the same red cycle expected around the end of the 3rd quarter. The implication of this analysis is for quite strong losses over the coming 8 to 10 months. For some time, I have been uncertain just how the rally from 79.70 to 147.66 developed. However, I suspect that it came in 3 waves and was probably either the start of a flat correction or possibly an expanded flat. The latter scenario implies new historic lows.

The decline from the 147.66 high down to the 101.25 low is labeled Wave (a). Since then, I feel we have seen a triangular Wave (b) develop, ending at 110.65. The wonderful nature of Fibonacci has shown through within this triangle. The rally in Wave ^c was exactly 66.7% of Wave ^a, the decline to Wave ^d was exactly 85.6% of Wave ^b and the recovery in Wave ^e was exactly 66.7% of Wave ^c, ending at 110.65. Therefore, the peak at 110.65 is the end of Wave –b- and we can derive a wave equality target in Wave –c- at 64.24 and a 138.2% projection at 46.51. To judge which of these projections is correct; I take the common relationships of an expanded flat Wave efb at 23.6% and 38.2%, which imply targets at 63.66 and 53.74. Clearly, the two that match are the 63.66 and 64.24 levels. (see Figure 2) Now, we need to determine whether the decline is going to move directly lower from current levels (92.50 at the

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Figure 2 – Cycle projections time of writing) or whether we will a correction to a higher level. This is finely balanced but looking at the daily chart, we can see that the correction from the Wave (i) low at 90.88 was very swift and given that daily cycles are finding a low around this time, I suspect a complex correction. There are a few possibilities here, ranging from a direct rally in Wave c back into the 101.00 to 104.00 range, a flat correction which could still see price dip back to 90.43 to 88 once again before recovering to the same area and finally a dip in an expanded flat Wave b at between 87.20 and 89.46 before the rally. Looking at the daily cycles, I suspect we should reach a peak in Wave (ii) around the end of February and from there the start of Wave (iii) should begin. This should move down closer to the 79.70 low and may dip a little further to around 74.50 by the middle of June and after a correction in Wave (iv) the final low should arrive by late in Ian Copsey is a veteran technician having begun his career in Foreign Exchange over 25 years ago. Over 4,000 readers worldwide have read his book, Integrated Technical Analysis. His experiences range from working in the trading rooms at Barclays Bank in London and Hong Kong, acting as a technical analysis specialist for Dow Jones Telerate in Tokyo where he provided seminars for bank traders and also as the regional manager for technical analysis products in Asia Pacific. He provides his popular daily forecast “The Daily Forecaster” through his website www.fx-forecaster.com. the 3rd quarter (possibly into the 4th quarter) somewhere around 63.66 to 64.24. While obviously a much longer timeframe call, but if all this occurs and we see a bounce from 63.66-64.24, then the implication from the structure and the major monthly cycle low is for a rally back to 147.66…

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JANUARY 2009

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DAR WONG

The Outlook for Major Currencies in

2009
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Our regular contributor, Dar Wong, provides his monthly commentary and outlook for the major currency markets as we trade into 2009.
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L

ast year, the financial crisis that originated with the U.S. subprime debacle rolled down the prices of global equity. At the same time, the continual axing of interest rates to stimulate the economies in many developed and emerging countries triggered a massive unwinding of high-yielding currencies against the Japanese yen that literally has been next to nothing among all currency investments. Last year from the middle of July through August, the fall of USD/JPY affected many Japanese investors and corporations who shifted their yen profits into offshore swaps. Major European currencies like the euro and the British pound also fell heavily from large exposure in U.S. institutional funds in addition to the pull caused by the domestic housing slumps and dwindling economic growth. The unexpected 70% slump in crude oil prices from the record high of USD147 added a double impact to the deflation of these slowed economies.
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MARKET OBSERVATIONS

USD/JPY as of December 11, 2008 As we move into 2009, crude oil prices will continue to be a leading indicator of recovery in many economies. As China has become a large industrialized country, it has also become one of the biggest crude oil consumers because of its emerging growth. Owing to the impact of the global crisis, every country including China has been experiencing a contraction in its exports and domestic demand. In other words, if China were affected with shrinking growth this year, oil prices may decline further to below USD30 per barrel. However, if a surge in crude oil demand is realized too soon as the result of the recovery of Asian economies, the situation may trigger a stagflation in many developing countries. Since China and India are the two largest industrialized nations in Asia, it will not be a surprise to see them emerge from this economic rut in 2010 more quickly than other areas. Other countries in Asia, especially those that are oil producing and rich in commodity-based products will emerge quickly from this rut as well. In this first issue of 2009, I would like to give a forecast for some major currencies that might be suitable for your

Source: NetDania (2008) investment portfolio. This could also serve as a general guideline for managing your corporate exposure if you are going to deal with commercial profits in any of these currencies.

Outlook for USD/JPY
The Federal Reserve and United States Congress face tough challenges trying to reshape the U.S. economy with huge financial bailouts. The Fed Funds rate currently stands at 1% after a series of rate cuts designed to boost the U.S. equities markets. Job losses continue to mount with the unemployment rate for November at 6.7 percent, the worst unemployment level since 1993. The U.S. Labor Department reports that citizens on unemployment benefits rose over 4 million at the end of November 2008. The housing crisis still infects the economy with home prices and sale figures both declining. The financial and manufacturing sectors of the economy are deteriorating with more collapse cases that will need to be salvaged. Last November, China surpassed Japan to become the larg-

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EUR/USD as of December 11, 2008 est holder of U.S. government treasury bonds. China unveiled a stimulus plan of 4 trillion yuan (estimated USD580 billion) to support the U.S. and prevent further faltering in the American economy. From the technical outlook, USD/JPY has been mauled by a selling frenzy caused by a loss of investor confidence. The market began its plunge from a high of 110.66 on August 15, 2008 and has made a remarkable 50% recovery after reaching a low 90.95 on October 24, 2008. Theoretically speaking, this bottom is a very important level to hold as it might well mark the end of the fall. However, if this 90.95 support level is broken, it will cast serious doubts for growth in the U.S. economy for 2009 and deter the export of Japanese products. Short-term market projection (3 months) – In our opinion, the market is likely to trade in the range between 90.00 and 100.00 for this quarter before the market successfully searches for a clear direction. However, on its way up, we expect the market will hover for a while around 96.50 and make a channel formation before it eventually climbs higher. It is important to remember that this projection is only

Source: NetDania (2008) good if the support at 90.95 is not violated. Otherwise, the market may go lower to attempt the region at 86.00 before we could see some rebound from there.

Outlook for EUR/USD
The Eurozone faces a slump in output. Although central bank policymakers have been focused on inflation in the early part of 2008 and complaints that the rising euro was hurting exports. The eventual decline of this currency’s value by an estimated 20% has not helped in the increase in the value of current accounts due to the global crisis. In December, the European Central Bank cut its refinance rate again by 75 basis points to 2.5 percent. During the last quarter of 2008, retail sales and consumer markets deepened its decline. Service and manufacturing figures reported by the Royal Bank of Scotland Group PLC were charted at below the expansion benchmark of 50. Gross Domestic Product for the whole European region shrank 0.2 percent in the third quarter of 2008 with much of the market’s pessimism carrying forward into the fourth quarter. From the technical outlook, EUR/USD reached its bottom

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GBP/USD as of December 11, 2008 at 1.2328 on October 27, 2008 and formed a powerful pincer bottom for reversal thereafter. We would consider that this market has made a good consolidating phase over the year-end and will prepare to move higher for a technical recovery. Short-term projection (3 months) – This market has gathered sufficient bullish sentiment to counter the past frantic selling. From the bottom gradually scaling up, the market has successfully built another 3 progressive supports at S1 – 1.2389 (November 13, 2008), S2 – 1.2424 (November 20, 2008) and S3 – 1.2549 (December 4, 2008). In January, we expect the market to form another support level in the region of S4 – 1.2950 before we see the target above 1.4300 probably some time in mid February or March. Thereafter, the market is expected to make a long downward correction for this current recovery bull trend that started in October of 2008. In any unlikely event, we would advise traders to abandon all long positions if the market turns south and drives below 1.2320. Unfortunately, we will be unable to forecast into the second quarter until we meet the calendar time-line. Furthermore, it will depend a lot on the speed of recovery and stimulus

Source: NetDania (2008) policies in the Eurozone during the middle of this year for the market to decide for a new potential direction.

Outlook for GBP/USD
The economy in the United Kingdom is very vulnerable with additional risk coming from U.S. subprime losses and declines of domestic housing prices. Foreclosures on residential homes rose 12 percent in the third quarter 2008 due to the contraction in the economy and rising unemployment. In November for the first time, the Chartered Institute of Purchasing and Supply (CIPS) reported a drop in the service index to 40.1, which was the lowest level on record since 1996. Consumer confidence and spending are still low while frozen credit continues to stall liquidity in markets necessary for purchasing fixed assets. The Gross Domestic Product (GDP) in the third quarter of 2008 slipped 0.5 percent, making its first decline since 1992. Nearing the end of 2008, Prime Minister Gordon Brown pledged the biggest round of tax cuts and spending increases in the last two decades to counter the recession. A declaration of a 25.6 billion-pound (USD38.8 billion) package to be released over coming two years will bring the budget
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MARKET OBSERVATIONS

USD/CAD as of December 11, 2008 deficit to 118 billion pounds for the 12 months through March 2010. In December, another round of rate cuts was introduced. With the current benchmark rate at 2 percent, policymakers hope to unlock the credit gridlock and encourage more banks lending to good customers, improving the market liquidity and cash flows in financial investments. From the technical outlook, GBP/USD has been very tricky. Some experienced traders spotted an opportunity in EUR/GBP during the last quarter 2008. To initiate our study of the British pound, we need to determine and confirm that the market has bottomed before we start our upward projection for the first quarter 2009. Otherwise, it will be very difficult for us to gauge GBP/USD if it acts like a bottomless pit and keeps trying to make new lows after every consolidation phase! Short-term projection (3 months) – If the lowest bottom is assumed to be at 1.4477 on December 4, 2008, the market will gradually recover together with the rising euro value. If this up trend is projected correctly, we expect the market will reach into the region around 1.5500 before mid January followed by a progressive phase of consolidation that will further build into another round of escalation up above 1.7000 in February.

Source: NetDania (2008) It is important to take note that the above hypothesis will not be valid if the market penetrates below the low at 1.4477. If this happens, the possibility of further decline in GBP/USD may make an attempt at 1.4000 before the selling forces halt and are overtaken by a technical rebound.

Outlook for USD/CAD
From the technical outlook, USD/CAD has formed a strong resistance area by making a pincer top formation around 1.3000. It is interesting to note from the weekly chart that USD/CAD began its slide above 1.6100 in January 2002 and has never looked back. The market reached its bottom at 0.9058 during early November 2008 and has since rebounded. As an oil-producing country, it is logical that the Canadian dollar is strong with the backing of crude oil prices. USD/ CAD moves inversely to general crude oil prices and the EUR/USD market. As we near year-end 2008, when oil prices declined by an estimated 70% from the record high at USD147, USD/CAD surged sharply to make a recovery briefly above the 50% retracement. Breaking through this resistance at 1.3000 will be a very difficult. We expect the market to fall back while moving

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into a sideways trend in the first quarter of 2009. Short-term projection (3 months) – If the aforementioned resistance can be protected, we forecast the market will track its way back down to the region around 1.1000 with the possible recovery of oil prices. It is likely the market may even stretch its southward direction to 1.0300 should the U.S. dollar weaken fundamentally against the euro. This could happen within the first quarter 2009 or into the second quarter. This hypothesis will delay if the market goes up further after breaking 1.3000. In that case, we could be looking at 1.3700 before the market reverses down.

strengthening Chinese yuan from the top limit of 7.8500 since 2006. Despite the European Union and U.S. central bank demands that the Chinese currency be allowed to appreciate, the value of the yuan is still very much controlled by People’s Bank of China for fear of overheating the Chinese economy and risking inflationary problems, especially when GDP growth is projected to be lower in 2009 from the global financial crisis. In our opinion, the U.S. dollar is only temporarily strengthening against the Asian currencies including Chinese yuan. We believe the U.S. dollar will continue to weaken when the European currencies start to surge against it after midyear with higher commodity and gold prices. We foresee a tight cap of resistance at 7.0000 and expect the USD/CNY rate will continue to drop progressively in the long-term outlook with the gradual expansion of the Chinese economy. However, we are not able to forecast how low the rate will go as it is new uncharted territory in this market.
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Outlook for AUD/USD
From technical outlook, AUD/USD started its slide last July when the U.S. dollar began to strengthen against all Asian currencies. This was mainly due to the fundamental weakness of major European currencies against the U.S. dollar putting an upward pressure in the greenback to hedge against other major Asian currencies. Taking the bottom of October 27, 2997 at 0.6006 to be the ultimate support level, the market has formed a reasonably strong consolidation in the last quarter as it strengthened and stabilized in a sideways trend. Short-term projection – If the U.S. dollar weakens against the major Asian currencies as the result of a technical recovery in the EUR/USD, we should expect AUD/USD to rise to about 0.8000. This is quite likely since the market has dropped drastically for the last 5 months without making a substantial correction. Another valid reason for this scenario is that the market has made a consolidation in November and December without breaking the ultimate support, thus developing sufficient strength to climb back for a window-dressing rally into the beginning of the New Year. This hypothesis is valid only if the market does not penetrate the ultimate support at 0.6006 in the first quarter. Otherwise, holding on to long positions or trying to pick new long entries could be disastrous as the market will be uncharted territory dating back to 2003.

Summary
We foresee a new trend of carry trades will be initiated in markets once the financial crisis gradually settles down late in this year or into 2010. As this current market crisis may take 1 to 2 years to drain out the losses, some new opportunities will be spotted for borrowing cheap Swiss franc (0.5%) since it is the next lowest yielding currency to the Japanese yen (0.3%). Eventually, if the U.S. dollar were to slide lower as expected, we predict new flight will move into the cross rates of Chinese yuan, euro and pound as safe havens to safeguard long-term investments for many corporate portfolios. Of course, in this case, we are talking about swapping from Swiss franc or Japanese yen again.

Outlook for USD/CNY
From the technical outlook, the USD/CNY has stabilized around 6.8000 from last July to December. This has been mainly due to the strengthening of the U.S. dollar against all major Asian currencies as previously discussed. Prior to that, the U.S. dollar has been devaluing against the

Dar Wong has 20 year of trading experiences in global derivatives and Forex markets. His past employment in the financial industry began in 1989 with Bank of America, followed by Bankers Trust, Barclays ZW PLC and as a senior floor trader with S.B. Shearson (Citigroup). Currently, besides writing for The Borneo Post and financial magazines, he functions as a hedge advisor, coach and seminar speaker while trading his personal account. Using his PowerWave Trading™ concepts developed since 1998, Dar has groomed many retail and corporate traders to become financially successful in leveraged trading. You may read his Forex weekly report by visiting www.pwforex.com

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UPCOMING EVENTS
Feb 4, 2009 - Feb 7, 2009 The World Money Show Orlando Stock markets and oil set new highs—just as the Fed fights a recession. Only by treating yourself (and your portfolio) to the most in-depth “annual checkup” at The Gaylord Palms Resort in Orlando—can you be confident that you have fully explored all of today’s best investment opportunities— amidst such market wrenching economic transition. Obtain the best financial advice from top investment gurus—all under one roof. Venue : The Gaylord Palms Resort, Orlando, United States. Organiser : By Money Show Feb 21, 2009 - Feb 24, 2009 The New York Traders Expo Acquire the knowledge and tools from expert and fellow traders that will take your skills and profits to new heights. Also, visit the exhibit hall where you can investigate and testdrive the latest trading tools. Venue : Marriott Marquis Hotel, New York, United States. Organiser : Traders Expo Mar 14, 2009 – Mar 15, 2009 Asia Trader & Investor Convention First launched in 2006, Asia Trader and Investor Convention (ATIC) event has travelled to 7 Asian Cities, i.e., Singapore, Kuala Lumpur, Bangkok, Ho Chi Minh City, Mumbai, Shenzhen and Tokyo. With participation by over 300 financial services companies, including securities exchanges, retail and consumer banks, securities brokerage firms, asset/fund management firms, listed companies and other financial services providers, ATIC events have attracted over 75,000 active traders and serious investors across Asia. Venue : Kuala Lumpur Convention Centre, Malaysia Organiser : Nextview Apr 18, 2009 – Apr 19, 2009 Asia Trader & Investor Convention First launched in 2006, Asia Trader and Investor Convention (ATIC) event has travelled to 7 Asian Cities, i.e., Singapore, Kuala Lumpur, Bangkok, Ho Chi Minh City, Mumbai, Shenzhen and Tokyo. With participation by over 300 financial services companies, including securities exchanges, retail and consumer banks, securities brokerage firms, asset/fund management firms, listed companies and other financial services providers, ATIC events have attracted over 75,000 active traders and serious investors across Asia. Venue : Suntec City, Singapore Organiser : Nextview May 17, 2009 – May 18, 2009 The Middle East Money Summit With return from traditional markets expected to remain low institutional investors are diversifying into alternative assets to achieve superior returns and reduce risk. Today, investors has already made allocations into alternatives such as hedge funds, private equity, commodities and are in search for emerging trends and new strategies. Venue : Jumeirah Beach Hotel, Dubai, United Arab Emirates. Organiser : Arabcom Group Jun 3, 2009 – Jun 6, 2009 The Traders Expo Los Angeles In this Trader Expo you can take a productive step back from the trading screen and look at the overall markets from a broader perspective. Venue : Pasadena Convention Center, Los Angeles, United States. Organiser : Traders Expo Jun 6, 2009 – Jun 7, 2009 Asia Trader & Investor Convention First launched in 2006, Asia Trader and Investor Convention (ATIC) event has travelled to 7 Asian Cities, i.e., Singapore, Kuala Lumpur, Bangkok, Ho Chi Minh City, Mumbai, Shenzhen and Tokyo. With participation by over 300 financial services companies, including securities exchanges, retail and consumer banks, securities brokerage firms, asset/fund management firms, listed companies and other financial services providers, ATIC events have attracted over 75,000 active traders and serious investors across Asia. Venue : Hotel Equatorial, Ho Chi Minh City, Vietnam Organiser : Nextview Jul 31, 2009 – Aug 2, 2009 The Money Show San Francisco The Money Show San Francisco is your best opportunity to learn how to manage your portfolio during uncertain economic times. Hear from world-class experts in more than 150 workshops on everything from market trends to stocks & ETFs to buy and sell. Venue : The San Francisco Marriott, San Francisco, United States. Organiser : Money Show 

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ECONOMIC EVENTS CALENDAR
Legend
AU = Australia BoE = Bank of England BoJ = Bank of Japan CPI = Consumer price index CPM = Chicago Purchasing Managers CGPI = Corporate goods price indes ECB = European Central Bank EU = European Union FOMC = Federal Open Market Committee GDP = Gross Domestic Product ISM = Institute for supply Management JN = Japan MPC = Monetary Policy Committee PMI = Purchasing managers index NAPM = National Association of Purchasing Managers PPI = Producer price index SK = South Korea

JANUARY 2009
1 2 3 4 5 6
US – Construction spending data for Nov 2008 US – Factory orders data for Nov - ISM Non-Mfg Index for Dec - Nov 2008 Pending Home Sales Index data AU – Nov 2008 retail sales data AU – Import & export data for Nov 2008 US - Nov consumer credit data UK – BOE MPC ends two-days meeting to set interest rates US – Dec 2008 unemployment data US – Dec ISM Mfg Index data

26 27 28 29

US – Dec 2008 existing home sales data Dec 2008 leading indicators data AU – PPI data for Q4,2008 US – Jan consumer confidence data AU – CPI data for Q1, 2009 US - FOMC Meeting Announcement US - Durable Goods Orders for Dec 2008 - Dec 2008 new home sales data JN – CPI data for Dec 2008 - Dec 2008 unemployment rate - Dec industrial production data US – GDP data for Q4,08 - Q4, 08 Employment Cost Index data - NAPM-Chicago for Jan - Consumer Sentiment data for Jan - Farm prices data for Jan

12 13 14 15 16 17 18

US – Retail sales date for Jan - Dec business inventories data EU – GDP Q4, 2008 US- consumer sentiment for Feb

US – Feb Empire State Mfg Survey data JN – Dec Tertiary Index UK – CPI data for Jan US - Treasury International Capital for Jan EU - Merchandise Trade for Dec 2008 JN - BOJ announcement US – FOMC minutes - Housing start data for Jan - Import & export prices for Jan - Jan industrial production data US – PPI index for Jan - Jan Leading Indicators data - Feb Philadelphia Fed Survey data JN – Dec 2008 All Industry Index US – CPI for Jan

30

7 8 9 10 11 12 13 14

31

19

FEBRUARY 2009
1 2
US - Personal Income and Outlays for Dec 2008 - Dec 2008 construction spending data - ISM Mfg Index data for Jan AU – Import & Export data for Dec 2008 - RBA announcement EU – PPI data for Dec 2008 AU – Dec retail sales data EU – Dec retail sales data US - ISM Non-Mfg Index data for Jan UK – BOE MPC ends two-days meeting to set interest rates EU – ECB Governing Council meets to set interest rates US - Productivity and Costs for Q4, 08 - Dec 2008 factory orders data UK – Dec 2008 industrial production data - Manufacturing Output for Dec 2008 US - Jan unemployment data - Consumer credit data for Dec 2008

20 21 22 23 24 25 26

US – Nov 2008 international trade data - Dec 2008 Treasury Budget data US – Dec 2008 retail sales data - Dec 2008 import & export prices data - Business inventories data for Nov 2008 AU – Dec employment & Unemployment data JN - CGPI (PPI) data for Dec 2008 EU – ECB Governing Council meets to set interest rates US – Dec 2008 PPI index - Phil survey data for Jan US – CPI data for Dec - Treasury International Capital data for Nov 2008 - Dec 2008 Industrial Production data - Consumer Sentiment data for Jan

US – consumer confidence data for Feb US – Existing home sales data for Jan US – Durable good orders data for Jan - Jan new home sales data JN – CPI & CPI Core data for Jan - Unemployment data for Jan - Jan industrial production data EU – Unemployment data for Jan US – Q4, 2008 GDP data - Feb consumer sentiment data - Feb farm prices data

3 4 5

15

16

27

17 18 19 20 21 22 23 24 25
JN - Tertiary Index for Nov 2008 JN – BOJ announcement for Jan US - Housing Market Index for Jan JN – Jan Merchandise trade data US – Dec 2008 housing starts data JN - All Industry Index for Nov 2008

6

28 29 30 31

7 8 9 10 11
UK – Merchandise trade data for Dec 2008 UK - Claimant Unemployment Rate for Jan - ILO Unemployment Rate for Dec 2008 US – International trade data for Dec 2008 JN – CGPI (PPI) for Jan AU – employment and unemployment rate for Jan

Economic release Release time ( EST) Economic release Release time ( EST) Economic release Release time ( EST) GDP 8.30am Housing starts 8.30am Construction spending 10 am CPI 8.30am Production & capacity CPM report 10 am ECI 8.30am utilization 9.15am Report on business 10 am PPI 8.30am Leading indicators 10 am on-manufacturing Employment 8.30am Consumer confidence 10 am report on business 10 am Personal income 8.30am Uni of Mic consumer New home sales 10 am Business inventories 8.30am sentiment 10 am Chicago Fed national Durable goods 8.30am Wholesale inventories 10 am activity index 10 am Retail sales 8.30am Philadelphia Fed survey 10 am Federal budget 2 pm Trade balance 8.30am Existing home sales 10 am Consumer credit 3 pm The information on this page is subject to change. The Trader’s Journal is not responsible for the accuracy of calendar dates beyond press time.
JANUARY 2009

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1

BROKERAGE FIRMS LISTING
MIG Investments SA
Website Address: Year Of Company’s Foundation: Forex Division Founded: Regulated By: Pip Spread On Major: Mini Account Size: Regular Account Size: Services: www.migfx.com 2003 2003 ARIF(CH), SFDF(CH) 1-3 pips US$5,000 US$5,000 MIG offers 24 hour streamline dealing with aggressive spreads on 32 pairs and no commission. The competitive trading conditions include an institutional offering with 1 pip on EURUSD & USDJPY and reduced spreads on most pairs. Standard spreads include 2 pip spreads on five currency pairs! The many advantages include no commission, exceptional margin conditions, free high quality market research, a powerful trading platform that allows for programming of automated trading strategies.Free daily technical analysis and market commentary, WAP & mobile phone trading.

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Years in Business: Instruments Traded: Country: Phone: Fax: Email:

FXDD
Website Address: Year Of Company’s Foundation: Forex Division Founded: Regulated By: Pip Spread On Major: Mini Account Size: Regular Account Size: Services: www.fxdd.com 2002 2002 N/A 2 EUR/USD; 3 USD/JPY; 3 USD/CHF and 4 GBP/USD US$500 US$5,000 FXDD, headquartered in New York City, is a leading online foreign exchange trading firm. FXDD offers numerous dealing platforms: FXDD Trader and Meta Trader (retail), Power Trader (institutional) and FXDD Auto (automated). FXDD provides tight dealing spreads, instant one-click execution, free trading tools and top-rated news, no-interest accounts, and much more.

Languages:

English, Arabic, Chinese (Traditional), Japanese, Russian, Spanish, Polish, Bulgarian

Years in Business: Instruments Traded: Country: Phone: Fax: Email:

5 years spot foreign exchange United States +1 212.791.3950 +1 212.937.3845 sales@fxdd.com 

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JUNE 2008

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