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Gauging the Nordic currencies p. 12 Dollar: More volatility, less certainty p.


Cu r re nc y Trader
August 2013 Volume 10, No. 8

The Euros ongoing headwinds p. 6

Strategies, analysis, and news for FX traders

FX system testing with an edge p. 22 The Argentine pesos lamentable history p. 26


Contributors..................................................4 Global Markets Euro survives crises, but faces lackluster economy.......................................................6
There isnt a whole lot of bullish sentiment surrounding the Euro these days, but what are the best bearish opportunities? By Currency Trader Staff

Global Economic Calendar......................... 32

Important dates for currency traders.

Conferences, seminars, and other events.

Currency Futures Snapshot.................. 33 BarclayHedge Rankings......................... 33

Top-ranked managed money programs

On the Money The ride of the Valkyries.......................... 12

Nordic currencies have had a good run, especially vs. the Euro, but is their edge diminishing? By Davide Accomazzo

International Markets............................. 34
Numbers from the global forex, stock, and  interest-rate markets.

Forex Journal............................................37
Pullback entry bets on renewed kiwi strength vs. dollar.

More uncertainty, more volatility............. 16

The mixed messages from the dollar might be resolved only by a market shock. By Barbara Rockefeller

Trading Strategies FX trading system development: Outperforming your tests......................... 22

When youre developing a forex trading strategy, how much price data should you use? By Daniel Fernandez

Looking for an advertiser?

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

Advanced Concepts Argentina cannot get its ARS in gear..... 26

What went wrong in Argentina, and can it be fixed? By Howard L. Simons

Questions or comments?
Submit editorial queries or comments to


A publication of Active Trader

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

q Howard Simons is president of Rosewood Trading Inc. and a strategist for Bianco Research. He writes and speaks frequently on a wide range of economic and financial market issues. q Barbara Rockefeller ( is an international economist with a focus on foreign exchange. She has worked as a forecaster, trader, and consultant at Citibank and other financial institutions, and currently publishes two daily reports on foreign exchange. Rockefeller is the author of Technical Analysis for Dummies, Second Edition (Wiley, 2011), 24/7 Trading Around the Clock, Around the World (John Wiley & Sons, 2000), The Global Trader (John Wiley & Sons, 2001), The Foreign Exchange Matrix (Harriman House, 2013), and How to Invest Internationally, published in Japan in 1999. A book tentatively titled How to Trade FX is in the works. Rockefeller is on the board of directors of a large European hedge fund. q Daniel Fernandez is an active trader with a strong interest in calculus, statistics, and economics who has been focusing on the analysis of forex trading strategies, particularly algorithmic trading and the mathematical evaluation of long-term system profitability. For the past two years he has published his research and opinions on his blog Reviewing Everything Forex, which also includes reviews of commercial and free trading systems and general interest articles on forex trading (http://mechanicalforex. com). Fernandez is a graduate of the National University of Colombia, where he majored in chemistry, concentrating in computational chemistry. He can be reached at q Davide Accomazzo is the chief investment officer at

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

President: Phil Dorman Publisher, ad sales: Bob Dorman Classified ad sales: Mark Seger

Volume 10, Issue 8. Currency Trader is published monthly by TechInfo, Inc., PO Box 487, Lake Zurich, Illinois 60047. Copyright 2013 TechInfo, Inc. All rights reserved. Information in this publication may not be stored or reproduced in any form without written permission from the publisher. The information in Currency Trader magazine is intended for educational purposes only. It is not meant to recommend, promote or in any way imply the effectiveness of any trading system, strategy or approach. Traders are advised to do their own research and testing to determine the validity of a trading idea. Trading and investing carry a high level of risk. Past performance does not guarantee future results.

THALASSA CAPITAL LLC, a registered investment advisor. He is also adjunct professor of finance at the Graziadio School of Business and Management at Pepperdine University in Malibu, Calif. He lives in nearby Topanga with his wife and daughter.

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Euro survives crises, but faces lackluster economy

There isnt a whole lot of bullish sentiment surrounding the Euro these days, but what are the best bearish opportunities?

In late July the Euro was virtually unchanged vs. the U.S. dollar from the start of the year (Figure 1). Price swings have been confined roughly to a range between 1.2660 and 1.3700 since late 2012, and more recently between 1.2800 and 1.3400, but more opportunities are likely to evolve in the next five months of the year. From a fundamental perspective however, there seem to FIGURE 1: RANGE-BOUND EURO

be few factors in the Euro-bullish camp, and the currency is widely seen as a sell vs. a range of other currencies in the months ahead. Although Euro break-up fears have dissipated, the fallout from the various European sovereigndebt crises is not completely in the rear-view mirror. The potential for additional flare-ups remains, which could again put downside pressure on the currency. More generally, monetary policy and economic growth prospects also favor a negative bias.

Growth backdrop

The EUR/USD pair has mostly traded in a choppy trading range over the past year or so.
Source for all figures: TradeStation

Eurozone gross domestic product (GDP) numbers are certainly nothing to write home about, especially compared to the relatively healthier data coming out of the U.S. this year. Moodys Analytics forecasts Eurozone growth at -0.6% in 2013 and a 1.3% pace in 2014. Nomura forecasts real GDP at -0.8% for 2013 and unchanged for 2014. Within the Eurozone economic chain there are, of course, strong links and weak links. The strongest economies typically record output growth jointly with a current account surplus and low unemployment rates, says Petr Zemcik, Ph.D., director of economic research at Moodys

Analytics. Examples are Germany and Austria. We estimate Germany to grow 0.4% and Austria 0.5% in 2013. He notes, interestingly, Ireland is also poised to perform relatively strongly, with output likely to grow 0.4% in 2013 and a current account balance 1.4% of GDP. According to Zemcik, the other side of the ledger is filled with the many of the usual suspects but also a couple of more surprising underperformers. Greece, Spain, (and) Portugal will contract further this year, and so will countries such as Finland and Netherlands, he says. Jay Bryson, global economist at Wells Fargo, says it looks like things in the Eurozone are stabilizing on a big-picture basis, even if significant challenges remain. There is still fiscal austerity in many of these countries, which is providing some headwinds, he says. But youve got to crawl before you can walk. Crawling is an apt description of the pace of economic reinvigoration in some areas of the Eurozone. It might even represent progress in some countries. High levels of both public and private debt weigh on growth, says Zemcik. This translates into declining house prices and rising unemployment rates. For example, the current unemployment rates in Spain and Greece are 26.9% and 26.8%, respectively. Restrictive flow of credit, according to Zemcik, is the biggest issue in southern Eurozone economies such as Spain, Italy, Portugal, and Greece. This has been labeled a transmission problem, because the relatively low monetary policy rate has not translated

into lower lending rates in these countries, he says. This is because banks in these countries are perceived as riskier, partly because of fiscally weak governments.

Sovereign-debt crisis: Not gone, not forgotten

The September 2012 creation of the European Central Banks (ECB) Outright Monetary Transaction (OMT) program was an important because it removed some tail risk from the volatile sovereign-debt crisis, which had reasserted itself several times over the past three years. The sovereign debt crisis (has been) on the back burner over the past 12 to 18 months, Bryson says. They have built institutions to stabilize the situation. He adds that although no one has used the OMT, its a big bazooka out there. Nonetheless, Bryson says the problems are far from resolved. In order to do that they need a full fiscal union and a full banking union, he says. They are making slow progress, but it wont be completely fixed, at least in my mind, until those (issues) are addressed. Zemcik is even more critical. The debt crisis is far from over, he says. The current hot spots are Greece, Cyprus, Portugal, and to some extent, Spain. Greece has not raised as much funds via privatization as hoped, and its debt may require additional haircuts or restructuring. In Cyprus, the Laiki Bank was wound down and its remaining assets were transferred to the Bank of Cyprus, the biggest Cypriot bank. However, restructuring of this bank


The Swiss franc is one of the most overvalued currencies in the G-10. It has fundamental pressures to weaken.
Richard Cochinos, Citi

has not been yet completed and additional funds may be required. Zemcik adds Portugal is suffering through a political crisis (driven by conflicting views on austerity measures), which increased yields on Portuguese government bonds, while Spains prime minister, Mariano Rajoy, faces a political corruption scandal.

Monetary policy

The ECBs official lending rate currently stands at 0.5%, and views are mixed about what lies ahead. Its unlikely to be lowered, despite low inflation and ongoing recession across the Euro area, Zemcik says. Lowering the rate would probably have only a small impact because of the transmission problem; it wouldnt boost lending and investment. The ECB is considering other alternatives. It hinted that it might keep the policy rate low for an extended period of time. This is a sort of weaker forward guidance used by the Fed and the Bank of England, but the promise of low interest rates is less credible. The ECB is also thinking of reviving the market with targeted purchases of asset-backed securities from peripheral economies. This might help circumvent the transmission problem. If the backing assets are loans to small firms, this amounts to indirect lending from the ECB to these firms via banks. However, Bob Lynch, head of G-10 FX strategy Americas for HSBC, says his firm thinks rates will be cut again by 25 basis points in the fourth quarter. Bottom line: monetary policy remains a bearish risk to the Euro. We could see some less traditional monetary policy, which could weaken the Euro, says Richard Cochinos, head of Americas G-10 FX strategy for Citi.

Euro outlook

Overall, the deck seems stacked against the Euro in terms of both interest rate and growth differentials. The Euro is caught in a two-way environment between better recovery in the U.S., which does have knock-off effects for Europe, and China, where weaker growth is now expected for the remainder of the year than was expected three or six months ago, Cochinos says.

Nomura economist Charles St-Arnaud says his firm sees the EUR/USD pair generally moving lower. Youre starting to see a divergence in monetary policy between the Fed and the ECB, he notes. The Fed is already starting to warn they will reduce monetary accommodation, which should put upward pressure on interest rates, while, the ECB is saying they will have to keep interest rates low for a long period of time. Vassili Serebriakov, foreign exchange analyst at BNP Paribas, also highlights the importance of the Fed-ECB divergence. We think there will be tapering later this year as we see U.S. growth strengthen in the third and fourth quarter, and that should help the dollar, he says. And, we have a very dovish ECB. He adds that because the market is quite long the dollar right now, he sees more Euro-bearish opportunity in nondollar cross rates. St-Arnaud notes the U.S. economys relative strength vs. the Eurozone will keep pressure on the Euro, which is also more susceptible to future shocks. There is always the risk that we could see some concerns about the sovereigndebt crisis, he explains. It has been the story for the past three years, so you cant fully discount it. Lynch notes Eurozone austerity continues to drag on growth. There is a weakening global backdrop, which is creating significant headwinds, he says. If growth is going to be weak, it also means that tax receipts are going to be lower. Lynch says HSBC has a EUR/USD downside target of 1.2600 at the end of September and 1.2400 by yearend. Alvise Marino, foreign exchange strategist at Credit Suisse, however, highlighted some positive views on the Euro, especially the flow story. We are neutral to bullish, he says. Europe is running a current account surplus and on the financial side they dont have big outflows. The current account surplus is at an all-time high. Marino says he is seeing central bank FX reserve managers moving back into the Euro after shifting assets into the Australian and Canadian dollars over the past two years. His firm has a 12-month EUR/USD target of 1.33.


Euro crosses

Forex strategists highlight a number of potential opportunities to short the Euro on the crosses, given the overall negative bias seen for the Eurozone currency. First, lets take a look at the Euro/Swiss franc pair (EUR/ CHF). From January 2012 to September 2012, Euro/Swiss traded primarily between 1.2000 and 1.2100. As of late July, the pair had edged up to 1.2373 (Figure 2). The rise of Euro/Swiss off the floor is a very interesting paradigm shift in the FX market, Citis Cochinos says. As people become less worried about Europe, we see the movement out of the Swiss franc. The structural changes at the ECB removed the need to hold the Swiss franc. Cochinos sees the potential for more upside in the Euro/Swiss pair. As long as the programs in Greece, Ireland, Portugal, and Cyprus remain on track, there will be less need to hold Swiss, he says. The fundamental reasons for being short the Euro Eurozone tail risk, Eurozone break-up those fears have been receding over the past nine months. The Swiss franc is one of the most overvalued currencies in the G-10. It has fundamental pressures to weaken. HSBCs Lynch says the Euro/ Swiss pair could get back to 1.25. Another area to watch is the Euro vs. Nordic currencies (Figure 3). The Euro could weaken vs. Norway and Sweden, according to Cochinos. Both the Norwegian krone (NOK) and Swedish krona (SEK) are attractive economies for investment, he says. They both have either trade or current account surpluses, which are supportive factors


Most analysts see more upside potential in the EUR/CHF pair.


The Euro is also expected to weaken against the Norwegian krone and the Swedish krona because of the relative economic strength of the Nordic countries.



Projections of for the Euro/yen pair range from 1.2200 to 1.2300 by year-end.

for their currencies. (For more analysis of the Nordic currenices, see The Ride of the Valkyries, p. 12.) Nomuras St-Arnaud also sees both the EUR/NOK and EUR/SEK pairs as potential crosses to watch. We could see a pretty good move because these economies are performing relatively well. He cites a 770 target for EUR/ NOK and an 850 target for EUR/SEK. Lynch sees even greater potential for the EUR/NOK cross to move. Euro/Norway could see 7.25 later this year, he says. We think Norways fiscal backdrop is the best in Europe. It is one of the only AAA sovereigns left in the world, he says. Nomura also expects the Euro to depreciate vs. the Japanese yen (Figure 4). Weve got Euro/yen (EUR/JPY) at 122 by year-end, St-Arnaud says. HSBC holds a similar view. We have Euro/yen down, because we have Euro/dollar going down by the end of the year, Lynch says. We dont expect the yen to weaken much more this year. We see Euro/yen at 1.23 by the end of the year.

Fragile situation

Although there are signs of stabilization in the Eurozone economy, the region remains vulnerable. Cochinos highlights a potential risk factor for the Eurozone and its currency the recent trend of higher crude oil prices. Growth could be weaker in Europe if oil prices continue to trend higher, and certain parts of the Eurozone are very sensitive to oil, he says. Weve seen a 10% appreciation in July, which has caused Norway and Canadas currencies to appreciate. Higher oil prices could push debt-to-GDP ratios higher, and that could get the rating agencies attention. For now, the Eurozone needs to avoid any major upsets if the Euro has any hope of mounting a sustained up move. And even then, the future is not certain. If there are no major shocks in the world, the Eurozone will stabilize and start to grow, Wells Fargos Bryson says. But it remains very fragile. Its certainly not an established recovery. y


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The ride of the Valkyries

Nordic currencies have had a good run, especially vs. the Euro, but is their edge diminishing?


In the aftermath of the 2008 global financial crisis, an interesting trend developed in foreign currency money flows: Nordic currencies, especially the Norwegian krone (NOK) and the Swedish krona (SEK), started to outperform the U.S. dollar and, to an even greater degree, the Euro (Figure 1). From the ashes of destabilized financial systems in traditional safe havens such as the United States, interFIGURE 1: SCANDINAVIAN STRENGTH

The downtrends in the U.S. dollar/Norwegian krone (USD/NOK) and the Euro/Swedish krona (EUR/SEK) beginning in late-2008, early-2009 reflect the strength of the Nordic currencies vs. the dollar and Euro in the aftermath of the 2008 global financial crisis.
Source for all figures: TradeStation

national money flows looked for credible alternatives. Scandinavian countries seemed to provide relative safety: Norway had a large current account surplus driven by its significant oil trade, Sweden was relatively detached from the malaise that afflicted core Europe, and Denmark was closely linked to the outperforming German economy (with the advantage of having its own currency). It worked like a charm until the fourth quarter of 2012, when signs of reversals started to appear. Relative to the U.S. dollar (USD), investor sentiment began to shift from a perception of never-ending quantative easing by the Federal Reserve to a guessing game about when the central bank may actually begin to tighten. A simultaneous slowdown in European economies seemed to force an opposing monetary policy in Europe, including in the Valkyrian group. At this juncture the main question is whether the recent weakness in Nordic currencies is a secular trend change or a temporary retracement that could provide an interesting entry point for longer-term trades. A proper analysis of the macro-economic picture should also reveal whether future price trends may be changing relative to both the USD and Euro (EUR) or only one of the two major global currencies.

The global macro picture

As of July, the global economic outlook was showing signs of slowing down. The International Monetary Fund (IMF) trimmed


The main question is whether the recent weakness in Nordic currencies is a secular change in trend or a temporary retracement that could provide an interesting entry point for longer-term trades.

its forecasts for world economic growth because of headwinds in the U.S., a persistent recession in Europe, and a brewing credit crisis in China. Nordic countries would not be immune to a global slowdown, but because of their smaller size and flexibility they could potentially better weather the storm. Furthermore, the current slowdown in the U.S. could be only temporary, as others have turned out to be in the last couple of years. The housing market seems to have stabilized and consumer confidence is on the rise; only significantly higher interest rates or another fiscal policy blunder could seriously derail the recovery in the second half of the year. The credit crunch in China, however, could have more negative ramifications. Some analysts are forecasting the coming of a Chinese Lehman moment that could badly damage the world economy. For the moment, it seems the Peoples Bank of China has enough tools and credibility to stem the crunch, but additional stresses on the system could really test its ability to cope with the emergency. A China slowdown is, by default, a negative for Europe overall and could exacerbate the current stagnation. Given this macro background, economic expectations for Nordic countries are being reduced as well. However, some specific trends could help especially Sweden and Norway perform better on a relative basis. Thanks to a rising trend in wages, a new round of tax cuts, and low inflation, Sweden, for example, is seeing positive data in private consumption (Economic Outlook Nordics, Nordea, June 2013). As far as Norway goes, energy is the main driver of its economic growth. Global oil prices are expected to remain well-bid despite good supply in the U.S., a fact confirmed by healthy investment plans by most oil companies.


While Sweden is indeed enjoying some positive trends in its internal demand, its overall growth is still below par. In June the National Institute of Economic Research (NIER, published its Economic Tendency Indicator (ETI), which hit 94.5 below its historic average, indicating a weak economy. However, the trend is pointing higher and additional improvement should be expected. The combination of strengthening household demand and economic data largely in line with expectations is keeping the Riksbank at bay; no rate cut seems likely. Economic recovery is not expected until fall, with an acceleration in 2014 when external demand is projected to grow more significantly, thanks to a larger contribution from exports (Swedish Economy Overview, NIER, June 2013). Swedens economy should see faster growth in 2014, not only as a result of improved household purchasing power and exports, but also as a function of expansionary fiscal policy because of the coming elections. However, if external demand disappoints, its possible the central bank may decide to lower its repo rate given an inflation number below target and unemployment above 8%.


Norways economic outlook is somewhat more complex than Swedens. Household income growth was strong for the past two years, but expectations for 2013 and 2014 are lower (Economic Outlook Nordics, Nordea, June 2013). Unemployment is on the rise, mostly as a result of a slowdown in commercial construction amid tightening lending standards. Residential construction and the housing sector in general are still growing and have been a source of out13



performance in 2012 but are expected to slow in 2014. Energy related investments remained strong in 2012 and 2013 and helped counterbalance softening data in other areas; however, its unclear how much longer such investments can be maintained. Recent forecasts for oil demand have surprised to the upside: A report by OPEC indicated

world oil consumption will increase next year by 1 million barrels a day, equivalent to 1.2% for a total daily demand of 90.7 million barrels. Of course, such forecasts are highly dependent on how deep the global economic slowdown turns out to be. (Business confidence also seems to be decreasing, as reflected in the confidence index reported by the Statistics Norway.) Overall, it seems the economy is in a FIGURE 2: EURO/SWEDISH KRONA stalling moment, but not necessarily facing a marked slowdown. This is keeping the Norges Bank on the sidelines for now, but new data could push the central bank in either direction. Deterioration in the inflation picture resulting from a stubbornly hot housing sector or an unexpected spike in energy prices could push the bank to hike rates. On the other hand, a continued worsening of the employment picture may create the conditions for a rate cut. A recent report from Norges Bank (Monetary Policy Report, June 20, 2013) illustrates a future interest path driven mostly by its 2.5% inflation target. Essentially, as of June, the central bank was worried about the potential for an accelerated slowdown in economic activity if the energy sector suffers Given its projected relative economic outperformance vs. the Eurozone, a setback in the coming months; given the the Swedish krona is positioned to continue gain ground on the Euro. current low level of inflation, lower rates are possible. The bank rationalizes the current low level of inflation as the result of powerFIGURE 3: U.S. DOLLAR/SWEDISH KRONA ful external forces, such as global deflationary dynamics and a strong NOK. Currency strength is viewed as the consequence of high oil prices and global interest rates at record low levels. Given this scenario, its possible to expect the bank is leaning more toward easing than tightening.


The krona may not perform as well against the U.S. dollar. The outlook here depends primarily on Federal Reserve policy adjustments.

The Danish economy is highly dependent on its neighboring countries, especially Germany and the UK. This factor helps explain its unremarkable performance of the past few quarters, as the economies of Denmarks trading partners were slowing down. However, rising competitiveness bodes well for the future, and 2014 forecasts have growth ticking up to 1.3% (Economic Outlook Nordics, Nordea, June 2013.


FIGURE 4: NORWEGIAN KRONE However, the countrys housing crisis remains an issue and a damping element in consumer confidence. In light of the fact that monetary policy is firmly anchored to Eurozone policies (Denmarks monetary policy objective is to hold the krone stable vs. the Euro), fiscal policy is practically the only tool available to jump start economic activity. However, it is perceived that profligate fiscal policy may be coming to an end as more intervention could push bond yields much higher, offsetting any possible benefits.

Trading implications

Macro-economic analysis would indicate that the Swedish krona is positioned to continue to outperform the Euro as a result of The odds may slightly favor a weaker Norwegian krone, but short-term expected stronger economic performance forecasts are for more range trading vs. the Euro and the dollar. vs. the economies of the common currency block (Figure 2). The spread between rates in Sweden and the Eurozone should remain FIGURE 5: DANISH KRONE wide enough and continue to attract money flows. However, the krona may not perform as well against the U.S. dollar (Figure 3); this trade will be highly dependent on the speed at which the Federal Reserve will decide to normalize its monetary policy. Short-term forecasts for the Norwegian krone are for more range trading. The uncertainty on oil prices and relative investments in the next 12 months and the still-too-low level of inflation vis--vis the Norges Banks target are elements not conducive to a quick return to outperformance vs. either the Euro or the U.S. dollar (Figure 4). For the foreseeable future the odds are actually tilted more toward a lower krone. The Danish krona is expected to continue to closely track the Euro and underperform the U.S. dollar (Figure 5). The Danish krone will likely continue to track the Euro closely and From a long-term perspective, the trend underperform the U.S. dollar. of increasing diversification into Nordic currencies from global central banks should remain intact as the investment choices for AAA-rated sovereigns continues to shrink. In this light, the Norwegian and Swedish currencies. y Wall Street Journal recently reported how, in the first part of 2013, central banks and sovereign wealth funds from Davide Accomazzo is the chief investment officer at THALASSA Poland, Russia, Indonesia, and different other East Asian CAPITAL LLC, a family office and Registered Investment Advicountries have increased the pace of their purchases of sor. For more information on the author, see p. 4.
CURRENCY TRADER August 2013 15

On the Money ON THE MONEY

More uncertainty, more volatility

The mixed messages from the dollar might be resolved only by a market shock.
The dollar should be in an uptrend because of rising yields. The overnight Federal Reserve funds rate may stay zero bound for years to come, but the Feds retreat from bond-buying that will start in September should push all other rates up permanently. The combination of relatively better U.S. economic growth and rising yields, resulting in a widening yield advantage over other G7 countries, is the classic recipe for a strong currency. (In late July, the U.S. 10-year had a yield advantage of 90-110 basis points over German bunds.) Or maybe not. You can also argue the dollar should be weaker because U.S. monetary policy is still extremely accommodative and, even if tapering occurs, will remain so until 2015 or 2016. Besides, good U.S. growth means the world is safe for risk i.e., non-dollar assets. The alternating push-me, pull-you effect of each point of view creates a range-trading environment that is pure hell for trend-following traders and hedgers in the FX market, but a no-lose situation for equity traders at least in G8 countries. FIGURE 1: WHAT IS THE EURO PATTERN? Its a sure loser for emerging-market currencies and assets, and probably for commodities, too, if only because of the higher cost of leveraging. One of the more interesting aspects of the watershed moment engineered by the Fed is the banks reluctance to acknowledge the global reach of its decisions. First, look at Figure 1, which shows the Euros (EUR) February breakout below the red support line, affirming the downtrend and culminating in a late-March low. Then there was a bounce and another low in May, followed by a bigger bounce and a third low in July. This pattern qualifies as a triple bottom on most criteria, even though the second bounce is abnormally large and as yet theres no confirmation, which comes when price surpasses the previous highest Confirmation of a triple-bottom in the Euro occurs would result in a Euro forecast high (horizontal line). If confirmation of 1.4079. occurs, the standard forecast is to take
Source: Chart Metastock; data Reuters and eSignal

Continued on p. 19



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A riff on equities

It will likely take a crisis outside the U.S. to derail the Fed or convert the dollar into a safe-haven think another Shanghai Surprise like the one that infected world stock markets in 2007-2008. The Shanghai Composite Stock index (SSE) fell from 6,124.04 on Oct. 16, 2007 to 1,664.92 on Oct. 28, 2008, and in the early stages of the collapse took every other major stock index in the world with it (Figure 2). The Shanghai Surprise was the first time there was widespread talk of contagion. Even today the Japanese Nikkei index is influenced by what happens in Shanghai, despite having plenty of its own factors to trade on, including the dollar/yen rate. Look at the SSE alone does this look like the stock market of The early stages of the SSEs collapse took every other major stock index in the a country about to take over as world with it. economic hegemon and issuer of Source: Chart Metastock; data Reuters and eSignal a reserve currency? Now consider the Nikkei, which has racked up more gains in the past year than any other stock index in But China is another matter. First, we really dont know if the world, including the U.S., which is doing splendidly Chinese data is accurate, and theres also some confusion the S&P index is at new historical highs and worth a record regarding policy. In June the central bank reined in bank $15 trillion, nearly the same as U.S. GDP. liquidity, causing a rate spike, but in July it threw out the Equities win around the world either on better growth floor on corporate loan rates. These arent really incompat(that means better earnings) or on outflows from bonds. ible, but theyre a bit hard to untangle. More difficult is the Emerging markets inevitably suffer because, well, they are finance minister saying 6.5% growth would be fine, but the second-rate in some important aspects and were popular premier saying only a few days later if growth fell to 7%, the only among desperate yield-seekers. Developed markets government would engage new stimulus initiatives. Growth have better legal and operating infrastructures that will was officially at 7.5% at the end of Q2, by the way, but always be preferable if return is converging toward develmanufacturing had slowed to just over the boom-bust line. oped markets. The old saw has it that real after-tax return Households are spending less and engaging more in gets the inflows, all other things being equal, but some capital flight. In the state-owned corporate sector, cronybasic things are not equal. In a pinch, would you rather ism, corruption, and overleveraging are rife. In real estate, go to court in New York, or Shanghai or Mumbai? Its that savers would rather own hundred of thousands of empty simple. apartments in ghost towns than to entrust their cash to Rising equity prices in the U.S. and Japan mean invesbanks or the stock market. Redirecting the economy from tors believe their respective central banks will achieve a manufacturing powerhouse to a more balanced economy growth and interest rates will remain low. They also believe with a high-functioning household sector is proving difficult. the central banks want to prevent any real drop in stocks Opinion is divided on whether Chinese event risk is underbecause rising equities promote the wealth effect that estimated or overestimated. keeps households feeling able to buy material goods and China has the potential to drag down the rest of the services. Household spending is the cornerstone of recovworlds stock markets and also their economies, to a ery. Good household data is important because it means certain extent. The lasting power may be limited, but once somebodys earnings are going up. And to a certain extent, a shock has awakened everyone to the risks theyre able to even a marginally bad data release, like U.S. existing home overlook today, you have to expect a flight to safety, meansales in June, is good news because it means the Fed will ing the dollar and U.S. assets. keep the punch bowl overflowing. Barbara Rockefeller




It will take a crisis somewhere else to put the U.S. in its safe-haven role and inspire outright dollar-buying.

the distance from the last low (1.2755) to the confirmation line (1.3417), or 662 points, and add it to the confirmation line. That would give a Euro reading of 1.4079, which would be the highest high since May 2011. This is a bizarre forecast that seems utterly at odds with the rising dollar scenario based on relatively higher growth and yield advantage. The mainstream press reflects the divergence: Recently the Wall Street Journal described the dollar as still reigning supreme, while the Financial Times wrote that Euro strength defies the bears, chiefly because all the negatives about the Eurozone are priced in and, besides, shorting the Euro on these issues has not worked out very well in the past. You can defend a rising or falling dollar scenario with equal ease. The outcome is nothing more than horrible FX market volatility. Bloomberg reports the dollar index reached a near three-year high in May, slid to a four-month low, and rose back again to the high in the space of a little more than two months. Implied volatility is as high as it was in 2010, implying sheer misery for traders and hedgers (if also an enticement to the options gang).

Context and nuance

What might break this deadlock? First, we need to take a stand on the Feds degree of commitment to begin tapering in September and ending it by June 2014. The dovish camp thinks the Fed will engage in delay because the conditions for tapering are not really in place. At around 1.5% (with some forecasters recently dropping Q2 forecasts to 1%), growth is on the weak side and inconsistent with rising payrolls. Unemployment will remain stuck at 7.5% or higher, and its overly optimistic to project 7% when tapering starts and 6.5% when any policy change (rate hike) could be contemplated. Even if it did decline to 7%, Fed chief Ben Bernanke pointed out in congressional testimony it may not be the data to watch because of the participation rate

and other factors. Because 7% unemployment is a threshold, not a trigger, unemployment data is not a reliable indicator of Fed plans. Third, inflation looks OK but only OK with the PCE index up 1% in May and CPI up 1.8% in June, but the Feds forecast of inflation rising to the 2% floor may be wrong. If inflation falls instead of rises (i.e., deflation), tapering and hikes will be deferred. Finally, we should expect fiscal drag on the economy when new spending cuts come in October, not to mention a possible replay of the late-December federal government-funding crisis. This expresses the doubts of the doves, but fails to mention some other factors we should assume are on the Feds list, too. The first is improvement in the financial sector, as seen in big banks Q2 earnings. To the extent quantitative easing (QE) was designed to prop up the financial sector, its no longer needed. Second, the perception is that the Fed is favoring fat cat bankers over the average Joe. The Fed is not elected but public perception is still important, especially in the context of voters not really knowing whether the likes of Senator Rand Paul (R-Ky.) have any real grounds in calling for the Fed to be dismantled. Third, tapering ends QE, which is government interference in markets, and this always causes distortions and misallocations. QE was a special form of intervention for special circumstances that no longer pertain, since growth has returned, employment has picked up, etc., even if not in a robust and fully convincing way. You could even argue the Fed is taking the earliest opportunity to stop interfering in markets. Fourth, monetary policy is not fiscal policy and cannot substitute for it. Central banks attempt to do that from time to time the first European Central Bank (ECB) chief Wim Duisenberg suggested more than once that national governments declining to rein is fiscal deficits meant rates had to stay higher, longer but its not the Feds mandate to stand in for fiscal policy. Bernanke may want to demon19


strate the Fed knows its place. Finally, if its true Bernanke is leaving office in January, its difficult to avoid the deduction he wants to be the guy who started and ended QE. He has said that any other Fed president will be qualified to do the job, but observers think its human nature for him to want to close the circle in the history books.

Watershed moments

In May the Fed first suggested tapering might be coming. In June it said tapering is coming. In July various Fed officials, including Bernanke in congressional testimony, added context and conditions. A majority of big bank economists, according to a Bloomberg survey, now expect the official announcement at the September policy meeting, Why so much folderol about something relatively simple? The multiple tapering announcements are, collectively, a watershed moment. Tapering means the crisis that began in 2008 and included the failure of Bear Stearns and Lehman Brothers is now over. The U.S. is emerging from crisis, and thus government intervention is no longer warranted. The U.S. is the only G8 country that has emerged from the Great Recession and has the only central bank that is talking about raising rates, even if an official rate hike is several years off. No matter what happens next, including a possible rise in QE after tapering starts, the end-of-crisis determination is a done deal. It was the Feds to call, and the Fed called it. So what will it be tapering to begin in September and conclude by June 2014, or not? The Fed cannot back away from announcing tapering at the Sept. 17-18 FOMC meeting unless something catastrophic occurs, such as non-farm payrolls posting a gain of only 50,000 in July or August when the running monthly average so far this year is 195,000. To back off now would make the Fed appear weak and indecisive. Similarly, the Fed has to deliver a cut in bond purchases, even if its not the $20 billion now expected and the amount has to be increased later. Since the Fed declared itself data-dependent the dollar has been tracking the 10-year yield with every data release, a trend that is unfortunately likely to continue with each piece of tapering-relevant news. To the extent that some traders and investors think the Fed is more dovish than it appears, their short dollar positions are at risk if theyre wrong. To the extent traders have faith the Fed will keep its word and are positioned long dollars, or plan to be, there could be quite a pullback on the slightest sign of wavering. In fact, a bad payrolls number on Friday, Aug. 2 would lead to a massive dumping of dollars while a really good number 200,000 or more

would inspire a dollar rally. Then there is the longer-term effect. Some question these short-term, data-driven effects and zero in on Fed policy itself i.e., the overnight Fed funds rate. Goldman Sachs, for example, thinks the Fed wont raise rates until early 2016. As a result, the firm believes the market has wildly overdone the bullish dollar outlook, and forecasts the Euro at $1.4000 over the next 12 months. Now go back and look at the triple bottom projection around $1.4000. You could argue tapering is already having big effects and outright policy change has been put on the back burner, but maybe Goldman is right and its the Fed funds rate that counts. Note that, in contrast, the Bloomberg survey gets a Euro projection $1.2400. A mini-era has ended. The crisis changed very little and the U.S. is returning to pre-crisis conditions. To be sure, banks have to be better capitalized and consumers have somewhat better protection against venal and rapacious financial institutions, but on the whole, things are back to normal. It will take a crisis somewhere else to thrust the U.S. into its safe-haven role and inspire outright dollar-buying. At this moment it appears any crisis will be in the European periphery or China. Although its tempting to imagine that higher growth and yields should favor the dollar, historically they have not, although Japanese Prime Minister Shinzo Abe is counting on it and Canada is certainly wondering about it. Its an attractive idea so reasonable but its more wishful thinking than anything else. That is, until the real U.S. yield is closer to historic norms and the yield spread against other G7 countries gets higher than the current 1%. Right now the real return is 70 basis points. Conventional wisdom has it the 10-year yield should be about 2-3% over inflation. If you consider that U.S. inflation was 1.8% in late June and add the high end of the real return, 3%, you get an optimal yield of 4.8%. This is the level at which the U.S. starts looking not only good, but also irresistible. As for yield differential, so far a 1% advantage is not enough of a premium to induce investors into buying more dollars than they already have. What will it take 2%? How about 3%? Assuming the bund remains the same at around 1.5%, a 4.8% U.S. yield gives the U.S. a 3.3% advantage. That ought to work. Stay tuned, but dont count on a lasting dollar rally until the real yield is substantially higher. y
Barbara Rockefeller ( is an international economist with a focus on foreign exchange, and the author of the new book The Foreign Exchange Matrix (Harriman House). For more information on the author, see p. 4.

20 CURRENCY TRADER August 2013

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FX trading system development: Outperforming your tests

When youre developing a forex trading strategy, how much price data should you use?

The most important characteristic of a trading strategy is its ability to generate live performance similar to its performance in historical testing. However, most of the system-development techniques that help achieve this goal are not straightforward, and most traders generally follow their intuition or experience in developing their own procedures. For example, many traders believe trading strategies need to be optimized on price data from only the most recent few months or years (depending on the systems time frame and frequency) to remain adapted to current market conditions, despite a lack of hard statistical evidence to back up this idea. To attempt to derive some conclusion on this point, well conduct a trading system-generation study using a wide range of historical in-sample and out-of-sample data periods to find out if there are certain thresholds that have tended to lead to more profitable results. Specifically, the study will allow us to assess what the optimum systemgeneration (in-sample) and live-trading (out-of-sample) periods have been for the Euro/U.S. dollar pair (EUR/ USD) over the past 25 years.

The in-sample, out-of-sample study

The study uses EUR/USD daily data from January 1986 to August 2012. All system-development procedures were

carried out using the Kantu system generator software, which generates price-pattern based strategies. In-sample data periods from 500 to 5,000 days were tested, along with out-of-sample periods from 200 to 800 days. For each in-sample or out-of-sample test, 5,000 price-based systems with positive performance and a coefficient of determination (R2) above 0.9 were generated. Initial tests of random in-sample intervals were followed by tests on an out-of-sample period of the required length. (In-sample periods ending before the year 2000 were avoided in order to prevent an overlapping bias on tests smaller than 5,000 days.) The goal is to see how the use of different-sized in-sample and out-of-sample data sets affected the performance of the trading systems. For example, for the test using an in-sample length of 2,000 days and an out-of-sample length of 200 days, we might first generate a system using data from Aug. 1, 2000 to Jan. 22, 2006 (2,000 calendar days), and then evaluate the system from Jan. 23, 2006 to Aug. 11, 2006 (200 calendar days). For each test we record the in-sample performance and out-of-sample performance, giving us an idea of how much each systems characteristics change when presented with unknown market conditions, which is a proxy for live trading.

August 2013 October 2010 CURRENCY TRADER

Developing trading systems across wider ranges of market conditions increases the likelihood of outperforming the in-sample test results.

tems start gaining a true statistical edge they tend to be To better interpret our results, we generated several graphs more profitable on longer out-of-sample periods, because that depict the relationship between in-sample and outshorter out-of-sample periods are more likely to capture of-sample trading performance for the different periods. systems when they are in temporary drawdown periods; These graphs seek to depict the average performance of longer periods make it possible for all systems that are the 5,000 trading systems for each period tested, allowtruly working to exhibit their statistical edge. Thats why ing us to see whether there is a true advantage or trend the chart exhibits a coherent ordering of the out-of-sample associated with following any specific in- or out-of-sample performance survivability as the in-sample period length period. increases, while the distribution is random for shorter inThe first characteristic we want to evaluate is survivabilsample values. ity, which measures the historical capability of a strategy to The next thing we want to look at is our odds of outpersurvive unknown market conditions. FIGURE 1: SURVIVABILITY IN-SAMPLE DATA THRESHOLD Figure 1 shows for in-sample period

Test results

lengths shorter than approximately 3,000 days, a systems ability to survive various out-of-sample period lengths is almost always below 50%. This means if you had created a pricebased system using less than 3,000 days of in-sample data, your chances of surviving when trading live would have been less than those from random chance, which implies losing results most of the time. This analysis suggests that, in the EUR/USD at least, generating strategies using fewer than 3,000 days of data leads to curve-fitting, because there isnt enough data to sufficiently generalize price behavior. Figure 1 shows survivability increases dramatically above the 3,000 threshold, reaching values as high as 62.7% for the 5,000 in-sample/800 out-of-sample combination. This makes perfect sense. As sysCURRENCY TRADER August 2013

In-sample period lengths of less than approximately 3,000 days were associated with unfavorable odds of surviving various out-of-sample periods lengths.




As the in-sample period lengthens, there is a clear increase in the percentage of systems that are more profitable in the out-of-sample tests than the in-sample tests.

forming the historical test results, since these results represent an ideal case of system performance. Figure 2 shows the percentage of systems with per-trade out-of-sample performance that surpasses the in-sample performance. There is an almost linear increase in the percentage of systems that are more profitable in out-of-sample conditions and most interestingly the values for the different out-of-sample periods start to converge as the in-sample lengths increase. This implies that when we develop systems across wider ranges of market conditions, our ability to outperform in-sample becomes more consistent across different out-of-sample periods. It is also not surprising that short-term out-of-sample results tend to have higher performance relative to the insample results than to longer out-of-sample periods as the out-of-sample period grows, the odds increase that a system will enter a drawdown and fail to outperform the in-sample results. Merging this analysis with the previous results, we can say that choosing a larger out-of-sample period implies a higher chance of survival but a lower probability of per24

forming better than in-sample. As noted, however, this effect becomes negligible with large in-sample periods (e.g., greater than 4,000). Figure 3 shows another key aspect of this study, which is the average daily out-of-sample performance (in USD) for the different in-sample and out-of-sample lengths. This statistic relates directly to our ability to make money (in the out-of-sample periods) if we had traded the 5,000 systems. It also helps tie together the previous two results, because it provides an idea of whether the better-than in-sample performance is able to compensate for the low survivability across small in-sample period lengths, and whether more money was made in the larger in-sample periods. The figure indicates there is indeed a tendency to lose money when using in-sample period lengths less than 3,000 days, and the ability to make money increases as we go to higher in-sample period lengths. As in the case of the first graph, the longer out-of-sample period also shows better performance, possibly because systems have been able to exit drawdowns and show their edge in the longer out-ofsample test conditions.


As the in-sample period lengthens, there is a clear increase in the average total profit produced by the strategies.

More is better

Overall, this study shows that generating systems with small amounts of data has never been a historically successful tactic on the EUR/USD daily charts. Accordingly, when developing trading strategies, you improve your odds of survival by using larger amounts of data (more than 3,000 days). Its also clear that giving your strategies adequate time to weather drawdowns (more than 800 days) also tends to produce better results, because a systems edge appears to remain solid when it has been developed on a large insample period.

setup for live trading. If you are developing systems using an in-sample length proven to have a historical edge, you will have a higher chance of trading profitably in the end.

Much more to study

You can always lose money!

Finally, this analysis study was limited by the amount of currently available data, so it was not possible to study larger in-sample generation periods. The odds of profitability will likely increase when using even larger insample periods (20 years, for example), but it is also possible the effect of a larger in-sample dataset might become negligible (i.e., fitting further conditions does not improve results). y
Daniel Fernandez is an active trader focusing on forex strategy analysis, particularly algorithmic trading and the mathematical evaluation of long-term system profitability. You can repeat this study, or conduct your own tests in other instruments, using the demo version of the Kantu software available at For more information on the author, see p. 4.

Although these results illustrate some historical trends in system generation across different in-sample and out-ofsample conditions for the EUR/USD, its important to note the possibility of losing money is always significantly high. For example, the best results show a 39% historical chance of committing to a losing system, which is the reason it is wise to pick several strategies when generating a



Argentina cannot get its ARS in gear

What went wrong in Argentina, and can it be fixed?

You would be hard-pressed to explain Argentina to a Martian assuming, of course, you could find a Martian willing to talk to a currency trader. A Martian sojourner to our fair planet would find only a few places with Argentinas natural endowments of water, soil, minerals and energy, a mostly temperate climate and the advantage of producing its grain and livestock during a different season than its Northern Hemisphere competitors. Also, Argentina, unlike Brazil, did not evolve as a state based on slavery during the colonial era. But to paraphrase an old joke several nations tell about themselves, God was alleged to have told an angel inquiring about these outsized gifts, Just wait until you see the people I put there! Very sadly, this is true. It is hard not to hold the Argentines in some measure of contempt for their declining status over time. (Here I defer to Josef Stalin as

an expert on squandered patrimony: Lenin founded our state, and weve [fouled] it up! he was alleged to have snarled in the early days of the German invasion.) At the beginning of the 20th century, Argentina was the seventh-wealthiest country in the world. It avoided getting chewed up in either World War, and then proceeded to destroy itself with an astonishing blend of corruption, the labor socialism of Juan Peron and his successors (including, at one point, himself), and a blend of assorted leftwing losers and vicious military despots. Argentina and the newly born Russia after the fall of the Soviet Union have to be the dual poster children arguing for private property rights and the rule of law. Countries who expropriate foreign investors, as Argentina did with Spanish oil company Repsol in 2012, tend to attract fewer foreign investors. Some things are very predictable.

The U.S. has been trying to achieve the impossible: Win a moneyprinting race with Argentina.

The Irish dramatist Brendan Behan wrote, Other people have a nationality. The Irish and the Jews have a psychosis. What would he have said about Argentina?

Dont cry for me, little peso

In that spirit, other currencies exist but the Argentine peso has a history, and a tragic one at that. Consider: In 1970, the peso moneda nacional became the peso ley. Lop off two zeroes in recognition of the 100:1 conversion rate. In 1983, the peso ley became the peso argentino. Lop off four zeroes in recognition of the 10,000:1 conversion rate. In 1985, the peso argentino became the austral. Lop off three more zeroes. In 1992, the peso was pegged to the dollar, effectively making Alan Greenspan the director of Argentine monetary policy. In 1999, the peso was allowed to float, more or less. For those not versed in scientific notation, all that lopping off of zeroes puts the post-1970 loss of purchasing power at 109, or 1 billion to one to the USD and thats before the dollars loss of 83.9% of its own domestic purchasing power since the end of 1969 and another 32.85% loss of the dollars purchasing power on an ICE dollar index (DXY) basis. The absolute loss of purchasing power before hedonic adjustments and any coupons you might have lying about has been close to 100 billion to one. This monetary history is independent of Argentinas default on its international debt in 2002. This followed years of various U.S. and multilateral arrangements to keep rolling the bad debt forward through devices such as Brady bonds. Some countries and you probably could name a few engage in a pretense their central bank operates indeCURRENCY TRADER August 2013

pendently of the political process. Score one for Argentina in intellectual honesty department: President Cristina Kirchner, the widow of the former president Nestor Kirchner, moved her hand-picked central banker Mercedes Marco del Pont to allow the government to borrow the excess foreign exchange reserves held by the central bank. The central bank has become a piggy bank; the outcome is as much in question as to which way the Rio de la Plata flows.

The peso market

The most fascinating question about the peso market is why it exists at all. Just like the Venezuelan bolivar or the Zimbabwe dollar, who would want to go long the ARS? The answer is some Argentine exports have to be paid for with pesos at some point, and foreign investors or multinationals in Argentina have to acquire pesos for operations. Enough of those trades exist to prevent shorting the ARS from being a one-way trade. The option market is never comfortable with the ARS rising, as seen in the excess volatility of three-month ARS forwards for USD holders. This is the ratio of the implied volatility for three-month non-deliverable forwards to high-low-close (HLC) volatility, minus 1.00. It serves as a measure of the markets demand for insurance. HLC volatility is defined as:

Where N is the number of days between 4 and 29 that minimizes the function:




23 21 19 17 15
Excess Volatility 3.50

2.75 3.00 3.25

13 11 9 7 5 3 1 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 -1

3.75 4.00 4.25 4.50 4.75 5.00 5.25

Even aside from the exceptional spikes, the excess volatility levels in the ARS have been high by currency market standards.


2.75 3.00 3.25
ARS Per USD, Inverse Scale 50% 45% 40% 35% 30%

3.50 3.75 4.00 4.25 4.50 4.75 5.00 5.25

25% 20% 15% 10% 5% 0%

When the financial crisis hit its peak in September 2008 the ARS started to collapse. The U.S. abandoned monetary discipline, and the interest rate gap started to widen in favor of Argentina.

Figure 1 shows the excess volatility readings for the ARS jumped during the 2002 default period, the 2008-2009 financial crisis, and during the 2011-2012 expropriation of Repsol and de facto politicization of the central bank. Even when these periods are excepted, the levels of excess volatility have been high by currency market standards. Of course, any resident of the Society of Quantitative Easers can and should be cautioned about throwing stones whilst living in a glass house. An analysis of expected short-term interest rates in Argentina is no longer possible given the demise of BAIBOR (Buenos Aires interbank offered rate) at the end of 2011. This still does not make LIBOR look good in comparison, given its reporting problems (see Major currencies and the Great LIBOR Kerfuffle, Currency Trader, June 2013, and Minor currencies less affected by Great LIBOR Kerfuffle, Currency Trader, July 2013). Prior to BAIBORs unfortunate exit from the world scene, the course of the ARS was related to the difference between the forward-rate ratios between six and nine months (FRR6,9) for the ARS and USD. These are rates at which we can lock in borrowing for three months starting six months from now, divided by the nine-month rate. The more the FRR6,9 exceeds 1.00, the steeper the yield curve; an inverted yield curve has a FRR6,9 less than 1.00. As is the case with other illiquid capital markets, the simple spread of three-month swap rates has to substitute

ARS Per USD, Inverse Scale ARS3M - USD3M














for the FRR differential. The story for Argentina remains unchanged. Once the financial crisis hit its peak in September 2008 (marked in Figure 2 with a green vertical line) the ARS, like almost all other emergingmarket currencies, started to collapse. The U.S. abandoned monetary discipline, and the interest rate gap started to widen in favor of Argentina. While the rate gap has not been causal of the ARS rate, the pattern has been that both countries have been on a path of monetary ease wherein the U.S. has been trying to achieve the impossible mission: win a money-printing race with Argentina. The U.S. under the stewardship of Ben Bernanke has joined a club to which no one should want to belong. What has been true over the post-September 2008 period is Argentine interest rates have exceeded their American counterparts consistently. The carry trade from the USD into the ARS can be decomposed into interest rate and spot rate components. If we re-index both to the start date of consistent data, Nov. 29, 2002, we can see how the interest rate spread has accelerated after the financial crisis at a rate consistent with the ARS spot rate weakness (Figure 3). Restated, Argentinas interest rate inducement to hold pesos has been insufficient. A second measure of failure has been the strong underperformance of Argentine stocks vis--vis their U.S. counterparts. A common pattern in emerging markets (and why do we call a country independent

320% 280%
Carry Return Components, Nov. 29, 2002 = 100% 5.25 5.00
IR Return Spot Return ARS

240% 200% 160% 120% 80% 40% 0% -40%

4.75 4.50 4.25 4.00 3.75 3.50 3.25 3.00 2.75 ARS Per USD












Since the global financial crisis, the interest rate spread has accelerated after the financial crisis at a rate consistent with the ARS spot rate weakness.

300 275 250
Excess Carry Return, USD : ARS 750% 700%
Carry Relative Performance


650% Relative Performance, Nov. 29, 2002 = 100% 600% 550% 500% 450%

225 200 175 150 125 100

400% 350% 300% 250% 200% 150% 100%












Argentine stocks have underperformed drastically since the launch of QE2 in November 2010.





DJ Grain

750% 700% 650% 600% 550% Relative Performance, Nov. 29, 2002 = 100%

Dow Jones - UBS Grain Subindex Total Return


Relative Performance


500% 450%


400% 350%


300% 250% 200%


150% 100%












Argentine relative equity performance was unaffected by the global grain rallies of 2010-2011 and 2012, as well as the 2013 price decline.

for almost two centuries emerging?) has been for the relative performance to follow the carry trade. Figure 4 shows Argentine stocks have underperformed drastically since the launch of QE2 in November 2010. The money printed in the U.S. supported U.S. stocks and may have rewarded those willing to hold ARS-denominated short-term interest rate instruments, but it did not reward Argentine investors. The earlier comments on private property and the rule of law apply.

A Pampas ARS

Argentina is a major player in world agricultural export markets, despite the burdens thrown on it in the form of taxes and price controls by the Kirchner government. It should be no surprise, therefore, that Argentine relative equity performance was unaffected by the global grain rallies of 2010-2011 and 2012, as well as during the 2013 price decline (Figure 5). Both rally periods should have allowed the government to replenish its foreign exchange reserves;

neither did, as those reserves were borrowed to finance ongoing expenditures. The net result of all this is Argentina would have to do what no leopard has done yet, and that is change its spots. If it keeps oscillating between left- and right-wing ineffectiveness, and continues to ignore the one set of policies ever proven to pull a country into prosperity the freemarket capitalism adopted but not embraced permanently by its trans-Andean neighbor, Chile its currency will continue to descend into exponentially greater levels of worthlessness. Yes, lopping off zeroes is cheap, but as every trader has learned the hard way, there is no wrong time to get on the right side of a market or of history. y
Howard Simons is president of Rosewood Trading Inc. and a strategist for Bianco Research. For more information on the author, see p. 4.





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Percentage of profitable and unprofitable accounts as reported to the NFA
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59.0% 61.9% 63.9% 67.0% 67.0% 69.7% 70.1% 71.0% 73.1%

652 22,121 5,707 12,384 9,792 1,021 2,212 21,775 3,877


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Member - NYSE, FINRA, SIPC. Lower investment costs will increase your overall return on investment, but lower costs do not guarantee that your investment will be profitable Supporting documentation for any claims and statistical information will be provided upon request. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets. [1] Standard Account. 07-IB13-554CH593 CURRENCY TRADER August 2013 31


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

August 1 2 3 4 5 6 7 8 9
U.S.: June trade balance Brazil: July PPI Brazil: July CPI Australia: July employment report Japan: Bank of Japan interest-rate announcement Mexico: July 31 CPI and July PPI Canada: July employment report LTD: August forex options; August U.S. dollar index options (ICE) U.S.: July ISM manufacturing index UK: Bank of England interest-rate announcement ECB: Governing council interest-rate announcement U.S.: July employment report Australia: Q2 PPI

21 South Africa: July CPI 22 Brazil: July employment report 23

U.S.: July leading indicators Mexico: Aug. 15 CPI Canada: July CPI Mexico: July employment report

24 25 26 U.S.: July durable goods 27 South Africa: Q2 GDP 28 29


10 11 12 Japan: Q2 GDP and July PPI 13 Germany: July CPI 14

U.S.: July retail sales UK: July CPI and PPI U.S.: July PPI France: July CPI Germany: Q2 GDP India: July PPI UK: July employment report U.S.: July CPI

U.S.: Q2 GDP (second) Canada: July PPI Germany: July employment report South Africa: July PPI U.S.: July personal income Brazil: Q2 GDP Canada: Q2 GDP France: July PPI India: Q2 GDP and July CPI Japan: July employment report and CPI

31 September 1 2 3 4
France: Q2 employment report Japan: Bank of Japan interest-rate announcement UK: Bank of England interest-rate announcement ECB: Governing council interest-rate announcement U.S.: August employment report Brazil: August CPI and PPI Canada: August employment report LTD: September forex options; September U.S. dollar index options (ICE) U.S.: August ISM manufacturing index

15 16 U.S.: July housing starts 17 18

Germany: July PPI Hong Kong: July CPI Mexico: Q2 GDP

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

Kong: May-July employment 19 Hong report


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Market EUR/USD JPY/USD GBP/USD AUD/USD CAD/USD MXN/USD U.S. dollar index CHF/USD NZD/USD E-Mini EUR/USD Sym EC JY BP AD CD MP DX SF NE ZE Exch CME CME CME CME CME CME ICE CME CME CME Vol 238.2 140.7 116.6 114.3 69.1 37.3 35.7 30.7 14.1 3.6 OI 213.1 175.7 139.4 183.3 114.1 75.9 59.6 35.5 12.5 4.5 10-day move / rank 1.71% / 71% 1.86% / 88% 0.26% / 0% -2.27% / 80% 1.66% / 73% -1.61% / 100% -1.57% / 57% 1.91% / 55% 1.60% / 47% 1.71% / 71% 20-day move / rank 2.76% / 74% 2.88% / 41% 0.63% / 32% -1.31% / 4% 2.90% / 100% 2.76% / 67% -2.29% / 71% 2.91% / 50% 3.66% / 70% 2.76% / 74% 60-day move / rank 1.97% / 62% 1.67% / 100% -1.93% / 39% -12.08% / 93% -1.67% / 38% -5.13% / 67% -0.50% / 27% 1.61% / 43% -5.96% / 64% 1.97% / 62% Volatility ratio / rank .46 / 48% .41 / 78% .32 / 32% .16 / 30% .33 / 22% .29 / 35% .49 / 43% .47 / 30% .22 / 20% .46 / 48%

Note: Average volume and open interest data includes both pit and side-by-side electronic contracts (where applicable). Price activity is based on pit-traded contracts.

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

BarclayHedge Rankings: Top 10 currency traders managing more than $10 million
(as of June 30 ranked by June 2013 return) June return 10.40% 5.90% 4.61% 3.77% 3.12% 3.10% 2.63% 2.22% 1.72% 1.04% 11.25% 11.16% 5.01% 4.69% 2.80% 2.23% 2.22% 0.49% 0.44% 0.01% 2013 YTD return 24.60% 17.82% 5.25% 4.37% -20.93% 9.18% 11.69% 10.48% 2.77% 2.38% 35.53% 34.37% 32.12% 4.40% 8.35% 13.01% -9.44% -12.65% 10.41% -0.65% $ Under mgmt. (millions) 27.3 62 14 92 21 53.5 3300 14.2 56 27.3 2.5 3.5 5.4 1.2 1.8 2.4 1.1 3 2.5 8

Trading advisor 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 CenturionFx Ltd. (6X) MIGFX Inc. (Retail) TMS (Arktos GCS II) IPM Systematic Currency (C) Friedberg Comm. Mgmt. (Curr.) Sequoia Capital Fund Mgmt. (FX) P/E Investments (FX Aggressive) BBK Bisang Blass Kavena (Currencies) A-Venture Capital CenturionFx Ltd. Fornex (Foyle) Investment Capital Adv (Managed Acts) SMILe Global (Mgmt FX) Swiss Seagull (Crossfire) FxProTech Exclusive Returns (Viktory) Smart Box Capital (Leveraged FX) Hartswell Capital Mgmt. (Apollo) MDC Trading Quaesta Capital GmbH (vTrader FX 2XL)

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

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





Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Currency South African rand Swedish krona New Zealand dollar Canadian dollar Russian ruble Brazilian real Taiwan dollar Singapore dollar Euro Indian rupee Thai baht Chinese yuan Australian Dollar Hong Kong dollar Swiss franc Great Britain pound Japanese yen July 25 price vs. U.S. dollar 0.102985 0.15455 0.79645 0.97109 0.03091 0.44954 0.033405 0.789685 1.321705 0.01683 0.0323 0.16201 0.92287 0.128905 1.06829 1.535255 0.010010 1-month gain/loss 4.75% 4.00% 2.87% 2.02% 1.54% 1.29% 1.00% 0.88% 0.86% 0.72% 0.48% 0.42% 0.06% -0.01% -0.10% -0.26% -1.86% 3-month gain/loss -5.35% 2.47% -5.73% -0.33% -2.48% -9.14% -0.45% -1.94% 1.65% -8.93% -6.69% 1.00% -10.09% 0.09% 1.08% 0.65% -0.40% 6-month gain/loss -6.74% 0.66% -5.31% -2.81% -6.87% -8.56% -2.93% -3.04% -0.87% -9.76% -3.71% 1.71% -12.13% -0.06% -0.66% -2.94% -10.55% 52-week high 0.1236 0.159 0.8619 1.0334 0.0337 0.5137 0.0345 0.8213 1.3639 0.0194 0.0348 0.1624 1.0578 0.129 1.1017 1.6286 0.0129 52-week low 0.0977 0.1434 0.7704 0.9445 0.03 0.4401 0.0326 0.7799 1.2099 0.0164 0.0315 0.1566 0.9044 0.128795 1.0074 1.4877 0.0097 Previous 15 9 13 10 14 16 7 8 4 17 11 6 12 5 2 3 1


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

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

July 25 14,562.93 21,900.96 16,432.00 3,956.02 5,018.30 6,588.00 40,752.09 1,690.25 7,865.40 19,804.76 8,298.98 40,739.95 12,669.10 3,235.68 49,067.00

1-month gain/loss 12.29% 10.30% 9.13% 8.39% 8.30% 7.97% 7.52% 6.44% 6.33% 6.31% 6.24% 5.86% 5.53% 4.72% 4.64%

3-month gain/loss 4.57% -2.23% -1.31% 3.01% -1.27% 2.26% -4.22% 6.63% -0.45% 2.05% 5.95% 4.12% 2.75% -3.06% -10.73%

6-month gain loss 33.28% -7.12% -7.30% 4.71% 3.28% 4.83% -10.58% 12.46% 5.45% -1.49% 5.61% 0.50% -1.15% -1.03% -19.79%

52-week high 15,942.60 23,944.70 17,897.40 4,072.24 5,229.80 6,875.60 46,075.00 1,698.78 8,411.30 20,443.60 8,557.86 42,016.45 12,904.70 3,464.79 63,473.00

52-week low 8,328.02 18,710.60 12,362.50 3,065.47 4,114.00 5,478.00 37,034.30 1,331.50 6,166.50 16598.50 6,324.53 34,069.59 11,475.40 2,931.60 44,107.00

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

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



Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Currency pair New Zeal $ / Yen Canada $ / Yen Euro / Yen Aussie $ / Yen Franc / Yen Pound / Yen Euro / Pound Euro / Franc Euro / Aussie $ Canada $ / Real Aussie $ / Franc Pound / Franc Pound / Aussie $ Euro / Real Euro / Canada $ Aussie $ / Real Aussie $ / Canada $ Franc / Canada $ Pound / Canada $ Aussie $ / New Zeal $ Yen / Real Symbol NZD/JPY CAD/JPY EUR/JPY AUD/JPY CHF/JPY GBP/JPY EUR/GBP EUR/CHF EUR/AUD CAD/BRL AUD/CHF GBP/CHF GBP/AUD EUR/BRL EUR/CAD AUD/BRL AUD/CAD CHF/CAD GBP/CAD AUD/NZD JPY/BRL July 25 79.595 97.05 132.09 92.23 106.765 153.43 0.8609 1.23722 1.4322 2.1602 0.863875 1.43692 1.663565 2.94016 1.361055 2.05431 0.95035 1.100095 1.58097 1.1587 0.022255 1-month gain/loss 4.86% 3.99% 2.81% 2.00% 1.84% 1.67% 1.12% 0.96% 0.79% 0.71% 0.16% -0.17% -0.32% -0.43% -1.14% -1.15% -1.91% -2.07% -2.23% -2.73% -3.18% 3-month gain/loss -5.29% 0.14% 2.13% -9.66% 1.56% 1.11% 1.00% 0.56% 13.06% 9.70% -11.34% -0.45% 11.94% 11.88% 1.99% -0.97% -9.79% 1.41% 0.98% -4.63% 9.55% 6-month gain loss 5.89% 8.70% 10.86% -1.73% 11.09% 8.55% 2.12% -0.21% 12.81% 6.29% -11.54% -2.30% 10.46% 8.40% 1.99% -3.84% -9.59% 2.21% -0.13% -7.21% -2.22% 52-week high 85.86 100.65 132.75 105.05 106.96 156.48 0.8747 1.256 1.4432 2.1795 1.0328 1.5398 1.6768 2.9755 1.3767 2.2253 1.0685 1.123395 1.6209 1.3061 0.0262 52-week low 61.39 76.68 94.65 79.81 78.81 121.17 0.7798 1.2004 1.1614 1.8879 0.8552 1.4062 1.4439 2.4667 1.2164 1.9633 0.94 1.0128 1.5286 1.154 0.0196 Previous 21 18 17 20 13 15 12 14 5 3 19 11 4 2 9 7 16 6 8 10 1


Country United States Japan Eurozone England Canada Switzerland Australia New Zealand Brazil Korea Taiwan India South Africa Interest rate Fed funds rate Overnight call rate Refi rate Repo rate Overnight rate 3-month Swiss Libor Cash rate Cash rate Selic rate Korea base rate Discount rate Repo rate Repurchase rate Rate 0-0.25 0-0.1 0.5 0.5 1 0-0.25 2.75 2.5 8.5 2.5 1.875 7.25 5 Last change -0.5 (Dec. 08) -0-0.1 (Oct. 10) -0.25 (May 13) -0.5 (March 09) -0.25 (Sept. 10) -0.25 (Aug. 11) -0.25 (May 13) 0.5 (March 11) 0.5 (July 13) -0.25 (May 13) 0.125 (June 11) -0.25 (May 13) -0.5 (July 12) Jan. 2013 0-0.25 0-0.1 0.75 0.5 1 0-0.25 3 2.5 7.25 2.75 1.875 7.75 5 July 2012 0-0.25 0-0.1 0.75 0.5 1 0-0.25 3.5 2.5 8 3 1.875 8 5


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

Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1

Release date
6/24 5/29 5/31 6/26 5/15 6/27 5/28 6/5 5/10 5/31 5/16 5/24

-6.2% -5.0% 0.8% -0.2% 1.2% 0.9% 0.1% 0.6% -7.5% 3.1% 0.9% -1.6%

1-year change
2.1% 7.5% 2.8% 0.5% 0.7% 2.2% 7.6% 2.6% 2.8% 12.5% 3.5% 1.3%

Next release
9/20 8/30 8/30 8/27 8/14 9/26 8/27 9/4 8/16 8/30 8/12 8/16


Unemployment AMERICAS

Q1 June June Q1 June March-May June April-June June Q2

Release date
5/20 7/24 7/5 5/7 7/31 7/17 7/11 7/18 7/30 7/31

7.9% 3.4% 7.1% 10.2% 5.5% 7.8% 5.7% 3.4% 2.1% 2.1%

1.0% 0.1% 0.0% 0.3% 0.2% -0.1% 0.1% -0.1% -0.2% -0.2%

1-year change
0.8% 0.1% -0.1% 0.8% 0.2% -0.3% 0.5% 0.1% 0.1% 0.1%

Next release
8/20 8/22 8/9 8/5 8/29 8/14 8/8 8/19 10/31 10/31



Argentina June June June June June June June Q2 June June June June Brazil Canada France Germany UK S. Africa Australia Hong Kong India Japan Singapore

Release date
7/12 7/5 7/19 7/11 7/10 7/16 7/24 7/24 7/22 6/30 7/26 7/23

0.8% 0.3% 0.0% 0.2% 0.1% -0.2% 0.3% 0.4% 0.2% 1.3% 0.0% 0.2%

1-year change
10.5% 6.7% 1.2% 0.9% 1.8% 2.9% 5.5% 2.4% 4.1% 11.1% 0.2% 1.8%

Next release
8/15 8/7 8/23 8/14 8/13 8/13 8/21 10/23 8/20 8/30 8/30 8/23




As of July 31

Argentina Canada France Germany UK S. Africa Australia Hong Kong India Japan Singapore June June June June June June Q1 Q1 June June June

Release date
7/12 7/30 7/26 7/19 7/16 7/25 5/3 6/14 7/15 7/10 7/29

1.2% 0.3% -0.3% 0.0% 0.1% 0.8% 0.3% 1.1% 0.6% -0.4% 0.9%

1-year change
13.4% 0.6% 0.1% 0.6% 2.0% 5.9% 1.6% 0.6% 4.9% -0.5% -0.2%

Next release
8/15 8/29 8/30 8/20 8/13 8/29 8/2 9/12 8/14 8/12 8/29

LEGEND: Change: Change from previous report release. NLT: No later than. Rate: Unemployment rate.




Pullback entry bets on renewed kiwi strength vs. the dollar

Date: July 30 Entry: Long the New Zealand dollar/ U.S. dollar pair (NZD/USD) at .7977. Reason for trade/setup: Analysis of the pairs price action on July 29 and July 30 indicated the potential for a rebound. The pairs condition at that juncture was modeled by the following pattern: 1. 2. 3. 4. 5. 6. Low[0]<Low[1] Close[1]<Close[2], Low[1]<Low[2], (Close[1]-Low[1])/(High[1]-Low[1])<=0.4, High[2]>Max(High[15]:High[5]), High[3]>Max(High[15]:High[5]).

Source: TradeStation

A limit order was entered at .7977 in expectation of the pullback extending below the round-number price of .8000 as well as the July 23-24 highs. The pair traded as low as .7956 early in the U.S. trading session, filling the order. Initial stop: .7926. Initial target: .8080; take partial profits and raise stop to protect remainder of position. Second target: .8180.

Where 0, 1, 2, etc. represent today, yesterday, two days ago, etc. Basically, the pattern rules identify an 11-day (or greater) high followed by at least a two-day pullback where the close of the second-to-last day closes in the bottom 40% of the days range. Although analysis indicated favorable odds of an up move over the next five days (higher 58% of the time, with a median gain more than twice the markets typical five-day gain, based on 109 examples), it must be noted the patterns bullish implication is ultimately based on its context in a neutral or up-trending market; examples in established downtrends did not perform as well. As a result, the stop will be placed nearby, with a relatively modest initial target. If the identified pattern plays out, the next up move should take price above resistance around .8100. (A longer-term bullish scenario would anticipate a challenge to the April high above .8600.)

Exit: Trade still open as of July 31. Profit/loss: -.0027, marked to market at .7964 at 1 p.m. ET on July 31. Outcome: After closing slightly in the black on the entry day, the pair dropped to within five pips of the stop (to .7931) early in the U.S. session the following day. By the afternoon the market had rebounded a bit, but the trade was still very much in doubt. y
Note: Initial trade targets are typically based on things such as the historical performance of a price pattern or a trading system signal. However, because individual trades are dictated by immediate circumstances, price targets are flexible and are often used as points at which to liquidate a portion of a trade to reduce exposure. As a result, initial (pre-trade) reward-risk ratios are conjectural by nature.

TRADE SUMMARY Date 7/30/13 Currency pair NZD/USD Entry price .7977 Initial stop .7926 Initial target .8080 IRR 2.02 MTM .7964 Date 7/31/13 P/L point -.0013 % -0.16% LOP .0021 LOL -.0046 Trade length 1 day

Legend IRR: initial reward/risk ratio (initial target amount/initial stop amount). LOP: largest open profit (maximum available profit during lifetime of trade). LOL: largest open loss (maximum potential loss during life of trade). MTM: marked-to-market the open trade profit or loss at a given point in time.