TRADING DOLLAR MOMENTUM MOVES P.

18

Strategies, analysis, and news for FX traders

November 2014
Volume 11 No. 11

Minor currency “Commodity

and stock market currency”
capitalizations turning point?
p. 24 p. 6

Searching Banzai!
for FX Japan ups QE
reality p. 14 program p. 12
 CONTENTS

Contributors..................................................4 Advanced Concepts

Minor currencies and capitalization-
Global Markets dependent stock returns.......................... 24
Has the move in commodity Don’t look for a uniform relationship between

currencies run its course?..........................6 minor currency and stock market caps.

The Australian and Canadian dollars have taken By Howard L. Simons

pretty big hits in recent weeks. Here’s what they

look like in the near- and long-term. Forex Journal............................................29
By Currency Trader Staff One dollar up, one dollar down.

BarclayHedge Rankings......................... 11
Top-ranked managed money programs.

On the Money
Japan pumps up stimulus.......................... 12
Yen slides, Nikkei soars on renewed
quantitative easing efforts.
By Currency Trader Staff
Looking for an
advertiser? 
What’s real and what’s not? .................... 14
Look to economic realities in Click on the company
gauging FX price action name for a direct link to the
ad in this month’s issue.
By Barbara Rockefeller

Ablesys
Trading Strategies
eSignal
Trading dollar index breakouts............... 18
A basic, intuitive filter shows surprising effective- FXCM

ness on short-term dollar breakouts. MoneyShow

By Currency Trader Staff

Questions or comments?
Submit editorial queries or comments to
webmaster@currencytradermag.com

2 November 2014 • CURRENCY TRADER

 CONTRIBUTORS

TRADING DOLLAR MOMENTUM MOVES P. 18

Strategies, analysis, and news for FX traders

November 2014
A publication of Active Trader ® Volume 11 No. 11

For all subscriber services:

www.currencytradermag.com

Minor currency “Commodity

and stock market currency”
Editor-in-chief: Mark Etzkorn capitalizations turning point?
metzkorn@currencytradermag.com p. 24 p. 6

Managing editor: Molly Goad

mgoad@currencytradermag.com

Contributing writers:
Searching Banzai!
Barbara Rockefeller, Marc Chandler for FX Japan ups QE
reality p. 14 program p. 12

Contributing editor:

Howard Simons

Editorial assistant and

webmaster: Kesha Green q Howard Simons is president of Rosewood

kgreen@currencytradermag.com Trading Inc. He writes and speaks frequently
on a wide range of economic and financial
market issues.
President: Phil Dorman

pdorman@currencytradermag.com

Publisher, ad sales: q Barbara Rockefeller (www.rts-forex.com) is an

Bob Dorman
bdorman@currencytradermag.com
Classified ad sales: Mark Seger
m.seger@currencytradermag.com
Volume 11, No. 11. Currency Trader is published monthly by TechInfo, Inc.,
PO Box 487, Lake Zurich, Illinois 60047. Copyright © 2014 TechInfo, Inc.
All rights reserved. Information in this publication may not be stored or
reproduced in any form without written permission from the publisher.
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.

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 perfor-
mance does not guarantee future results.

4 November 2014 • CURRENCY TRADER

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 GLOBAL MARKETS

Has the move in commodity

currencies run its course?
The Australian and Canadian dollars have taken pretty big hits in recent
weeks. Here’s what they look like in the near- and long-term.

BY CURRENCY TRADER STAFF

Two of the major “commodity currencies,” the Australian
dollar and Canadian dollar, have depreciated significantly
in recent months. Falling commodity prices, including
crude oil and iron ore, are economic red flags for both
Canada, a major energy exporter, and Australia, a large
iron ore exporter, and have put pressure on their respec-
tive currencies.
FIGURE 1: DOWN AND DOWNER
Also, the U.S. dollar rallied significantly in the late sum-
mer and early fall, putting additional pressure on these
currencies. However, some market watchers are saying
the dollar move may have been overdone; with the U.S.
Federal Reserve monetary policy still on hold, the dollar
may have difficulty extending its rally.
Let’s look at the underlying macroeconomic and mon-
etary forces at play in Australia and
Canada to see whether they offer
any indication of whether the moves
in their currencies have run their
course.

Aussie landscape
The Australian dollar/U.S. dol-
lar pair (AUD/USD) has generally
weakened since peaking out at the
$1.10 area in late 2011 (Figure 1).
After hitting a three-and-a-half
year low early this year, AUD/USD
topped out around .9500 in July,
after which it wobbled sideways for
several weeks before falling sharply
in September. It traded slightly
below its 2014 low in early October
Source: TradeStation
before steadying, trading mostly

6 November 2014 • CURRENCY TRADER

 FIGURE 2: FINDING A BOTTOM?
Source: TradeStation
between .8650 and .8850 into early November (Figure 2).
In addition to pressure from a rising U.S. dollar, Wells
Fargo Securities currency strategist Eric Viloria notes
the Aussie dollar is being weighed down by China — a
major destination for Australian commodity exports. “The
Chinese economy has been slowing,” he says. “Over the
past few months the Chinese data has softened.”
Australia’s strong trade link to China includes major
exports of coal and iron ore, the latter having hit a five-
year low in September. Moody’s Analytics economist
Katrina Ell notes China is Australia’s largest trading part-
ner and iron ore is Australia’s biggest commodity export.
“Softer growth in China — led by the property market —
has depressed global steel prices and hurt Australia iron
ore export receipts,” she says.
Moody’s Analytics forecasts Australian gross domestic
product (GDP) at 2.9% for 2014 and 3% for 2015. Ell says
the Australian economy is at a turning point.
“Mining investment is no longer the growth driver it
once was, so other non-mining, interest-sensitive sectors
are starting to pick up the slack,” she says. “The Reserve
Bank of Australia has injected significant monetary stimu-
lus to help this transition. The housing market was the first
clear beneficiary of rate cuts, and this has spilled over to
other sectors like residential construction, retail trade, and
business conditions.” is injecting various stimulatory measures to ensure growth
CURRENCY TRADER • November 2014 7
The Reserve Bank of Australia’s (RBA) cash rate current-
ly stands at 2.5% — significantly lower than its 4.75% level
from October 2011. Since then, the RBA has been chip-
ping away at the rate to its current level, where it has held
steady throughout 2014. Viloria says Australia’s monetary
policy outlook is currently neutral. “The RBA has said they
see a period of stability in interest rates,” he notes.
However, the RBA has been actively attempting to “talk”
the Aussie dollar lower. “The central bank has been saying
the currency is still high by historical standards,” Viloria
says. A lower currency rate is beneficial to a country’s
export sector.
For now, the RBA has not backed up its rhetoric with
intervention (purchases and sales in the forex market), but
Viloria says he wouldn’t rule it out. The Reserve Bank of
New Zealand (RBNZ), in contrast, has actively intervened
in the forex market to pressure its currency lower. The
RBNZ sold New Zealand dollars in August, its largest such
action since 2007-2008.
Of all the risks facing the Australian economy, a “hard
landing” in China remains the most potentially damag-
ing, if not the most probable. “A sharp fall in Chinese GDP
growth would lead some mining investment to be shelved
and [would] hurt already soft employment and income
growth,” Ell says. “This is an unlikely scenario, as Beijing
 GLOBAL MARKETS
FIGURE 3: CRUDE SLIDE
Source: TradeStation
reaches the government’s 7.5% target in 2014.”
Another risk is a downturn in Australia’s housing mar-
ket. “Australia is one of the few countries in the developed
world to not have endured a sharp correction in house
prices, which are up about 10% year over year,” Ell says.
Currency outlook
Some analysts see the potential for an Aussie dollar
rebound into year-end. Westpac Institutional Bank’s base-
line projection is 0.9000 by the end of 2014, according to
senior currency strategist Sean Callow. He says one factor
that could support a bounce in the AUD/USD pair over
the next two months is a more positive mood supported in
part by a recovery in iron ore prices.
According to a Westpac market outlook research note:
“We are also forecasting that the iron ore price has bot-
tomed out. We anticipate a lift of around 15% in the price
by year’s end. That will be driven by a reduction in the
growth in supply of iron ore as we anticipate that local
Chinese producers, who are already operating at costs
10-20% above the current market price, will not reopen a
number of facilities after the Golden Week holiday.”
Wells Fargo’s 18-month target for the AUD/USD pair
is .8600, with the key driver being the USD. “Over the
longer-term, we are looking for U.S. dollar strength,”
8 November 2014 • CURRENCY TRADER
Viloria says. “Currently, the tone of the Fed is still cautious
and we expect some correction over the next three to six
months.”
Viloria points to his firm’s six month target at .9100 for
the Aussie dollar. “We expect some recovery,” he says. “We
would expect the U.S. dollar to be a bit more restrained or
even weaker in the coming quarters because of subdued
U.S. Treasury yields before the Fed tightens.”
Vassili Serebriakov, FX strategist at BNP Paribas, had
a more subdued outlook into year-end. “The Aussie is
viewed as fairly neutral for now,” he says. “We are looking
for a little bounce toward .8900 by year-end. But it might
just trade in a range between .8600 to .8900. The U.S. dollar
might have to wait a little for the next move higher. Wait
until we get closer to Fed rate hikes, then we’d turn more
bearish on Aussie and Canada.”
Canadian dynamics
The recent tumble in energy prices has been a negative fac-
tor for the Canadian dollar (CAD), which is often associat-
ed with crude oil prices because Canada is a major energy
exporter. After trading above $100 per barrel this summer,
nearby WTI crude oil futures (CL) fell as low as $79.10 in
October (Figure 3). Not only is weak global demand pres-
suring oil prices, but the U.S.’s dramatic domestic oil pro-
 FIGURE 4: EXTENDING THE TREND
Source: TradeStation
duction increases are weighing on demand for Canadian
crude.
“The U.S., who used to be the number one Canadian
customer, is a lot less interested,” says Tim Quinlan, econo-
mist at Wells Fargo Securities. Quinlan also notes how
the price of crude oil has a psychological bearing on busi-
ness and consumer sentiment in a large energy exporting
nation. “A bear market in oil has a knock-on effect in terms
of business and consumer confidence,” he says.
Wells Fargo pegs Canada’s 2014 GDP at 2.4% and 2015
slightly higher at 2.8%. Nomura has a slightly less optimis-
tic forecast, with 2.3% GDP for this year and 2.5% for 2015.
The Bank of Canada (BOC) is widely believed to be firmly
on hold, with its current policy rate at 1%. Unlike the U.S.
Federal Reserve, the BOC doesn’t have a so-called “dual
mandate” for both employment and inflation. The BOC’s
mandate extends only to inflation, with a target at the
mid-point of a 1-3% band. Through September, the year-
over-year consumer price index (CPI) in Canada sat at 2%,
which puts it squarely at the central bank’s target.
“Based on the current CPI reading, they have a neutral
monetary policy approach,” Quinlan says. Also, he notes
the price of oil may play into their viewpoint. “As a central
bank they may say, ‘do we need to take away the punch
bowl when oil may be entering a bear market?’ Sustained
CURRENCY TRADER • November 2014 9
lower oil prices will be a headwind for the economy,” he
says.
However, market watchers see the potential for the BOC
to raise interest rates in 2015. Wells Fargo forecasts a 0.25%
hike in the third quarter 2015 and another 0.25% hike in
the fourth quarter to end 2015 at a 1.5% rate. Nomura also
has a 2015 year-end policy rate at 1.5% for Canada.
In addition to the potential impact from declining energy
prices, the Canadian economy faces concerns about its
housing market. “Generally speaking, we think Canada
will struggle,” says BNP Paribas economist Bricklan
Dwyer. “They continue to face headwinds from high
household debt and a pending correction in the housing
market. House prices have outstripped the pace of income
for quite some time.”
According to Quinlan, Canadian consumer spending has
been financed by a growth in consumer credit. “There’s
limited scope for consumer spending to be fueled by credit
growth,” he says.
Dwyer agrees there’s a risk consumers will deleverage
more quickly and consumption will pull back.
Currency action
Since the beginning of July, the U.S. dollar/Canadian dol-
lar pair (USD/CAD) rallied from around 1.06 to nearly
 GLOBAL MARKETS
FIGURE 5: CROSS-RATE ACTION
Source: TradeStation
1.14 in mid-October, which reflects weakness in the
Canadian dollar vs. the U.S. dollar (Figure 4). For now,
however, some market watchers believe that move may
have topped out, at least in the short-term.
“Our sense is that it will stabilize in a bit of a range,”
Serebriakov says. “Our year-end forecast is 1.12. We don’t
have a strong directional view. We don’t think there is a
strong domestic catalyst. The central bank is on hold, the
economy is growing. To move, much will depend on how
the U.S. dollar fares across the board.”
Serebriakov speculates the markets will probably be
interested in buying the USD/CAD rate below 1.12, while
1.14 could be the upside for now. “I don’t see what will get
us above that,” he says.
However, Viloria says it’s tough to say if the recent
$1.1385 high was a top.
“There are risks to the forecast,” he says. “A continued
decline in oil prices could weigh on the Canadian dollar.”
Viloria says the spread between the U.S. two-year
Treasury note vs. the Canadian two-year government bond
is a key signal for the Canadian dollar. He notes that as of
late October, the U.S. two-year was trading around .39%,
10 November 2014 • CURRENCY TRADER
vs. the Canadian two-year yield at 1%.
“If we take the spread — U.S. two-year yields minus
Canadian two-year yields — and overlay it on the
Canadian dollar, there’s a high correlation,” he says. “If
U.S. yields are moving up, that’s supportive for the U.S.
dollar. In the near term, it’s likely to be neutral for the U.S.-
Canadian pair.”
Over the next six months, Wells Fargo sees room for dol-
lar/Canada to retrace a portion of its recent up move, with
a target of 1.08. However, that would likely just be a short-
term adjustment. “Longer term, the Canadian dollar could
weaken in a more meaningful move, with an 18-month
forecast at 1.13 and the main driver being the yield
spread,” Viloria says. “Higher U.S. yields will support the
U.S. dollar and be negative for the Canadian dollar.”
Cross-rate perspective
Outside the AUD/USD pair, there are some potential
opportunities on the crosses over the near- to intermediate-
term. Serebriakov suggests the Euro could be used as the
“funding currency” in several cross-rate plays.
“We like Euro/Canadian dollar lower, Euro/Australia
lower, and Euro/kiwi (New Zealand dollar) lower,” he says. quarter of 2015 forex traders will be focusing squarely on
“The commodity-based currencies are still offering a little the timing of a U.S. Fed rate hike, which will likely trigger
more carry. We like selling the Euro and buying those cur- the next up move in the U.S. dollar. That, in turn, would
rencies on the crosses. We still see the Euro moving lower, again weigh on the Australian and Canadian dollars.y
and like to use that as a funding currency. There could
be more bang for the buck than trading those currencies
against the U.S. dollar.”
Callow hones in on the
Australian/New Zealand
dollar cross (Figure 5). “Risks
are to the upside on the
BarclayHedge Rankings:
Top 10 currency traders managing more than $10 million
AUD/NZD to 1.13,” he says.
(as of Sept. 30 ranked by September 2014 return)
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However, beyond first
 ON THE MONEY

Japan pumps
up stimulus
Yen slides, Nikkei soars on renewed quantitative easing efforts.

BY CURRENCY TRADER STAFF

Sending out the month with a bang, on Oct. 31 the Policy
Board of the Bank of Japan (BOJ) approved new quantita-
tive easing measures with a 5-4 vote, expanding the coun-
FIGURE 1: YEN SURGE
Source: TradeStation
try’s already unprecedented stimulus efforts. The news
caught markets off guard, sending the Japanese yen tum-
bling and fueling gains in global equity markets.
The dollar/yen pair (USD/
JPY) jumped nearly 3% on
the day and almost 4% on the
week, pushing above August
2008 implied chart resistance
and reaching its highest level in
nearly seven years (Figure 1).
Citing deflationary pressures,
the BOJ announced it would
expand its purchase of Japanese
government bonds (JGBs) to a
total of approximately ¥80 tril-
lion (more than $715 billion) on
an annual basis, and also extend
the average maturity of its hold-
ings. It also announced it would
increase purchases of exchange-
traded funds (ETFs) and real
estate investment trusts (REITs).

12 November 2014 • CURRENCY TRADER

 FIGURE 2: WEEKLY 3% OR LARGER RALLIES

In announcing the move, BOJ Governor Haruhiko are also at least 12-week highs (green line, 16 examples)
Kuroda described the Japanese economy as being at a since 1971. The black and gray lines represent the dol-
“critical moment in the process of getting out of deflation.” lar/yen’s benchmark performance. The pair has tended
to underperform, especially
Markets react in the first three weeks after
In addition to crushing the yen, such moves. However, the
the news drove up stocks, in performance after those
Japan (the Nikkei index gained weeks that are also 12-week
4.8%), Europe, and the U.S. highs (as was the week end-
(American indices gained more ing Oct. 31) was stronger.
than 1%; the Dow hit a new all- Daily dollar/yen moves as
time high and the S&P 500 made big as the one on Oct. 31 are
a new closing high). even rarer — only eight one-
Historical examples of yen day closing gains of 2.85%
moves of this magnitude are or more since 1971, the most
small in number, but those that do recent previous example
exist suggest the Halloween rally occurring on April 4, 2013,
stands a good chance of being retraced, at least partially, in which just so happened to be the last time the BOJ made a
the near term. Figure 2 shows the USD/JPY’s performance big QE announcement. In that case, the market rallied for a
in the eight weeks after 3% or larger weekly closing gains few more days before pulling back, consolidated for a few
(blue line, 40 examples) and 3% or larger weekly gains that weeks, then rallied for a few more before reversing. y

CURRENCY TRADER • November 2014 13

 ON THE
On the MONEY
Money
What’s real and what’s not?
Look to economic realities in gauging FX price action
BY BARBARA ROCKEFELLER
There were two “flash crashes” in October, one in equities
and one in government notes — extreme price moves with
no clear and compelling cause, just panic. What do they
mean? Hard as it is to grasp when trillions of dollars are
being lost, they mean nothing much. What matters is price
trends, not self-inflicted wounds. The two remaining key
FIGURE 1: 10-YEAR NOTE YIELD
Source: Chart — Metastock; data — Reuters
FIGURE 2: 10-YEAR NOTE YIELD (RED) VS. S&P 500
Source: Chart — Metastock; data — Reuters
14 November 2014 • CURRENCY TRADER
asset classes, commodities (especially oil) and currencies
are showing trendedness, not crashes. This is where we
should focus our attention.
Two flash crashes
Figure 1 shows the Reuters 10-year note yield. From the
highest high on Dec. 31, 2013 at 3.036% the yield
fell to 1.1868% on Oct. 15, 2014. It had been as
high as 2.642% only a month before on Sept. 18.
The vertical line on the chart marks the end of the
standard error channel, which is then carried fur-
ther out in time by hand (dotted lines). The center
line of the channel is the linear regression and the
outer bands are two standard errors away from
it. To the extent the channel represents “normal”
price behavior, Figure 1 shows wildly abnormal
price behavior.
In fact, Sept. 18 is the critical date: It’s when
both the S&P 500 and 10-year note began to
fall into the rabbit hole (the arrow in Figure 2).
By Oct. 15, when the S&P bottomed, the CBOE
Volatility Index (VIX) — the “fear index” —
had hit 31.06, the highest since November 2011
(Figure 3). The Oct. 15 high is triple the year’s
low, 10.28 from July 3. Analysts like the VIX
55-day moving average. VIX has the occasional
spike, but again, the chart shows wildly abnormal
behavior.
What happened around Sept. 18 that proceeded
to create a panic? Aside from the then-pending
Scottish referendum, the Fed. The Fed meeting on
Sept. 16-17 resulted in mass confusion. We got a
dovish statement but the dot-plots showing mem-
 FIGURE 3: VIX WITH 55-DAY MOVING AVERAGE

longer”) over the dot-plot.

Source: Chart — Metastock; data — Reuters
bers’ forecasts was hawkish. At the time, the Fed had a
forecast for the Fed funds rate of 1.375% by the end of 2015
(from zero today), while the bond market forecast was far
lower, 0.76%, according to the Financial Times. The bond
market preferred to believe the written word (“lower for
The other factor that emerged during October
was the Ebola crisis. Analysts and even august
publications like the Financial Times blamed wob-
bles in the equity markets, note yields, and the
dollar/yen rate to renewed fear of a pandemic in
the U.S. The probability of an Ebola pandemic is
infinitesimal but not zero. It’s likely the financial
market gyrations in late October attributed to
Ebola would not have occurred if nerves were not
frayed by the mindless panic in mid-October.
The real events
Something else was happening at the same time — oil
prices kept going south (Figure 4). It fell as low as $79.78
on Oct. 16, which was the lowest price since $77.28 in June

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 ON THE MONEY
FIGURE 4: WTI CRUDE OIL MONTHLY
2012. During September oil was pushing red sup-
port, and during October it broke that support.
Oil can be volatile, of course, but breakouts must
be respected, and never more so than when there
are real fundamentals underlying the price move.
Despite some rumblings about slowing global
growth rates, the real impetus for falling oil prices
is sharply rising domestic U.S. production com-
bined with Saudi Arabia’s refusal to cut output in
response to falling prices. We may get a change in
Source: Chart — Metastock; data — Reuters
the Saudi stance at the Nov. 27 OPEC meeting in
Vienna, but so far the Saudis are turning a deaf ear
to appeals from Venezuela and Libya.
The U.S. oil production situation has been developing
for a long time but it’s not clear we have fully integrated
the new conditions into our thinking. Domestic produc-
tion is accelerating at warp speed, from 9.8 million bar-
rels a day in 2011 to 9.5 million in 2016, according to the
U.S. Energy Information Administration’s Annual Energy
Outlook for 2014. The U.S. uses about 20 million barrels
per day, so “self-sufficiency” is not the correct label, but
dependence on imports has been sharply reduced and is
still falling. Falling oil prices endanger domestic produc-
tion, but evidently not by much. There’s no single breakev- deficit is a mere 2.3% of GDP. The German trade surplus,
en cost for the shale production that forms the core of the
rising U.S. oil independence, but the average is somewhere
around $57 per barrel, with wide variation according to
region. The average breakeven is already down from $70
in the summer of 2013 and one forecaster says shale pro-
duction costs could fall another 40%.
The other real effect of falling oil prices is taking place
in Russia. The ruble is hitting new all-time lows just about
every day, the government has had to pull over a dozen
bond offerings, the yield is nearing 10%, and FX interven-
tion in October alone is about $15 billion. Experts say the
only thing that can save Russia from financial ruin is a rise
in the price of oil and gas.
Major oil producer Rosneft has already asked the gov-
ernment for $50 billion, since it’s one of the companies
under sanction from accessing Western markets. The
foreign affairs component of Russia’s plight is quite inter-
esting: Logically, if Russia wants to curry favor with the
Saudis and get oil prices back up, it would have to dump
support for Syria’s Assad, among other foreign policy
actions.
No one knows whether the Saudis are motivated by this
kind of consideration, but it would not be out of order in
the grand sweep of history. Maybe the U.S. and the Saudis
are working together — who knows? We can’t take our
eyes off Russia. Based on past performance, Russian chief
Vladimir Putin is not going to take this lying down. The
probability is high he will retaliate by depriving Ukraine
and Eastern Europe, if not all of Europe, of energy supplies although they might go up to four to five years.
16 November 2014 • CURRENCY TRADER
this winter.
To return to oil, the U.S.’ journey toward self-sufficiency,
or at least reduced dependency on foreign oil, is a real game-
changer. Some analysts fret and fume a key reason for the
oil price decline is recession/deflation in Europe and slow-
ing growth in China, but this assumes the U.S. is subject
to contagion. It’s poppycock. The direction of contagion
is from the U.S. to the rest of the world, not the other way
around. The size, flexibility and robustness of the U.S.
economy may not make it entirely immune from troubles
elsewhere, but to take one key metric, trade, the U.S. trade
in contrast, is 7.6% of GDP.
As for capital flows, the worse it gets elsewhere, the
better it is for the safe-haven dollar. From the most recent
Treasury International Capital System (TICS) report for
August 2014: “[The] sum total in August of all net foreign
acquisitions of long-term securities, short-term U.S. securi-
ties, and banking flows was a monthly net TIC inflow of
$74.5 billion. Of this, net foreign private inflows were $63.1
billion, and net foreign official inflows were $11.4 billion.
Foreign residents increased their holdings of long-term
U.S. securities in August; net purchases were $26.5 billion.
Net purchases by private foreign investors were $20.7 bil-
lion, while net purchases by foreign official institutions
were $5.9 billion. U.S. residents decreased their holdings
of long-term foreign securities, with net sales of $25.5 bil-
lion.”
Also, capital inflow is almost certain to continue from
an unexpected direction — official reserve holders. The
ECB has instituted a negative rate of return on deposits
and yields on government paper are extremely low. Even
without U.S. rates rising, international reserve manag-
ers want some return and not a charge for parking their
money in Euros. The negative deposit rate halts diversifi-
cation of reserves into the Euro dead in its tracks. A Societe
Generale analysis estimated that some Euro selling has
already occurred, but another $2.9 trillion worth of Euro
foreign reserves “are at risk.” If reserve managers move
into dollars, they would tend to buy the two-year maturity,
 We can dismiss contagion (while watching it from corner long in advance. For the ECB to make an unexpected
of our eye). The real focus should be the wonderful effect
of falling oil prices on U.S. businesses and households.
Aside from oil companies and suppliers, just about every
other economic player benefits from falling oil prices as
they feed through to transportation expenses, home heat-
ing oil, and gasoline.
Economists estimate the falling oil price puts as much as
$1,400 into every household pocket, not a trivial amount.
Since wages are stagnant, this is like a wage hike or a tax
cut. Judging from experience, American consumers will
spend most of it, which is good for everything from kitch-
en appliance makers to teenagers’ clothing to auto sales.
As for companies complaining about the strong dollar
harming foreign earnings, tough nuts. They should learn
to hedge FX exposures.
Bottom line, the U.S. economy is far from tanking from
contagion, and the boost to the U.S. economy from fall-
ing oil prices is real and should be celebrated. What is not
real is the Fed dithering about possibly postponing the
end of tapering at the Oct. 28-29 policy meeting. Worse,
both hawks and doves have chimed in on the subject. The
general consensus seems to be that delaying the end of
QE at this late date, when everyone expects it, would be
overly disruptive. But renewed dovishness is confusing.
If the U.S. economy is doing okay at GDP growth for the
year probably at 3-3.5%, inflation flat (if somewhat low at
around 1.7%), and unemployment below 6% (if without
wage growth), dovishness may be warranted but extreme
dovishness is not. Chatter about QE4 is not justified.
It’s not just conditions in the U.S. and at the Fed that
count, but also conditions in Europe and at the ECB. There
are two new factors in Europe with the potential to devel-
op into events or even surprises in early November. The
first is stealth intervention by the European Central Bank
(ECB). The press reported and the ECB confirmed the ECB
bought covered bonds from two French banks, rumored
to be at least two Spanish issues, one German and one
French, with maturities ranging from one to six years. The
ECB announced it will report the purchases every
Monday — even though the Bundesbank is dead
FIGURE 5: EURO BREAKOUT LEVELS
set against the ECB buying bonds because it fears
it will get snookered into buying junk. A few days
later, the press reported the ECB was consider-
ing buying corporate bonds by December, even
though the subject of corporate bond buying is not
even on the agenda.
Confidence in the ECB’s ability to engage in
stimulus via QE has been running on fumes but
was beefed up by these stories. The absence of
details is puzzling and worrying. It’s also a change
in communications strategy by the ECB. Central
Source: Chart — Metastock; data — Reuters
banks usually like to signal what they’re doing
CURRENCY TRADER • November 2014 17
move like buying covered bonds with no prior notification
is potentially a big deal. While the Fed (and BoE) waffle
about forward guidance and waste time on exact language
usage (“considerable period”), the ECB appears bold.
In the battle of central bank machismo, ECB chief Mario
Draghi wins hands down.
It’s a good thing for Draghi, too, because the ECB’s
stress and capital adequacy tests of the 130 big European
banks is due on Oct. 26. So far it looks like only a hand-
ful — 10 or so — banks will fail and need to raise capital,
probably about €10 billion, which is less than banks have
already raised ahead of time. Still, lack of confidence in the
European banking sector is running high.
In looking at FX, we need to be very careful to winnow
out what is real and what is not. What is real is the U.S.
economy on the upswing and diverging further away
more or less continuously from the European slump —
GDP not making even 1%, inflation at a frightening 0.3%,
and banks unwilling to lend. The flash crash in yields was
not based on real economics but rather a flight of fancy
about the Fed possibly keeping “lower for longer” even
lower and even longer.
Bottom line, the dollar should get a boost from the eco-
nomic resurgence promised by falling oil prices, by ongo-
ing capital inflows and the prospect of further inflows
from reserve managers, and from the Fed ending QE once
and for all and (we can hope) speaking with better clarity.
But to be sure, we need to see old Euro lows get taken
out before we see momentum. The critical old low is from
Oct. 3 at 1.2501 (Figure 5). Alas, we could also see a rise to
red resistance around 1.3000, but keep the faith. The Euro
downtrend is real. y
Barbara Rockefeller (www.rts-forex.com) is an international econo-
mist 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.
 TRADING STRATEGIES
Trading dollar
index breakouts
A basic, intuitive filter shows surprising effectiveness
on short-term dollar breakouts.
BY CURRENCY TRADER STAFF
The U.S. dollar does not lend itself to a long-term buy-
and-hold strategy — giddiness over the currency’s recent
three-month rally notwithstanding. The U.S. dollar index’s
(DXY) trajectory since the beginning of the floating-rate era
has been mostly lower, interrupted by one monster rally in
the 1980s and another big bull phase in the 1990s — moves
that, along with several other intermediate-term upswings,
have made the buck almost equally unfriendly to a “sell-
and-hold” strategy, as illustrated by Figure 1.
FIGURE 1: DOWN, SIDEWAYS, AND UP (SOMETIMES)
On a shorter-term perspective, the dollar index can often
frustrate traders with its stodgy, congestive trading. Even
extended trends — for example, the 2002-2008 down-
trend — typically include lots of sideway price action and
repeated back-and-fill moves (see 2006-2008 particularly).
The following discussion analyzes the dollar index’s per-
formance after a representative short-term breakout signal
18 November 2014 • CURRENCY TRADER
(applied on the weekly time frame) and looks at ways to
enhance its performance on a four- to eight-week time
horizon.
Eight-week breakout
The stop-and-reverse (SAR) channel breakout strategy is
one of the simplest approaches available to traders. It’s
based on the idea that a move above the n-period (day,
week, etc.) high or low indicates significant momentum
in the direction of the breakout and a likely continuation
of the move — i.e., a rally. The SAR approach keeps the
system in the market at all times: When price makes a new
n-period high, the system liquidates (stops out) its exist-
ing short position and simultaneously goes long, while the
opposite occurs when the market makes a new n-period
low.
This strategy is essentially a trend-following approach,
with the implied significance of the breakout and the sub-
sequent trend length increasing as n increases — that is,
a 100-day breakout is considered more significant than a
10-day breakout and implies a larger subsequent move.
As any student of trend-following knows, the majority of
trend signals are losers and the approach is designed to
make money from a minority of large winning trades.
Figure 2 shows how DXY performed in the first eight
weeks after the 189 initial eight-week high breakouts from
June 1971 to October 2014 (the most recent occurred the
week ending Aug. 22). The eight-week channel length is
merely representative; it’s not intended to have any sig-
nificance other than being an easily referenced, short-term
period.
In this case, breakouts were registered when price traded
above the highest high of the most recent eight weeks, but

the position was established on the close
of the breakout week. The modest post-
breakout returns in Figure 2 peak at week
4 and outperform the negative benchmark
returns by a wide margin. The percent-
age of higher closes for all one- to eight-
week periods (the benchmark percentage,
light-green bars) was between 48-49% at
all intervals; the percentage for the post-
breakout moves (dark green bars) was
never below 50% and reached 55.56% at
several intervals. Overall, there appears to
be some modest bullish momentum after
eight-week upside breakouts.
Figure 3 shows DXY’s performance
after the 188 eight-week downside break-
outs from 1971-2014. As we might expect
given the market’s overall downside bias,
the moves after these breakouts are larger
in absolute terms than the moves follow-
ing upside breakouts. Also, the percentage
of higher closes after downside breakouts
peaked at 46.81% (week 6) and was as low
as 41.29%, which means DXY was lower
at least 53.19% and as much as 58.71%
of time after these breakouts. Again, the
eight-week breakout appears to result in
bearish momentum in excess of DXY’s
benchmark performance.
Let’s experiment a bit with the basic
strategy and see where it takes us.
CURRENCY TRADER • November 2014 19
FIGURE 2: EIGHT-WEEK UPSIDE BREAKOUTS
Interpreting the performance charts
The accompanying performance charts compare the performance of a spe-
cific trading strategy or signal to the market’s overall performance during a
specific historical period. The blue and red lines represent the median and
average moves, respectively, from the close of the price pattern or signal
being analyzed to the closes of the subsequent x bars (one to eight weeks, in
this case). The black and gray lines are the median and average moves for all
one- to x-bar periods in the historical analysis window (June 1971 to October
2014 in this case) — in essence, these are “benchmark” performance lines
that show what would have happened if you traded every one- to x-bar period
in the analysis window.
The vertical bars at the bottom of the chart represent the percentage of times:
1) the market closed above the closing price of the signal bar (dark green
bars) at each interval and 2) the percentage of times the market closed higher
for all one- to x-week periods (light green bars). For example, Figure 2 shows
that one week after an eight-week upside breakout, the U.S. dollar Index
(DXY) had positive median and average gains (0.09% and 0.04%, respective-
ly), while the median and average move for all one-week periods was -0.1%.
The bottom of the chart shows the winning percentage one week after eight-
week upside breakouts (55.56%) was higher than the winning percentage for
all one-week periods (48.9%). y
 TRADING STRATEGIES

FIGURE 3: EIGHT-WEEK DOWNSIDE BREAKOUTS

Stop-and-reverse
vs. fixed exit
Figures 2 and 3 showed DXY’s up
move after eight-week upside break-
outs maximized at week 4, while the
down move after downside break-
outs peaked at week 8. (Note: These
observations are made exclusively in
the context of the eight-week follow-
up period used in the analysis. The
performance after eight weeks is
not taken into consideration, even
though it is highly likely, for exam-
ple, DXY would continue to increase
its downside gains after week 8.)
Table 1 compares the perfor-
TABLE 1: EIGHT-WEEK BREAKOUT mance for two strategies for
the 1971-2014 test window:
Stop-and-reverse With 4- and 8-week exits
an eight-week breakout SAR
All Long Short All Long Short
trades trades trades trades trades trades
system (left) and an eight-
week breakout system that
Net profit 194.95 83.64 111.31 226.87 110.54 116.33
exits long trades after four
Profit factor 2.34 2.13 2.56 2.03 1.97 2.1 weeks and short trades after
No. of trades 145 72 73 295 171 124 eight weeks. (Position size
Percent profitable 51.03% 51.39% 50.68% 58.64% 58.48% 58.87% is a fixed one unit, and per-
Winning trades 74 37 37 173 100 73
formance is shown in index
points; no commissions or
Losing trades 71 35 36 121 70 51
slippage costs were assessed.)
Avg. net profit 1.34 1.16 1.52 0.77 0.65 0.94 The table shows the end-
Avg. winning trade 4.60 4.26 4.94 2.58 2.24 3.05 ing net profit increased when
Avg. losing trade -2.05 -2.12 -1.98 -1.82 -1.62 -2.08 using the fixed exits, but
Avg. win/Avg. loss ratio 2.24 2.01 2.49 1.42 1.38 1.46 not dramatically (194.95 to
226.87). It accomplished this
Max. consec. wins 7 8 6 8 6 9
by increasing the percent-
Max. consec. losses 7 5 7 5 7 6
age of profitable trades from
Max. close-to-close DD -19.22 -17.00 -13.45 -16.15 -11.74 -12.40 51.03% overall to 58.64%.

20 November 2014 • CURRENCY TRADER

 FIGURE 4: EIGHT-WEEK UPSIDE BREAKOUTS

Most of the additional profit came from

the long trades, an indication the four-
week exit removed some trades that
would have been smaller winners or los-
ers had they been allowed to run longer.
However, the modest improvement
in net profit came at the expense of a
more than 100% increase in the number
of trades, from 145 to 295. To make the
fixed-exit version worth trading, you’d
have to take positions large enough to
FIGURE 5: FILTERED LONG SIGNALS
offset the increase in trading costs —
which could be excessively risky.
Analysis of individual trades pointed
to another way to potentially improve
the performance of these breakout sig-
nals.

Close direction
Figure 4 shows five of the eight-week
upside breakouts that occurred in 2013
and 2014. Breakouts 1, 2, and 3 were fol-
lowed by mostly downward price action
while breakouts 4 and 5 were followed
by gains.
The first three and the last two break-
outs are distinguished by a very simple
characteristic: The placement of the
breakout week’s closing price. In the first FIGURE 6: FILTERED SHORT SIGNALS
three, the breakout week closes relatively
low — below the previous week’s close,
in the lower portion of the week’s range,
or both. In the final two, the breakout
week closes above the prior week’s close
and near the top of the week’s range.
Because this is such a simple and
straightforward characteristic — a high
close results in a better long signal and a
low close produces a better short signal
— it’s tempting to dismiss it. Figures 5
and 6 show the performance of upside
and downside breakouts, respectively,
using the four- and eight-week exits and
the following filters: Long trades are exe-
 TRADING STRATEGIES
cuted only when the breakout week’s closing price is in the
upper third of the week’s range and is above the previous
week’s close. Similarly, short trades are taken only when
the breakout week’s closing price is in the bottom third of
the week’s range and is below the previous week’s close.
Both charts’ general profiles are the same to those in
FIGURE 7: UNFLITERED SIGNAL EQUITY CURVES
FIGURE 8: FILTERED SIGNAL EQUITY CURVES
22 November 2014 • CURRENCY TRADER
Figures 2 and 3 (e.g., gains after upside breakouts peak at
week 4), but the size of the moves, and their success rates,
are higher. At week 4, the median gain after the filtered
long signals is 0.34% vs. 0.22% for the unfiltered signals,
with the percentage of higher closes at 59.2% vs. 55.56%.
At week 8 the median gain after the filtered short signals is
-0.9% with the percentage of lower closes
58.14% vs. figures of -0.52% and 54.26%
for the unfiltered signals. For both long
and short filtered signals, the percentage
of higher and lower closes pushed above
60% at different intervals. Finally, the
number of long signals dropped from 188
to 125, while short signals shrank from
189 to 129.
Figure 7 shows the 1971-2014 per-
formance of the unfiltered eight-week
upside and downside breakouts using
the four- and eight-week exits. The
four lines show the performance (in
index points) of all trades, long and
short trades individually, and the dollar
index. The performance is about what
you’d expect: Long trades do well dur-
ing uptrends and short trades do well in
downtrends. However, notice the overall
strategy’s equity peaked in 1995 and sub-
sequently stagnated (it nearly matched
the 1995 high in 2011) as DXY mostly
moved sideways, from a long-term per-
spective.
Figure 8 shows the performance when
using the trade filters. The change from
Figure 7 is fairly significant. The overall
strategy’s equity curve trends much more
consistently upward, and it made a new
high as recently as 2012. The unfiltered
system’s five-year, 13% post-1995 draw-
down has been reduced here to only two
years and approximately 5%.
These improvements aren’t bad, given
the filter’s simplicity. y
WILLIAMS BOLLINGER PERSON McMILLAN FREEBURG KAMMERMAN HOFFMAN GRAMZA
FUTURES STRATEGIES COMMODITIES OPTIONS STRATEGIES STOCKS STRATEGIES FUTURES

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 TRADING STRATEGIES
ADVANCED CONCEPTS

Minor currencies and

capitalization-dependent
stock returns
Don’t look for a uniform relationship between
minor currency and stock market caps.

BY HOWARD L. SIMONS

In “Major currencies and capitalization-dependent stock The inspiration was to examine a widely accepted prem-
returns” (Currency Trader, October 2014) I concluded: ise: large-capitalization stocks, represented by the Russell
1000 index, are more subject to the vagaries of currency
The analysis suggests no systematic excess correlation exists movements than their small-capitalization brethren in the
across major currencies and time for the Russell 1000. At best Russell 2000 index. The logic underlying the premise is
there is a series of anecdotes applicable for individual currencies large corporations have more global presence and do busi-
and over individual market environments; several of these anec- ness in more different currencies than smaller firms.
dotes are sector specific. Is the conclusion noted for major currencies valid for a
set of minor currencies?
As discussed last month, size-dependent
FIGURE 1: U.S. LARGE- AND SMALL-CAP STOCKS CORRELATION different responses would make sense only
if the Russell 1000 and 2000 indices had
material divergences in behavior. To refresh,
over the period beginning with the March
1999 start date for many minor currencies’
carry return series, the Russell 2000 has dem-
onstrated it is a higher beta version of the
Russell 1000 on a total return basis:

R2tr = 1.926 * R1tr – 49.852, r2 = .891

The rolling three-month correlation of

returns has been surprisingly stable since the
2002 low, as demonstrated by its continu-
ously in-sample average of 0.905 (Figure 1).
Large- and small-cap stocks’ differences are
more about the greater variance of small

24 November 2010 • CURRENCY TRADER

October 2014
stocks’ returns than in their return paths. will be referred to as excess correlation for the Russell
1000.
Minor currencies and capitalization Before we begin the graphic narration, we can look
Now let’s turn to the rolling three-month correlations of at two sets of regression statistics of stock index returns
returns between the Russell 1000 and 2000 total return against currency carry returns (Tables 1 and 2). Several
indices and the carry returns of the USD into a set of six things stand out immediately. First, the betas (or relative
minor currencies. These carry returns effectively are a con- variances) for the Russell 2000 against the currency car-
tinuous long futures position for each currency. ries are uniformly higher than those for the Russell 1000,
If large-capitalization stocks are more sensitive than and by significant margins. This tells us the more volatile
small-capitalization stocks to changes in minor currencies, Russell 2000 has a greater relative movement to the minor
we should see large swaths of magenta representing the currencies than does the Russell 1000. The same observa-
correlation of the Russell 1000 index to individual curren- tion applied to the major currencies — with the exception
cies outside of the tan areas representing the Russell 2000 of the Japanese yen, which has a habit of being excep-
index’s correlation of returns in Figures 2-7. These periods tional.
Second, the r-squared or percentage of vari-
ance explained for the Russell 2000 is greater
TABLE 1: REGRESSION SYNOPSES (RUSSELL 1000)
for each currency carry return series; this also
ln(R1000 TR) = f(ln((CurrencyTR)) was the case with the major currencies with
Beta Const R-Squared DW the exception of the Japanese yen. Third, none
MXN 1.111 0.849 0.373 0.0032 of the regression r2 levels meet the 0.80 stan-
dard set forth in FAS 133 as a bona fide hedge.
BRL 0.310 3.079 0.491 0.0045
Only the Russell 2000-Chilean peso (CLP)
KRW 1.252 1.195 0.438 0.0062
relationship comes close. Finally, the Durbin-
INR 0.953 0.123 0.396 0.0045 Watson (DW) statistics for all of the regres-
IDR 0.499 2.174 0.332 0.0044 sions involved are very near zero; we should
CLP 1.245 1.059 0.717 0.0096 want these to be near 2.00. This indicates
serial correlation in the residuals as opposed
to a random and white-noise process and is a
TABLE 2: REGRESSION SYNOPSES (RUSSELL 2000) telltale sign the independent variables of cur-
ln(R2000 TR) = f(ln((CurrencyTR)) rency carry returns are poor explicators for
Beta Const R-Squared DW stock index returns.
MXN 2.087 5.397 0.692 0.0063 We can account for this serial correlation
by converting the total return series into
BRL 0.518 2.327 0.723 0.0066
daily percentage returns, or ln(Pt0/Pt-1).
KRW 1.973 4.245 0.573 0.0077 Now let’s run the regressions in the form
INR 1.764 3.445 0.714 0.0010 Stockret=f(Currencyret) and isolate the partial
IDR 0.958 0.174 0.644 0.0073 correlation coefficient, or correlation after
CLP 1.785 3.196 0.764 0.0103 removing the effect of other variables, for the

CURRENCY TRADER • November

October 2010
2014
25
 ON
ADVANCED
THE MONEY
CONCEPTS

TABLE 3: PARTIAL CONTRIBUTION

Russell 1000 Russell 2000
MXN 0.519 0.496
BRL 0.404 0.374
KRW 0.111 0.110
INR 0.149 0.136
IDR 0.032 0.031
CLP 0.262 0.248

FIGURE 2: CORRELATION OF RETURNS, RUSSELL INDICES VS.

MEXICAN PESO currency carry’s daily return (Table 3).
The two sets of partial correlation coef-
ficients are very similar. This tells us we
should not expect to see systematically
greater correlation of returns for the stock
indices against the currency carry indices
in the following charts.

FIGURE 3: CORRELATION OF RETURNS, RUSSELL INDICES VS.
BRAZILIAN REAL
Correlation history
If we look at the case of the Mexican peso
(MXN), we can see the effects of NAFTA,
cross-border maquiladora plants and large-
scale operations by large U.S. firms in
Mexico (Figure 2). This is one case with
a very clear dominance by Russell 1000
firms both in bull and bear market cycles.
The Mexican case underscores the impor-
tance of running the statistical analysis as
opposed to relying on visual observation;
we might think the strong carry into the
MXN would have matched the Russell
2000’s post-crisis outperformance, but this
did not happen until mid-2013.
This close physical integration is absent
for Brazil (Figure 3). While the correlation
of the carry trade into the Brazilian real
(BRL) was higher for the Russell 1000 than
for the Russell 2000 prior to the finan-
cial crisis that dominance has dissipated
since 2009. Why the correlation of the
carry trade to the Russell 2000 should be
as high as it is given the relatively small
importance of the Brazilian market to
small-capitalization U.S. stocks is some-
thing of a mystery. In addition, the strong
relative correlation for the Russell 2000

26 November 2014 • CURRENCY TRADER

 FIGURE 4: CORRELATION OF RETURNS, RUSSELL INDICES VS.
KOREAN WON

persisted regardless of directional turns

for the carry trade.
The small-capitalization bias is even
more pronounced after 2009 for the
Korean won (KRW), and like the case
for the BRL, the strong relative correla-
tion between the carry trade into the
KRW and the Russell 2000 has persisted
through both bullish and bearish cycles
for the currency (Figure 4). As is the case
for Mexico, it is the large-capitalization
issues of the Russell 1000 that have the
FIGURE 5: CORRELATION OF RETURNS, RUSSELL INDICES VS.
strongest business linkages with their INDIAN RUPEE
Korean counterparts in industries such
as telecommunications equipment, steel
and automobile manufacture. We might
expect the correlation of returns to be
higher for the Russell 1000, but it clearly
is not, a mid-2014 spike notwithstanding.
The correlations between the dollar
carry trade into the Indian rupee (INR)
and both U.S. stock indices are about as
random as we can get (Figure 5). These
correlations oscillate rapidly around zero
at fairly low levels of correlation. This
suggests trade with India simply is not
as important of a factor as we might have
believed given the country’s growth over
the past two decades.

CURRENCY TRADER • November

October 2010
2014
27
 ON
ADVANCED
THE MONEY
CONCEPTS

FIGURE 6: CORRELATION OF RETURNS, RUSSELL INDICES VS.

INDONESIAN RUPIAH

A very similar statement can be made for

FIGURE 7: CORRELATION OF RETURNS, RUSSELL INDICES VS.
CHILEAN PESO
the Indonesian rupiah (IDR, Figure 6). These
correlations also oscillate rapidly at small
absolute levels and do so throughout bullish
and bearish cycles for both U.S. equities and
the IDR itself.
Correlations of returns between the dol-
lar carry trade into the Chilean peso do not
oscillate as rapidly as those for either the
INR or IDR, although they are at fairly low
absolute levels (Figure 7). We should expect
the correlations against the Russell 1000 to
dominate given the importance of Chile’s
large mining sector, and this is visible even
though the absolute dominance is small.
No single answer
On balance, the same conclusion reached for
the major currencies applies here as well:
No single, simple and systematic relation-
ship exists between a set of minor currencies
and U.S. equities split along the capitaliza-
tion dimension. Once again, any reflexive
response a strong/weak dollar might favor
large- or small-capitalization stocks is likely
to be correct only anecdotally. It may be
good enough for government work or a
two-sentence sound bite on television, but
it is not good enough for traders and inves-
tors. y

Howard Simons is president of Rosewood Trading

Inc. For more information on the author, see p. 4.

28 November 2014 • CURRENCY TRADER

 FOREX TRADE JOURNAL

One dollar up, one dollar down.

TRADE exited if price approaches the short-term resistance around

.8000 (note the multiple highs near this level — Oct. 15, 16,
Date: Oct. 27. and 22 — on the daily chart).

Entry: Long the New Zealand dollar/U.S. dollar (NZD/
USD) pair at .7862.
Reason for trade/setup: The “kiwi” was one of many
currencies that has sagged recently against the resurgent
dollar, but in early October, the pair showed signs of form-
ing a base and making a possible up move. The pair made
a higher low on Oct. 24, and the trade was entered after
price demonstrated continued strength in early trading on
Oct. 27.
The stop will be kept tight — we will not risk a test of
the swing low around .7710 — and the position will be
Source: TradeStation
Initial stop: .7819.
Initial target: .7984.
RESULT
Exit: .7902 on Oct. 29.
Profit/loss: +.0040
Outcome: This trade turned a small profit, but didn’t cap-
ture anything thing close to its full potential for a couple
of reasons. The biggest reason is that the exit target
was originally .7964, which was raised to .7984 to
squeeze a little more out the trade. This was unfor-
tunate, because the kiwi rallied to .7976 on Oct. 29
shortly before the FOMC announcement slammed it
down around 200 ticks. Luckily, the stop had been
raised twice, so no damage was done. However,
given the volatility the FOMC announcement was
certain to bring, it would have wiser to take profits
before it — especially since price came within eight
ticks of the profit target. 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 circum-
stances, 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
Currency Entry Initial Initial P/L Trade
Date IRR Exit Date LOP LOL
pair price stop target point % length
10/27/14 NZD/USD 0.7862 0.7819 0.7984 2.84 0.7902 10/29/14 0.0040 0.51% 0.0114 -0.0002 2
Legend – IRR: initial reward/risk ratio (initial target amount/initial stop amount). LOP: largest open profit (maximum available profit during
lifetime of trade). LOL: largest open loss (maximum potential loss during life of trade). Trade length: duration of trade in calendar days.
MTM: marked to market (the trade’s open profit or loss at a given point in time).

CURRENCY TRADER • November 2014 29