FUTURESMAG.

COM
SEPTEMBER 2013

TAPER WORM
HOW FED ACTION
WILL AFFECT FOREX
LOOK MA!
BUILDING BETTER
MOVING AVERAGES
RATIO MATTERS
BEST TOOLS FOR
MEASURING PORTFOLIO
PERFORMANCE

Midas
Shrugged
BEN DAVIES
TALKS GOLD, CURRENCIES AND
CENTRAL BANK-FREE MARKETS

US $6.95 CAN $8.95

 TR AD
I NG ER
AT S

CONTENTS 41
C

FO
ED

R
years

E
U

N
T I
U
SEPTEMBER 2013 // VOLUME XLII NUMBER 7 RE
S M AG
AZ

DIGITAL MARKETS
EXCLUSIVE 20 Dollar days coming
THIS EDITION INCLUDES as Fed prepares exit
ADDED ARTICLES AND
EXPANDED COVERAGE. By Daniel P. Collins
How will forex markets react to the
Fed signaling a stimulus exit as other
central banks are hitting the gas?
FEATURES
TRADING TECHNIQUES

26 The 48-hour movement strategy

By Azeez Mustapha
Swing-trade yourself to success with
this strategy for forex markets.
28 Leveraging futures vs.
ETN differentials
14 By Paul Cretien
As metal market relationships have
shifted this year, the different trading
contracts have had to evolve.
COVER STORY
30 A closer look at price
Ben Davies: chart choices
Turning adversity into gold By Jean Folger
Price charts are a trader’s portal
By Michael McFarlin to the markets. It’s important to
After a back injury forced him to re-evaluate his Olympic dreams, choose the style that works for you.
Ben Davies found a new thrill in the competition of trading. Now
managing a long-only gold fund, he strives to protect investors’
EQUITY TRADING TECHNIQUES
wealth while advocating for free market reforms around the globe.
34 Stocks, moving averages and
how to leverage them
DEPARTMENTS By Bramesh Bhandari
How to select the best moving
average to identify opportunities.
6 Ad Index 46 Trader Profile
Vallen: Second time’s
8 Editor’s Note TRADING 101
the charm
Metamorphosis
36 Quick and easy guide to
10 Forex Trader livestock trading
Fed tapering and U.S. By Rich Nelson
dollar potential Cattle and hogs offer opportunities
12 Options Strategy that are unique from other markets.
Deriving income from cash on
hand by selling premium. MANAGED FUNDS
40 Measurement matters
By Mark Anson, Donald Chambers,
For additional information, Keith Black and Hossein Kazemi
visit futuresmag.com There are a number of ways to see
inside rates of return. Here we look into
For reprints and e-prints of FUTURES articles, please contact some of the most popular methods.
PARS International at reprints@parsintl.com or (212) 221-9595.

4 FUTURES September 2013

 ®

OPTIONS ADVANCED
TRADING CHARTING

DYNAMIC CUSTOMIZABLE
TRADE LAYOUTS
TICKET

STREAMING IDEA
MARKET GENERATION
DATA TOOLS

How do you trade? Trade up to the all-new Active Trader Pro® and get fully customizable layouts
that let you see everything you need to discover, execute, and monitor your next big trading
idea — all in one place. Or start with one of our prebuilt layout options and get trading in seconds.

Active Trader Pro.

One more innovative reason serious investors are choosing Fidelity.

Get 200 free trades when you start using Active Trader Pro.*

800.FIDELITY | Fidelity.com/TryATP

Mobile
Retirement Planning Trading Investments

Investing involves risk, including risk of loss.

Fidelity’s Active Trader Pro PlatformsSM is available to customers trading 36 times or more in a rolling twelve-month period; those trading 120 times or more receive advanced
charting with Recognia anticipated pattern and events and Elliot Wave analysis.
Options trading entails significant risk and is not appropriate for all investors. Certain complex options strategies carry additional risk. Prior to trading options,
contact Fidelity Investments by calling 800-343-3548 to receive a copy of Characteristics and Risks of Standardized Options and to be approved for options
trading. Supporting documentation for any claims, if applicable, will be furnished upon request.
* See Fidelity.com/ATP200free for further details. Valid for new or existing Fidelity customers opening a Fidelity retail account and funding it with at least $50,000 in
cash and/or eligible securities.
System availability and response times may be subject to market conditions.
Fidelity Brokerage Services, Member NYSE, SIPC. © 2013 FMR LLC. All rights reserved. 652588.2.0
 WANT TO KNOW MORE?

SEE WHAT’S NEW AT Publisher & Editor-in-Chief

futuresmag.com Ginger Szala

Associate Editor
Michael McFarlin

TODAY! Editors At Large

Daniel P. Collins
Steve Zwick
Contributing Editors
James T. Holter
BREAKING NEWS DAILY & WEEKLY STRATEGIES Murray A. Ruggiero, Jr.
Art Director
WEB EXCLUSIVES ECONOMIC RELEASES Michael Beckett

ARCHIVED ISSUES & ARTICLES Vice President of Advertising Sales

& Associate Publisher
TOOLS & RESOURCES Chris Casey
phone: (312) 846-4606
fax: (312) 846-4638
e-mail: ccasey@futuresmag.com

FEATURED WEB EXCLUSIVES Futures Magazine Group Office


/
+FGGFSTPO
4U
r
4VJUF

BOOK REVIEWS “FLOORED” Chicago, Ill. 60661
phone: (312) 846-4600
Leslie Masonson Watch for
reviews “Trading the official Futures Circulation Offices
Beyond the web pre- P.O. Box 1144, Skokie, IL 60076
Circulation Service
Matrix: The miere of phone: (847) 763-4945
Red Pill for “Floored” Calls accepted 8:00 am – 4:30 pm CST
Traders and in early e-mail: futures@halldata.com

Investors” by Van September.

THE ALPHA PAGES, LLC
K. Tharp, and Released
Chief Executive Officer
Billy Williams for the first Jeff Joseph
reviews “The time on the e-mail: jj@alphapages.com
Art and Science Internet, President & Executive Editor
Kristin Fox
of Technical this director’s cut version of the
e-mail: kf@alphapages.com
Analysis: Market film follows floor traders as they
Chief Financial Officer
Structure, were forced to adapt to the new David Friedman
Price Action world of electronic trading and e-mail: david@alphapages.com
& Trading” by how some tried to fight against
Adam Grimes. that current of change.

STAY CONNECTED TO

Take Your Trading to the Next Level AD INDEX

Subscribe to our Daily Market Focus enewletter ADVERTISER PAGE
Amp Futures . . . . . . . . . . . . . . . . . . . . IFC-3
FREE and get invaluable information on where
Classifieds . . . . . . . . . . . . . . . . . . . . . . . 45
markets are headed and how you can position
CME Group . . . . . . . . . . . . . . . . . . . . . . . BC
yourself to take advantage of upcoming market Daniels Trading . . . . . . . . . . . . . . . . . . . . 47
moves, every day, every weekend! eSignal . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Fidelity Investments . . . . . . . . . . . . . . ....5
Sign Up Today! FuturesMag.com/eNewsletters
FXCM . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Interactive Brokers LLC . . . . . . . . . . . ....7
Moneyshow. . . . . . . . . . . . . . . . . . . . . . . 43
Facebook: Twitter: LinkedIn: OptionsXpress. . . . . . . . . . . . . . . . . . . . . 13
Futures Magazine FuturesMagazine Futures Magazine RJOFutures . . . . . . . . . . . . . . . . . . . . . 24-25
TradeStation . . . . . . . . . . . . . . . . . . . ....9

futuresmag.com TD Ameritrade . . . . . . . . . . . . . . . . . . . . . 37
SEE CLASSIFIED ADVERTISING ON PAGE 45

6 FUTURES September 2013

 Financing Rates.
How much is your
broker charging?
Interactive Brokers lends margin* at just . . .

1.59%
For a margin loan of
1.34%
For a margin loan of
$25,000 $200,000

0.96%
For a margin loan of
0.73%
For a margin loan of
$1,500,000 $3,500,000

Trading on margin is only for sophisticated investors

with high risk tolerance.
You may lose more than your initial investment.

interactivebrokers.com/interest

Interactive Brokers
LOWER YOUR COSTS TO MAXIMIZE YOUR RETURN

Interactive Brokers LLC is a member of 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.
Margin Rate as of July 1, 2013. *For additional information regarding margin loan rates, see
www.interactivebrokers.com/interest 09-IB13-659CH628
EDITOR'S NOTE

Metamorphosis

O
nce on a flight from
Chicago to San Francisco,
I (miraculously) was
upgraded to business class and
was seated next to a very tall man
who was on the phone from the
time we entered the plane to take-
off. Overhearing the conversation, I picked up some “puts” and
“calls” recommendations, which obviously piqued my interest.
When we were in the air, I asked him if he was an options trader.
He said he used options only to protect his portfolio, which he
managed for a large East Coast firm.
As we spoke, he said he had gone to the University of Illinois,
where he had played football. It turned out he was the quar-
terback and a stand out until sustaining a debilitating injury.
He said during those dark days when he was reevaluating his
life goals, he had a real gut check. He eventually went on to
become a doctor and then an asset manager, where he focused
on health/medical stock funds.
Although Illinois friends were excited I met one of their
former football stars, I was most impressed with his ability to
reinvent himself successfully. Moving from athlete to doctor to
asset manager is quite a curvy path, but he seemed to do it easily.
I remembered this when reading our cover interview with
Ben Davies (see “Ben Davies: Turning adversity into gold,”
by Associate Editor Michael McFarlin, page 14). Davies had
been on deck to go to the Atlanta summer Olympics to play
field hockey when he was sidetracked with a back injury, which
basically ended that “career.” However, a chance meeting led to
a stint at Man Financial, which was at that time a private com-
modity group. Eventually he came to work for one of the top
primary dealers, Greenwich Capital, where he really cut his teeth
both in trading and devising his worldview of free markets and
the importance of hard assets.
Today Davies manages a multimillion dollar long-only gold
fund for his firm, Hinde Capital. Granted, it’s been a tough year
for gold, and yes, for Davies’ fund, but he says his fund has done
better than gold. He also reminded us that the gold fund is only
one part of a client’s overall portfolio.
Change is inevitable and often not easy. Moving from an old
to new media platform has been long, tedious and sometimes
exhilarating for us at Futures. However, seeing how the above
traders/managers used their competitive skills and smarts to
change is a testimony to being agile and opportunistic in mar-
kets and in careers.
One of the sea changes for the futures industry was its move
off the floor into electronic trading. It was long in coming
and then seemed to happen overnight. In early September,
FuturesMag.com will host the web premier of the movie
“Floored.” Originally released in theaters in late 2009, the
director’s cut will be available for the first time on the Internet,
and, for now, only at FuturesMag.com.
The documentary shows how the waning days of the floor
affected many traders; some of them had made their money
and left, while others planned to be the last man standing. It’s
poignant, troubling and funny, but captures the trading indus-
try and some of its players well and, of course, solidifies the
incredible legend of the trading floor.
Director James Allen Smith, like many successful traders, also
learned to adapt to his environment. He started off as a painter
but became a web designer, which landed him a job with a for-
mer trader who ran an upstairs business. Smith then became a
filmmaker, something that never was in his original game plan,
when he saw how life on the floor was changing and how many
traders weren’t adapting.
No doubt the skills of the floor are different than the skills
needed upstairs. But perhaps only the best traders are able to
adapt to adversity, both in life and in trading. That shouldn’t be
surprising as volatility is the lifeblood of this business.
E-mail me at gszala@futuresmag.com

CUSTOMER SERVICE CENTER

Want to sound off on a Futures article? Send your comments or questions to gszala@futuresmag.com.
Article submissions: E-mail mmcfarlin@futuresmag.com for a copy of our writer’s guidelines.
Subscriptions: Visit our website at futuresmag.com to order or change your subscription or
contact our subscription house at futures@halldata.com or call (847) 763-4945
Reprints: Order 500 or more or e-prints through Pars International at (212) 221-9595 or reprints@parsintl.com

Futures (ISSN 0746-2468) is published monthly by The Alpha Pages LLC, 217 N. Jefferson, Chicago, IL 60661. Subscriber rates in the United States, are one year, $78; two
years, $128. – All other areas, $121 per year. International online version also available; call 847-763-4945 for details. All orders from outside the United States must be paid in
U.S. dollars by international money order only. Single copies $6.95 in the United States, $8.95 in Canada. Periodical postage paid at Chicago, IL and additional mailing offices.
Postmaster: Send address changes to Futures Magazine, P.O. Box 1144, Skokie, IL 60076. Allow four weeks completion of changes. CPC IPM Product Sales Agreement No. 1254545.
Canadian Mail Distributor information: IBC/Canada Express, 7686 Kimble Street, Units 21 & 22, Mississauga, Ontario, Canada L5S1E9. Canadian Subscriptions: Canada Post Agreement Number 7178957. Send
change address information and blocks of undeliverable copies to IBC, 7485 Bath Road, Mississauga, ON L4T 4C1, Canada. Printed in the USA. COPYRIGHT © 2013 by The Alpha Pages LLC. All rights reserved. No
part of this magazine may be reproduced in any form without consent. CONTRIBUTORS: Return postage must accompany unsolicited manuscripts, photographs and drawings if return is desired. No responsibility is
assumed for unsolicited material. Futures Magazine Inc. believes the information contained in articles appearing in FUTURES is reliable, and every effort is made to assure its accuracy, but the publisher disclaims
responsibility for facts or opinions contained herein. MICROFILMS and MICROFICHE of all issues of FUTURES are available from University Microfilms Inc., 300 N. Zeeb Ave., Ann Arbor, MI 48106; Information Access
Co., 11 Davis Drive, Belmont, CA 94002. The full text of FUTURES is available in the electronic versions of the Business Periodicals Index.

8 FUTURES September 2013

 Te

80 ece Ana
to ica
ch

r l
n

0 ive lys
C 4. r F ad
.2 yo is
al
l
6 u Tr
85 R er
16 EE Pac
k
TradeStation’s tools help you spot opportunities
before other traders do. See for yourself. Go to
TradeStation.com and take the TradeStation Tour.

The Proof is in the Platform.™

1.800.264.8516 | TradeStation.com
1RRIIHURUVROLFLWDWLRQWREX\RUVHOOVHFXULWLHVVHFXULWLHVGHULYDWLYHVIXWXUHVSURGXFWVRURIIH[FKDQJHIRUHLJQFXUUHQF\IRUH[WUDQVDFWLRQVRIDQ\NLQGRUDQ\W\SHRI
WUDGLQJRULQYHVWPHQWDGYLFHUHFRPPHQGDWLRQRUVWUDWHJ\LVPDGHJLYHQRULQDQ\PDQQHUHQGRUVHGE\DQ\7UDGH6WDWLRQDIÀOLDWH7UDGLQJFRPPRGLWLHVIXWXUHVRSWLRQV
DQGRIIH[FKDQJHIRUHLJQFXUUHQFLHVFDUULHVDKLJKOHYHORIULVNDQGPD\QRWEHVXLWDEOHIRUDOOLQYHVWRUV7KHUHLVDSRVVLELOLW\WKDW\RXPD\VXVWDLQDORVVHTXDOWRRU
JUHDWHUWKDQ\RXUHQWLUHLQYHVWPHQWWKHUHIRUH\RXVKRXOGQRWLQYHVWRUULVNPRQH\\RXFDQQRWDIIRUGWRORVH3OHDVHYLVLWRXUZHEVLWHZZZ7UDGH6WDWLRQFRPIRUUHOHYDQW
ULVNGLVFORVXUHV(TXLWLHVHTXLWLHVRSWLRQVDQGFRPPRGLW\IXWXUHVSURGXFWVDQGVHUYLFHVDUHRIIHUHGE\7UDGH6WDWLRQ6HFXULWLHV,QF0HPEHU1<6(),15$1)$DQG
6,3&)RUH[SURGXFWVDQGVHUYLFHVDUHRIIHUHGE\7UDGH6WDWLRQ)RUH[DGLYLVLRQRI,%);,QF0HPEHU1)$7UDGH6WDWLRQ6HFXULWLHV,QFDQG,%);,QFDUHVHSDUDWHEXW
DIÀOLDWHGFRPSDQLHV‹7UDGH6WDWLRQ$OOULJKWVUHVHUYHG
FOREX TRADER

Fed tapering and U.S. dollar potential

BY J E R E M Y WAG N E R

W
hen the U.S. Federal Reserve embarked TAPER TALKS
upon the policy of asset purchases (known
as “Quantitative Easing”) in the wake of the The USDOLLAR uptrend began in August 2011.
2008 credit freeze, the goal was to stimulate the econ-
2009 2011 2013
omy by keeping longer term interest rates low. This is
QE
accomplished by creating new money that increases the 11,750
supply available. 11,500
If a strong economic recovery takes hold, this new 11,250
money looks for a home and immediately can be sold 11,000
into other assets or investments. This would weaken the 10,750
10,745
purchasing power of the U.S. dollar (USD). Therefore, 10,500
for the past five years, traders have grown accustomed QE2
10,250
to translating quantitative easing into representing a 10,000
weaker USD.
9,750
Beginning in May 2013, the Fed communicated more QE4
QE3 9,500
purposefully to the markets the potential for tapering
USDOLLAR Bottom August 1, 2011 9,250
its purchases. The exact amount of the taper, along 06/18 09/19 12/23 07/01 10/02 04/12 07/14 10/15 04/25 07/25 10/26 05/01 08/02 11/05 08/15
12/11/2007 03/30/2009 04/19/2013
01/07/2010 01/18/2011 01/27/2012 02/08/2013
with when the initial taper might happen, hasn’t been
Source: FXTrader
announced yet, but economists are forecasting it will
occur in September 2013. plan was formalized, the For daily forex updates:
If the Fed follows through with this plan, there are several uptrend began before the futuresmag.com/Forex
reasons for future strength in the greenback. Some of the rea- announcements of QE3
sons are exclusive of one another, so don’t look for all of them and QE4. [Note: The U.S. Dollar Index bottomed in 2009.]
to occur. Rather, look for at least one of these reasons to fuel This is what we find most compelling because the
a USD rally: USDOLLAR was showing relative strength when it had every
t
If USD weakens on increased money printing, then it makes reason to be weak. Think of it like pressing down on a spring.
sense for the opposite to occur, and we would see strength of Once you remove your thumb, the spring explodes higher. In
the USD on reduced quantities of new money. this example, the USDOLLAR is the spring and the Fed’s asset
t
If tapering releases the headwinds and interest rates rise with- purchases are the thumb. If the asset purchases get smaller, it
in the context of a stable U.S. economy, then capital may be would be like taking your thumb off a compressed spring.
attracted toward the U.S. currency. How do you trade this?
t
If tapering increases rates, the higher rates may act like a tax Naturally, we want to look for technical opportunities to buy
on income and upset capital markets. Money then looks for the greenback. In forex, trades are made in pairs, so if we buy
safety that is found in the USD. the USD, then we need to look for a weak currency to match it
against simultaneously.
U.S. dollar bottom If the taper results in increased interest rates in the United
We will use the Dow Jones-FXCM Dollar Index (ticker: States and a stable environment, then look for other low yield-
USDOLLAR) in our forecast, which reflects the change in value ing currencies to match it against. This way, you can earn a daily
of the U.S dollar measured against a basket of the most liquid dividend by holding the trade open at 5 p.m. each business day.
currencies in the world. The index is built by equally weighting At of the time of this writing, the euro (EUR), Swiss franc
of the following currency pairs: EUR/USD, GBP/USD, USD/ (CHF) and Japanese yen (JPY) are the major currencies that you
JPY and AUD/USD. Together, this basket typically accounts for can buy the USD against and earn a daily dividend.
80% of world-wide currency spot market activity and reflects a Therefore, enter trades toward USD strength by selling the
diverse economic and geopolitical make-up. EUR/USD pair or buying the USD/CHF and USD/JPY pairs.
Using technical analysis, we can see USDOLLAR has been If the Fed taper results in increased interest rates but in a risk-off
hitting a series of higher highs and higher lows. The U.S. dollar environment, then consider the USD against other higher yielding
already met the definition of an uptrend before the formalized currencies like the British pound (GBP) or Australian dollar (AUD).
taper plan was announced. That would mean selling the GBP/USD or AUD/USD pairs.
In fact, the USDOLLAR carved out its bottom in August
2011, nearly two years ago (see “Taper talks,” above). So not Jeremy is an active trader and head of DailyFX education of FXCM.
only did the USDOLLAR uptrend begin before the taper He currently specializes in FX and writes education/analysis articles.

10 FUTURES September 2013

 Watch for the official web
premiere of “Floored” in early
September. Released for the
first time on the Internet, this
director’s cut version of the
film follows floor traders as
they were forced to adapt to
the new world of electronic
trading and how some tried
to fight against that current
of change.

THE
E 24/7
24/ RES
RESOUR
SOURCE FOR
FOR TODAY’S TR
RADE
ADERS
S

BREAKING NEW
EWS

E XCLUSIVE
CLUSIVE REPORTS & ANALYSIS

EDUCATION
CATION

TRADING
RADING STRATEG
ATEGIES

LIVE
VE MARKE
MARKET UPDATES
P
OPTIONS STRATEGY

Question: How can I derive income from cash on hand?

Answer: Sell premium.

BY G R EG LO E H R

W
ould you like to collect income regardless of the see- If the stock remains For more options strategies:
saws in the market? Here’s how to use two comple- steady, or moves high- futuresmag.com/Options
mentary strategies for collecting short-term income. er, the put spread will
The first thing that’s needed is a low-dollar stock with options drop in value. By expiration, if the stock is higher than $27, then
that have high implied volatility. The higher implied volatility both puts should expire worthless and you would keep the full
means there’s more premium to collect. For this example, take credit as the income.
a look at the Yahoo (YHOO) price chart below. At the bottom of I said ‘should expire worthless’ because even though the 27
this chart you can see that the implied volatility is trading in the strike put option is out-of-the-money, the option holder still has
middle of its one-year historical range. My rule on this is that if the right to exercise it and might do so in certain circumstances.
the volatility clearly isn’t low, then it’s high. That’s the case here. So ‘best practices’ would dictate buying to close the option when
it drops to one to two cents. Some brokers offer no, or lower,
IMPLIED VOLATILITY commission costs to close short options below five cents.
30
After buying the short option to close, it’s time to sell the
29
28 ATM put spread again for the next expiration. Depending on
27.2
27
the stock or ETF you’ve chosen, the next expiration could be
26
25 anywhere from one week to one month away. Sell the ATM put
24
23
option to open, and buy a lower strike put, as a short vertical
22 put spread. Which strike should you buy? Look for something
21
20
cheap, five cents or less, just to hedge the downside risk.
Repeat this trade every expiration until the day comes when
0.4 you get assigned the stock. It’s going to happen, so you need
0.35 to be prepared to buy the stock. What do you do now? This is
0.2949
0.3
where the second strategy comes in: A collar.
0.25
In a previous issue the use of a cashless collar was discussed,
Feb Mar Apr May Jun July Aug
but the implementation of this collar differs. Instead of sell-
Source: Need source... ing an OTM (out-of-the-money) call as a way of paying for the
protective put, this strategy sells a call with the same strike as
The first strategy is selling a short-term ATM (at-the-money) the put on which you were just assigned. Let’s assume the 27
put spread. With the stock trading at $27.25, and 10 days remain- strike again for this example.
ing until expiration, selling the 27 strike put for $0.33 provides For those who understand synthetics, you’ll see that owning
the credit. But we’ll also buy to open the 24 strike put for three the stock from the assignment and selling the 27 strike call
cents as protection in case the stock drops. The net credit for the acts just like a short 27 strike put. By buying the OTM put for
spread is now $0.30 and has a maximum risk of $2.70. In this protection, this position resembles the same short put spread.
instance the net credit represents a potential 11% ROI in 10 days. At expiration, if the stock remains below $27, you keep the
credit income from the call, and your long put protects the stock
YAHOO CHAIN if the price continues to drop. If the stock moves above $27 at
expiration, then you sell the stock back at the same price you
Exp Strike Bid Ask
bought it, and you still keep the credit.
$27.25 As long as the implied volatility remains high, keep this trade
Aug 13 23 0.01 0.02 going. When the implied volatility reverts back to the low end of
Aug 13 24 0.02 0.03 the range, then it’s time to find another suitable candidate and
Aug 13 25 0.03 0.05 start the process again. Over time, taking in these short-term cred-
Aug 13 26 0.10 0.12 its will start to add up regardless of which way the market moves.
Aug 13 27 0.33 0.34
Greg Loehr is a former CBOE market maker trained by Susquehanna
Aug 13 28 0.89 0.91
Intl. Group, and founder of education firm OptionsBuzz.com. He has
Aug 13 29 1.73 1.76
written and presented extensively on options globally.

12 FUTURES September 2013

 WHY YOU SHOULD
TRADE FUTURES WITH A
COMPANY YOU THOUGHT
WAS JUST AN
OPTIONS SPECIALIST.
Our innovative, easy-to-use platform was also designed for futures traders.
After all, we specialize in more than just options.

ONE PLATFORM: FUTURES, NEW LOWER

OPTIONS, STOCKS PRICING
Trade futures, options and
stocks on one platform.
$3.50
24-HOUR SERVICE PER CONTRACT
Get help from dedicated for futures and futures options.
futures specialists available
24 hours per trading day.
A CHARLES SCHWAB
OPEN
COMPANY AN ACCOUNT
Rely on the reputation of a
leader in financial services. TODAY

1-888-330-3138 OPTIONSXPRESS.COM/TRADEFUTURES

Options and futures involve substantial risk and are not suitable for all investors. Please read “Characteristics and Risks of Standardized Options” and
“Risk Disclosure Statement for Futures and Options,” available by calling 1-888-280-8020, prior to opening an account. Multi-leg option strategies may also be
subject to multiple commissions. Profits may be eroded by the commission expended to open and close the positions, and other risks apply. Online trading has
inherent risk due to system response and access times that may vary due to market conditions, system performance, volume and other factors. Website content
and tools are provided for educational and informational purposes only. Supporting documentation for any claims, comparisons, recommendations, statistics,
or other technical data will be supplied upon request. optionsXpress, Inc. (Member SIPC) and Charles Schwab & Co., Inc. (Member SIPC) are separate but affiliated
companies and subsidiaries of The Charles Schwab Corporation. ©2013 optionsXpress, Inc. All rights reserved. Member FINRA, SIPC, NFA.
 GOLD

Q&A

BEN DAVIES:
Turning adversity
into gold
I N TERVIEWED BY MI C H A E L MC FA R LI N
P H O TO G RAPH Y BY J O R DA N H O LLE N D ER

I
t was a chance encounter after a back injury that turned Ben Davies’ attention from
sports to the markets, but the same competitive spirit still drives him in advocating for
monetary reforms. Cutting his trading teeth at Greenwich Capital, he saw firsthand
the events and conditions that led to the 2008 financial crisis.
Now having started his own firm, Hinde Capital, Davies is a champion for free markets
and allowing them to [function] independent of central bank intervention, all while oper-
ating a long-bias gold fund to protect investor purchasing power. We caught up with him
to get his view on the gold market and the role of central banks.

FUTURES MAGAZINE: Ben, you went to school
to be an athlete and came very close to com-
peting in the Olympics. Can you tell us how you
went from athlete to trader?
BEN DAVIES: I was born in Cambridge and went to
first school in Cambridge. That was a very academic
school. I think it is fair to say that I enjoyed the aca-
demic rigor but my real passions [were] sports and
psychology. I came to appreciate academia years later
because of trading as I wanted to learn for learning’s
sake, not because of the enforced nature of exams.
So, I made the decision when I was 18 that I
wanted to follow my true passion, which at the
time was sports science. I focused on exercise
physiology, sports psychology and biomechan-
ics. I became a sports science and finance student
at Loughborough University, which is very well
known for its sporting programs. Early on, it was
really psychology and sports that attracted me to
competition and developing winning strategies
that comes with that, which is very pertinent to
trading today.
At that time I was a field hockey player, and
being a sports psychologist and going to college
there, I was able to devote a lot of my time play-
ing for Loughborough, Wales and Great Britain.
As you said, I was on the Atlanta Olympics squad,
but I had to pull out because of a serious back
injury early on. I will say that my passion had
probably since passed, and if you are going to do
anything well, then you need to be authentic and
have integrity, otherwise you’re not going to give
your best for it. It made me rethink my career,
and I made that move from athlete to trader.
It was a chance discussion that lead me to a few
days’ work at Man Financial, which at the time
was a private commodity group, and I’ve been bit-
ten by the bug ever since. I think it was a manifes-
tation of ‘Could I do it? How would I have coped
with some of the famous crashes?’ I wasn’t trading
in 1987, but how would I have adapted to it? That
led me to make that shift. It was part forced, but
part that desire to pit myself against the market.
FM: Where did you get your break into trading?
BD: It’s interesting having come from the back-

14 FUTURES September 2013 DIGITAL EXCLUSIVE

 Competition always has been
a way of life for Ben Davies, only
his opponents have changed. Now
he’s facing his biggest foe: Central
banks and their fight for survival.

DIGITAL EXCLUSIVE futuresmag.com 15

Q & A continued
ground I had as an athlete just how many people wanted to hire
me more for my sporting prowess than perhaps my academic
capabilities. Ultimately it was Greenwich Capital. That was my
breakthrough into trading markets at the macro fixed-income
level. I also was very fortunate to meet my now work partner,
Mark Mahaffey, who co-founded the London office of Greenwich
Capital. For people who don’t know, Greenwich Capital was the
No. 1 primary dealer in U.S. government bonds, agencies and
to some extent mortgages. [Mahaffey] was the chap who really
instilled in me the inquisitive nature you need to pursue the truth
in developing your rigor and understanding of the markets.
FM: What were some of the important trading lessons you
learned throughout your time at Greenwich?
BD: I started off as a market maker, and I think that’s a great
place for any young trader to start because you get an appre-
ciation of risk. Often you’re put into positions that are not
conducive [to] a positive outcome, the risk/reward isn’t nec-
essarily conducive to a successful trade there and then. It was
very much about mitigating loss rather than turning it into
profit. The time horizons for a market maker are very differ-
ent from [those of] a macro proprietary sort of longer-term
investor where you can determine the timing of your trades,
but nonetheless it gave me a huge appreciation for risk-taking.
Trading for me ultimately is about having conviction and
flexibility, which in many ways are at odds with each other. If
you allow your conviction to boil over too much, it can border
on hubris, but if your flexibility is too much that you can’t risk
at the first sign of trouble, then that’s not successful either. A lot
of the subjective and discretionary risk-taking that I first learned
at Greenwich Capital, and [from] my partner since, has been
codified in [the] systems, we use as our parameters to ensure we
have very good risk and dynamic money management.
FM: You just mentioned Greenwich’s position in the global
16 FUTURES September 2013 DIGITAL EXCLUSIVE
securities market What did your time at
Greenwich teach you about the global
economy?
BD: It gave us a very unique, inside track as
to what one of the largest players in capital
and trade flows was doing, and that was
China. In regard to the U.S., being the No.
1 dealer in bonds, agencies and mortgages,
I was able to see firsthand this buildup of
FX currency reserves, and see how they
were impacting and driving down long-
end rates. By driving down long-end rates,
the U.S. was supporting mortgages and
consumer credit, while at the same time
creating a dearth view for pension and
endowment funds, the symptom of which
was financial engineering.
The sub-prime crisis really was a prod-
uct of Bretton Woods II, which I refer to
as a semi-fixed exchange rate where the
U.S. is centric . In essence the Asian coun-
tries are more or less pegging their currencies to the dollar with-
out the backing of gold to maintain their relative competitive
ability to sell things cheaply to the U.S. The defining nature
of this whole international monetary system is financing the
United States’ huge deficits, both fiscal and trade, and has done
those at low interest while allowing them to finance the export
boom of China. Really, it’s helped build up a huge amount of
credit in the system. If we had been under a gold conversion or
standard, there would have been restraint on that build-up of
reserve currency, that would have been the natural equilibrating
mechanism of the trade balance, but we haven’t had that. So,
we’ve had this egregious proliferation of credit as a consequence.
In many ways, this is what led us to setting up Hinde Gold
Fund. It was our macro insight that led us to believe there is
going to be an unraveling of the financial system or this credit
bubble, and that the re-balancing of this vendor financing
relationship ultimately would lead to the collapse of the credit
bubble and the recapitalization or monetization by the private
sector of gold. That’s what we are witnessing.
FM: Was this view pervasive among other traders at Greenwich?
BD: No, definitely not. Don’t get me wrong, I do think there
was an inordinate [number] of people that understood there
was something wrong with the financial system. All asset prices
were rising, and they hadn’t necessarily put the macro picture
together, which I felt that we had. And, certainly we had the con-
viction to set up a business. We created a unique long-only man-
aged gold fund that was backed primarily by allocated gold held
outside the jurisdiction of the banking system, and it garnered a
lot of interest at the time. You have to remember that for CNBC
and Bloomberg at the time, gold wasn’t even a ticker on the TV
screen when we started, despite it being in a stealth bull market
probably for about five years. Certainly the reaction from others
suggested that this was a rather unique and insightful thought
process, but I would say there were many who understood that

something was fundamentally wrong.
FM: You’ve already mentioned that government securities
are some of the largest and most-traded assets available;
what made you go from trading bonds and securities to the
comparatively much smaller gold market?
BD: We perhaps were intellectually correct but commercially
naïve. We thought that the boom of the gold market would
create sponsorships of very big gold funds, and we wanted to
be part of that. But primarily, we wanted to protect investors’
assets from what we saw as potential fallout from the finan-
cial crisis, either from default risk or policy responses of cen-
tral banks and governments, which would be to increase the
money supply to such a significant extent that they would try
and underpin the credit system. That’s what we’re continuing to
see today. That policy prescription probably is the definition of
insanity; we’ll keep repeating the same state over and over again.
But it wasn’t about moving from a big market to a small mar-
ket. In fact, I would argue that we are in the process of witnessing
the great bond bubble, which is at the center of our financial
system. You have to think about how fractional reserve banking
ultimately is collateralized with sovereign debt. When you under-
mine the credibility of sovereign debt by getting to a level where
the country doesn’t have the income to service its debt repay-
ments, then you have to look to the growth of a new monetary
system. I certainly think that gold is part of that new mechanism.
FM: Obviously these views led to your forming Hinde Capital.
Can you tell us a little about your fund?
BD: We started Hinde Capital in 2007 and we set up a long-only
managed fund. It garnered enormous attention both from the
media and from investors in our first few years, but ironically
the 2008 crisis and forced deleveraging — all the reasons why
people should have gone into our fund — suddenly meant that
it wasn’t available to them because they were putting out fires.
It was a very difficult couple of years.
As people came to understand that gold is growing as an asset
class, we started getting a lot of interest from pension funds and
sovereign wealth funds, and the firm grew in accordance. Despite
the recent correction in the gold market, the fund has returned more
than 40% [since inception] and we’ve outperformed our benchmark
gold price, perhaps not by as much as we had hoped because we
had an allocation to mining. Thankfully 18 months ago we had the
foresight to reduce that almost to a zero holding because we saw a
cost issue where, let’s just say, the banking and mining industries
were being disingenuous about what the true costs were. Our big-
gest macro expression is a belief that the crisis is ongoing, and the
distortion in market rates is creating all sorts of opportunities and
hence why a lot of our investors asked us to set up a global macro
fund, which is what we are in the process of doing.
FM: So your gold fund only trades in the gold markets?
BD: We trade allocated precious metals — gold and silver pri-
marily — and we can choose to have up to 20% in the mining
sector as well.
DIGITAL EXCLUSIVE
Go to futuresmag.com/davies
for an unabridged version of this interview.
FM: You recently made some astute calls in the silver market,
predicting both the market’s takeoff and subsequent decline.
What’s your trading methodology?
BD: It’s interesting you should mention those; when you’re able
to make those sort of accurate calls, it does tend to put you on
the map. It was more important for us actually to create a return
out of both of those situations, rather than just be a mouthpiece
for what was happening. Thankfully we were able to achieve that
with a very good risk vs. reward setup.
We center everything around macro analysis, all in conjunc-
tion with understanding the market dynamics. It doesn’t matter
what our macro conclusions are on a potential trajectory of an
economy or marketplace, we have to wait for a signal genera-
tion of whether to deploy risk in that asset class. As you know, if
the marketplace isn’t in a dynamic state to facilitate your view,
you end up losing a huge amount of capital in terms of time
premium, opportunity costs and mental capital associated with
that. We always feel we need to know what phase the market is
in — is it trend ready, exhausted or in homeostasis?
All of this is assessed within the bigger picture of Breton
Woods II, which is a highly imbalanced currency system.
It drives imbalances right across the global economy, and it
impacts right down to the micro level, like the silver market.
Take the vendor financing relationship under Breton Woods
II, which financed the U.S. housing boom, and because that
arbitrage of interest rates was the same across Europe, it was
why we had a housing boom there. So we like to look at and
examine supply and demand imbalances both at the macro
and micro level. That can be a trade in capital accounts or all
the way down to these inconsistencies that we refer to in silver
where there seems to be a huge imbalance, and definitely in
my mind proves the efficiency of markets under [the efficient
market hypothesis] (EMH) is a complete fallacy. It’s fair to say
that is a disproven theory. We tend as a firm to observe more
heterodox economic theories, highly polarizing doctrines that
are in development of each other. In many ways it’s distasteful
and perhaps born out of egotistical posturing, but we can learn
a lot [from] other economic theories.
When we go through the macro observations, there are prem-
ises that business cycles are propagated by excessive growth in
banking credits, vis-à-vis fractional reserve banking. This obvi-
ously is being encouraged by central bank interest rates remaining
below the natural rate of interest, i.e., this is where individuals
would truly lend or borrow based on consumer or temporal pref-
erences. It is this monetary intervention in the market that has
created a distorted signal of demand, and has led to the misalloca-
tion of capital in various sectors like precious metals. The facts
don’t support or match consumer preferences. What people see
as a rising price and think is rising demand in fact is an inflation
dynamic of that business cycle or that industry.
FM: So how do you model this in your trading?
BD: When it comes to modeling, we look at the macro side, as
I’ve alluded to, from the concept that the business cycle is the
credit cycle. In terms of the market dynamics, Albert Einstein
used to say a theory is more impressive the simpler its premises,
futuresmag.com 17
Q & A continued
so my mantra is ‘keep it simple, stupid’ or KISS. So, we distill every
complex notion down into its component parts, ask the obvious
questions and build a hypothesis from there. For me, markets are
like nature — they definitely are a complex system, which exhibits
complex organizational behavior and similar dynamics to nature.
You end up with ruptures brought about by plate tectonic shifts
and earthquakes; it’s the same principle when you see volatile
cracks appearing in markets before a crash. Yet, systems are very
holistic. You have these observations where you can see stresses
as the precursors for a rupture or movement in the market.
The way theory is today and the way people model today
is based on trying to find order and equilibrium, which is an
innate desire within people. One area that we use particularly
is fractal analysis and market behavior, i.e., that which has dis-
credited EMH and the random walk concept. All these partici-
pants are solving for the wrong question. Trying to understand
why we are here — why we’re on this planet or why the market
is where it is — is an insolvable question. Markets for me are
just a function of life. It comprises decision-making by myriad
people; it’s a combination of interactions and reflects as either
rational or irrational in the eye of the beholder. So any crowd
maintaining order is extremely difficult.
So, what we do is look to the market to tell us the state, rather
than comprehend all the reasons it is in that state. We don’t
try and assign cause; we ignore our innate desire for order. We
tend to look at the market in a more three-dimensional way. For
us, markets look the same on every time or scale. Most people
look just at price and time; we tend to look at four-dimensional
components. We want to look at the phase changes that occur
before a change in the state of the market.
FM: Speaking of market states, the bear market in gold that
began after the 1980 peak lasted for about 20 years. Where
do you see us in the lifespan of the current gold bull market?
BD: We’re more interested in what the present state and dynamic
of the market is. Certainly the four-dimensional components of
the market that led to the down trade showed a scaled invari-
18 FUTURES September 2013 DIGITAL EXCLUSIVE
ance to different time scales. The market
was exhibiting some stress. Looking at par-
ticipants in the market, there were some
that had been in the market for a long
time, and ultimately the market was trend-
ing and was ready to make a move in one
way or another. In this case, stale longs or
whatever the trigger we can debate, but the
market had to release lower. I personally
believe markets move from fair value, and
that isn’t a mathematical value based on
intrinsic values of cash flow, but is based
on supply and demand of participants in
the market having satisfied the conditions
for exchange until such time as the market
becomes out of balance with one or more
of those economic agents perceiving that
economic value needs to be higher or lower.
Then the market will start to trend. Now,
when I talk about the market trending
here, it was in regard to a short-term trend that was corrective
in nature to the primary trend, which is still higher. This is a
very healthy correction, and the market on our models has now
reached trend exhaustion, it has exhibited all of those signs.
When we talk about the gold market, it’s actually two markets
— a physical market and a paper market. There is no doubt that
there is a fractional reserve banking-esque element to the gold
market whereby for every ounce that is traded, many multiples
of that are leased out or traded in some OTC construct. That
leads to an unfair amount of potential supply at some points
on the marketplace that is not reflective necessarily of funda-
mentals. Right now, we’ve satisfied the conditions of the short
sellers, and if anything the long-term holders in the market are
extracting new value. As you can see, the market has started to
rebound and probably will find itself at a new trading range
in the next six months at around $1,400 to $1,600 [an ounce].
FM: You’ve already talked about some of the factors that
are really affecting gold, but do you see traditional supply
and demand factors at play or is gold being moved by larger
geopolitical concerns?
BD: Ben Bernanke pays very little lip-service to gold, he almost
doesn’t mention the word at any point in any of his directives
or speeches. It’s almost as if [it would] give some acknowledge-
ment to an alternative currency, which let’s face it, it potentially
is. [Gold] was once money, and it could be again. It could be a
way of recollatoralizing the system either through a government
gold standard or through the private sector creating some kind
of payment system that uses gold as a backing for transactions,
and perhaps in some countries, like the East, using it to exchange
their U.S. dollar holdings. That definitely is the dynamic in play.
China and the rest of the BRICS probably couldn’t believe their
luck when they were able to purchase gold at these levels for some
of the U.S. Treasuries and agencies that they already owned. So,
yes, it’s part of a bigger dynamic indeed.
Q & A: Ben Davies continued on page 45
 FOREIGN EXCHANGE
MARKETS
Dollar days coming
as Fed prepares exit
BY DA N I E L P. C O L L I N S
The U.S. Federal Reserve appears ready to begin tapering just as other central
banks may be adding to their balance sheets. What will this mean for the global
forex market? And remember, this is all data-dependent.
S
ince Federal Reser ve Board
Chairman Ben Bernanke first
hinted back in May that the Fed
at some point would reduce the amount
of monthly bond purchases (QE3), talk
of a taper and its effect has dominated
all market sectors. Currencies are no dif-
ferent. But the one constant in financial
markets over recent years is a gnawing
uncertainty. The economy has experi-
enced slow, tepid
p ggrowth and, jjust as the
recovery looks to gain steam, there is a
downturn. All Fed action is data-depen-
dent and the data is screaming, “ugh!”
Things are better but we aren’t out of the
woods yet.
The taper debate
Carry trade divergence
A consensus was building that the Fed
would begin tapering at this September’s
FOMC meeting, which would be U.S. dol-
lar positive, but weaker jobs growth in the
July employment report may have pushed
it back to the 50/50 range.
“The entire tapering debate is the
biggest catalyst for the dollar at the
moment,” says Andrew Wilkinson, chief
economic strategist for Miller Tabak &
Co. LLC.
20 FUTURES September 2013
George Dowd, head of Chicago for-
eign exchange for Newedge, sees tapering
occurring earlier than consensus based on
better employment numbers (we spoke
before the July report came out; one more
employment report will come out before
the Fed meets next). Dowd expects a taper
in September and thinks it may be more
substantial than expectations.
“You have to look at where they are going
to go
g with the purchases as well,” he says.
“Currently they
the are purchasing $45 billion
in Treasuries and
a $40 billion in [mortgage-
backed securi
securities]. The market consensus
for the Septem
September meeting is they go 35
and 30; I think they can go 30 and 30.”
While the taper is generally bullish
the dollar, W Wilkinson believes — like the
initial reaction
reactio to taper talk — the dollar
have gotten ahead of itself.
rally may hav
“What cha changed in [July] is that the
market has dealtd with the distinction
between tap tapering and raising interest
shouldn’t be confusing. Price
rates. It shou
action tends to mislead investors and
that is exactly what happened. Rising
bond yields immediately impacted the
stock market and the logical conclusion
was that the Fed is tightening, and that
wasn’t the case,” Wilkinson says. “What
has transpired over the early part of the
For forex updates,
go to futuresmag.com/Forex
summer is that the dollar is not set to
benefit any time soon from rising yield
differentials on account of official inter-
est rate rises, so as the market discounts
that, investors’ appetite for dollars
become less.”
Sharpe + Signa Managing Director
Garen Ovsepyan agrees. “Fed tapering is
dollar-positive in terms of market senti-
ment; however, as far as money markets
are concerned, tapering is not necessarily
a hike in rates,” he says
Ovsepyan points out that the dollar
consistently has failed to take out signifi-
cant technical resistance at 83.50. “If the
Dollar Index trades convincingly above
83.50 at least on a weekly basis, we adjust
our view from bearish to neutral or pos-
sibly mildly bullish.”
Dowd, however, sees the dollar’s slide in
July as an opportunity. “It has had a nice
little retracement down from where it had
been; you cleaned out a lot of weak longs,”
he says. “The fundamental focus going
into year end is going to be dollar-bullish; I
am expecting new highs in the dollar index
going into year end. You will see the dollar
trading up around 85.50-86.00.”
 Jason Rotman, president of Lido Isle VOLATILITY WATCH
Advisors, says the data needs to justify dol-
lar confidence. “A lot of people are looking The S&P 500 usually is highly correlated to the carry trade. You can see the divergence
for the U.S. dollar to start to go up again between the Deutche Bank Carry Trade Harvest index vs. the S&P 500. Each represents
a buy and hold philosophy, and they tend to be highly correlated.
and break this year’s high of about 85,
but it is not doing that, it is not coming
1800 330
close,” Rotman says. “For the U.S. dollar Carry trade market and yield value
to continue its 2013 bull trend, it will need
several months of phenomenal nonfarm 1600
310

payroll growth and even start to see the

core [Consumer Price Index] numbers 290

DB Carry Trade Index

1400
[come in] consistently above expectations
because the Fed does not want to crash S&P 500 270
this market with a premature statement 1200
of stimulus reduction.” 250
FXCM Chief Currency Strategist John
1000
Kicklighter sums up the divergence of 230
opinion on the dollar: “For the remainder
of the year, one of the takeaways is that it 800
210
is going to be extremely volatile.” S&P 500
He adds, “It is a game of competitive DB Carry Trade Index
600 190
stimulus. It is going to have an impact
7/1/2003

7/1/2004

7/1/2005

7/1/2006

7/1/2007

7/1/2008

7/1/2009

7/1/2010

7/1/2011

7/1/2012

7/1/2013
on the dollar. If we see the taper occur
in September, it is the thing that could
cause the dollar to continue higher.” Source: FXCM
One reason why Kicklighter is expect-
ing greater volatility is the divergence SAFE HAVEN OR RISK ASSET?
between the S&Ps and the carry trade.
“You have a strong correlation between Kicklighter says the risk-on/risk-off trade pattern has changed because historically we
expect the safe haven to be on the opposite side of the spectrum of the investment
the S&P 500 and the carry trade index
benchmark. Here we see (in 2013) a high correlation despite subdued volatility as
(see “Volatility watch,” right). Just over measured by the VIX.
the past three or four months you have
seen a very substantial divergence in their
Correlation - Safe haven dollar and high return S&P 500
performance,” Kicklighter says. “This is 90.0 -1.0
one of those early warning signs that you
80.0 -0.8
get when the markets [don’t assume] that
there is going to be very low volatility. I 70.0
-0.6

SPX-USD Correlation
don’t think there has been a carry trade -0.4
60.0
because of these concerns. The carry
-0.2
trade has a lot more room to unwind,
VIX

50.0
especially if things get dicey.” 0.0
40.0
Another divergence Kicklighter points 0.2
out is the dollar is a safe haven. While 30.0
0.4
that always will be the case, he points
20.0
out that its correlation with the S&P has 0.6

built in 2013 despite a strong equity rally 10.0

VIX 0.8
with low volatility (see “Safe haven or risk SPX -USD Correlation (60-Day, Inverse)
0.0 1.0
asset?” right).
1/2/2003

1/2/2004

1/2/2005

1/2/2006

1/2/2007

1/2/2008

1/2/2009

1/2/2010

1/2/2011

1/2/2012

1/2/2013

He says the dollar will get to 90 by year

end but not go beyond it. “To make the
transition, you have to have extreme risk
aversion and the dollar is already essen-
tially at a three-year high so a lot of the
taper concern has been priced in. … but I
don’t think you will get beyond 90 until
you have the conversation that you are
Source: FXCM
moving beyond stimulus.” add more stimulus.
And therein lies the rub because as “You are talking about the Fed at the
the U.S. central bank is debating when crest of its stimulus program while the
to take money out, others are looking to Bank of Japan just recently hit the accel-

futuresmag.com 21
MARKETS continued

NO LONGER BEST BUDDIES Dowd also is skeptical of euro strength.

“The euro has some structural issues; we can
Whether you blame China or the Aussie central bank, correlation among commodity get down to 1.2450-1.2500 before year end.”
currencies has split. Ovsepyan splits the difference, expecting
1.07000 1.08000
the euro to settle near 1.3000 by year end.
1.06500
AUD/USD Spot Forex (Daily) 1.07000 So there you have it — analysts are split
CAD/USD Spot Forex (Daily) 1.06000 between the euro making either a yearly
1.06000

1.05500
1.05000 low or yearly high as 2013 comes to a close.
1.04000
1.05000
1.03000
1.04500
1.02000
Manipulation
1.04110
1.04000
1.01000
In our April currency outlook, we men-
1.03500
1.00000 tioned there was some fear of a currency
1.03000 0.99000 war based on a statement from the Group
1.02500 0.98000 of 20 at its Moscow Summit expressing
1.02000 0.97000
concern over the level of central bank
1.01500 0.96000
machinations and a chance some coun-
1.01000 0.95000

0.94000
tries might be labeled currency manipu-
1.00500
0.93000 lators. That seems to have calmed down
1.00000
0.92000 and most view the various central banks as
0.99500

0.99000
0.98500
0.98000
2013 16 Feb Mar Apr
erator, so they are at different phases of
their programs,” Kicklighter says.
And it is not just the yen. New Bank of
England Governor Mark Carney is making
noise that the BOE will add stimulus soon,
as is likely with the European Central Bank
(ECB) and the Reserve Bank of Australia.
Euro conundrum
“The euro is in a curious place because
on the one hand monetary policy looks
set to ease in the Eurozone even as the
economy improves, and as the economy
continues its improvement more people
appear to be buying the euro, which in
effect is creating tighter monetary con-
ditions,” Wilkinson says. “That in itself
argues for further easing from the ECB.”
Dowd says, “I don’t think the ECB is
opposed to having the euro weaker. So if
the dollar gets strong, the first step on the
downside [for the euro] after you get past
the 1.2740 [2013 low] is 1.25. Germany
is the big question. It is really how much
Germany wants to continue to carry some
of these peripheral countries.”
But the euro has shown resilience in
2013 and may be in in a good spot where
growth is beginning to pick up, but not
so much as to prevent further stimulus.
“The euro is really the weakest link,
0.91000
0.90060
0.90000
0.89000
0.88000
16 May 16 Jun Jul 16 Aug
Source: eSignal
though one of those things that has
helped it is the fact that it is always in
trouble: Greece, Ireland and rest of the
[peripherals],” Kicklighter says. The euro
is going to be interesting because it really
depends on how robust risk trends are
going to get. You probably will be down
to 1.25 by end of year. The [British]
pound will drop back to 1.48.”
“The euro has been extremely strong,”
Rotman says. “It has been in a range
from 1.27-1.34 throughout the summer.
Now we are getting pretty positive eco-
nomic confidence data coming out of the
Eurozone and Germany. Even though the
European officials have said that the job
growth is horrendous, you really could
not tell that by looking at the euro. It is
at 1.33 and approaching the range high
of 1.34. Any time it has gotten to the bot-
tom part of the range we have found sig-
nificant buying. I could see 1.36.”
Wilkinson sees this, but says, “My out-
look for the euro is to fight the trend. The
trend is very clearly upward and that is
tripping a lot of people up. Most people
are not looking for monetary tightening,
with many looking for easing. I don’t
think improving growth prospects is a
sufficient factor to drive the currency
higher at this point.”
simply doing what they can on the mon-
etary side to support their economies.
“Japan has been the [closest] example
of manipulation that you are going to
get,” Kicklighter says. “They don’t label
them a currency manipulator because if
you label Japan a manipulator, then you
would have to label China a currency
manipulator and then you would have
to say the U.S. is a currency manipulator
because we moved our stimulus program
to exceptional levels.”
He adds, “The appropriate term is
‘competitive stimulus gain.’ You have
to measure what their objectives are,
they have to prove that you are trying to
manipulate the exchange rate simply for
the exchange rate sake rather than pro-
moting domestic growth.”
Rotman says active central banks are a
part of life today. “That issue is so wide-
spread and commonplace in today’s
central-bank-dominated currency mar-
ketplace. Central banks overtly affect the
currency markets on a daily basis. That is
the reason the Aussie dollar went below
the 90 level [at the end of July].”
Dowd sees the move down in July in
the yen as more corrective. “[The yen] is
going to move up to 105. By year end the
yen will be around 105-110.”
Dowd has the consensus opinion but
the yen has improved against the dollar
despite the interventions of “Abenomics”
to weaken the currency based on Japanese
Prime Minister Shinzo Abe’s policies.
“We are going to have a pullback in

22 FUTURES September 2013

the yen for the next month and a half
but eventually end the year at 105,”
Kicklighter says.
“The pace of yen weakening has
stalled with the yen trading below 100,”
Wilkinson adds. “I believe it is a cor-
rection; ultimately the yen will trade
between 104 and 110, whether that is
before the end of the year I am not sure.”
Rotman pegs 105 in the yen by year
end. Ovsepyan is the outlier, pegging 98
in the yen.
Aussie
A permanent concern in all markets and
market sectors is China, and slow growth
in China has been blamed for the extreme
weakness in the Aussie dollar.
“I have been of the opinion that the
Chinese economy is slowing because of
what happened in the Eurozone. Yes, there
is some domestic slowdown in China but
it appears the Chinese authorities will step
in to support growth even if it is slipping
to a historically low level,” Wilkinson says.
Dowd says, “Australia is going to be
dependent on how things go in China but
when you look at that chart it looks a little
oversold right here. If we can trade above
95, the market gets back on a flat position.”
Wilkinson points out that China has
emerged and may see lower GDP num-
bers as a result. “As the Eurozone news
becomes less bad, you will definitely see a
pick-up in Chinese activity. Whether that
is sufficiently strong to drive a rally in the
Aussie dollar is [debatable].”
Also debatable is whether weakness in
the Aussie dollar can be blamed on China
or if the reason is closer to home.
Rotman says central bank statements,
not Chinese weakness, is the reason for
the fall. “It is because Australian central
bank chief Glenn Stevens blatantly said
‘we still think our currency is too high.’
You can’t get much more obvious than
that. As soon as he said that the Aussie
went from 91 to 89.”
Whether you blame it on China or
Stevens, it has caused a split in the once
dependable correlation in the commod-
ity currencies (see “No longer best bud-
dies,” left).
Wildcards
Opinions are varied, and of course data-
dependent. The one wildcard mentioned
by most analysts is a significant change in
the expectations of a tapering, but more
importantly the fundamental reasons for
such a change. Dowd sums it up, “The real
wildcard would be if the [United States]
turns down again. If we saw a real dete-
rioration in the employment numbers or
the housing market in the [United States],
that would be a game changer.”
The U.S. dollar appears strong because
the U.S. economy is preparing to begin
weaning itself from extraordinary accom-
modation while the rest of the world is at
the trough. If the numbers don’t justify
it, things could change.

How Do You Turn Trading Possibilities into Profit?

eSignal’s award-winning trading software helps you find and execute on trading opportunities
Specialty Chart Types Volume Delta
For nearly 30 years, eSignal has provided
serious traders with the tools they need, in
a single, easy-to-use platform

eSignal Futures Trader Lightning-fast data: Futures, Stocks, Forex,

Options, ETFs
Advanced Charting: Customizable technical
Seasonal Study
analysis tools
Access to 100s of exchanges and indices
Alert Ticker worldwide
Trading integration with 50+ brokers
Advanced GET Dashboard Market Profile

Try eSignal Risk-Free for 30 days!*

Award-Winning Products
eSignal products have
Sign up now and start trading in minutes.
consistently been voted #1
by users worldwide 800.900.1779 | www.eSignal.com
eSignal, an Interactive Data company.
*If you’re not completely satisfied during the trial, cancel the service, and we will refund your subscription fees.
Taxes, add-on service/exchange fees and activation fees are non-refundable. x14789

futuresmag.com 23
YEAH... IT’S THAT
DAMN OBVIOUS.

Vs
 Introducing RJO Futures PRO.
An obvious edge.

RJO FUTURES PRO – an exclusive and sophisticated online trading platform like no other with integrated tools to
seamlessly trade and monitor the markets. Traders can easily view market activity, place orders, and track orders
and positions via the premier order management system. Best of all – it’s FREE to RJO Futures clients.

Here are just a few feature highlights:

ș FREE $50K simulated account with real time ș OCO orders with GTC capability
data & execution ș Trailing stop functionality
ș Click N’ Trade – one click trading from charts, price ș Options window with options calculator and
ladder (DOM) & order ticket screens
‘what if’ scenarios
ș Click N’ Drag – cancel/replace orders without typing

Get a FREE $50,000 simulated account

with real-time data & execution.
Visit www.rjofutures.com/FutMag-RJOFPROdemo A division of R.J. O’Brien

or call 800-441-1616

Ȫ op6rig%t ǗǕǖǘ   2t2res. ǗǗǗ . i3erside )a7aǾ Ǟt% ƝoorǾ %i agoǾ  ǛǕǛǕǛ.

%e ris( o# )oss in trading o**odit6 #2t2res and options is s2stantia). e#ore tradingǾ 6o2 s%o2)d are#2))6 onsider 6o2r Ɯnan ia) position to deter*ine i# #2t2res
trading is appropriate.
 FOREX
EQUITY TRADING TECHNIQUES
The 48-hour movement strategy
BY A Z E E Z M U S TA PH A
Trading success is rooted in the consistent application of proven techniques.
For most traders, that starts with the right strategy. Here’s one swing-trading
method that works.
M
arkets often experience long,
smooth upward pushes
punctuated by violent pull-
backs, brought about by some fun-
damental event. This isn’t surprising,
especially when we delve deeper into
market dynamics.
Market studies have shown that the
seriousness of market metamorpho-
sis could be decided by the buying and
selling pressure. During a serious price
movement, pressure gains momentum.
Intensifying moves in an equilibrium ter-
ritory may portend an exponential rise
in price pressure. Moves that become less
intensified may forecast a counter-trend
rise in pressure.
A short-term swing trading strategy
Using technical tools for swing trades
Finding opportunities in forex markets
Expanding pressure brings with it a
more colossal directional move, but you
should not overlook the seemingly refrac-
tory nature of the financial markets. The
most crucial issue is that it is not just the
pressure itself. With any given market
move, don’t assume there is a bear for
every bull; therefore, market pressure is
ineffectual. If this were true, the markets
would be caught in never-ending consoli-
26 FUTURES September 2013
dation. Fear and greed of bulls and bears
propels the markets.
Transaction pressure and market
movements reveal price dynamics.
Consider buying/selling pressure as
a lopsided attempt, while the market
action is the aftermath. If bears are
inclined to close orders at all costs, there
might be a propensity to do so at the bid
rather than the offer. If purchasing need
is scantily situated beneath the price,
then the markets would be propelled
toward the downside until bears get sat-
isfied. Alternatively, if bulls are inclined
to act, they may purchase the offer and
not sit on the bid. If there is not much
resistance, the market may move higher
until the bulls are satisfied.
We can capture the tendency of the
market to swing from one short-term
extreme to the other with a technical-
based trading strategy that brings with
it the added benefit of simplicity.
Swing strategy
The 48-hour movement system uses a
simple moving average (SMA) and the
relative strength index (RSI), both on
a 20-period basis. It is most effective
trading currency pairs and crossrates
(for example, EUR/JPY, AUD/JPY, EUR/
For more from Azeez, go to
futuresmag.com/Mustapha
USD, AUD/USD, EUR/NZD, EUR/
CAD, GBP/USD, GBP,CHF). It trades on
hourly charts. The rules are simple: Go
long when the price is above the SMA
and the RSI is above 60. Go short when
price is below the SMA and the RSI is
below 40.
The trade triggers are just part of the
plan, however. Just as important are posi-
tion sizing and risk-control guidelines.
Maintain a stop loss 90 pips from the
entry price. Take profits 180 pips from
the entry price. Move the stop loss to
breakeven once prices moves 50 pips in
your favor. As for size, smaller positions
are auspicious. Trade $2,000 lots.
Finally, if the stop loss or the profit
target aren’t hit within 48 hourly bars,
exit the position.
Trade examples
In the charts showing the trade exam-
ples, the vertical red line on the right
shows where a position was opened. The
vertical red line on the left shows where
it was exited.
On June 8, the major trend on the
EUR/NZD was bearish (see “Swinging
low,” top right). The entry criteria were SWINGING LOW
met, and a short position was opened.
There were minor pullbacks and a gap During this short trade, there were some market developments that tested our
during the course of this trade (which discipline. As we can see, sticking with the rules paid off.
could test our emotions), but sticking
1.6530
to our exit rules paid off. We entered 1.6485
1.6440
the trade at 1.6280, with a stop loss at Downtrend: A bearish signal 1.6395
1.6370 and a profit target at 1.610. On 1.6350
1.6305
June 12, our profit target was hit for 180 1.6260
pips of profit. 1.6215
1.6170
On March 13, a bullish signal was 1.6145
1.6125
1.6080
generated in the GBP/CHF (see “Swiss 1.6035
100
opportunity,” center right). This cross
60
experienced some prior consolidation,
40
especially a few days before this par-
0
ticular signal. This trading method can 2012
06:00 14:00 22:00 06:00 14:00 22:00 06:00 14:00 16:00
2012.06.08 22:00 07:00 15:00 23:00 2012.06.12
07:00 15:00 16:00
23:00 07:00 15:00 23:00
6 Jun 7 Jun 8 Jun 11 Jun 12 Jun 13 Jun
be used to avoid a range-bound market
Source: MetaQuotes Software Corp.
in that the RSI would neither be above
the level 60, nor be below the level 40
when there is consolidation. This trade SWISS OPPORTUNITY
also worked well. We entered the trade Following an extended period of consolidation, this trade shot higher shortly after our
at 1.4400, with a stop loss at 1.4310 and criteria were met, making for quick profits and a great trade.
a profit target of 1.4580. The target was
hit the following trading day for the 1.4635
1.4605
maximum profit. A bullish signal 1.4575
1.4545
In “Breaking even” (below right), we 1.4515
can see our risk control at work. The 1.4485
1.4455
short trade in the AUD/USD initially 1.4425

went our way but then it failed to reach 1.4395

1.4365
its target. Luckily, it has moved far 1.4335
1.4305
enough into profitable territory (50 pips) 100

that we had moved our stop to breakev- 60

en. Analytically speaking, the price hit 40

a major demand zone and shot higher. 02:00 10:00 18:00 02:00 10:00 18:00 03:00 11:00 19:00 2012.03.13
03:00 11:00 12:00
19:00 03:00 11:00 19:00
2012.03.14 03:00
16:00 11:00 19:00
0
2012
Our entry price was 0.9682 on June 1 8 Mar 9 Mar 12 Mar 13 Mar 14 Mar 15 Mar
with an initial stop loss of 0.9772 and a Source: MetaQuotes Software Corp.
profit target of 0.9502. The stop, which
we later moved to breakeven, was hit BREAKING EVEN
the same day. Not all trades make money, of course. Thankfully, though, this one at least didn’t lose
Over time, this trading strategy works. money. Before the market moved against us, we had followed our rules and adjusted
As with all systems, though, it’s impera- our stop loss to breakeven.
tive to follow the rules and to always
trade small so you can stay in the game. 0.9905
0.9875
If the system doesn’t work for you, either An aborted trade
0.9845
0.9815
because of your risk tolerance or your 0.9785
time frame, then move on, but don’t 0.9755
0.9725
modify the system or ignore trades. The 0.9695
trade you skip may be the one that puts 0.9665
0.9635
you in the black. Above all, however, don’t 0.9605
0.9575
stop learning. Commit yourself to ongo- 100

ing education and explore new opportu- 60

nities with discipline and restraint. 40

0
07:00 15:00 23:00 07:00 15:00 23:00 07:002012.06.01
15:00 23:00
03:00 00:00 15:00
2012.06.01 08:00 16:00 00:00 08:00 16:00 00:00
Azeez Mustapha is a professional forex trad- 2012
29 May 30 May 31 May 4 Jun 5 Jun 6 Jun
er, forex signal strategist, fund manager, Source: MetaQuotes Software Corp.
researcher and coach.

futuresmag.com 27
 GOLD & SILVE R

TRADING TECHNIQUES

Leveraging futures vs. ETN

differentials
BY PAU L D. C R E T I E N

The metals markets have experienced a big trend shift this year. Here’s how the
relationships among different contracts are evolving.

FUTURES PRICE CHANGES

T
he relatively smooth price trends
for gold, silver and copper The metals market underwent a major shift this spring, when prices fell off the
futures that were in place when proverbial cliff.
2013 began were interrupted by rough
waters in mid-February. As you can see Cumulative percentage price changes
in “Futures price changes” (right), values (Gold, May silver and copper futures)
10%
fell abruptly in the middle of April. The
5%
metals showed signs of modest recovery
0%
by the end of the month, but that process
-5%
has been slow to develop.
-10%
Precious vs. industrial -15%
Breaking down the metals markets -20%

How metals relate in the new economy -25%

-30%
Metals exchange-traded notes (ETN) -35%
followed much the same course as the
Jan 3
Jan 8
Jan 11
Jan 16
Jan 22
Jan 25
Jan 30
Feb 4
Feb 7
Feb 12
Feb 15
Feb 21
Feb 26
Mar 1
Mar 6
Mar 11
Mar 14
Mar 19
Mar 22
Mar 27
Apr 2
Apr 5
Apr 10
Apr 15
Apr 18
Apr 23
Apr 26

futures contracts through the first four

months of 2013. “Metals ETNs veer from
Gold Silver Copper
futures” (far right) shows that although
the overall patterns of price changes are Source: Barchart.com

similar, there are significant differences
between the ETN and futures markets.
For example, the cumulative percentage
price change for the silver ETN (USLV) fell
to negative 95% on April 16 as opposed to
the cumulative change of –30% for May
2013 silver futures. This difference is not
surprising for an ETN that has the objec-
tive of providing three times the daily per-
formance of the S&P GSCI silver index,
plus a daily accrual of three-month U.S.
Treasury rates (less the daily investor fee). For more from Paul, go to
In other words, leverage may be sought for futuresmag.com/Cretien
price gains or losses, and it is obvious that
the leverage is working as intended. ETN, again demonstrating the power of
The gold ETN (UGOLD) also is lev- leverage.
eraged, and has the goal of producing Copper futures and the contract’s
three times the S&P GSCI gold index. comparable ETN do not show the same
At the end of trading on April 16, 2013, results as gold and silver. The operative
the cumulative percentage price change copper ETN is iPath DJ-UBS Copper
for June 2013 gold futures was down TR Sub-Idx. The note has the objective
by 19% compared to –68% for the gold of reflecting the performance of copper

28 FUTURES September 2013

futures contracts traded on the CME’s METALS ETNS VEER FROM FUTURES
Comex and is not leveraged. While the
May 2013 copper futures fell to a –14.30% The price drop as measured by ETNs is similar to the futures, although there are some
differences due to the leveraged nature of the gold and silver products.
cumulative change on April 16, the cop-
per ETN had declined by 14.96%.
For a trader interested in gaining from Metals ETNs
(Cumulative percentage changes)
leverage and willing to accept the risk, 20%
silver futures and silver ETNs are prime 0%
alternatives. -20%

-40%
Leveraged opportunities -60%
“Metals call options” (right) shows June
-80%
and December delivery dates for silver,
-100%
gold and copper futures on April 16, 2013.
Jan 3
Jan 8
Jan 11
Jan 16
Jan 22
Jan 25
Jan 30
Feb 4
Feb 7
Feb 12
Feb 15
Feb 21
Feb 26
Mar 1
Mar 6
Mar 11
Mar 14
Mar 19
Mar 22
Mar 27
Apr 2
Apr 5
Apr 10
Apr 15
Apr 18
Apr 23
Apr 26
The three higher price curves for December
(square symbol) have silver above copper Gold Silver Copper
and gold because of silver’s acceptance by
Source: Barchart.com
the options market as the most volatile
and, thus, the most valuable option of
the three calls having the same expiration METALS CALL OPTIONS
date. For June calls (triangle symbol), silver All else equal, silver options are priced higher due to that market’s higher volatility.
is still the highest curve, reflecting its supe-
rior volatility. While copper has given up 0.09
its position relative to gold, the two price
Call price/Strike price

0.08
curves are almost equal. 0.07
Heights of options price curves, as 0.06
measured by the ratio of the call value at 0.05
the point where the futures price is equal 0.04
to the strike price, indicate the options 0.03
market’s assessment of relative (implied) 0.02
volatility for each futures contract. For 0.01
the calls on silver, gold and copper, the 0.00
curve heights for the December expira- 0.75 0.80 0.85 0.90 0.95 1.00

tion are 8.77%, 6.34% and 7.18%. For June
futures, they are 5.19%, 3.76% and 3.12%.
The call price curve heights are deter-
mined by the spread between upper
and lower breakeven prices (at which a
neutral delta spread will return neither
profit nor loss at expiration). According
to the options market’s forecast on April
16, 2013, December breakeven prices for
silver, gold and copper are $29.64-$20.61,
$1,657.28-$1,257.62, and $3.88-$2.91,
respectively. These price ranges compare
with the December futures prices on
April 16: silver, $23.665; gold, $1,378.40;
and copper, $3.34. As always, the options
market does not forecast a direction of
price change. It only cares about volatil-
ity and time to expiration in determining
call and put prices.
Descriptions of the gold and silver
ETNs indicate that they are an easily trad-
ed pair, priced as exchange-traded securi-
ties not too far apart in dollars and cents.
Futures price/Strike price
Silver June Silver Dec Gold June Gold Dec Copper June Copper Dec
Source: Barchart.com
After slowly gaining with respect to sibility of a shadow price in the same
silver over the first three months of way that the COW agricultural ETN was
2013, UGLD plunged by $13.03 from shadowed by a combination of agricul-
April 9 to April 16, while USLV fell tural futures contracts (see “Trading
$8.64. Gold has led the recovery from cattle, hogs and ETNs,” November 2012).
that short-term trough, rising by $4.78 A chart of cumulative percentage
vs. $1.23 for the silver ETN through price changes for May copper futures
April 30. Based on past experience, sil- and the copper ETN would illustrate
ver eventually should narrow its price how closely their prices move togeth-
spread with gold; however, at the end of er, with apparently little chance for a
April 2013 this had not occurred. profitable spread trade between the
The copper ETN DJ-USB is not lever- two. However, we will look at the daily
aged but is based on an index of copper differences in percentage price changes
futures contracts. On April 30, 2013, the between the futures contract and ETN
index consists of one futures contract on to investigate trading potential.
copper, currently the high-grade copper As shown on “Differences in per-
futures contract traded on the Comex. centage price changes” (page 33), there
The ETN is balanced with copper futures are many one-day shifts between plus
by dollar weighting. This creates the pos- Trading Techniques: Cretien continued on page 33

futuresmag.com 29
 CHARTING

TRADING TECHNIQUES

A closer look at price

chart choices
BY J E A N FO LG E R

Understanding how prices are represented on your computer screen is critical to

seeing market moves clearly.

P
rice charts are a technical trader’s TWO STYLES
portal to the markets and a pri-
mary means of making trading Two common chart styles are OHLC bars and candlesticks. Both convey the same
information: The open, high, low and closing prices for a specified interval.
decisions. Today’s market analysis plat-
forms offer traders a variety of options 15500 15500
for viewing price data on a chart, from 15400 15400
15300 Candlestick Chart 15300
chart style to interval. The style of the OHLC Bar Chart 15200 15200
chart determines how price is displayed; 15100 15100
15000
for example, bar and candlestick charts. 14895
14900
15000

The chart interval dictates which data are 14800

14895
14900
14700 14800
Bars and candlesticks 14600 14700
14500 14600
Visualizing market moves up bar down bar up bar down bar
14400 14500
high high high high
Putting prices in perspective 14300 14400
close 14200
close
open 14300
14100 open 14200
used to construct the display. Here, we 14000 14100
take a look at popular chart styles and close 13900 14000
13800 close
intervals, including time, tick, volume open 13700 open 13900

and range bar charts. low low 13600 low low 13800
13700
Mar Apr May Jun Jul Mar Apr May Jun Jul
Chart styles Source: NinjaTrader
While there are many different chart
styles, the two most common ways to horizontal lines that represent the bar’s For more from Jean Folger,
display prices are bar and candlestick opening and closing prices appear on go to futuresmag.com/Folger
charts. These two styles show the same either side, as shown in the left chart of
information: The open, high, low and “Two styles” (above). — thin lines that appear above and below
closing prices for a specified chart inter- Candlestick charts show the same the body, as shown in the right chart in
val. Visually, however, bar and candlestick open, high, low and closing prices with a “Two styles.” The body of the candlestick
charts are quite different. On a bar chart different display. Here, the opening and appears black if the close is lower than the
(also called an OHLC chart), the high closing prices form the body of the can- open and white if the close is higher than
and low prices for each specified interval dlestick, and the high and low prices for the open. It’s common for traders to sub-
appear as a vertical line, and two, small the interval are represented by the wicks stitute colors for black and white. A green

30 FUTURES September 2013

 TIME TO TURN
Candlestick charts can be used to identify
price patterns, such as this bullish engulf-
ing pattern example.
Bullish Engulfing Pattern
The body of the up candle
bar completely covers, or
engulfs, the body of the
prior bar.
Do
wn
tre
nd
Source: NinjaTrader
body, for example, means that price closed
above its open (showing strength), while a
red body often indicates that price closed
below the open (showing weakness).
Some traders use candlestick charts
to spot price patterns that may indicate
a reversal or a weakening of the trend.
Patterns can be formed within the same
candlestick by comparing the size of the
body to the wick, or across several adja-
cent candlesticks. A bullish engulfing
pattern, for example, is a reversal pattern
that occurs when the body of an up-can-
dle bar completely covers, or engulfs, the
body of the prior bar, signaling the end of
a downtrend, as shown in “Time to turn”
(above). Candlestick charting often works
best when combined with other technical
tools or indicators for confirmation.
Time-based charts
Most investors and traders are accus-
tomed to viewing price charts that are
based on time, such as daily, 60-minute
or five-minute intraday intervals. With a
time-based chart, one bar — be it a can-
dlestick or OHLC bar — prints at the end
of each specified time interval, regardless
of the amount of trading activity that
has occurred. On a five-minute chart,
for example, a bar will print at 9:35, 9:40,
9:45, 9:50 and so forth until the end of
the trading session.
There always will be an equal number
of bars per trading session when the same
time interval is applied. Time-based charts
can be as small as a few seconds to as large
as weekly, monthly or yearly intervals.
ACTIVITY DRIVEN
This chart of the E-mini S&P 500 shows a close-up view of the tick and range bar
activity that takes place during one 15-minute candlestick.  
Tick interval activity
inside 15-minute
price bar
15-minute
price bar
05.00 05.30 06.00 06.30 07.00 07.30 08.00 08.30 09.00 09.30 10.00 10.30 11.00 11.30 12.00 12.30 13.00 13.30 14.00 14.30
A trader’s style often determines the
size of the chart interval. Longer-term
traders, such as swing and position trad-
ers, might use hourly, daily or even week-
ly charts. In contrast, short-term traders
may prefer 30-second or one-minute
charts to see the details of price action.
Activity intervals
While time-based charts are perhaps the
most widely used, activity-based price
charts offer traders a different view of the
markets, and as more bars print within a
set amount of time, these charts can indi-
cate an increase in volatility. Tick, volume
and range-bar charts are examples of
activity-based charts.
These charts print a new bar at the
close of a specified activity interval,
regardless of how much time has elapsed.
“Activity driven” (above) shows a 15-min-
ute chart of the E-mini S&P 500 (ES). The
overlays in the chart show one 15-min-
ute bar “exploded” to illustrate the tick
(on the left) and range bar (on the right)
activity that took place during the same
time. Activity-based charts can paint a
more accurate picture of market action
by showing the effect that the number
of transactions or volume has on price.
Here’s a closer look at various types of
activity-based charts.
Tick charts
With a tick chart, each bar represents
1621.00
1620.00
1619.00
1618.00
1617.00
1616.00
1615.00
1614.00
Range bar activity 1613.00
inside 15-minute 1612.00
price bar 1611.50
1611.00
1610.00
1609.00
1608.00
1607.00
1606.00
1605.00
1604.00
1603.00
1602.00
1601.00
Source: NinjaTrader
the price activity that took place dur-
ing a specified number of transactions.
A 100-tick chart, for example, prints a
new bar each time 100 transactions have
filled. Each transaction is counted just
once, regardless of the size.
Because tick charts are based on a cer-
tain number of transactions per bar, they
help traders identify current market infor-
mation. Acting much like the display on
a gas pump that allows you to judge the
flow of gas into your car by the speed at
which price scrolls by, tick charts give trad-
ers instantaneous information about the
speed of the market. The more time that a
trader spends in a particular market using
tick charts, the more the trader will be
used to that market’s tendencies. Periods
of increased activity — and potential trad-
ing opportunities — then instantly can be
recognized and acted upon.
The interval of tick charts often is
derived from Fibonacci numbers, a
numerical series discovered by Leonardo
Fibonacci in which each number is the
sum of the previous two numbers. While
traders can specify any number of trans-
actions, popular Fibonacci-based inter-
vals include 144-, 233-, 610- and 987-tick
charts. It is common for traders to use
different tick intervals across multiple
charts of the same trading symbol. For
example, a trader might make trades off
of a 144-tick chart after finding confir-
mation on a 987-tick chart.
futuresmag.com 31
TRADING TECHNIQUES continued
VOLUME VIEW
Volume bars can help traders identify periods of increased activity – and better trad-
ing opportunities.
One hour One hour
09:30 09:37 09:50 10:01 10:15 10:37 11:03 11:38 12:18 13:02 13:50 14:20 14:52 15:26 15:43 15:59
HOME ON THE RANGE
This chart of the Nasdaq 100 illustrates the effectiveness of applying trendlines to range
bar charts.
Range bar chart
09:09 09:28 09:30 09:32 09:34 09:36 09:40 09:43 09:47 09:50 09:54 09:57 10:00 10:01 10:02
Volume charts
Volume charts record the prices for a
specified number of contracts or shares
traded. In a 1,000-volume chart, for
example, a new bar prints every time
1,000 contracts (for futures/commodities
markets) or shares (stocks and exchange-
traded funds) have traded, regardless of
the time that has elapsed. One bar might
represent a single large transaction or
numerous small trades and, similar to
tick charts, traders can get an idea of
how rapidly a market is moving simply
by noting how many (and how quickly)
bars are printing.
32 FUTURES September 2013
5000-volume chart
1607.75
Source: NinjaTrader
2946.00
2945.75
Horizontal trendlines indicate
areas of support & resistance.
Once price breaks out, a nice
upward move follows.
Source: NinjaTrader
“Volume view” (above) shows a
5,000-volume chart of the E-mini S&P
500 contract. To illustrate how volume
and activity can differ throughout the
trading session, the first hour and lunch
hour are highlighted in yellow. Note how
there is significantly more trading activity
during the open.
Volume intervals are typically scaled to an
individual symbol to reflect normal market
activity for that symbol. A symbol that trades
under large volume, such as the E-mini S&P
500, would require a larger interval to pro-
vide relevant charting analysis.
Popular intervals include 500, 1,000,
2,000 and 5,000 volume charts (again,
depending on the symbol), though vir-
tually any number could be assigned. As
with tick-based charts, Fibonacci inter-
vals, such as 987, 1597 and 2584, are
1621.00
1620.00
popular choices for volume charts.
1619.00
1618.00 Range bar charts
1617.00 Range bar charts are the relative newcomers
1616.00
to the charting world, and are composed of
1615.00
1614.00
bars that are based only on price activity,
1613.00 thereby eliminating time, number of trans-
1612.00 actions and volume from the equation.
1611.00 Each bar represents a specified price move-
1610.00
ment, such as 10 cents or 50 cents, and once
1609.00
1608.00
price has moved the specified amount, one
1607.00 bar will close and a new will open. The three
1606.00 governing rules of range bars are:
t
Each range bar has a high/low range
that equals the specified range;
t
Each range bar opens outside the high/
low range of the previous bar; and
t
Each range bar closes at either its high
or low.
2948.00 Unlike time-based intervals where an
equal number of bars print each trading
2944.00 session, any number of range bars can
2942.00
appear during a session depending on the
2940.00
2938.00
volatility of the given market.
2936.00 Range bars can help traders view price
2934.00 in a consolidated manner. A lot of the
2932.00 noise that occurs when prices bounce
2930.00 back and forth in a narrow range can be
2928.00
reduced to one or two bars, helping trad-
2926.00
2924.00
ers distinguish what is happening to price.
2922.00 Because much of the noise is eliminated,
2920.00 range-bar charts make especially ideal
2918.00 charts on which to draw trendlines to
point out areas of support and resistance,
as shown in “Home on the range” (left).
Chart views
Determining the best chart interval
requires practice and screen time. The
chart should match the trading style
and the time frame in which the trader
operates. It is important to remember
that time and activity chart settings are
relative to the market being traded, so
no single setting is appropriate across
all markets or trading styles.
Jean Folger is the co-founder of, and system
researcher with, PowerZone Trading, LLC. Jean
can be reached at www.powerzonetrading.com.
TRADING TECHNIQUES continued

Cretien continued from page 29

DIFFERENCES IN PERCENTAGE PRICE CHANGES could overcome a larger negative shift
in the ETN. Counting on the possibil-
As we can see here, copper futures often diverge from the ETN. The goal is to take ity of a one-day reversal, this suggests
advantage of those differences as the two instruments converge. buying the ETN and selling the futures
contract to hedge and to help provide
May Copper futures less DJ-UBS Copper ETN
0.80%
funds for the ETN purchase.
0.60%
On the other hand, a negative differ-
ence means that a change in the ETN
0.40%
price could not overcome the negative
0.20%
change in the futures price. Thus, the
0.00%
indication would be to buy the futures
-0.20% and sell the ETN to cover the trade.
-0.40% From Jan. 3 to April 30, 2013, there are
-0.60% 11 dates on which the difference in per-
-0.80% centage changes exceeds 40 basis points
Jan 4
Jan 9
Jan 14
Jan 17
Jan 23
Jan 28
Jan 31
Feb 5
Feb 8
Feb 13
Feb 19
Feb 22
Feb 27
Mar 4
Mar 7
Mar 12
Mar 15
Mar 20
Mar 25
Mar 28
Apr 3
Apr 8
Apr 11
Apr 16
Apr 19
Apr 24
Apr 29
(0.40%). In eight of these, the difference
is positive (buy ETN, sell futures), with
Source: Barchart.com
three dates showing a negative difference
(sell ETN, buy futures).
SPREAD PROFIT: COPPER FUTURES VS. ETN Results for the 11 spread trades are
Of the 11 trades based on a basic futures vs. ETN arbitrage strategy, eight of those summarized on “Spread profit: Copper
trades made money. futures vs. ETN” (left). In each trade,
2,500 ETNs are spread against one
Date ETN Futures ETN Futures Gain
futures contract of 25,000 pounds of
change change (Loss) high-grade copper. This ratio generally
plus Jan 3 46.55 3.7200
produces a net one-day investment of
approximately $20,000.
Jan 4 46.69 3.7035 350.00 (412.50) 762.50
Of the 11 spread trades, eight are prof-
plus Feb 20 45.31 3.6250 itable, with the highest return being April
Feb 21 44.83 3.5695 (1,200.00) (1,387.50) 187.50 16-17 at $1,325. Two trades show losses
plus Feb 25 44.52 3.5610 ($150 April 25 and $200 April 30). One
Feb 26 44.99 3.5830 1,175.00 550.00 625.00
trade, resulting in no gain and no loss,
occurs on the weekend of the big shake-
plus Mar 7 44.03 3.5205
out in metals prices, April 12-15. Because
Mar 8 44.02 3.5090 (25.00) (287.50) 262.50 of the large dollar amounts swinging
minus Apr 4 41.97 3.3515 both ways on this date, it appears that the
Apr 5 41.72 3.3440 (625.00) (187.50) 437.50 market was able to counteract possible
plus Apr 12 41.61 3.3500 losses in either direction. Futures and
ETN price charts described earlier indi-
Apr 15 40.84 3.2730 (1,925.00) (1,925.00) 0.00
cated that huge gains and losses were at
minus Apr 16 41.23 3.3055 stake at this mid-April event, from which
Apr 17 39.52 3.1875 (4,275.00) (2,950.00) 1,325.00 the metals are still recovering.
plus Apr 17 39.52 3.1875 Are the profits on these trades realis-
Apr 18 39.87 3.2045 875.00 425.00 450.00 tic? To a certain extent, the results are
hypothetical and depend on actual mar-
minus Apr 24 39.37 3.1570
ket prices reflected in end-of-day num-
Apr 25 40.23 3.2370 2,150.00 2,000.00 (150.00)
bers. Actual trading results could vary
plus Apr 26 39.41 3.1845 significantly from those shown here. It
Apr 29 39.73 3.2255 800.00 1,025.00 225.00 also is surprising that a positive dollar
plus Apr 29 39.73 3.2255 amount could remain for retail trading
following arbitrage between ETNs and
Apr 30 39.43 3.1875 (750.00) (950.00) (200.00)
futures.

and minus differences from Jan. 3 changes in the ETN, a positive differ- Paul Cretien is an investment analyst
through April 30. Because the bar chart ence means that neither a negative nor and financial case writer. His e-mail is
shows changes in the futures price less positive change in the futures price PaulDCretien@aol.com.

futuresmag.com 33
 T E C H N I C A L A N A LY S I S

EQUITY TRADING TECHNIQUES

Stocks, moving averages and

how to leverage them
BY B R A M E S H B H A N DA R I

Trends can make you money in the stock market, and one of the best tools to identify
opportunities during trend moves is the moving average.

T
he moving average is one of the TWO AVERAGES
classic and most-reliable tools for
technical analysis. A moving aver- Exponential moving averages apply more weight to more recent prices. Simple
moving averages weight all prices within the lookback period equally. Here, we also
age simply shows the average value of a
can see how longer-term moving averages are smoother and less reactive than
security’s price over a defined period of shorter-term ones.
time. The direction of the average reflects
the general trend of the security. Market Vectors Gold Miner (GDX)
56
Although the moving average is one of 55
54
53
the simplest technical indicators, there are 50-day 52
51
exponential 50
variations in its calculation. For example, the moving 49
48
47
moving average calculation can be based on average 46
45
44
a security’s open, high, low, close, volume or 43
42
41
even another indicator. In addition, it can 40
39
EMA (50d) 38
be calculated over different time periods. Moving average (20d) 20-day simple 37
36
moving average 35
The longer the time period, the smoother 34
33
32
the average. The shorter the time period, the 70.0M
64.6M
31
30
29
more reactive the average. 59.2M
53.8M
28
27
48.4M 26
43.1M 25
Finding trends in stocks 37.7M
32.3M
24
23
26.9M 22
SMA vs. EMA 21.5M
16.1M
10.8M
5.38M
How moving averages work
Aug Sep Oct Nov Dec 2013 Feb Mar Apr May Jun Jul
There also are variations in the process
used to calculate the average. Two of the Source: www.chartnexus.com

most popular methods are the simple
moving average (SMA) and the exponen-
tial moving average (EMA).
The only signif icant difference
between the EMA and SMA is the weight
assigned to the most recent data. The
SMA applies equal weight to all prices
in the range; the EMA applies more
weight to recent prices. “Two averages”
(above) shows a 20-day SMA in red and
the equivalent of a 50-day EMA in blue
applied to daily data of the Market
Vectors Gold Miner (GDX) exchange-
traded fund (ETF).
An SMA is calculated by adding the
security’s price for the desired lookback
For more from Bramesh, go to
futuresmag.com/Bhandari
period (say, five days) and dividing by the
same number (in this case, five). Each day,
we add the new day and drop the oldest.
For example, assume these seven
daily closing prices: 101, 102, 103, 104,

34 FUTURES September 2013

105, 106, 107. On the fifth day of this AVERAGE COMPARISON
sequence, the average would be (101 +
102 + 103 + 104 + 105) / 5 = 103. On the This table shows a side-by-side comparison of SMA and EMA values for Apple.
second day of this sequence, the aver-
age would be (102 + 103 + 104 + 105 + Date Closing price SMA Multiplier EMA
106) / 5 = 104. On the third day of this 25-01-2012 446.66
sequence, the average would be (103 + 26-01-2012 444.63
104 + 105 + 106 + 107) / 5 = 105. Such 27-01-2012 447.28
an average is probably too sensitive to 30-01-2012 453.01
price changes because small changes in 31-01-2012 456.48 449.61 449.61
price quickly are reflected in changes in
01-02-2012 456.19 451.52 0.33 451.80
the average.
02-02-2012 455.12 453.62 0.33 452.91
This is where EMAs are helpful.
03-02-2012 459.68 456.10 0.33 455.17
Because EMAs emphasize more recent
prices in their calculation, we can achieve 06-02-2012 463.97 458.29 0.33 458.10
a smoother average line with nearly the 07-02-2012 468.83 460.76 0.33 461.68
same level of reactivity. 08-02-2012 476.68 464.86 0.33 466.68
EMAs are based on the most recent 09-02-2012 493.17 472.47 0.33 475.51
value of the average, the most recent raw 10-02-2012 493.42 479.21 0.33 481.48
price and a weighting multiplier. The 13-02-2012 502.60 486.94 0.33 488.52
weighting multiplier can be changed to
mimic a comparable length SMA. For
the initial EMA calculation, an SMA of APPLE SMOOTHIE
the target length is substituted for the A five-period-equivalent EMA applied to Apple (AAPL) is just as reactionary as the SMA
previous-period EMA. during quick price changes but is smoother during times of less volatility.
First, we calculate the value of the mul-
tiplier. Apple Inc (AAPL)
649
Multiplier = (2 / (Time periods + 1) ) = EMA (5d) 638
627
616
(2 / (5 + 1) ) = 0.33 605
594
Then, we insert the multiplier value 583
572
into the following EMA formula: 561
550
539
EMA = [Close – EMA(previous day)] x 528
517
multiplier + EMA(previous day) 506
495
“Average comparison” (right) shows 484
473
462
the values of a five-day SMA and EMA 49.9M
451
440
for Apple. The exponential moving 46.1M
42.3M
429
418
38.4M
407
average starts with the simple moving 34.6M
30.7M 396
26.9M 385
average value of 449.61 in the first cal- 23.1M
19.2M
374

culation. After the first calculation, the 15.4M

11.5M
7.68M
EMA formula takes over. The chart of 3.84M
5 12 19 27 3 9 17 23 30 6 13 21 27 5 12 19 26 2 9 16 22
the EMA is shown in “Apple smoothie” Dec 2012 Feb Mar Apr
(below right). Source: www.chartnexus.com

Because the EMA gives more weight to

recent price action, whipsaws are less fre-
quent. As seen in the chart, Apple closing
prices stay above the stock’s five-period
EMA throughout most of the uptrend
that started in January 2012.
Reading averages
The most popular method of interpret-
ing a moving average is to compare the
relationship between a moving average
of the security’s price with the security’s
price itself. A buy signal is generated
when the security’s price rises above its
moving average and a sell signal is gener-
ated when the security’s price falls below
its moving average.
While such basic trading rules may be
appealing, moving averages may be bet-
ter used in a less-rigid sense. For exam-
ple, they can be used to find support and
resistance and trend identification.
“Look at me, MA” (page 45) shows an
example of the S&P 500 bouncing off
its 50-day SMA. The green arrows iden-
tify points of bullish reaction. The red
arrows identify periods when the average
provided resistance.
Trend identification generally is done
with long-term averages. Perhaps the
most popular application is the 200-
day moving average. In general, the
market is considered bullish when it is
above the 200-day moving average, and
bearish when it is below the 200-day
moving average.
As seen in “Look at me, MA,”
Microsoft broke its 200-day moving
average on Sept. 29, 2012, at $30. It cor-
Trading Techniques: Bhandari continued on page 44

futuresmag.com 35
 CAT T L E & H O G S

TRADING 101

Quick and easy guide to

livestock trading
BY R I C H N E L S O N

Cattle and hogs offer opportunities for traders that are unique from those available
in other markets. Here’s a breakdown of supply and demand factors that drive
livestock prices.

W
e previously covered general
grain fundamentals to moni-
tor during the summer, key
reports to follow and the 2013 picture
(“Quick and easy guide to summer grain
trading,” June 2013). Here, we tackle
BALANCE SHEET
The balance sheet gives an overview of the current fundamentals. Here’s the balance
sheet for pork for fourth quarter 2013.
Fourth quarter pork pricing (1993-2012)
100
Price (Average Lean Hog Price)

the less-understood, but opportunity- 2011 - 15.8, $88.86

90
rich, livestock markets, namely cattle 2012 - 16.35, $82.07
and hogs. We’ll provide a breakdown of 80
the complex and offer a general taste of 70 Q4 Pork Balance Sheet
ALDL
fundamental analysis. A framework for 60 2012 2013

finding true value in pricing will be given. 50

Beg Stocks (from Q3)
Production
712
6,249
706
6,255
Imports 205 209
Supply and demand 40 Total Supply 7,166 7,170

Exports 1,386 1,328

What moves livestock markets 30 End Stocks 625 617

Cattle and hog price drivers 20 Disappearance 5,155 5,226

Population 315.2 317.5 R2 = 0.7471
Per Capita (lbs.) 16.35 16.46
The value picture is drawn mostly by 10
livestock balance sheets similar to those 14.5 15.0 15.5 16.0 16.5 17.0 17.5 18.0 18.5
0 Supply (Per capita consumption, carcass)
prevalent in the grain complex. However,
instead of trying to estimate the amount Source: Allendale Inc.
left over, called ending stocks, the meat
industry is priced off the amount left price to make that supply move through For livestock updates, go to
for the U.S. consumer in a given period. the system. This gives many opportuni- futuresmag.com/Meats
It is that measure, the supply left in the ties for both sharp rallies and declines.
United States, that is the basis for price In “Balance sheet” (above), we see an Only a comparison against other fourth
determination. example of the pork balance sheet for quarters is made.
The implications of this discussion the coming fourth quarter. Separate In the meat world, analysts monitor
should be clear. Production decisions are numbers are used for cattle. We are not pricing for the live animal, wholesale
made months in advance, without a per- comparing these numbers against the processed meat and retail levels using
fect knowledge of demand for that peri- first, second or third quarters because slightly different tools. The table shown
od, and the market must find the right demand changes from season to season. here works well for finding true value at

36 FUTURES September 2013

CAN YOU DIVE INTO THE FUTURES MARKET
WITHOUT BEING SHARK BAIT?

thinkorswim is designed to build confidence

and skill before you get into the market.
Our platform gives you daily live chats and webinars with experienced pros.
®
And paperMoney lets you test-drive the market with our unique paper trading tool.

Get up to $600 when you open a new account. tdameritrade.com/thinkorswim

Trading futures involves speculation, and the risk of loss can be substantial. Clients must consider all relevant risk factors, including their own
personal financial situation, before trading. Market volatility, volume and system availability may delay account access and trade executions.
paperMoney® application for educational purposes only. Successful virtual trading does not guarantee actual results. Offer valid through 9/30/13.
Funding with minimum of $25,000–$99,999 receives $100; funding with minimum of $100,000–$249,999 receives $300; funding with
minimum of $250,000 or more receives $600. Cash bonus subject to nine-month funding-duration condition. See Web site for details and other
restrictions/conditions. TD Ameritrade reserves the right to restrict or revoke this offer at any time. This is not an offer or solicitation in any
jurisdiction where we are not authorized to do business. TD Ameritrade, Inc., member FINRA/SIPC/NFA. TD Ameritrade is a trademark jointly
owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2013 TD Ameritrade IP Company, Inc. All rights reserved.
Used with permission.
TRADING 101 continued
PURCHASING POWER
As the purchasing power of consumers in other countries grows, so will the demand
for U.S. pork and livestock exports.
GDP per capita (Purchasing power parity in current $)
$10,000
$7,500
$5,000
$2,500
$0
2004
2005
2006
2007
2008
2009
2010
the live animal level for the general trad-
er. Background tables of these per capita
disappearance numbers can be found
on the website for the U.S. Department
of Agriculture (www.ers.usda.gov/data-
products/livestock-meat-domestic-data.
aspx#.UdcvwZys_Qh).
Traders also can get a feel for the
USDA’s own viewpoint on future pro-
duction and trade figures in the back
tables of the monthly Livestock, Dairy
& Poultry Report (available at www.ers.
usda.gov/publications/ldpm-livestock,-
dairy,-and-poultry-outlook/ldpm228.
aspx#.UdrshZys_Qh).
For cash-settled lean hogs, you need to
estimate the lean hog index on the expira-
tion dates for futures. You either can com-
pute where those dates typically fit into the
quarterly average or move to a monthly
format. Focusing on the current 2013
December contract, last year’s December
2012 price for the lean hog index was
$82.59. Research suggests that we will see
a slightly higher supply offered to the U.S.
consumer this year. Excluding estimates of
U.S. consumer financial health and com-
peting meats, this would imply a slightly
lower price for the 2013 contract.
Exports have a role
After supply estimates, the next real issue
on the balance sheet is the trade picture.
38 FUTURES September 2013
India
China
2011
2012
2013
Source: Allendale Inc.
The economic health, food needs, cur-
rency values and trade relations with
other countries all play a part. There are
tremendous hopes for the long-term
meat demand picture for the world (see
“Purchasing power,” above).
As incomes improve, diets improve.
Usage of vegetable oils, dairy products
and eventually meats increases. The rela-
tive purchasing power of the two most
populous nations has doubled over the
past 10 years. Gains in many develop-
ing countries also have been impres-
sive. At the start of this 10-year period,
Japan, Canada and Mexico took 77% of
our pork exports and 87% of our beef
exports. Due to new markets for our
product, those same figures are 52% and
58%, respectively.
This year has seen a number of export-
related developments. Russia and China
have discussed problems with our use of
a popular animal feed additive in hogs
and cattle. Canada and Mexico have
raised concerns with a U.S. meat labeling
law. They may eventually retaliate against
our meat exports. A good example of the
importance of these numbers was the
recent announcement of the intended
purchase of the largest U.S. pork proces-
sor by a Chinese firm.
Throughout the summer, we heard
wildly inflated estimates of U.S. pork
export growth from traders not familiar
with actual numbers. Last year, China
accounted for only 14% of our total
exports. Before we even discuss increases
over last year, we first have to fix our cur-
rent sales problem. Exports to China in
May (the latest data available at this time)
were 14% lower than last year. While we
don’t fight the initial move made from
irrational hopes or fears, a fact-based
approach to fundamental analysis can
signal clear mispricing opportunities.
U.S. demand conundrum
Most discussions in the meat complex
revolve around supply. There is a great
deal of quality information for sup-
ply through daily, weekly and monthly
slaughter reports. Future production
levels can be computed from the various
government surveys of producers.
The industry calls the last line of the
balance sheet we have shown either per-
capita disappearance or per-capita con-
sumption. That is incorrect terminology.
A much better term would be product
supplied. Essentially, we put the meat
on their plate whether they asked for it
or not. Their method of telling us accep-
tance is through price.
In the example above, let’s say we proj-
ect a 16.46 lbs. per-capita consumption
(product supplied). Depending on con-
sumer demand for it, that could trigger
a price from $62 to $102. Though the
majority of price changes in livestock
come from supply, we cannot forget
about the year-to-year changes in con-
sumer demand. Consumer income/
employment and the economy/asset
appreciation are all factors to consider.
For 2013, specifically, consumer spend-
ing on meats is up slightly over last year.
Lean hog futures
The CME Group lean hog futures con-
tract, symbol HE, calls for 40,000 lbs. of
hogs on a lean (carcass) basis. Today, a
270 lb. live hog produces a 203 lb. car-
cass. Pricing is quoted on a dollar-per-
hundred-weight (cwt.) basis. Therefore,
a quote on the screen of 85000 is called
$85 per cwt. The minimum tick size is
2.5 cents per cwt. A minimum tick move
from 85000 to 85025 would represent
a change in value of $10 per contract.
(Take note that some quote systems do
not quote the last digit.) The contract is
cash-settled against a two-day weighted
average of the cash market called the
Lean Hog Index, symbol IHX. Contract
expiration is generally around the 12th
of each contract month.
Supply projections are pretty straight-
forward for lean hogs. It takes just six
months from birth (farrowing) to
slaughter. When you add in a 114-day
pregnancy period, you have a relatively
modest 10-month delay from a decision
to expand or contract to when those
numbers hit the packing plant and
affect prices.
The main long-term supply pic-
ture comes from the USDA’s quarterly
survey of producers called the Hogs
& Pigs Report (which can be down-
loaded at http://usda.mannlib.cornell.
edu/MannUsda/viewDocumentInfo.
do?documentID=1086). The general
trader can get a quick idea of supply for
the next six months out by looking at
the weight breakdowns in the “kept for
marketing” numbers. With slightly more
effort, the farrowing intention numbers
can help provide a map of supply for the
next full year out. For 2013, with sharply
lower grain prices, the question in the
industry is not if producers will expand,
but when and by how much.
Live cattle
The CME Group live cattle futures
contract, symbol LE, also is traded in a
40,000 lb. allotment. Though packers
buy on a carcass- and live-animal basis,
this contract is based off the live animal
pricing. It also is different from hogs in
that it can be physically delivered. Keep
that in mind as first notice day approach-
es. Pricing is quoted as dollars per cwt. A
price of 127000 on your screen is there-
fore $127 per cwt.
Supply projections are a little different
for cattle because there is a two-stage pro-
duction process. The base producer in the
industry carries a herd of mothers (cows)
and sells the offspring in the form of
400-500 lb. calves or later as 600-900 lb.
feeder cattle. Those offspring are fed out
in feedlots from three to eight months,
depending on various factors, until they
are 1,100 to 1,400 lbs. Profitability in the
MEAT BREAKDOWN
Although there is no active futures market in chicken, it remains the most popular
meat in the United States, and that popularity is growing.
U.S. meat production
100
90
80
70
Billion Lbs.
60
50
40
30
20
10
0
2012
Turkey
feedlot phase is dependent on the pur-
chase price of feeder cattle, feed costs and
selling price of live cattle.
Important for us for the long term is
that the base producer has a separate
concern as well: Quality pastures. With
drought a lingering concern in the Plains,
the breeding herd has been in liquidation
for eight years. As there is a three-year lag
between a decision to expand and when
that expansion hits the packing plant,
the long-term supply picture is clear here.
The report that the industry gauges
to determine monthly supply is the
USDA’s Cattle on Feed Report. It can be
accessed at http://usda.mannlib.cornell.
edu/MannUsda/viewDocumentInfo.
do?documentID=1020. A supply pic-
ture for the coming months can be made
by following the number of new calves
and feeders starting their feeding peri-
od, called “placements.” We can gauge
whether feedlots are actively selling mar-
ket-ready animals on time by monitoring
the marketing numbers.
Chicken rising
Though there is no longer an active U.S.
futures contract for chicken, this is the
industry powerhouse. Although most
traders will not need to have a full work-
ing knowledge of chicken fundamen-
+2.5%
+0.8%
-2.1%
ALDL 2013
Chicken Pork Beef
Source: Allendale Inc.
tals, it is important to know the general
trends of both production and prices and
how they can affect cattle and hogs. The
story into 2014 is increased production
because of lower feed costs (see “Meat
breakdown,” above). This will help tem-
per some of the shortfall in beef produc-
tion expected next year.
Spreads
Almost as popular as outright trades in
individual contracts are spreads. Spread
trades involve two opposing positions in
related contracts or different months of
the same contract.
Popular spreads play off seasonal sup-
ply changes. For hogs, we are heading
into the period with heavy supplies, so
many traders sell the winter contracts
and buy the spring. Cattle traders often
buy the period with tight supplies, such
as December and February, and sell the
June against it. Another trade to consider,
as cattle and hogs are entering opposite
supply periods into winter, is simply to
buy the cattle and sell the hogs.
Rich Nelson is the chief strategist for
Allendale Inc. He has more than 15 years of
experience as an analyst and broker covering
agricultural futures. His daily analysis can be
accessed at www.allendale-inc.com.
futuresmag.com 39
 PERFORMANCE
MANAGED FUNDS
Measurement matters
BY M A R K A N S O N , D O N A L D C H A M B E RS, K EI T H B L AC K A N D H OS S E I N K A Z E M I
Trading performance can be measured in many ways. Here we review what tools
asset allocators use to see inside rates of return.
F
inancial theory tells us that inves-
tors should expect a positive
relationship between risk and
return: Those who assume greater lev-
els of market risk are expected to earn
higher returns, while lower risk portfo-
lios should earn lower returns. However,
investors should not expect to earn
higher returns by accepting higher levels
of risk from single stocks or a concen-
trated portfolio, because the markets do
not compensate investors for risks that
easily can be diversified away.
Return-to-risk ratios
Risk-adjusted returns
Key to determining an investment is a
measurement to estimate the magnitude
of the risk-return tradeoff that can differ
across investments and investment man-
agers. Performance measures may show
thatt a hi
th high
h return
t is
i nott attractive
tt ti giveni
the extraordinarily high level of risk that
is needed to earn that return, while lower
levels of return may be quite attractive if
they come with minimal risk.
There are two major types of perfor-
mance measures. First, there are ratios of
return to risk. Return can be expressed in
several ways in the numerator, and risk
can be expressed in numerous ways in the
40 FUTURES September 2013
denominator. The denominator of the
ratio can be any risk measure, although
the most popular performance measures
employ the most widely used risk mea-
sures, such as volatility (standard devia-
tion) or beta. The risk measure may be
an observed estimate of risk or the inves-
tor’ss belief regarding
tor reg expected risk. These
ratios include those developed by William
Sharpe, Jack Treynor
T and Frank Sortino.
A second m method to measure perfor-
mance is to generate the risk-adjusted
return of an asset
as and compare that return
to a standard.
standard The alpha measure, devel-
oped by Mic Michael Jensen, compares the
return on an investment to the expected
return on an investment
i of similar risk.
Sh
Sharpe eRRatio
at
The most popular
p measure of risk-
adjusted perperformance for investments
iis the
th Sharpe
Sh ratio (see “Measuring
sticks,” right).
When using annual returns and an
annual standard deviation of returns,
the Sharpe ratio may be interpreted as
the annual risk premium that the invest-
ment earned per percentage point in
annual standard deviation. In this case,
the investment’s return exceeded the risk-
less rate by 35 basis points for each per-
For more on CTAs, go to
futuresmag.com/Managed-Funds
centage point in standard deviation. In
an analysis of past data, the mean return
of the portfolio is used as an estimate of
its expected return, and the historical
standard deviation of the sample is used
as an estimate of the asset’s true risk.
Throughout the remainder of this analysis of
performance measures, the analysis may be
viewed as interchangeable between using his-
torical estimates and expectations.
Obviously, both the numerator and
denominator of the Sharpe ratio should
be measured in the same unit of time,
such as quarterly or annual values. But
the resulting Sharpe ratio is sensitive to
the length of the time period used to com-
pute the numerator and the denominator.
Note that the numerator is proportional
to the unit of time, ignoring compound-
ing. Thus the excess return expressed as an
annual rate will be two times larger than
a semiannual rate and four times larger
than a quarterly rate, ignoring compound-
ing. However, the denominator is linearly
related to the square root of time, assum-
ing that returns are statistically indepen-
dent through time:
σT = σ1 √ T where σT is the standard
 MEASURING STICKS
Ratio Use Formula Definitions Example

Sharpe Ratio Measure of risk-adjusted perfor-
mance for investments; annual
risk premium that the investment
earned per percentage point in
annual standard deviation
SR=[E(Rp)-Rf]/p r
SR is the Sharpe ratio for portfolio p
r
E(Rp) is the expected return for portfolio p
r
Rf is the riskless rate
r
p is the standard deviation of the returns
of portfolio p
A portfolio that earns 10% per year and
has an annual standard deviation of 20%
when the risk-free rate is 3%. The Sharpe
ratio is (10% – 3%)/20 %, or 0.35

Treynor Ratio Measure of risk-adjusted
performance for investments;
risk premium that the investment
earns per unit of beta
TR = [E(Rp) − Rf]/p r
TR is the Treynor ratio for portfolio p
r
E(Rp) is the expected return, or mean
return, for portfolio p
r
Rf is the riskless rate
r
p is the beta of the returns of portfolio p
A portfolio that earns 10% per year and
has a beta with respect to the market
portfolio of 1.5 when the risk-free rate is
3%. The Treynor ratio is (10% – 3%)/1.5 or
0.0467 (4.67%)

Sortino Ratio A measure of risk-adjusted
performance; uses the concept
of a target rate of return both
in expressing the return in the
numerator and the risk in the
denominator.
Sortino Ratio = r
E(Rp) is the expected return, or mean
[E(Rp) −RTarget]/TSSD r
Return in practice, for portfolio p
r
RTarget is the user’s target rate of return
r
TSSD is the target semistandard deviation
(or downside deviation)
A portfolio that earns 10% per year when
the investor’s target rate of return is 8% per
year. The semistandard deviation based
on returns relative to the target is 16% an-
nualized. The Sortino ratio would be (10%
– 8%)/16% or 0.125

Jensen’s Alpha Direct measure of the absolute p

amount by which an asset is es-
timated to outperform, if positive,
the return on efficiently priced
assets of equal systematic risk in
a single-factor market model
= E(Rp) − Rf − r
E(Rp) is the expected return of the portfolio If a portfolio is expected to earn 7% an-
p
[E(Rm) − Rf] r
Rf is the riskless rate nualized return when the riskless rate is 4%
and the expected return of the market is
r
p[E(Rm) − Rf] is the required risk premium 8%, then if the beta of the portfolio is 0.5,
r
p is the alpha of the returns of portfolio p the alpha of the portfolio is 1%: p = 7% −
4% − [0.5(8% − 4%)] = 1%

Source: CAIA Association®

deviation over T periods, σ1 is the standard
deviation over one time period, such as one
year, and T is the number of time periods.
This formula assumes that the returns
through time are statistically indepen-
dent. Thus, a one-year standard devia-
tion is only √2 times a semiannual stan-
dard deviation, and a one-year standard
deviation is only twice (√4) the quarterly
standard deviation. Thus switching
from quarterly returns to annualized
returns roughly increases the numerator
fourfold but increases the denomina-
tor only twofold, resulting in a twofold
higher ratio.
For example, ignoring compounding
for simplicity, and assuming statisti-
cally independent returns through time,
the Sharpe ratios based on semiannual
returns and quarterly returns are shown,
using the same annual values as illus-
trated earlier:
Annual: (10% – 3%)/20% = 0.350
Semiannual: [(10% − 3%)/2]/ 20% √
0.5= 0.247
Quarterly: [(10% − 3%) /4] / 20% √
0.25= 0.175
Note that the Sharpe ratio declines from
0.350 to 0.175, which is a 50% decrease,
as the time interval for measurement is
reduced by 75% from annual to quarterly.
If returns were correlated perfectly
through time, the Sharpe ratio would
not be sensitive to the time unit of mea-
surement; it would be dimensionless.
However, in a perfect financial mar-
ket, returns are expected to be statisti-
cally independent through time and,
in practice, returns usually are found to
be somewhat statistically independent
through time. The point is that Sharpe
ratio comparisons must be performed
using the same return intervals.
Sharpe ratios should be computed
and compared consistently with the
same unit of time, such as with annual-
ized data. They then can be easily intui-
tively interpreted and compared across
investments.
However, Sharpe ratios ignore diversi-
fication effects and are primarily useful
in comparing returns only on a stand-
alone basis. This means that they typi-
cally should be used when examining
total portfolios rather than evaluating
components that will be used to diversify
a portfolio. Of course, if the investments
being compared are well-diversified port-
folios, then the Sharpe ratio is appropri-
ate because systematic risk and total risk
are equal in well-diversified portfolios.
It should be noted that a well-diversified
portfolio is traditionally defined as con-
taining only trivial amounts of diversifi-
able risk.
Finally, a Sharpe ratio is only as useful
as volatility is useful in measuring risk. In
the case of normally distributed returns,
the volatility fully describes the disper-
sion in outcomes. But in many alterna-
tive investments with levels of skew and
kurtosis that deviate from the normal
distribution, volatility provides only a
partial measure of dispersion. Thus, the
Sharpe ratio is a less valuable measure
of risk-adjusted performance for asset
returns with non-normal distributions.
The Sharpe ratio should be used with
caution when measuring the performance
of particular investments, such as options
and option-like strategies, which have
return distributions that are skewed or con-
tain the potential for non-linear payoffs.
The Treynor ratio
Another popular measure of risk-adjusted

futuresmag.com 41
MANAGED FUNDS continued
performance is the Treynor ratio. Unlike
the Sharpe ratio, this ratio uses beta as the
measure of risk in the denominator rather
than standard deviation.
The Treynor ratio may be interpreted
as the risk premium that the investment
earns per unit of beta.
The Treynor ratio depends on the unit of
time used to express returns. Generally, the
beta of an asset, the denominator of the
ratio, would be expected to be quite simi-
lar, regardless of the unit of time used to
express returns. However, ignoring com-
pounding, the quarterly returns would be
expected to be one-quarter the magnitude
of annual returns, and monthly expected
returns to be one-twelfth the magnitude
of annual returns. Thus the numerator
is proportional to the time unit, and the
denominator is roughly independent of
the time unit, meaning that the ratio is
proportional to the unit of time.
The Treynor ratio is easily intuitive-
ly interpreted as excess return earned
by bearing systematic risk. Unlike the
Sharpe ratio, the Treynor ratio should
not be used on a stand-alone basis. Beta
is a measure of only one type of risk,
systematic risk. Therefore, selecting a
stand-alone investment on the basis of
the Treynor ratio might tend to maxi-
mize excess return per unit of systematic
risk but not maximize excess return per
unit of total risk unless each investment
were well-diversified.
Beta does serve as an appropriate mea-
sure of the marginal risk of adding an
investment to a well-diversified portfolio.
Therefore, the Treynor ratio is designed
to compare well-diversified investments
and to compare investments that are to
be added to a well-diversified portfolio.
But the Treynor ratio should not be used
to compare poorly diversified invest-
ments on a stand-alone basis. It is less
frequently applied in alternative invest-
ments, because beta is not an appropriate
risk measure for many alternative invest-
ment strategies.
The Sortino ratio
A measure of risk-adjusted performance
that tends to be used more in alterna-
tive investments than in traditional
investments is the Sortino ratio. Unlike
the Sharpe ratio, the Sortino ratio sub-
42 FUTURES September 2013
tracts a benchmark return, rather than
the riskless rate, from the asset’s return
in the numerator. Also, it uses downside
standard deviation, rather than standard
deviation, as the measure of risk in the
denominator. Therefore, the Sortino
ratio can be used for investments with
skewed returns, especially those where
the downside risk seems larger than the
upside potential.
As a semistandard deviation, the target
semistandard deviation (TSSD) focuses
on the downside deviations. As a target
semistandard deviation, TSSD defines a
downside deviation as the negative devia-
tions relative to the target return rather
than a mean return or zero. Thus, the
Sortino ratio uses the concept of a tar-
get rate of return both in expressing the
return in the numerator and the risk in
the denominator.
Even if the target return is set equal to
the riskless rate, the Sortino ratio is not
equal to the Sharpe ratio. Although they
would share the same numerator, the
denominator would be the same only
for perfectly symmetrical distributions
and where the mean return of the asset
equaled the riskless rate.
The point is that the emphasis of the
Sortino ratio is the use of downside risk
rather than the use of a target rate of
return. To the extent that a return distri-
bution is nonsymmetrical and that the
investor is focused on downside risk, the
Sortino ratio can be useful as a perfor-
mance indicator.
Jensen’s Alpha
Jensen’s alpha follows directly from the
single- factor market model, which links
the expected return of an investment to
the amount of beta risk incurred.
Jensen’s alpha is a direct measure of
the absolute amount by which an asset is
estimated to outperform, if positive, the
return on efficiently priced assets of equal
systematic risk in a single-factor market
model. It is tempting to describe the
return in the context of the capital asset
pricing model (CAPM), but strictly speak-
ing, no asset offers a nonzero alpha in a
CAPM world, because all assets are priced
efficiently. In practice, expected returns
on the asset and the market, as well as the
true beta of the asset, are unobservable. So
Jensen’s alpha is typically estimated using
historical data as the intercept (a) of the
following regression equation:
Rt- Rf = a + b(Rm,t- Rf)+εt
where Rt is the return of the portfolio
or asset in period t, Rm,t is the return of
the market portfolio in time t, a is the
estimated intercept of the regression, b
is the estimated slope coefficient of the
regression and εt is the residual of the
regression in time t.
The error term εt estimates the idio-
syncratic return of the portfolio in time
t, b is an estimate of the portfolio’s
beta and a is an estimate of the portfo-
lio’s average abnormal or idiosyncratic
return. Because the intercept, a, is esti-
mated, it should be interpreted subject
to levels of confidence. Positive levels of
alpha show outperformance, meaning
that the manager has earned a greater
amount of return than justified by the
amount of risk undertaken. Conversely,
negative alpha measures underperfor-
mance, where the return on the invest-
ment was lower than expected for the
amount of risk incurred.
Other popular performance measures
exist, and some firms use those unique
to the firm. In practice, a variety of per-
formance measures should be explored,
each of which is selected to view perfor-
mance from a relevant perspective.
Mark J.P. Anson, Ph.D., CFA, has head-
ed up several asset management firms,
including Nuveen Investments, Hermes
Pension Mgmt. and British Telecom Pension
Scheme, as well as was CIO of the California
Public Employees’ Retirement System.
He also is on the board of the Chartered
Alternative Investment Analyst (CAIA)
Association. Donald R. Chambers, Ph.D.,
is the associate director of programs at
CAIA and a professor of finance at Lafayette
College. Keith H. Black, Ph.D., CFA, is the
director of curriculum for CAIA. Hossein B.
Kazemi, Ph.D., CFA, is a professor of finance
at the Isenberg School of Management at
the University of Massachusetts, Amherst.
He also is a CAIA managing director.
This piece is an exerpt from “CAIA
Level I: An Introduction to Core
Topics in Alternative Investments,
Second Edition,” Wiley, 2012.
 CBOE and MoneyShow
Invite You…Into the CHICAGO
“Heart of Options Trading” October 3–5, 2013
at the Chicago Board of Hyatt Regency McCormick Place

Options Exchange

Chicago Board of Options Exchange

s Experience Mock Trading

in the pit at the CBOE!

s Learn from the best options s Choose from two

traders who are on the front lines event levels, each
daily—they will teach you their geared to expand your
personal trading strategies! knowledge depending
on your current level as an
s Discover how to avoid the pitfalls options trader.
and profit from options trading.
s Indulge yourself with this rare,
s Network with professional traders during included intensive experience so you can
breakfast, lunch, dinner, and reception events. become a more profitable options trader!
TOM SOSNOFF

JJ KINAHAN

DON KAUFMAN

JAMES BITTMAN

JOHN PERSON

JOHN CARTER

LAWRENCE MCMILLAN

STEVE LENTZ

MARK SEBASTIAN

DAN SHERIDAN

Call 800/970-4355 for more information today…

Space is extremely limited, and this event will sell out! Mention Priority Code 032790
TRADING TECHNIQUES continued

Bhandari continued from page 35

rected until it reached $26, and then
consolidated and started forming its
base. On April 9, 2013, eight months
later, Microsoft was able to close above
its 200-day moving average at $29.60,
LOOK AT ME, MA
1) Often, markets will react when they intersect with moving averages, resuming the
dominant trend. Here’s a 50-day SMA vs. the S&P 500.
1695

initiating a big rally that hit $36 by June Moving Average (50d) 1680
1665
1650
5, a 20% rally in just two months. 1635
1620
1605
1590
1575
Crossovers 1560
1545
Two moving averages can be used 1530
1515
1500
together to generate crossover signals. 1485
1470
Crossovers involve one relatively short 1455
1440
moving average and one relatively 1425
1410
1395
long one. 1380
1365
As with all moving averages, the gen- 1350
1335
1320
eral length of the lookback period deter- 1305
1290
mines the indicator’s sensitivity. A system 1275
1260
using a five-day EMA and a 20-day EMA
May Jun Jul Aug Sep Oct Nov Dec 2013 Feb Mar Apr May Jun
would be deemed short-term. A system
using a 50-day SMA and a 200-day SMA
would be long-term. 2) Microsoft established a generally bullish tone above the 200-day moving average
A bullish crossover occurs when the and a bearish or sideways tone below it.
shorter moving average crosses above 36.0

the longer moving average. A bearish Moving Average (200d) 35.6

35.2
crossover occurs when the shorter 34.8
34.4
moving average crosses below the lon- 34.0
33.6
ger moving average. As seen in “Look 33.2
32.8
at me, MA,” when the five-period EMA 32.4
32.0
(red) of Caterpillar (CAT) crossed 31.6
31.2
below the 20-period EMA (blue), the 30.8
30.4
stock began a downtrend correction 30.0
29.6
from $95 to $83. 29.2
28.8
Moving average crossovers produce 28.4
28.0
relatively late signals. After all, the 27.6
27.2
strategy depends on two lagging indi- 26.8
26.4
cators. The longer the moving average
periods, the greater the lag in the sig- Sep Oct Nov Dec 2013 Feb Mar Apr May Jun Jul Aug

nals. These signals work great when a

good trend takes hold. However, a mov- 3) Caterpillar corrected following a bearish cross of its EMAs.
ing average crossover system will pro-
100
duce lots of false signals in the absence 99
of a strong trend. 98
97
As lagging indicators, all moving- 96
95
average-based strategies are not intend- 94
93
ed to get you in at the exact bottom nor 92
out at the exact top. Rather, they keep EMA (5d) 91
EMA (20d) 90
you in line with the security’s price 89
88
trend by being on the right side of the 87
86
bulk of the move. 85
84
83
B r a m e s h B h a n d a r i w r i t e s a t w w w. 82
81
bramesh-techanalysis.com and provides 80
79
online tutoring on technical analysis. He
can be reached via email at bhandari - 22 28 4 11 19 25 4 11 18 25 1 8 15 22 29 6 13 20 28 3 10 17 24 1
Feb’13 Mar Apr May Jun Jul
brahmesh@gmail.com.
Source: www.chartnexus.com

44 FUTURES September 2013


Davies continued from page 18
FM: And how have all of these dynam-
ics affected your fund’s performance
recently?
BD: We’ve continued to outperform
the gold price. Fortunately, because we
had the foresight to sell out our mining
exposure, which is a leveraged play on the
gold price, we have maintained outper-
formance to the gold price. We certainly
had a difficult run. Models are based on
human input, and there’s always in long-
only funds an innate bias when you see
value to be over-allocated. The way our
system works is that when the market is
trend ready, we have to get under-invest-
ed. We did that, but not to the allocation
that we would have liked.
One dynamic of the gold market that
is very difficult to explain to investors is
that because of this dichotomy between
the paper market and the physical mar-
ket, it sometimes is hard to read the real
cues as to what is going on. Typically,
when local London is trading at a pre-
mium, it means that there’s normally a
dearth of metal in the system and that
normally leads to a significant price
reversal. Now in this case, we saw that
come much earlier, and the price of gold
probably dropped another 20%. So, there
are not any absolute levels that neces-
sarily could have given us a warning of
that. You can see that it’s perhaps not as
simple as other markets. Suffice [it] to
say we are the leading gold fund over the
last five years, and although I’m pleased
with that, we have higher performance
aspirations and perhaps have not been
good as we had hoped considering the
skill sets and modeling we have.
FM: Being a long-only fund in the gold
market, do you primarily express your
views on the physical markets, or do
you use futures to hedge also?
BD: We have a construct where ultimately
the bedrock of the fund is 75% physical
allocated gold stored in Switzerland out-
side the traditional banking system, but
we have futures and OTC forward hedges
that we lift through the futures market to
give us exposure to the upside or we sell
more futures to get under-invested. We
look at all the dynamics within the COT
data; you have to as a gold fund manager.
CLASSIFIEDS
FM: Your fund is down about 20% year- BROKERAGE SERVICES
to-date; what are some of the things
you could have done differently to
improve that performance? FRUSTRATED TRADING?
BD: You have to remember that it is a
Having Problems?
long-only managed fund. We’re advo- Take a look at USAFutures.com
cating it within asset allocation. We
subscribe to the theory that you have X
amount in equity, X amount in real assets, EDUCATIONAL SERVICES
X amount in fixed income and maybe X
amount in cash or property. What we’re WWW.WindCityReport.COM
trying to achieve by you allocating to us
is to outperform our index, which is what BROOKSTRADINGCOURSE.COM
we achieved. So if the market goes down, 53 videos, 26 hours, only $249
we will lose a certain percent of the gold Excellent Reviews–Great Value–Money Back Guarantee
price. If it went straight down, we typi- Financing available, Al Brooks, Price Action trader 25 yrs
cally would lose 75% of the gold price. But
by capturing the waves in the market over www.EMINISCALP.com
the course of a year or two, we start to cre- Automated Trading
ate outperformance and, until the recent
six months, we have outperformed the
gold price 8% annualized. That is what SP500guru.com
Real Time Trading Chat Room, 14th year of
we’re trying to achieve for our investors. high ACCURACY Timing SP with 1 point stop
Timing to the minute, timing is everything.
FM: You mentioned that you store all of
your fund’s gold outside of the banking
system in allocated form. Can you talk
a little about why you decided that was
necessary?
BD: We felt that the credit bubble and
the bursting of it would expose finan-
cial institutions to default, which we
witnessed, and it’s often very difficult
to determine what the systemic fallout
from that would be. So, it’s essential that
we mitigate all the risks associated with
that default. Also, it’s just cleaner to have
that gold held outside that default risk.
It’s that simple. When Man Financial
went down, there was all the rehypoth-
ecation that occurred in the banking
system through repos of bonds, and to
some extent we’ve even seen that in the
gold market, which is why the bedrock is
almost entirely physical bullion in allo-
cated form. That means it is in our name
and no one else has rights to it.
FM: Switching gears a little, you’ve writ-
ten a fair amount about what ‘money’
actually is. Can you talk a little as to
what constitutes ‘money?’
BD: Money is in the eye of the holder. It was Classified Advertising WORKS!
Nelson Mandela who said ‘Money won’t For Classified Information:
create excess, but the freedom to make it Chris Casey 312-846-4606
Email ccasey@futuresmag.com
Q & A: Ben Davies continued on page 50
DIGITAL EXCLUSIVE futuresmag.com 45
TRADER PROFILE
Vallen: Second time’s the charm
BY DA N I E L P. C O L L I N S
R
obert Lavin has spent 30 years trading for institutions,
customers, government agencies and himself, but may
have found his niche with the recent relaunch of com-
modity trading advisor Vallen Advisors. Lavin initially launched
Vallen in 2009 but shut it down after two years to pursue more
lucrative opportunities in consulting.
The program came about by accident in the first place as
Lavin launched it after leaving Fort L.P. He was hired by Fort
to help build short-term trading models to complement their
successful and growing longer-term programs, but redemptions
because of the fallout of the credit crisis (not in Fort’s programs,
which weathered the crisis well) forced them to cut back.
“The goal was to build new products for those guys,”
Lavin says. “Unfortunately when the crisis hit they had about
$900 million in assets and favorable liquidity provisions led to
redemptions and a lot of assets went out the door.”
ROBERT LAVIN
Lavin liked what he built and decided to offer it as a separate
program. It wasn’t his first rodeo; he ran a successful short-term
CTA, Sage Capital, in the early 1990s. He left there to take a job
with Sallie Mae, where he traded a $10 billion bond portfolio for
the government-sponsored entity managing student loans.
Lavin has had many stops at significant firms over the past
three decades, but found a home in the Washington, D.C. area,
where he operates out of Leesburg, Va.
He was head swap trader for Security Pacific Bank in the mid-
1980s when no one knew what a swap was and went on to build
hedging strategies for Citicorp.
He also had stints as managing director for GMAC and the
Blackstone Group before being named director of market risk
for Fannie Mae, where he was when he was tapped by Fort to
develop their programs.
“I always was in trading. Most of the time I was managing
positions for corporations or trading for customers,” he says.
46 FUTURES September 2013
In all those stops he specialized in quantitative short-term
trading with a bit of a discretionary overlay. In fact, Lavin points
out that he was one of the very few people trading off of intraday
data back in the 1980s when it wasn’t so easy to get.
He took those skills to Fort and when he decided to launch
Vallen it was based on intraday data trading with a one-day time
horizon. The program earned 9.5% in the last nine months of
2009 but dropped 4.5% in 2010. He decided to shut it down
and take on a consulting offer, but he continued to trade and
optimize the program with proprietary money.
He really liked the improvements to the program and decided
to offer it to customers again earlier this year. “I hadn’t really
thought of coming back and trading for institutional money
until late 2012 after I did all the stress testing and was pretty
certain this thing was for real,” Lavin says. “First I thought it
was too good to be true.”
The changes included lengthening the time horizon from one
to three days, eliminating intraday data from his models, changing
the entry time from the open to late in the day and, perhaps most
importantly, adding an intermarket overlay to his entry model.
“Vallen 1 had some good ideas but then I took everything and
reworked it; changed some of the time horizons, changed some
of the ways I calculated formulas, changed the time of execu-
tion,” Lavin says. “One thing that I found that was very favor-
able was using more than one market to [trigger] a trade. I call
it a combination; we take markets that are positively correlated
and trade the more volatile one. For example, in metals the most
liquid markets are silver and gold; silver is more volatile. The
only instrument I trade is silver but [run my] analytics on both.”
He uses five predictors that together create a score that indi-
cates whether to go long, short or stay neutral. A neutral posi-
tion can be pushed to a long if the companion market has a buy
signal based on his analytics.
Lavin calls this his most significant upgrade and has a com-
panion market for all of the eight markets he trades. In the
stock indexes he will run his analytics on the Dax, which can
trigger a signal in the S&P 500. For the Nasdaq 100, he looks
at the FTSE and for the 30-year bond he will look at the TLT
exchange-traded-fund (iShares Barlcay 20-year+ bond).
“It was kind of a big breakthrough. I also look at index ETFs. I
use them as analysis instruments and then trade the comparable
futures contract,” Lavin says.
His strategy is a combination of momentum, countertrend
and pattern recognition with a volume overlay. The risk is
equally divided into four asset classes: Equities, fixed income,
commodities and forex. Each sector has one quarter of the risk.
PHOTO BY DAN CHUNG
The changes seem to be working well. His proprietary trading
since the initial 2009 launch has produced a compound annual
return of 14.32% with a worst drawdown of 6.34%. And the pro-
gram is up (based on proprietary and customer returns) 15%
through July. Seems like the second time is the charm for Lavin.
CREDIBILITY
CREDIBILTY IS DRIVEN BY
CHARACTER & COMPETENCE.
THESE PRINCIPLES ARE AT
THE CORE OF WHO WE ARE.
WE BELIEVE EVERY
INTERACTION IS AN
OPPORTUNITY FOR US
TO DEMONSTRATE
OUR CREDIBILITY TO
OUR CLIENTS.

ELEVATE YOUR EXPECTATIONS.

Visit danielstrading.com or call 800.800.3840 today.

© 2013 Daniels Trading 100 South Wacker Drive, Sui

u te
e 1225 Chicago,
o, Illin
inoi
oiss 60
6060
606.
Past performance is not necessarily indicati tive
ve of fu utu
ure
r performance. Th The risk of lo
loss
ss in tr
trad
a ing future ress co
cont
ntra
ntract
ractss or
ct o
commodity options can be substantial, and ther eref
e ore ininve
vestors should und nder
e stand the risks invovolv
lved
ed in tataki
k ng lev
e er
erag
aged
ed
positions and must assume responsibility for the ris isks ass
ssocciated with such h in
investmentss an
andd fo
forr th
thei
eirr re
esu
sult
lts.
s You sho
h uld
FDUHIXOO\FRQVLGHUZKHWKHUVXFKWUDGLQJLVVXLWDEOHIRU
U \R
\ XLQ
LQOLJK
JKWRI \RXUFLUFXP
PVWVWDQFHVDQG
G ĆQ
ĆQDQFLDOUHVRXRXUFFHV
HV
BOOK REVIEWS

Trading Beyond the Matrix:
The Red Pill for Traders
and Investors
By Van K. Tharp, Ph.D.
John Wiley & Sons, Inc.
Subscribe to
provides 40 key principles about trad-
ing that need to be understood and Futures today!
applied. Other material from his Super
Trader book is scattered through-
out this book. In addition, there are FUTURESMAG.COM
| APRIL 2013

$40.00; 397 pages many useful resources included for

individuals to analyze their trading, CURRENCY JACK SCHWAGER
:
OUTLOOK
BY LESLIE N. MASONSON including a checklist for trading busi- DOLLAR/YEN
DUKE IT OUT In Search
of
Trading
ON ANY GIVEN

ness handbook, checklist for prepara- CALENDAR

SPREAD
HOW TO LEVERAGE
KEY FOREX
RELATIONSHIPS Excellence
This book is about psychological tion and commitment and a scoring LEARNING
CURVE
S
7 STEPS TO FINDING
transformations and a journey of self- sheet. Moreover, by going to Tharp’s FO
A FOREX BROKER

discovery. Thus, it portrays a very dif- website, readers can obtain a free evalu- FUTURESMAG.COM |
MAY 2013

ferent trading and investing approach ation of their level of consciousness,

than most books in this field. Tharp play a position sizing game, obtain MARKET
METTLE
IS GOLD NO LONGE
R
puts forth the premise that a trader Super Trader lesson five and receive a THE CHOSEN METAL?
TREND SCALING

F
SID LD O
PRICE ACTION AND

E IN R W
does not trade the market, but instead free weekly e-newsletter with Tharp’s VOLUME IN ACTION

SE WO VIE
E S’
GOOD AS GOLD

E
TH ER
METALS PRO OFFERS

AD
TRADING PREP TIPS
trades his beliefs about the market. And market views, commentary and current

TR
US $6.95 CAN $8.95

if the beliefs about the market are not course offerings. JOHN BRYNJOLFS
SON:
HOW THE
useful, then they must be eliminated Key concepts that top-notch trad- BILLION DOLLAR
to not sabotage trading. ers must master include ALPHA HUNTER
CAP TURES RETURNS
Examples of the latter proper position sizing
include: Not developing (often not addressed),
and following written trading efficiency (elimi-
US $6.95 CAN $8.95

trading rules, not using nating trading mistakes),

stops, not using a trad-
ing log, fear of trading,
not being able to pull the
trigger, cutting profits
short and not willing to
take small losses, among
many others.
Tharp is the pro-
lific and well-respected
author of f ive trad -
ing books including
Super Trader and Trade Your Way to
Financial Freedom. He is a trading
coach, consultant and trader with 30
years of experience helping many trad-
ers better understand themselves and
achieve better trading performance
through a three-level approach, which
he covers in detail. Chapters focus on
each of these three levels, and a small
group of his students have written per-
sonalized chapters illustrating the ben-
efit of learning his trading approach
to understand themselves and achieve
greater success in their trading and per-
sonal lives. These chapters demonstrate
that traders with different psychologi-
cal profiles and trading approaches all
benefited from Tharp’s coaching.
One of the most useful chapters cov-
ers the importance of adding Tharp
Think to your trading. Here Tharp
managing the risk-reward
ratio, creating your own
trading business plan, Futures magazine is the
confronting and get- premier publication in
ting rid of your trading
demons, understand- circulation today serving
ing why exits are more
important than entries,
futures, options, stock and
keeping a trading log and forex traders. Your most
getting rid of all non-use-
ful trading beliefs. These complete source for obtaining
concepts are hammered home many critical strategic guidance
times throughout the book.
Tharp believes that if a trader reads in global markets, trading
this book, takes the red pill (referencing
strategies and tactics,
the “Matrix” movie where Neo selects the
red pill to see the world as it truly is), and market news, successful
follows its methodology, it will forever
change his life by reprogramming him to
trader profiles and more!
operate at a higher level. I suggest that
traders not familiar with Tharp’s books CALL 847.763.4945
consider reading the two mentioned
earlier in addition to this one to better OR EMAIL AT
understand the author’s total approach FUTURES@HALLDATA.COM
and the reasons for his success in train-
OR SUBSCRIBE ONLINE AT
ing and coaching hundreds of traders to
excel on all levels. FUTURESMAG.COM/SUBSCRIBE
Leslie N. Masonson is a day trader and the
author of “Buy DON’T Hold” and “All About
Market Timing,” (Second Edition). Reach
him at lesmasonson@yahoo.com.

48 FUTURES September 2013 DIGITAL EXCLUSIVE

The Art and Science of
Technical Analysis:
Market Structure,
Price Action & Trading
By Adam Grimes
John Wiley & Sons, Inc.
$95.00; 480 pages
BY B I L LY W I L L I A M S
Go into any bookstore, and you’ll find
countless books stacked flush in the
Investment section on the subject of
technical analysis, but most add very
little beyond using it to trade the mar-
ket for consistent gains. This is such a
common experience, it’s almost a rite of
passage for the aspiring trader and even
joked about among veteran traders who
have experienced it firsthand.
However, “The Art and Science of
Technical Analysis,” by Adam Grimes,
is something of an anomaly in a sea of
mediocrity on the subject. Possibly the
most impressive aspect of Grimes’ work
is the opening where it is stressed that
having a “trader’s edge” is fundamen-
tal to successful trading. It goes on to
explain that without the existence of a
defined edge in your trading, success just
isn’t possible, and Grimes deserves deep
praise for stressing that aspect of trading
upfront to the reader.
The rest of the book expands on that
subject while moving into key factors
that are essential to long-term success as
a trader, such as expectancy, price action,
price swings, the use of indicators, a break-
down on the use of moving averages, stud-
ied use of technical analysis
in the pursuit of successful
trading and more. Using
these key factors, Grimes
helps you understand how
to approach the market
with a clearly defined set
of criteria to locate points
of imbalance in the market
where you gain a signifi-
cant edge to exploit profit-
ably, while identifying the
periods of price action you
should avoid.
He goes on to make the
case that there are two
competing forces in the market — mean
reversion and range expansion. These
forces express themselves through alter-
nating trends and trading ranges while
giving you the tools to formulate strate-
gies to trade each market type.
Armed with these tools, Grimes con-
veys to the reader that success is possible
because smaller traders are not playing
the same game as the big institutional
traders or mutual funds. Grimes lays out
the case that most professionally man-
aged funds are so large that they often
are the market, and lack the agility of
a skilled trader who understands price
action and market structure.
The subject of price action is a complex
and imperfectly defined
subject in and of itself,
and Grimes’ work is a big
contribution. His stated
goal is to help the trader
identify the market’s own
structure and movement
so that he can use those
dynamics to profit over
and over again.
This is a massive work in
scope and breadth on the
subject, which depending
on your own point of view
is not necessarily good or
bad, but it will take you
some time to get through it to apply it. In
total, the book succeeds in adding some-
thing meaningful to a difficult subject
while helping traders gain the understand-
ing and skill-set to profit in the market.
Billy Williams is a 20-year veteran trader
and publisher of www.StockOptionSystem.
com, where you can read his commentary
and a report on the fundamental keys for
the aspiring trader.

THE
HE 24/7 RES
RESOURCE FOR
O TODAY’S TR
R AD
DER
RS

Watch for the official web premiere of “Floored” in

early September. Released for the first time on the
Internet, this director’s cut version of the film fol-
lows floor traders as they were forced to adapt to
the new world of electronic trading and how some
tried to fight against that current of change.

DIGITAL EXCLUSIVE futuresmag.com 49

Q & A continued
Davies continued from page 45
will.’ So, my premise for how I look at money is based on my views
being a classical, liberal economist. Not to sound too pompous, but
that’s the order that I bring to my own personal life.
Talking about chaos and order earlier on, I’m definitely an
advocate that the pursuit of society [should be] property rights
are observed, the rule of democratic law is observed, the role of
government is limited and you have institutions that are sup-
portive of freedoms such as speech, religion, thinking and politi-
cal persuasion. All of those are parts in my mind of a free market
enterprise. If money is a statement of the day through central-
ization, taxation and de jure money, then we have fiat currency
and debt creation that ultimately only helps fund political votes.
It’s not a democratic process; it’s not conducive to a free market
enterprise. For me, pursuits of democracy, political or social
freedoms are totally inseparable from economic freedom, and
economic freedom comes from having money that is chosen
by the free market.
History has told us over the last 6,000 years that gold and silver
were commodities that had intrinsic value. The reason why it
works so well is because it isn’t corruptible, and you can’t print
it like you can on the printing press. It is limited in its annual
supply to 1.5%-2.5%, which incidentally is what the population
growth is each year. So it meets that supply/demand dynamic of
population growth, which is helpful, but maybe that will change
50 years down the line as we see a tapering off of demographics.
A pure gold standard provides a constraint on governments to
fund welfare and largesse and to build up a credit system. It just
provides more stable prices. It’s not ideal, but at the moment
it’s probably better than the system that is highly volatile based
on credit proliferation that we have right now. You just have to
observe that wealth creation from credit is not permanent in any
stretch of the imagination. You just have to ask a Spanish house-
holder what the value of his house is — next to zero right now.
FM: So is gold a commodity, a currency or both?
50 FUTURES September 2013 DIGITAL EXCLUSIVE
BD: It’s not money in legal terms right now, but it has all the [ele-
ments] that make it attractive as a means of exchange. Certainly
it can be a store of value. The excessive volatility that we’ve seen of
late is more representative of a leveraged futures market, which
I don’t think is necessary for gold. It gives potential for govern-
mental bullion banks to be coercive of the gold price. You might
say, ‘Well, why would they want to act in such a fashion?’ At the
end of the day, gold is the proverbial canary in the coal mine and
a rising gold price signifies there is stress or a lack of faith in the
currency of a country or certainly in the faith of that govern-
ment. Any distrust of fiat currency takes away the engine that
drives those economies and drives the government machine. I
certainly think that in that regard gold fits the remits that you
need to be money. It is a commodity-money at this point, but
it’s not in fact legal tender.
FM: Does the same hold true for silver?
BD: That’s a very good question. Gold has a more representative
supply/demand dynamic relative to population growth than
potentially silver, but let the free market decide. Ultimately, you
can have competitive currencies. I don’t have to assign all my
value to gold being the alternative currency. I’m sure we might
have a debate later, but [I’m for] alternative currencies, limiting
of fractional reserve banking or free banking itself, anything
that allows the free market to express what it thinks holds value.
The market is very efficient at doing that. It might be that by
a metallic standard, silver at times holds a certain amount of
value. It’s when you see excessive price movements that you tend
to see hoarding, and then that causes deflationary escapades.
That is definitely a drawback that if it becomes more speculative
in nature rather than a currency, then you have problems. The
reason you get hoarding at the moment is because people are
fearing the fiat currency system. If we allow a competing system
to take place, which government is not interested in doing for
the obvious reasons that I just mentioned, then we probably
would see less of that hoarding because
we would spend it, or spend electronic
payments backed by gold or silver.
FM: You’ve been quite a champion for
monetary reform around the globe. Can
you explain your platform briefly?
BD: I’m a classical, liberal economist. I
believe that credit proliferation due to
state manufactured money has allowed us
to view most commodities as too specula-
tive. For example, our houses are no longer
our homes. [They’re] no longer a store of
value. Housing globally has started to col-
lateralize the financial system. It misdirects
production and savings away from more
innovative and productive areas. I find that
such misallocations like we’ve seen into
housing ultimately are very disruptive to
the social and material wealth of a nation.
That’s why I feel rather strongly about
being an advocate for sound finance. It also allows a level playing
field in terms of wealth equality. There is no doubt that perhaps the
next bubble, the bubble we’re exhibiting now based on this credit
proliferation, the rich or those closest to government through plu-
tocracy have enriched themselves at the expense of those who have
not had access to that. So you end up with a potential bubble for
the ruptures in the fabric of society. Social cohesion is going to
unravel, and we’re already witnessing that. Clearly that instability
is more egregious the greater the credit system is. It seems to me
that when we had a sound monetary system, namely gold, we had
far less wars under a 200-year period, or certainly not as significant
an inflationary bias so people could afford to live with less and their
disposable income actually bought them more of the amenities
they required. But when those are stretched, as we’re seeing in the
Middle East, and food, shelter and water come at a premium, that
leads to a revolt, which is an inevitability.
FM: So what sorts of reforms are you advocating?
BD: First and foremost, [we] need to limit the availability of credit.
There needs to be a check on that. Unfortunately the system is
built up so much, and policy makers are very fearful that a collapse
of the credit bubble would lead to a more permanent retraction
of prices and growth. [Conversely], I see a reduction in prices and
growth as part and parcel of any correction that leads to healthy
growth. For example, fire suppression in California: They real-
ized that allowing a certain amount of controlled bush fires actu-
ally regenerated green growth. Ultimately, there was more green
growth around, less tinder and fewer bush fires.
It’s exactly the same if you suppress the marketplace and sup-
press money. If you do it in a wholly constrictive manner, then
you are just sowing the seeds for a greater calamity, which is
what I believe we are in the midst of doing now. We need to dial
back the credit in the system. If we are going to have central-
ized banking and money, then we need appropriate regulatory
reform, but that does not mean coercive constriction of capital
and forcing these banks to have far too much government debt,
which probably isn’t worth the paper it is on because they are all
so in debt. We need tax reform, and to provide education both
vocationally and intellectually to the masses so they understand
the purpose of a sound economic system. The list is endless, but
that for me is the core; that will drive everything else.
[We need] institutions that foster this, the rule of law and
most importantly property rights, which protect individuals
when governments are desperate to pay for services and are
highly indebted. That is when they are desperate to take capital
from the private sector, and they will pursue any means to do it.
The financial transaction tax and off-shore tax havens weren’t
the issues that caused the banking crisis, but nonetheless these
are the regulatory outcomes as governments go seeking private
savings to pay for their own largess.
FM: What do you see as the role of central banks under your
proposed reforms?
BD: My belief is that the free market ultimately will move toward
a money born out of a crisis situation. Technology is allowing
people to understand the importance of money through the
DIGITAL EXCLUSIVE
World Wide Web, I call this the ‘Internet Reformation.’ Payment
systems are going mobile and borderless. They are allowing peo-
ple to almost circumvent the current fiat currency system. With
bail-ins and perhaps bail-outs on the horizon in Europe, people
are going to look for ways to protect their money as a store of
wealth and circumvent the traditional system.
Although I see all those things happening, in a crisis situation,
which I still see as highly likely globally, central banks will have
to consider and already are considering backing their systems
with something stable. The BRICS, and particularly China, have a
great affinity to gold, and have the potential to back their systems
with gold. In the death throes of a monetary collapse, which I
don’t rule out, this is when a new system perhaps would occur,
and likely would be some kind of commodity standard or gold
standard, or a change to the banking system itself, which prob-
ably would maintain a central bank but in reality would be gold
as the constraint on the system. It would constrain trade flow
through the balance of payments process, and it would constrain
the ability of banks to create credit by having a certain amount of
currency backed by gold — say 40% as it was traditionally.
FM: So then related to the things you’ve been talking about,
lately there has been a lot of talk about currency wars devel-
oping. Do you see this as a real possibility?
BD: It’s happening, isn’t it? What is a currency war? Ultimately,
it’s where you have ‘beggar thy neighbor’ tactics to try and
improve your export market to steal growth from other coun-
tries. The question right now is if it is more coordinated? It’s
almost like countries are going around one after another — the
United States does quantitative easing, followed by the European
Union’s [Outright Monetary Transactions] and now we’ve had
Japan beginning a huge QE process, which wasn’t unexpected
because there’s no one left in the world to purchase their debt.
I wonder if at some point it will be of more pertinence and
value for someone to break away from that coordinated attempt
to reflate the banking system. All these central bankers and gov-
ernment officials realize that a coordinated effort is better than a
single effort because it spreads risk. It would impact demand too
much across the world if one, two or three countries go down.
So, we’re seeing a subtle currency war starting to develop, and
certainly Japan has upped the ante because it has to. What’s real-
ly interesting is that there have been 500 interest rate cuts [glob-
ally] since the crisis. That really has a huge impact on trade and
capital flows. It’s only going to lead to more financial repression
as people realize that as other nations manage to steal some of
their growth, [those nations] have to find capital from some-
where, so they have to conscript capital from the private sector
in any shape or form they can. That can lead to capital controls,
currency controls; all of those are at risk.
FM: What will the man on the street see as a result of these
“subtle” currency wars?
BD: This is where there is huge debate, and it is binary and there
won’t be a muddle through. I certainly feel that central banks
have tried to maintain the balance of credit in the system as
it is, and what they do is adjust the money supply and volatil-
futuresmag.com 51
Q & A continued
ity, but they do so by circumventing the necessary adjustments
that you need within the monetary system. You need market
failures, but they are not allowing this market failure to take
place. They pump up the monetary side, which you think would
lead to inflation, but credit matters more than money. It is this
overhang of credit, and ostensibly the system hasn’t delevered
to the extent that people think it has.
There has been a redistribution perhaps in the way debt is
organized, maybe from private to public sectors. All of that
has gone to underpin nominal GDP. You can argue that there
should be an inflationary impact, and perhaps in some ways
there has been because without that money supply increase,
prices would be a lot lower. Right now, because of the unravel-
ing of imbalances between China and the United States, China
is beginning to finally break down from its own credit largess.
This imperils the world to a very deflationary outcome and it
will be interesting to see how central banks ratchet up.
For me, it is very binary. There is the deflationary outcome of
full credit retraction, which would lead to a resetting of the system,
or there is a hyper-inflationary phenomenon that might occur in
places like Japan where if all the reserves that have been created to
buy their bonds end up in the economic system, that will cause
prices to rise dramatically. If I was arguing any country might see
hyper-inflation, that would be it. It’s not an easy dynamic to com-
prehend, but it’s basically pumping up the system with money and
the overhang of credit, which if you notice has continued to rise or
stayed at the same pace it has and is phenomenal. As a consequence,
for every bit of credit that is pumped into the system, the margin
utility, or the ‘bang for your buck,’ is less and less. That’s not good
for growth; that’s not good for taxes, so we won’t be able to repay
the system. I feel the system has to reset — it’s just which way I’m
not sure as of yet, but it will manifest itself.
FM: If you see those as the two possible outcomes, how would
you suggest people prepare themselves?
BD: If I was to think from a wealth allocation perspective, I
would say there is no holding of fixed-income debt at the levels
we’ve seen. Under an inflationary or insipid economy, you are
looking at guaranteed real losses. Under a deflationary spiral, or
even just the rate of inflation goes up, that will be significantly
negative for long-end interest rates. Either way, the bonds sector
is just not a sector that will yield compensate you in any way. It’s
a guaranteed capital loss of a significant amount — we’re talking
20%, 30% even 40% depending on the credit spectrum.
Equities have definitely benefited from this portfolio chan-
neling effect. Because of the environment created by central
banks, yields have been driven so low that capital is forced to
circulate by looking for yields. In equity, it’s almost like it is driv-
ing up all asset prices so that the return on your investments will
by $0 at the wrong price. So, equities in large parts, particularly
in the U.S. and emerging markets, have come back. Again, they
are very risky, and you have to reduce your holdings.
At these levels, would I be advocating shifting into the pre-
cious metals sector? Absolutely. It provides a base here for a
default or deflationary fallout, and if you want to earn equity,
then it provides a significant diversifier that mitigates that
52 FUTURES September 2013 DIGITAL EXCLUSIVE
downside risk over a long tenure of 10 years — not necessarily
a couple of years because any year can have increased volatility.
FM: It sounds like you really believe you need to have the
physical asset to protect your wealth then.
BD: You cannot be participating in paper constructs because
you leave yourself open to counterparty risks. However much
some of these providers say they are backed by allocated gold,
why take the risk? The ultimate cost is so much cheaper to store
gold with an allocated provider, and if you have the economies
of scale, then it becomes much cheaper than an ETF, which to
me is a more speculative vehicle.
FM: With the macro perspective that you’ve already dis-
cussed, how realistic do you see a return to the gold standard
at this point?
BD: First off, it is not in the interest of governments to want to
do that. Obviously there is a growing groundswell in the United
States, but it has not happened, which isn’t to say it won’t hap-
pen. More importantly, the development of technology and the
awareness that has been created by the Internet is creating prob-
lems for governments around the world in how people perceive
the intentions of that government, whether it has their best inter-
ests [at heart] or not. I always encourage my step-children that
they should hold their politicians accountable. That largely has
been forgotten today — they are representatives of ours. They
are seen as too powerful and important to talk to, but in reality
they are elected officials. We seem to have lost that point of view.
We would have to go to an extreme crisis scenario, which I
assign a much higher probability. I’m one of those people that
doesn’t believe in absolutes. The exponential rate of growth in the
monetary system has been so manifest even to energy creation
and population that I think the stresses are very manifest. We’ve
had one major shock in 2008, and I don’t believe the solution
to the problem will be a prescription of more of the same. This
system needs to readjust lower, and that could be very volatil-
ity. That’s typically when the system is questioned, and the pro-
pensity for a new alternative currency could come into play. It is
incumbent on the free market to make it felt that there is an alter-
native. I’m a big proponent that we create online, mobile payment
systems that potentially are backed by gold. The private sector can
start to create that, but obviously that runs into the regulatory
and legal nightmare the state will throw at you, but it needs to be
addressed through [government] by asking for banking reform.
FM: You alluded to Fed Chairman Ben Bernanke earlier; in
his most recent testimony to Congress, he mentioned at one
point that ‘No one understands gold prices.’ Do you?
BD: Yeah, his statement barely mentions gold. He almost was
forced into a comment on it, and by being dismissive of it, he’s
not providing any validity to gold being a potential alternative to
what he sees as the best system or mechanism for running a com-
plex monetary system. I don’t know him personally, but through
degrees of separation I have some insights into his psyche and
beliefs, and I believe he is far too dogmatic in his doctrine and
he should, as I am, be open to all sorts of ways to prevent the
catastrophes we have witnessed over the
last few years. I don’t think I can be more
fair than that.
FM: You’ve talked about alternative cur-
rencies throughout this interview. Can
you talk a little about some of the differ-
ent ones that have been proposed such
as Bitcoin?
BD: Oh Bitcoin. Absolutely fascinat-
ing, that is a great example of what we’re
talking about. I notice it is referred to as
a ‘virtual currency,’ almost as if to invali-
date it. I believe in the principle of Bitcoin;
it meets many of the requirements of an
alternative currency.
Just to say what Bitcoin is, it’s a decen-
tralized, censorship-resistance, digital,
peer-to-peer currency that was created by
someone with the pseudonym Satoshi
Nakamoto about four years ago. You can
use that currency to buy goods and services over the Internet
without having to pay bank fees or government tax. In many
ways, it’s theoretical roots do come from the Austrian school. The
inception of it was the fear of the current fiat monetary system
and all the interventions that have taken place by the government.
So, it follows up from the belief you should have competitive
currencies, and certainly this is a competitive currency, although
it’s not one with any intrinsic value like gold. But, it’s very clever
because it has this data-mining principle that creates supply just
like gold is produced, but it limits it each year. It has something
called a block chain that creates a public record of all the transac-
tions in the system, so it has that ledger that prevents you from
spending it twice. In that regard, it absolutely is fantastic.
More importantly, whether or not it becomes a real challenge
to the fiat currency system, which I suspect it won’t, it is techno-
logically too complicated — unless you are programmer, you don’t
understand the open source code that is part of its credibility in
theory because everyone can look at it. I’m not convinced that
the cryptology used to secure it is not perhaps open in some way
to the issuer or issuers of the limited number of Bitcoins a year,
which could be inflationary. There’s no constraint on currency
proliferation like you would have if you were backing the system
with gold, which is why I still believe gold is the best fit for an
alternative currency. It has created good debate, though.
The other issue with it at the moment is Bitcoin is more a
speculative instrument. I’m not sure how many people really
see it as an alternative currency. Obviously, it doesn’t have a
store of value yet. Security and integrity of its system, there
has been embezzlement, but that’s more at the exchange end.
There are exchanges where you can convert Bitcoins into fiat
currency, and interestingly this is where regulators have really
gotten ahold of them. Again, it’s not in governments’ interests
to have potential alternative currencies vying with the official
state currency that ultimately people have to pay taxes in. They
want people to pay taxes to pay for the welfare system with that.
DIGITAL EXCLUSIVE
Ultimately, it’s a natural progression that payment systems
that historically have been arcane and very slow are now moving
to new methods of payment. We’re going to have a cashless soci-
ety. I really think biometric identification is going to come in and
remove all this password nonsense that you can never remember.
This is a really helpful evolution in both currency usage and the
debate about who should determine what currency should be and
where the counterparty risk is. At the end of the day, the bearer
is the U.S. government at the moment, but why shouldn’t it be a
free market concept? Why shouldn’t we decide what we choose
as long as the supply of it is constrained by something that is
naturally in constraint of its own supply, i.e., gold? Where I differ
is gold could be the bedrock to that electronic payment system. It
is fascinating and I’m learning more about it all the time.
FM: Looking specifically at Bitcoin, do you see it has a viable
alternative that will have staying power and will still be around
in 10 years?
BD: Sometimes you think ‘First-mover advantage,’ but as an
alternative, borderless currency, I plead the Fifth Amendment.
I’m not sure how it’s going to pan out. I suspect there will be
systems that are better maybe in some way will work within the
current system. Once that happens, that changes the dynamics
of it. I really watch its base. If Bitcoin can convince people this is
not just a speculative investment, and it’s more about facilitating
free trade, then it’s a real possibility.
FM: Going back to gold, Jim Sinclair recently was quoted as
saying he could see it going as high as $50,000 an ounce.
Do you have any projections?
BD: If I’m consistent in what we’ve been talking about, I certainly
can envision outcomes based on macro analysis, but we always
wait for a signal generation. I don’t believe in absolutes; I believe
the Gaussian curve descriptive is not representative of complex
systems. Why it would get to $50,000 an ounce is in my mind
futuresmag.com 53
 continued

because these fiat currencies have completely collapsed. At that
point it’s not about value anymore but complete distrust of the
system, although I would question at what point supply would
come on and lead to dishoarding at a level where there would be an
arbitrage opportunity whereby you could divest yourself of physical
gold assets to buy other assets at lower prices. I don’t know if he
was saying all prices will be at that level, or whether just gold will
be at that level.
I would say for gold to be at that level, everything else will
be much higher in price. With the technological advances in
energy, barring a complete collapse of the monetary system,
I find that difficult to see. I’ve been very consistent in saying,
all things equal, $6,000 based on the backing of the monetary
system as it stands and all the credit. If you look at the $220
trillion market capitalization of all assets, clearly that has been
way in excess of the growth of gold. I suspect that credit will
rescind and gold value will go up to somewhere in between,
which for me is around $5,000-$6,000 an ounce. As a visionary
of monetary changes, I’m not sure I can bring myself to envi-
sion $50,000 yet.
FM: We’ve talked about a lot of different topics here. Finally,
what are the next steps for you professionally and for your
firm, Hinde Capital?
BD: The most exciting development for us is we have received
huge recognition; even being in this magazine is fantastic. We’re
not one of the big boys and to have recognition more and more
over the last five years from lots of major publications means that
our message is getting across. We have a unique fund; we have a
unique message. In terms of staying within the bounds of tradi-
tional investment management, we’re setting up a global macro
fund. The distortions that have been created by central banks
and governments at this point will lead to far more ruptures and
trends within the marketplace that we will look to exploit because
we want to create a capital return, hopefully adjusted for inflation
a real return, that protects their purchasing power. That’s our
aim. It’s very exciting that I feel I can complement my promotion
of monetary reform while focusing more clearly on my first love
— trading and investing. Developing a new fund is very exciting.
From my own personal perspective, I’ve wanted to create a busi-
ness that aligns itself heavily with investors. I do think the hedge
fund model is likely over for the institutional players. The days of
upfront fees after a period of poor performance and not having
to return them are over. There’s a disproportionate payout, and
in conversations with friends who reminded me of my integrity,
fund businesses will have less of a short life and can be more about
building investor value if they align themselves with long-term
investors, private equity firms or family offices that take a stake
in thier businesses. They help with the operating capital, because
it is very difficult for a mid-size firm to survive beyond five years.
The average shelf-life of a hedge fund is very short, probably under
four years, and we’ve been going seven years, which is a testament
to our investors and how we structure our funds. It’s about being
aligned with our investors, changing the fee structure for longer-
term performance. That’s a much more authentic approach, and
is one you either embrace or be forced upon anyway.
Additionally, I’m in the process of putting all these thoughts
we discussed today into a more succinct format in a book ,
which will depict how we got here and where we may be going,
and have a proper debate about alternative and virtual curren-
cies and solutions rather than just knocking how we got here.
Maybe that’s for my own edification, but it is also about the
education process, because a lot of people don’t understand
what’s happening with money and why it’s so important for
our belief systems and generational sustainable wealth. People
need to understand sound money.

THE
HE 24/7 RES
RESOURCE FOR
O TODAY’S TR
R AD
DER
RS

Watch for the official web premiere of “Floored” in

early September. Released for the first time on the
Internet, this director’s cut version of the film fol-
lows floor traders as they were forced to adapt to
the new world of electronic trading and how some
tried to fight against that current of change.

54 FUTURES September 2013 DIGITAL EXCLUSIVE

Confidence to grow
That’s what agricultural producers can achieve when they’re
smart about managing risk. And smart managers work with
CME Group, the world’s leading derivatives marketplace.
Farmers and ranchers around the world partner with us to
help them manage every kind of risk. Crop prices, weather
fluctuations, interest rate movements, changing currency
valuations – whatever the risk, we help the world advance
beyond it. Learn more at cmegroup.com/advance.

How the world advances

CME Group is a trademark of CME Group Inc. The Globe logo is a trademark of Chicago Mercantile Exchange Inc. All other trademarks are the property of their respective owners. Copyright © 2013 CME Group. All rights reserved.