True Managed Forex

Spare change needed

2007-01-22T21:59:00.000+02:00

Guys,

ok, so here's the deal... They will let me have a demo, but I have to pay for it beforehand... $250 for the program i posted about in my previous post...

So, what do you guys reckon? Reckon my visitors could scrape together between all of us the $250 needed to buy this prog. If you would like to help, please scroll right to the bottom of the page and follow the link to email me for more info...

Those of you that donate towards this, I might just have a special deal for you regarding this...

So guys, I'm stuck in a country where $250 means a hell of a lot more than it sounds, but if you guys email me, I'm sure we can work something out...

Something to think about: I have 1.3million impressions left on a highly visited site for banners, as well as 1.3million text adds comprising of 4 lines of text... all prominently placed on the site... maybe you would like that and we work out something from there... others not wanting to do that, I'm sure we can work something out...

Prosperous 2007 with 1200% a year?

2007-01-08T12:02:00.000+02:00

What?

That's right (well maybe)....

Santa dropped by not long into X-mas day and filled my stocking with a url which I wish was earlier noted...

I'm currently in negotiations with the owners of the wonderful EA they proclaim they have, if possible I will test it to the Max and then we will take it further from there...

I'm not even going to name names at this stage, but let's just say that once I have publicly tested this, I will praise these guys for a long time to come... As always, my testing will be done by me and me alone, without preference or favour.

No-one likes to have some yuppie brag his ass off and then get bent over because you followed stupid advice. So, let's wait and see what comes off this, if they play ball we all might have a very nice time in 2007...

I would also like to apologize for not posting so much in the later stages of 2006, things went hectic, but that was always the purpose of this site, to be able to have your forex account trading itself in such a manner that you would not have to be looking over it's shoulder the whole time like a vulture...

I will let you guys know as soon as I get a reply.... Round up the folks, this might get hectic!

Full Test Report - 1Minute Timeframe

2006-10-04T21:37:00.000+02:00

Foreign Exchange Tester Report

Symbol		EURUSD (Euro vs US Dollar)
Period		1 Minute (M1) 2004.06.21 00:01 - 2006.07.07 00:00 (2004.06.20 - 2006.07.07)
Model		Every tick (based on all available least timeframes with fractal interpolation of every tick)
Parameters		TakeProfit=72; Lots=0.6; TrailingStop=74; MACDOpenLevel=4; MACDCloseLevel=6; MATrendPeriod=26;

Bars in test	659098	Ticks modelled	2866221	Modelling quality	22.05%

Initial deposit	10000.00
Total net profit	4718.76	Gross profit	9285.96	Gross loss	-4567.20
Profit factor	2.03	Expected payoff	98.31
Absolute drawdown	0.00	Maximal drawdown	2821.32 (21.28%)	Relative drawdown	21.28% (2821.32)

Total trades	48	Short positions (won %)	27 (81.48%)	Long positions (won %)	21 (76.19%)
		Profit trades (% of total)	38 (79.17%)	Loss trades (% of total)	10 (20.83%)
Largest		profit trade	457.92	loss trade	-1428.33
Average		profit trade	244.37	loss trade	-456.72
Maximum		consecutive wins (profit in money)	10 (2529.33)	consecutive losses (loss in money)	4 (-2821.32)
Maximal		consecutive profit (count of wins)	2529.33 (10)	consecutive loss (count of losses)	-2821.32 (4)
Average		consecutive wins	5	consecutive losses	2

A real bad forex result.... Ok, 47% in 2 years is still a great return, still better than any bank... Foreign Exchange is still the way to go... Allthough, have you noticed that suddenly the modelling quality dropped to 22.05% ?... That is also another thing to look out for in managed funds... If they only provide historical results (Foreign Exchange Managed Funds Comments), how good was their modelling quality? How exactly did they do the tests and were they run through various options and settings in order to prove without a doubt that it is an even semi-reliable predictor for the future.

REMEMBER: Historical results are never proof of future results!

The Forex Market waits for no one...

2006-10-04T09:13:00.000+02:00

The next natural step when done with Historical testing of data, is to do forward testing in a live environment... This forward testing of data is the ultimate in result as it is the defining character of your Trading Expert or strategy... It doesn't matter how good your historical results are until you've proven it in a live environment with forward testing.

This is a very important fact: Many managed funds out there shows only historical results gathered via backtesting. It doesn't mean sh!t. If you are looking at investing into a managed fund, make sure that the results they show or give you, is true results and not just backtested results.

So, the next step in my conquest would have been to live forward test my data on a Demo Forex account.... And I started doing it... Only problem was, my internet connection is seriously KAK so the figures I have in my eyes are not 100% correct and as such I'm not willing to post them.... Even so, until such time as my internet connection gets sorted out, my forward testing will be biased. I might just give small blocks of time where the connection has been stable.

That's another good point. In doing any kind of Foreign Exchange Trading, you will need a semi-decent connection. I'm not saying you need to get an 8MB line just for your forex, but you would need a connection that's stable and always on...

SO, where does that leave us now? My initial idea was to just move on to the next forex advisor and test that... But, a forex bulb sprang on in my mind and had my clogs churning as quick as they have ever gone... I've read a few books now where it's mentioned that timeframe might be more important than some of your indicators... And I can prove this... Will show you my early trade reports done on my own where me and a friend was trading at the exact same company, me trading 1H/4H and him trading 1M/5M... We were constantly on skype communicating and sharing ideas, and talking about the market and what was happening... On an average day, I wooped his butt simple because I had a broader view of the market than he did...

This got me thinking about forex advisors and automated forex traders in general... If we are going to do this research 100% completely and look at it from every angle, we should be using all available timeframes to do our testing in... What would it mean to you in your pocket if you ran a system in one timeframe and I ran the same system in a different timeframe, but we got different results....

You get where I'm going with this.... I'm back to backtesting my 87% in 2years system, the results below was derived from 1Hour timeframes... I'm going to bump it up to a 1Day timeframe as well as drop it down to a 1Minute timeframe... Check for the first report to be out within the next 24 hours or so... once I have the report, it will be posted here...

Any comments or ideas regarding this, contact me at managedforexblogger at gmail dot com

Full Test Report

2006-09-20T09:26:00.000+02:00

Foreign Exchange Tester Report

Symbol		EURUSD (Euro vs US Dollar)
Period		1 Hour (H1) 2004.06.22 15:00 - 2006.07.07 00:00 (2004.06.20 - 2006.07.07)
Model		Every tick (based on all available least timeframes with fractal interpolation of every tick)
Parameters		TakeProfit=100; Lots=0.6; TrailingStop=80; MACDOpenLevel=5; MACDCloseLevel=5; MATrendPeriod=30;

Bars in test	12770	Ticks modelled	2720361	Modelling quality	89.30%

Initial deposit	10000.00
Total net profit	8738.58	Gross profit	24360.68	Gross loss	-15622.10
Profit factor	1.56	Expected payoff	84.02
Absolute drawdown	2154.74	Maximal drawdown	3774.60 (32.48%)	Relative drawdown	32.48% (3774.60)

Total trades	104	Short positions (won %)	57 (73.68%)	Long positions (won %)	47 (78.72%)
		Profit trades (% of total)	79 (75.96%)	Loss trades (% of total)	25 (24.04%)
Largest		profit trade	618.72	loss trade	-2521.44
Average		profit trade	308.36	loss trade	-624.88
Maximum		consecutive wins (profit in money)	14 (3809.76)	consecutive losses (loss in money)	2 (-581.52)
Maximal		consecutive profit (count of wins)	3889.92 (9)	consecutive loss (count of losses)	-2521.44 (1)
Average		consecutive wins	4	consecutive losses	1

----------------------------------------------------------

OK, so the graphics and layout doesn't look it's best, but this report shows that money can be made on automated trading in the foreign exchange markets.

89.30% quality anyone will tell you is pretty good considering all the variables available, and looking at he profit - 87% return in 2 years is more than any bank will ever give you... Forex markets is the way to go people, and we will walk down that path...

Does your bank offer you a 87.74% return in 2 years?

2006-09-19T00:48:00.000+02:00

Lots	Profit	Trades	Profit Factor	Expected Payoff	Drawdown $	Drawdown %
0.1	$1,296.48	83	1.60	15.62	$661.26	6.28%
	$1,401.10	104	1.54	13.47	$632.10	6.17%
	$1,462.44	104	1.56	14.06	$629.10	6.12%

0.2	$2,802.20	104	1.54	26.94	$1,264.20	12.07%
	$2,794.52	104	1.54	26.87	$1,258.20	12.03%
	$2,924.88	104	1.56	28.12	$1,258.20	11.92%

0.3	$4,191.78	104	1.54	40.31	$1,887.30	17.65%
	$3,795.12	85	1.57	44.65	$2,038.02	17.55%
	$4,387.32	104	1.56	42.19	$1,887.30	17.43%

0.4	$5,849.74	104	1.56	56.25	$2,516.40	22.66%
	$4,944.54	83	1.57	59.57	$2,734.40	22.65%
	$5,185.90	83	1.60	62.48	$2,645.04	21.77%

0.5	$7,005.48	104	1.54	67.36	$3,160.50	28.25%
	$6,986.28	104	1.54	67.18	$3,145.50	28.20%
	$7,312.18	104	1.56	70.31	$3,145.50	27.64%

0.6	$8,406.55	104	1.54	80.83	$3,792.60	33.19%
	$8,383.50	104	1.54	80.61	$3,774.60	33.15%
	$8,774.58	104	1.56	84.37	$3,774.60	32.38%

The above figures have been derived from a very simple trading expert running a 2 year historical test ranging from 16 June 2004 to 14 July 2006 through numerous steps.

The process involves having historical performance tested per your trading system by optimizing the availble options to maximize cashflow and get the best results available.

!! Historical results are never a clear indication of future results. !!

However, through historical testing systems can be optimized and fine-tuned to such an extent that possible future results would be more profitable.

The figures have been derived by a time-consuming process of running the exact same data for the dates given through the same processes of optimization by different factors. In total we have used for the above results 5 automated steps taking a total of about 24 hours with manual setup in between... After that, it has taken a total of about 4 hours to evaluate and convert the raw data into a readible and usable format.

Obviously not all the results have been posted, but only the top 3 for every lot for the period given. If you look at the top result for 0.6 lots per trade, 87.74% profit in the 2year period sounds a heck of a lot better than the 2% a year your bank is offering you....

Foreign Exchange is the way to go, and we are at the forefront of making it happen. Comments would be appreciated and any enquiries can be sent to managedforexblogger (at) gmail (dot) com.

I wish you all a good day and am anxiously awaiting your comments on the above.

True Managed Forex

2006-09-17T01:51:00.000+02:00

Dear Members of my Private group as well as those members of the public following this...

Next week will see the start of our Foreign Exchange Market Journey into our Managed feature...

I have been running examples for the past week and as such we will start by discussing them on Monday...

If you are a new reader to this blog/site -- Be sure to bookmark http://truemanagedforex.blogspot.com right now to keep up with our exciting ventures into the Foreign Exchange Market.

See you all on Monday

Technical Indicators: Bollinger Bands

2006-09-12T00:36:00.000+02:00

Overview

Bollinger Bands are similar to moving average envelopes. The difference between Bollinger Bands and envelopes is envelopes are plotted at a fixed percentage above and below a moving average, whereas Bollinger Bands are plotted at standard deviation levels above and below a moving average. Since standard deviation is a measure of volatility, the bands are self-adjusting: widening during volatile markets and contracting during calmer periods.

Bollinger Bands were created by John Bollinger.

Interpretation

Bollinger Bands are usually displayed on top of security prices, but they can be displayed on an indicator. These comments refer to bands displayed on prices.

As with moving average envelopes, the basic interpretation of Bollinger Bands is that prices tend to stay within the upper- and lower-band. The distinctive characteristic of Bollinger Bands is that the spacing between the bands varies based on the volatility of the prices. During periods of extreme price changes (i.e., high volatility), the bands widen to become more forgiving. During periods of stagnant pricing (i.e., low volatility), the bands narrow to contain prices.

Mr. Bollinger notes the following characteristics of Bollinger Bands.

* Sharp price changes tend to occur after the bands tighten, as volatility lessens.

* When prices move outside the bands, a continuation of the current trend is implied.

* Bottoms and tops made outside the bands followed by bottoms and tops made inside the bands call for reversals in the trend.

* A move that originates at one band tends to go all the way to the other band. This observation is useful when projecting price targets.

Example

The following chart shows Bollinger Bands on Exxon's prices.

The Bands were calculated using a 20-day exponential moving average and are spaced two deviations apart.

The bands were at their widest when prices were volatile during April. They narrowed when prices entered a consolidation period later in the year. The narrowing of the bands increases the probability of a sharp breakout in prices. The longer prices remain within the narrow bands the more likely a price breakout.

Calculation

Bollinger Bands are displayed as three bands. The middle band is a normal moving average. In the following formula, "n" is the number of time periods in the moving average (e.g., 20 days).

The upper band is the same as the middle band, but it is shifted up by the number of standard deviations (e.g., two deviations). In this next formula, "D" is the number of standard deviations.

The lower band is the moving average shifted down by the same number of standard deviations (i.e., "D").

Mr. Bollinger recommends using "20" for the number of periods in the moving average, calculating the moving average using the "simple" method (as shown in the formula for the middle band), and using 2 standard deviations. He has also found that moving averages of less then 10 periods do not work very well.

Technical Indicators: The Moving Averages

2006-09-08T15:18:00.000+02:00

The moving average is probably one of the most used and possibly overused indicators in the financial markets. In the first of this three-part series we will look at the calculation and comparison of simple, exponential and weighted moving averages.

Simple Moving Average

An average is simply the sum of a data set divided by the number of data points. Let's look at a set of grades. Suppose Johnny earns the following grades:

67 77 80 82 85

His average would be the sum of the grades divided by the number of tests:

(67 + 77 + 80 + 82 + 85)/5 = 391/5 = 78.20

Now suppose on his next test he scores a 90. If we took a 5-day "moving" average of his grades we would drop off his oldest grade (67) and add in his newest grade (90) and then divide by 5. This is illustrated in Figure 1. Notice how the average "moves" from the oldest 5 data points to the newest 5 data points, hence the name "moving average."

Figure 1: A 5-Period Simple Moving Average. Notice how the average "moves" from the oldest 5 periods to the newest 5 periods.

Exponential Moving Average

An Exponential Moving Average (EMA) takes a percentage of today's price and adds in the prior day's exponential moving average times 1 minus that percentage. For instance, suppose you wanted a 10% EMA. You would take today's price and multiply it by 10% then add that figure to the prior day's EMA multiplied by the remaining percent:

(today's close * .10) + (yesterday's exponential moving average * (1-.10))

Because most people think in terms of days (time periods) versus percentages, the following formula can be used to determine the percentage to be used in the calculation:

Exponential Percentage = 2 / (Time Periods + 1).

So if you wanted a 20 period EMA you would use 9.52% (2/(20+1)) as your percentage for the calculation.

As usual, I strongly suggest that you have a computer do all the work, since the EMA is available in virtually all charting packages. I have yet to meet a trader that does these calculations by hand.

As you can see, by nature of its calculation, the EMA gives more weight to the recent periods. This brings us to our next type of moving average: the weighted moving average.

Weighted Moving Average

The theory behind a weighted moving average (WMA) is that the recent data is more relevant than past data. Therefore, it puts more "weight" on the recent data and less weight on the older data. To calculate it, you take the number of periods you wish to analyze and that becomes the weight for today's price. Yesterday's price would use today's weight -1 and so on and so forth for the number of periods. You then divide the sum of the weighted prices by the sum of the weights.

For example, suppose we took the last five "grades" we used in our first example and calculated a 5-period WMA. The calculation would be as follows:

Figure 2: Calculation of a Weighted Moving Average. The number of periods (in this case 5) becomes the "weight" for today. The weight for the remaining days is reduced by 1 until the last day is found. Therefore, the most recent period gets the highest weight and the oldest period gets the smallest. The summed weighted prices are then divided by the sum of the weights

Again, I strongly suggest that you have your computer do all the work.

Comparing the EMA,WMA and Simple Moving Averages

The simple moving average gives equal weight to all data points. By nature, it is the "true" average. The exponential and weighted moving averages give the most recent data points the highest rankings or "weightings". Therefore, the simple moving average tends to lag (by representing all data points equally) the exponential and weighted moving averages during large price changes. However, during "normal" or "flat" markets the differences become negligible. This is illustrated in figure 3.

Figure 3: March 2000 Bonds with 50-day Simple, Exponential and Weighted Moving Averages. Notice during "normal" or "flat" markets the averages tend to run together (a). However, once the market begins to make sharp moves (b) and (c) the EMA and WMA tends to catch up to price faster while the Simple Moving Average tends to lag.

So Which One Should You Use?

Deciding between the types of moving averages really becomes a matter of personal preference. Normally when you hear talk of moving averages, in the media it normally refers to simple moving averages. Therefore, due to widespread focus on these numbers, it's important to give them consideration. The 50- and 200-day (simple) moving averages are most commonly used here. As a trader, especially during large price moves, you might consider experimenting with exponential or weighted moving averages.

Using Technical Indicators

2006-09-06T09:08:00.000+02:00

A good understanding of the basic tenets of technical analysis can vastly improve
one's trading skills.

When using technical analysis, price is the primary tool. Simply put, "everything is already in the rate." However, technical analysis involves a bit more than simply staring at price charts hoping to find a "yellow brick road" to a bonanza payday. Along with various methods of plotting price action on charts by using bars, candlesticks, and Xs and Os on point and figure charts, market technicians also employ many technical studies that help them to delve deeper into the data. By using these studies in conjunction with their price charts, traders are able to build much stronger cases to buy, sell or remain on the sidelines than they could by simply looking at price charts alone.

Here are descriptions of some of the more widely used and time-tested studies that technicians keep in their toolboxes:

Moving Averages

One of the most basic and widely used indicators in a technical analyst's tool box, moving averages help traders verify existing trends, identify emerging trends, and view overextended trends about to reverse. Moving averages are lines overlaid on a chart indicating long term price trends with short term fluctuations smoothed out.

There are three basic types of moving averages:

Simple
Weighted
Exponential

A simple moving average gives equal weight to each price point over the specified period. The user defines whether the high, low, or close is used and these price points are added together and averaged. This average price point is then added to the existing string and a line is formed. With the addition of each new price point the sample set drops off the oldest point. The simple moving average is probably the most widely used moving average.

A weighted moving average gives more emphasis to the latest data. A weighted moving average multiplies each data point by a weighting factor which differs from day to day. These figures are added and divided by the sum of the weighting factors. A weighted moving average allows the user to successfully smooth out a curve while having the average more responsive to current price changes.

An exponential moving average is another way of "weighting" the more recent data. An exponential moving average multiplies a percentage of the most recent price by the previous period's average price. Defining the optimum moving average for a particular currency pair involves "curve fitting". Curve fitting is the process of selecting the right number of periods with the correct type of moving average to produce the results the user is trying to achieve. By trial and error, technicians work with the time periods to fit the price data.

Because the moving average is constantly changing based on the latest market data, many traders will use different "specified" time frames before they come up with a series of moving averages that are optimal for a particular currency.

For example, a trader might create a 5-day, a 15-day and a 30-day moving average for a currency and then plot them on his or her price chart. He might start out using simple moving averages and end up using weighted moving averages. In creating these moving averages, traders need to decide on the exact price data that will be used in this study; meaning closing prices vs. opening prices vs. high/low/close etc. After doing so, a series of lines are created that reflect the 5-day, 15-day and 30-day moving average of a currency.

Once the data is layered over a price chart, traders can determine how well these chosen periods keep track of the trend being followed. If, for example, a market is trending higher, you'd expect the 30-day moving average to be a very accurate trend line, providing a line of support for prices on their way higher. If prices seem too close under this 30-day moving average on several occasions without resulting in a halt in the up trend, a trader will simply adjust the time period to say a 45-day or 60-day moving average in order to optimize the average. In this way, the moving average will act as a trend line.

After determining the optimum moving average for a currency, this average price line can be used as a line of support in maintaining a long position or resistance in maintaining a short position. Breaches of this line can also be used as a signal that a currency is in the process of reversing course, in which case a trader will want to pare back an existing position or come up with entry levels for a new position. For example, if you determine that a 30-day moving average has shown itself to be a good support line for USD-JPY in an upward trending market, then market closes under this 30-day moving average line could be a signal that this trend could be running out of steam. However, it is important to wait for confirmation of these signals. One way to do this is to wait for another close below the level. On the second close under the average, you should begin to pare down your position. Another confirmation involves using other, shorter term moving averages.

While a longer term moving average can help to define and support a particular trend, shorter term moving averages can provide lead signals that a trend is ending before prices dip below your longer term moving average line. For this reason, most traders will plot several moving averages on the same chart. In a market that is trending higher, a shorter term moving average might signal a market reversal by turning down and crossing over the longer term moving average. For example, if you are using a 15-day and a 45-day moving average in a market that is in an up trend, and the 15-day moving average turns down and crosses over the 45-day moving average, this could be an early signal that the up trend is ending and it is probably time to begin to pare down your position.

Stochastics

Stochastic studies, or oscillators, are another useful tool for monitoring the expected sustainability of a trend. They provide a trader with information about the closing price in the current trading period relative to the prior performance of the instrument being analyzed.

Stochastics are measured and represented by two different lines, %K and %D and are plotted on a scale ranging from 0 to 100. Indications above 80 represent strong upward movement while level indications below 20 represent strong downward movements. The mathematics behind the studies are not as important as knowing what the stochastics are telling you. The %K line is the faster, more sensitive indicator while the %D line takes more time to turn. When the %K line crosses over the %D line, this could be an indication that a market is about to reverse course. Stochastic studies are not useful in choppy, sideways markets. At times when prices are fluctuating in a narrow range, the %K and %D lines might be crossing many different times and will be telling you nothing more than the market is moving sideways.

Stochastics are most useful in measuring the strength of a trend and as augurs of a coming reversal in prices. When prices are making new highs or lows and your stochastics are doing the same, you can be reasonably certain that the trend will continue. On the other hand, many traders finds that the best trading opportunity comes when their stochastic indicator is flattening out or moving in the opposite direction of prices. When these divergences occur, it's time to book profits and/or to establish a position in the opposite direction of the prior trend.

As should always be the case when using any technical tool, do not act on the first signal you see. Wait at least one or two trading sessions for confirmation of what the study is indicating before you commit to a position.

Relative Strength Index (RSI)

RSI measures the momentum of price movements. It is also plotted on a scale ranging from 0 to 100. Traders will tend to look at RSI readings over 80 as an indicator of a market that is overbought or susceptible to a downturn, and readings under 20 as a market that is oversold or ready to turn higher.

This logic therefore implies that prices cannot rise or fall forever and that by using an RSI study, one can determine with a reasonable degree of certainty when a reversal will come about. However, be very wary of trading on RSI studies alone. In many instances, an RSI can remain at very lofty or sunken levels for quite a while without prices reversing course. At these times, the RSI is simply telling you that a market is quite strong or quite weak and shows no signs of changing course.

RSI studies can be adjusted to whatever time sensitivity a trader feels necessary for his or her particular style. For instance, a 5-day RSI will be very sensitive and will tend to give many more signals, not all of them sustainable, than say a 21-day RSI, which will tend to be less choppy. As with other studies, try a variety of time periods for the currency that you are trading based on your trading style. Longer term, position type traders, will tend to find that shorter time frames used for an RSI (or any other study for that matter) will give too many signals and will result in over-trading. On the other hand, shorter time frames will probably be ideal for day-traders trying to capture many shorter-term price fluctuations.

As with stochastics, look for divergences between prices and the RSI. If your RSI turns up in a slumping market or turns down during a bull run, this could be a good indication that a reversal is just around the corner. Wait for confirmation before you act on divergent indications from your RSI studies.

Bollinger Bands

Bollinger Bands are volatility curves used to identify extreme highs or lows in relation to price. Bollinger Bands establish trading parameters, or bands, based on the moving average of a particular instrument and a set number of standard deviations around this moving average.

For example, a trader might decide to use a 10-day moving average and 2 standard deviations to establish Bollinger Bands for a given currency. After doing so, a chart will appear with price bars capped by an upper boundary line based on price levels 2 standard deviations higher than the 10-day moving average and supported by a lower boundary line based on 2 standard deviations lower than the 10-day moving average. In the middle of these two boundary lines will be another line running somewhat close to the middle area depicting in this case, the 10-day moving average. Both the moving average and the number of standard deviations can be altered to best suit a particular currency.

Jon Bollinger, creator of Bollinger Bands recommends using a simple 20-day moving average and 2 standard deviations. Because standard deviation is a measure of volatility, Bollinger Bands are dynamic indicators that adjust themselves (widen and contract) based on the current levels of volatility in the market being studied. When prices hit the upper or lower boundaries of a given set of Bollinger Bands, this is not necessarily an indication of an imminent reversal in a trend. It simply means that prices have moved to the upper limits of the established parameters. Therefore, traders should use another study in conjunction with Bollinger Bands to help them determine the strength of a trend.

MACD - Moving Average Convergence Divergence

MACD is a more detailed method of using moving averages to find trading signals from price charts. Developed by Gerald Appel, the MACD plots the difference between a 26-day exponential moving average and a 12-day exponential moving average. A 9-day moving average is generally used as a trigger line, meaning when the MACD crosses below this trigger it is a bearish signal and when it crosses above it, it's a bullish signal.

As with other studies, traders will look to MACD studies to provide early signals or divergences between market prices and a technical indicator. If the MACD turns positive and makes higher lows while prices are still tanking, this could be a strong buy signal. Conversely, if the MACD makes lower highs while prices are making new highs, this could be a strong bearish divergence and a sell signal.

Fibonacci Retracements

Fibonacci retracement levels are a sequence of numbers discovered by the noted mathematician Leonardo da Pisa during the twelfth century. These numbers describe cycles found throughout nature and when applied to technical analysis can be used to find pullbacks in the currency market.

Fibonacci retracement involves anticipating changes in trends as prices near the lines created by the Fibonacci studies. After a significant price move (either up or down), prices will often retrace a significant portion (if not all) of the original move. As prices retrace, support and resistance levels often occur at or near the Fibonacci Retracement levels.

In the currency markets, the commonly used sequence of ratios is 23.6 %, 38.2%, 50% and 61.8%. Fibonacci retracement levels can easily be displayed by connecting a trend line from a perceived high point to a perceived low point. By taking the difference between the high and low, the user can apply the % ratios to achieve the desired pullbacks.

One final word of advice: Don't get too caught up in the mathematics involved in putting together each study. It is much more important to understand how and why studies can and should be manipulated based on the time periods and sensitivities that you determine are ideal for the currency you are trading. These ideal levels can only be determined after applying several different parameters to each study until the charts and studies begin to reveal the "details behind the details."

Using Indicators to Identify Trends

2006-09-05T19:36:00.000+02:00

Of the many market sayings thrown around by traders, perhaps none is more overused and less understood than the old adage 'the trend is your friend'. All too often, the phrase is used after a trader has taken a counter-trend position and subsequently been stopped out at a loss. Remorse sets in at this point and most traders kick themselves not only for having lost on a counter-trend trade, but also for not having caught the latest move in the trend itself.

To avoid this all too common scenario, we will suggest using several technical tools to identify whether or not a trend is in place and then use additional indicators to help maximize trading profits. Having a strategy in place to identify trends is essential to successful trading in any market, but especially so in the case of the forex markets. Currencies have a greater tendency to move in trending fashion due to the longer-term macroeconomic elements that drive exchange rates, such as interest rate cycles or global trade imbalances. Currencies are also pre-disposed to short-term, intra-day trends due to international capital flows reacting in unison to day-to-day economic and political news.

Identifying the Trend
In its most basic sense, a trend is simply a prolonged market movement in one general direction, either up or down. From a traders' perspective, though, that simple definition is so broad as to be relatively meaningless. A more relevant definition of a trend would be one where a trend is defined as a predictable price response at levels of support/resistance that change over time. For example, in an uptrend the defining feature is that prices rebound when they near support levels, ultimately establishing new highs. In a downtrend, the opposite is true-price increases will reverse as they near resistance levels, and new lows will be reached. This definition reveals the first of the tools used to identify whether a trend is in place or not-trendline analysis to establish support and resistance levels.

Trendline analysis is often underestimated because it is perceived as overly subjective and retrospective in nature. While both criticisms have some truth, they overlook the reality that trendlines help focus attention on the underlying price pattern, filtering out the noise of the market. For this reason, trendline analysis should be the first step in determining the existence of a trend. If trendline analysis does not reveal a discernible trend, it's probably because there isn't one.

Trendline analysis is best employed starting with longer timeframes (daily or weekly charts) first and then carrying them forward into shorter timeframes (hourly or 4-hourly) where shorter-term levels of support and resistance can then be identified. This approach has the advantage of highlighting the most significant levels of support/resistance first and less important levels next. This helps reduce the chances of following a short-term trendline break while a major long-term level is lurking nearby.

Another technical tool that can be deployed to verify the existence of a trend is the directional movement indicator system (DMI), developed by J. Welles Wilder (see Wilder, New Concepts in Technical Trading Systems, c. 1978). Using the DMI removes the guesswork involved with spotting trends and can also provide confirmation of trends identified by trendline analysis. The DMI system is comprised of the ADX (average directional movement index) and the DI+ and DI- lines. The ADX is used to determine whether or not a market is trending (regardless if it's up or down), with a reading over 25 indicating a trending market and a reading below 20 indicating no trend. The ADX is also a measure of the strength of a trend--the higher the ADX, the stronger the trend. Using the ADX, traders can determine whether or not there is a trend and thus whether or not to use a trend following system.

As its name would suggest, the DMI system is best employed using both components. The DI+ and DI- lines are used as trade entry signals. A buy signal is generated when the DI+ line crosses up through the DI- line; a sell signal is generated when the DI- line crosses up through the DI+ line. (Wilder suggests using the "extreme point rule" to govern the DI+/DI- crossover signal. The rule states that when the DI+/- lines cross, traders should note the extreme point for that period in the direction of the crossover (the high if DI+ crosses up over DI-; the low if DI- crosses up over DI+). Only if that extreme point is breached in the subsequent period is a trade signal confirmed.

The ADX can then be used as an early indicator of the end/pause in a trend. When the ADX begins to move lower from its highest level, the trend is either pausing or ending, signaling it is time to exit the current position and wait for a fresh signal from the DI+/DI- crossover.

CHART 1: JUMP IN AND HANG ON FOR THE RIDE. If you are an aggressive trader and entered a long position at Point A, and only exited your position at Point C, you would be pleased with the results. This can be achieved with a few simple indicators.

Let's look at recent long-term trend (chart 1) and put trendline analysis together with the DMI system to illustrate the utility of these tools when used in conjunction with each other. An aggressive trader might initiate a long position as the daily resistance line is breached on 11/12/03 (point A). A trader looking for confirmation might wait a day, when the DI+ crosses up through the DI- line, generating a buy signal. A conservative trader might wait for confirmation of the DI+/- crossover by waiting for the extreme point (high) to be exceeded, in line with Wilder's extreme point rule. This confirmation is given the following day (11/14/03). As the market begins to move higher, the support trendline drawn off the lows is tested, but holds, underscoring its validity to a nascent trend. Although the market has moved higher in line with the DI+/DI- crossover and trendline support, the ADX is still below 25 until 12/2/03 (point B), when a trend is finally confirmed. At this point, a trader should recognize that they are in a trending market and trend following systems can usefully be employed.

This brings us to the point of introducing some additional tools that can be used to maximize profit within a trending market. We have already suggested using the ADX as an early indicator of the end of a trend. Note that from point B, when it first registers above 25 indicating a trending market, the ADX continues to make new highs until 01/14/04 (point C) when it closes lower signaling a likely end to the uptrend and that it's time to exit the long position.

A second tool used to identify an exit point and possibly the end of a trend is the parabolic indicator. The parabolic indicator follows the price action but accelerates its own rate of increase over time and in response to the trend. The result is that the parabolic is continually closing in on the price, and only a steadily accelerating price rise (the essence of a trend) will prevent the price from falling below the parabolic, signaling an end to the trend. Chart 2 shows the parabolic indicator overlaid on the previous chart. Note that the parabolic gives an exit signal (point D) the day after the ADX experienced its first lower close.

CHART 2: ADD A COUPLE MORE INDICATORS. Here, the parabolic indicator was used. The exit signal was given one day after the ADX gave its exit signal.

The very basic trendlines that are drawn also could have signaled the end to the uptrend. Note that the price accelerates above the upper channel line in the final extension of the uptrend, tests back to the break and then goes on to make new highs. The subsequent price decline back below the upper channel line would then signal the end of the up-move. As well, another support line similar to the parabolic could also be drawn, and its breach would have been the earliest signal of the end of the upmove.

What About Short-term Trading?
The same tools outlined above can be used for short-term decision making, even in markets that are trading sideways, or so-called trendless markets. While the market may not be trending in a long-term sense, there are multiple smaller, short-term movements taking place that can be exploited. (One caveat must be noted, though: traders need to be aware of what is happening in the bigger picture. If shorter term ADX readings indicate a trending market, traders must be circumspect in initiating trades that are counter to the larger, daily trend.)

CHART 3: INTRADAY BASIS. On this hourly chart of the Australian dollar, the first entry signal was at point A. You could have held until point D, where you should have sold your position. The next entry signal was point AA (short) with a signal for covering that short position at point CC.

Let's then look at a short-term scenario using an hourly chart of the Australian dollar (chart 3). The first hint of a potential trading opportunity is the quick convergence of the DI+/DI- lines in the hour marked by point A. This is caused by the sharp bounce in price during that hour. The next hourly bar breaks through and closes above trendline resistance, precipitating DI+ crossing up through DI-. Following Wilder's extreme point rule, we wait for the previous high to be surpassed, which happens in the next hour at point B. At this point, we have several signals indicating a long position-the break of trendline resistance, crossover of DI+/DI-, extreme point rule satisfied, break of parabolic. As the market moves higher, the ADX begins to rise as well, peaking at point C and declining at point D, giving us our signal to exit the long. Basic trendline and parabolic supports are then broken several hours later setting the stage for the next potential move.

The next signal is given at point AA as the DI- crosses up through the DI+, generating a sell signal. This coincides with the price falling below recent hourly lows. The ADX begins to move up, indicating the possibility of a trend forming and eventually rises over 25 at point BB indicating a trend is in place and that the parabolic should be followed. Trendline and parabolic resistance are then breached and the ADX stalls at point CC, indicating an early, but profitable exit to the trade.

The Trend is Your Friend
Profiting from market trends is the essence of making the trend your friend. The first step to profiting from both short- and long-term trends is understanding what constitutes a trend and knowing how to identify them. The next step is employing a disciplined trading strategy that is specific to trends. A conscientious approach utilizing trendline analysis, the DMI system, and the parabolic indicator should help traders make more friends of market trends.

An Introduction to Technical Analysis

2006-09-05T14:09:00.000+02:00

Technical analysis is research of market dynamics that is done mainly with the help of charts and with the purpose of forecasting future price development. Technical analysis comprises several approaches to the study of price movement which are interconnected in the framework of one harmonious theory. This type of analysis studies the price movement on the market by means of analyzing three market factors: price, volumes, and, in case of study of futures contracts’ market, of an open interest (number of open positions). Of these three factors the primary one for technical analysis is the prices, while the alterations in other factors are studies mainly in order to confirm the correctness of the identified price trend. This technical theory, just like any theory, has its core postulates.

Technical analysts base their research on the following three axioms:

Market movement considers everything
This is the most important postulate of technical analysis. It is crucial to understand it in order to grasp rightly the procedures of analysis. The gist of it is that any factor that influences the price of securities, whether economic, political, or psychological, has already been taken into account and reflected in the price chart. In other words, every price change is accompanied by a change in external factors. The main inference of this premise is the necessity to follow closely the price movements and analyze them. By means of analyzing price charts and multiple other indicators, a technical analyst comes to the point that the market itself shows to her/him the trend it will most likely follow.
This premise is in conflict with fundamental analysis where the attention is primarily paid to the study of factors, and later on, after the analysis of the factors, to conclusions as to the market trends are made. Thus, if the demand is higher than the supply, a fundamental analyst will come to the conclusion that the price will grow. Technical analyst, however, makes her/his conclusions in the opposite sequence: since the price has grown, it means the demand is higher than the supply.
The prices move with the trend
This assumption is the basis for all methods of technical analysis, as a market that moves in accordance with trends can be analyzed, unlike a chaotic market. The postulate that the price movement is a result of a trend has two effects. The first one implies that the current trend will most likely continue and will not reverse itself, thus, excluding disorderly chaotic movement of the market. The second one implies that the current trend will go on until the opposite trend sets in.
The history repeats itself
Technical analysis and studies of market dynamics are closely related to the studies of human psychology. Thus, the graphical price models identified and classified within the last hundred years depict core characteristics of the psychological state of the market. First of all, they show the moods currently prevailing in the market, whether bullish or bearish. Since these models worked in the past, we have reasons to suppose that they will work in the future, for they are based on human psychology which remains almost unchaged over years. We can reword the last postulate — the story repeats itself — in a slightly different way: the key to understanding the future lies in the studies of the past.

Glossary of Foreing Exchange Terms: S - Z

2006-09-01T10:24:00.000+02:00

- S -

Same day transaction - A transaction that matures on the day the transaction takes place.

Selling rate - Rate at which a bank is willing to sell foreign currency.

Settlement date - The date upon which foreign exchange contracts settle.

Settlement Risk - Where a payment is made to a counter party before the counter value payment has been made. The risk is that the counter party's payment will not be received.

Short sale - The sale of a specified amount of currency not owned by the seller at the time of the trade. Short sales are usually made in expectation of a decline in the price.

Short-term interest rates - Normally the 90 day rate.

Sidelined - A major currency that is lightly traded due to major market interest being in another currency pair.

Slippage - Refers to the negative (or depreciating) pip value between where a stop loss order becomes a market order and where that market order may be filled.

Soft Market - More potential sellers than buyers, which creates an environment where rapid price falls are likely.

Spot - (1) The most common foreign exchange transaction. (2) Spot or Spot date refers to the spot transaction value date that requires settlement within two business days, subject to value date calculation.

Spot next - The overnight swap from the spot date to the next business day.

Spot price/rate - The price at which the currency is currently trading in the spot market.

Spread - (l)The difference between the bid and ask price of a currency. (2) The difference between the price of two related futures contracts.

Square - Purchase and sales are in balance and thus the dealer has no open position.

Squawk Box - A speaker connected to a phone often used in broker trading desks.

Squeeze - Action by a central bank to reduce supply in order to increase the price of money.

Stable market - An active market which can absorb large sale or purchases of currency without major moves.

Standard - A term referring to certain normal amounts and maturities for dealing.

Sterilization - Central Bank activity in the domestic money market to reduce the impact on money supply of its intervention activities in the FX market.

Sterling - British pound, otherwise known as cable.

Stocky - Market slang for Swedish Krona.

Stop-Loss order - Order to buy or sell at the best available price when a given price threshold has been reached.

Support levels - When an exchange rate depreciates or appreciates to a level where (1) Technical analysis techniques suggest that the currency will rebound, or not go below; (2) the monetary authorities intervene to stop any further down ward movement. See resistance point.

Swap price - A price as a differential between two dates of the swap.

Swap - The simultaneous purchase and sale of the same amount of a given currency for two different dates, against the sale and purchase of another. A swap can be a swap against a forward. In essence, swapping is somewhat similar to borrowing one currency and lending another for the same period. However, any rate of return or cost of funds is expressed in the price differential between the two sides of the transaction.

Swissy - Market slang for Swiss Franc.

- T -

Technical Correction - An adjustment to price not based on market sentiment but technical factors such as volume and charting.

Thin market - A market in which trading volume is low and in which consequently bid and ask quotes are wide and the liquidity of the instrument traded is low.

Thursday/Friday Dollars - A US foreign exchange technicality. If a foreign bank buys dollars on Tuesday for Thursday delivery. If the bank leaves the funds overnight and transfers them on Friday by means of a clearing house cheque then clearance is not until Monday, the next working day. Higher interest rates for this period are thus available.

Tick - A minimum change in price, up or down.

Today/Tomorrow - Simultaneous buying of a currency for delivery the following day and selling for the spot day, or vice versa. Also referred to as overnight.

Tomorrow next (Tom next) - Simultaneous buying of a currency for delivery the following day and selling for the spot day or vice versa.

Trade date - The date on which a trade occurs.

Tradeable amount - Smallest transaction size acceptable.

Transaction date - The date on which a trade occurs.

Transaction - The buying or selling of currencies resulting from the execution of an order.

Two Tier market - A dual exchange rate system where normally only one rate is open to market pressure, e.g. South Africa.

Two-Way quotation - When a dealer quotes both buying and selling rates for foreign exchange transactions.

- U -

Uncovered - Another term for an open position.

Under-valuation - An exchange rate is normally considered to be undervalued when it is below its purchasing power parity.

Up tick - A transaction executed at a price greater than the previous transaction.

- V -

Value Date - For a spot transaction it is two business banking days forward in the country of the bank providing quotations which determine the spot value date. The only exception to this general rule is the spot day in the quoting centre coinciding with a banking holiday in the country(ies) of the foreign currency(ies). The value date then moves forward a day.

Value Spot - Normally settlement for two working days from today. See value date.

Volatility - A measure of the amount by which an asset price is expected to fluctuate over a given period.

Vostro Account - A local currency account maintained with a bank by another bank. The term is normally applied to the counterparty's account from which funds may be paid into or withdrawn, as a result of a transaction.

- W -

Wash trade - A matched deal which produces neither a gain nor a loss.

Whipsaw - Term for where a trader takes a position, then has to move against it triggering stop loss limits and liquidation of positions, then having to move in the original direction. Normally occurs in volatile markets.

Working day - A day on which the banks in a currency's principal financial centre are open for business. For FX transactions, a working day only occurs if the bank in both financial centre's are open for business (all relevant currency centers in the case of a cross are open).

Glossary of Foreing Exchange Terms: M - R

2006-08-31T09:18:00.000+02:00

- M -

Maintenance margin - The minimum margin which an investor must keep on deposit in a margin account at all times in respect of each open contract.

Make a market - A dealer is said to make a market when he or she quotes bid and offer prices at which he or she stands ready to buy and sell.

Managed float - When the monetary authorities intervene regularly in the market to stabilize the rates or to aim the exchange rate in a required direction.

Margin call - A claim by one's broker or dealer for additional good faith performance monies usually issued when an investor's account suffers adverse price movements.

Margin - The amount of money or collateral that must be, in the first instance, provided or thereafter, maintained, to ensure against losses on open contracts. Initial must be placed before a trade is entered into. Maintenance or Variation margin must be added to initial to maintain against losses on open positions. Sometimes herein the amount that needs to be present to establish or thereafter maintained is sometimes herein referred to as necessary margin.

Mark to market - The daily adjustment of an account to reflect accrued profits and losses often required to calculate variations of margins.

Market maker - A market maker is a person or firm authorized to create and maintain a market in an instrument.

Market order - An order to buy or sell a financial instrument immediately at the best possible price.

Micro economics - The study of economic activity as it applies to individual firms or well defined small groups of individuals or economic sectors.

Mid-price or middle rate - The price half-way between the two prices, or the average of both buying and selling prices offered by the market makers.

Minimum price fluctuation - The smallest increment of market price movement possible in a given futures contract.

Monetary Base - Currency in circulation plus banks' required and excess deposits at the central bank.

Moving Average - A way of smoothing a set of data, widely used in price time series.

- N -

Net Position - The amount of currency bought or sold which have not yet been offset by opposite transactions.

- O -

Odd Lot - A non standard amount for a transaction.

Offer - The price at which a seller is willing to sell. The best offer is the lowest such price available.

Offset - The closing-out or liquidation of a futures position.

Off-shore - The operations of a financial institution which although physically located in a country, has little connection with that country's financial systems. In certain countries a bank is not permitted to do business in the domestic market but only with other foreign banks. This is known as an off shore banking unit.

Overnight limit - Net long or short position in one or more currencies that a dealer can carry over into the next dealing day. Passing the book to other bank dealing rooms in the next trading time zone reduces the need for dealers to maintain these unmonitored exposures.

Overnight - A deal from today until the next business day.

- P -

Parity - (1) Foreign exchange dealer's slang for your price is the correct market price. (2) Official rates in terms of SDR or other pegging currency.

Parities - The value of one currency in terms of another.

Pegged - A system where a currency moves in line with another currency, some pegs are strict while others have bands of movement.

Pip - One unit of price change in the bid/ask price of a currency. For most currencies, it denotes the fourth decimal place in an exchange rate and represents 1/100 of one percent (.01%).

Position - The netted total commitments in a given currency. A position can be either flat or square (no exposure), long, (more currency bought than sold), or short ( more currency sold than bought).

Profit Taking - The unwinding of a position to realize profits.

- Q -

Quote - An indicative price. The price quoted for information purposes but not to deal.

- R -

Rally - A recovery in price after a period of decline.

Range - The difference between the highest and lowest price of a future recorded during a given trading session.

Rate - (1) The price of one currency in terms of another, normally against USD. (2) Assessment of the credit worthiness of an institution.

Reaction - A decline in prices following an advance.

Reciprocal currency - A currency that is normally quoted as dollars per unit of currency rather than the normal quote method of units of currency per dollar. Sterling is the most common example.

Resistance Point or Level - A price recognized by technical analysts as a price which is likely to result in a rebound but if broken through is likely to result in a significant price movement.

Revaluation - Increase in the exchange rate of a currency as a result of official action.

Revaluation rate - The rate for any period or currency which is used to revalue a position or book.

Risk management - The identification and acceptance or offsetting of the risks threatening the profitability or existence of an organisation. With respect to foreign exchange involves among others consideration of market, sovereign, country, transfer, delivery, credit, and counterparty risk.

Risk Position - An asset or liability, which is exposed to fluctuations in value through changes in exchange rates or interest rates.

Rollover - An overnight swap, specifically the next business day against the following business day (also called Tomorrow Next, abbreviated to Tom-Next).

Round trip - Buying and selling of a specified amount of currency.

Glossary of Foreing Exchange Terms: F - L

2006-08-30T09:42:00.000+02:00

- F -

Fast market - Rapid movement in a market caused by strong interest by buyers and/or sellers. In such circumstances price levels may be omitted and bid and offer quotations may occur too rapidly to be fully reported.

Fed Fund Rate - The interest rate on Fed funds. This is a closely watched short term interest rate as it signals the Feds view as to the state of the money supply.

Fed - The United States Federal Reserve. Federal Deposit Insurance Corporation Membership is compulsory for Federal Reserve members. The corporation had deep involvement in the Savings and Loans crisis of the late 80s.

Federal Reserve System - The central banking system in the United States.

Fill or Kill - An order which must be entered for trading, normally in a pit three times, if not filled is immediately canceled.

Fisher Effect - The relationship that exists between interest rates and exchange rate movements, so that in an ideal situation interest rate differentials would be exactly off set by exchange rate movements. See interest rate parity.

Fixed exchange rate - Official rate set by monetary authorities. Often the fixed exchange rate permits fluctuation within a band.

Flexible exchange rate - Exchange rates with a fixed parity against one or more currencies with frequent revaluation's. A form of managed float.

Floating exchange rate - An exchange rate where the value is determined by market forces. Even floating currencies are subject to intervention by the monetary authorities. When such activity is frequent the float is known as a dirty float.

FOMC - Federal Open Market Committee, the committee that sets money supply targets in the US which tend to be implemented through Fed Fund interest rates etc.

Foreign Exchange - The purchase or sale of a currency against sale or purchase of another.

Forex - Term commonly used when referring to the foreign exchange market.

Forex Club - Groups formed in the major financial centers to encourage educational and social contacts between foreign exchange dealers, under the umbrella of Association Cambiste International.

Forward margins - Discounts or premiums between spot rate and the forward rate for a currency. Normally quoted in points.

Forward Operations - Foreign exchange transactions, on which the fulfillment of the mutual delivery obligations is made on a date later than the second business day after the transaction was concluded.

Forward Outright - A commitment to buy or sell a currency for delivery on a specified future date or period. The price is quoted as the Spot rate minus or plus the forward points for the chosen period.

Forward Rate - Forward rates are quoted in terms of forward points , which represents the difference between the forward and spot rates. In order to obtain the forward rate from the actual exchange rate the forward points are either added or subtracted from the exchange rate. The decision to subtract or add points is determined by the differential between the deposit rates for both currencies concerned in the transaction. The base currency with the higher interest rate is said to be at a discount to the lower interest rate quoted currency in the forward market. Therefor the forward points are subtracted from the spot rate. Similarly, the lower interest rate base currency is said to be at a premium, and the forward points are added to the spot rate to obtain the forward rate.

Free Reserves - Total reserves held by a bank less the reserves required by the authority.

Front Office - The activities carried out by the dealer , normal trading activities.

Fundamentals - The macro economic factors that are accepted as forming the foundation for the relative value of a currency, these include inflation, growth, trade balance, government deficit, and interest rates.

FX - Foreign Exchange.

- G -

G7 - The seven leading industrial countries, being US , Germany, Japan, France, UK, Canada, Italy.

G10 - G7 plus Belgium, Netherlands and Sweden, a group associated with IMF discussions. Switzerland is sometimes peripherally involved.

Gap - A mismatch between maturities and cash flows in a bank or individual dealers position book. Gap exposure is effectively interest rate exposure.

Going long - The purchase of a stock, commodity, or currency for investment or speculation.

Going short - The selling of a currency or instrument not owned by the seller.

Gold Standard - The original system for supporting the value of currency issued. The was that where the price of gold is fixed against the currency it means that the increased supply of gold does not lower the price of gold but causes prices to increase.

Golden Mean Math Formula - The golden mean is a ratio which has fascinated many. It can be expressed succinctly in the ratio of the number "1" to the irrational "1.618034..." and is used in GFT's Echelon System™.

Good until canceled - An instruction to a broker that unlike normal practice the order does not expire at the end of the trading day, although normally terminates at the end of the trading month.

Grid - Fixed margin within which exchange rates are allowed to fluctuate.

Gross Domestic Product - Total value of a country's output, income or expenditure produced within the country's physical borders.

Gross National Product - Gross domestic product plus " factor income from abroad" - income earned from investment or work abroad.

- H -

Hard currency - Any one of the major world currencies that is well traded and easily converted into other currencies.

Head and Shoulders - A pattern in price trends which chartist consider indicates a price trend reversal. The price has risen for some time, at the peak of the left shoulder, profit taking has caused the price to drop or level. The price then rises steeply again to the head before more profit taking causes the the price to drop to around the same level as the shoulder. A further modest rise or level will indicate a that a further major fall is imminent. The breach of the neckline is the indication to sell.

Hedge - The purchase or sale of options or futures contracts as a temporary substitute for a transaction to be made at a later date. Usually it involves opposite positions in the cash or futures or options market.

Hedged position - One open buy position and one open sell position in the same currency.

Hit the bid - Acceptance of purchasing at the offer or selling at the bid.

- I -

IMF - International Monetary Fund, established in 1946 to provide international liquidity on a short and medium term and encourage liberalization of exchange rates. The IMF supports countries with balance of payments problems with the provision of loans.

IMM - International Monetary Market part of the Chicago Mercantile Exchange that lists a number of currency and financial futures Implied volatilityA measurement of the market's expected price range of the underlying currency futures based on the traded option premiums.

Implied Rates - The interest rate determined by calculating the difference between spot and forward rates.

Indicative quote - A market-maker's price which is not firm.

Inflation - Continued rise in the general price level in conjunction with a related drop in purchasing power. Sometimes referred to as an excessive movement in such price levels.

Initial margin - The margin required by a Foreign Exchange firm to initiate the buying or selling of a determined amount of currency.

Inter-bank rates - The bid and offer rates at which international banks place deposits with each other. The basis of the Interbank market.

Interest Arbitrage - Switching into another currency by buying spot and selling forward, and investing proceeds in order to obtain a higher interest yield. Interest arbitrage can be inward, i.e. from foreign currency into the local one or outward, i.e. from the local currency to the foreign one. Sometimes better results can be obtained by not selling the forward interest amount. In that case some treat it as no longer being a complete arbitrage, as if the exchange rate moved against the arbitrageur, the profit on the transaction may create a loss.

Interest parity - One currency is in interest parity with another when the difference in the interest rates is equalized by the forward exchange margins. For instance, if the operative interest rate in Japan is 3% and in the UK 6%, a forward premium of 3% for the Japanese Yen against sterling would bring about interest parity.

Interest rate Swaps - An agreement to swap interest rate exposures from floating to fixed or vice versa. There is no swap of the principal. It is the interest cash flows be they payments or receipts that are exchanged.

Internationalization - Referring to a currency that is widely used to denominate trade and credit transactions by non residents of the country of issue. US dollar and Swiss Franc are examples.

Intervention - Action by a central bank to effect the value of its currency by entering the market. Concerted intervention refers to action by a number of central banks to control exchange rates.

- K -

Kiwi - Slang for the New Zealand dollar.

- L -

Leading Indicators - Statistic that are considered to precede changes in economic growth rates and total business activity, e.g. factory orders.

Liability - In terms of foreign exchange , the obligation to deliver to a counterparty an amount of currency either in respect of a balance sheet holding at a specified future date or in respect of an un-matured forward or spot transaction.

Limit order - A request to deal as a buyer or seller for a foreign currency transaction at a specified price, or at a better price, if obtainable.

Liquidation - Any transaction that offsets or closes out a previously established position.

Liquidity - The ability of a market to accept large transactions.

Glossary of Foreing Exchange Terms: A - E

2006-08-29T12:55:00.000+02:00

- A -

Accrual - The apportionment of premiums and discounts on forward exchange transactions that relate directly to deposit swap (Interest Arbitrage) deals , over the period of each deal.

Actualize - The underlying assets or instruments which are traded in the cash market.

Adjustable Peg - Term for an exchange rate regime where a country's exchange rate is "pegged" (i.e. fixed) in relation to another currency , often the dollar or French Franc, but where the rate may be changed from time to time. This was the basis of the Bretton Woods system. See peg, and crawling peg.

Adjustment - Official action normally by either change in the internal economic policies to correct a payment imbalance or in the official currency rate or.

Agent Bank - (1) A bank acting for a foreign bank. (2) In the Euro market - the agent bank is the one appointed by the other banks in the syndicate to handle the administration of the loan.

Aggregate Demand - Total demand for goods and services in the economy. It includes private and public sector demand for goods and services within the country and the demand of consumers and and firms in other countries for good and services.

Aggregate risk - Size of exposure of a bank to a single customer for both spot and forward contracts.

Aggregate Supply - Total supply of goods and services in the economy from domestic sources (including imports) available to meet aggregate demand.

Agio - Difference in the value between currencies. Also used to describe percentage charges for conversion from paper money into cash, or from a weak into a strong currency.

Appreciation - Describes a currency strengthening in response to market demand rather than by official action.

Arbitrage - The simultaneous purchase and sale on different markets, of the same or equivalent financial instruments to profit from price or currency differentials. The exchange rate differential or Swap points. May be derived from Deposit Rate differentials.

Arbitrage channel - The range of prices within which there will be no possibility to arbitrage between the cash and futures market.

Around - Used in quoting forward "premium / discount". "Five-five around" would mean five point on either side of the present spot value.

Asset Allocation - Dividing instrument funds among markets to achieve diversification or maximum return.

Ask - The price at which the currency or instrument is offered.

Asset - In the context of foreign exchange is the right to receive from a counterparty an amount of currency either in respect of a balance sheet asset (e.g. a loan) or at a specified future date in respect of an unmatched forward Forward or spot deal.

At best - An instruction given to a dealer to buy or sell at the best rate that can be obtained.

At or Better - An order to deal at a specific rate or better.

Authorized Dealer - A financial institution or bank authorized to deal in foreign exchange.

- B -

Back Office - Settlement and related processes.

Backwardation - Term referring to the amount that the spot price exceeds the forward price.

Balance of Payments - A systematic record of the economic transactions during a given period for a country. (1) The term is often used to mean either: (i) balance of payments on "current account"; or (ii) the current account plus certain long term capital movements. (2) The combination of the trade balance, current balance, capital account and invisible balance, which together make up the balance of payments total. Prolonged balance of payment deficits tend to lead to restrictions in capital transfers, and or decline in currency values.

Band - The range in which a currency is permitted to move. A system used in the ERM.

Bank line - Line of credit granted by a bank to a customer, also known as a " line".

Bank Rate - The rate at which a central bank is prepared to lend money to its domestic banking system.

Base currency - United States Dollars. The currency to which each transaction shall be converted at the close of each position.

Basis - The difference between the cash price and futures price.

Basis point - For most currencies, denotes the fourth decimal place in exchange rate and represents 1/100 of one percent (.01%). For such currencies as the Japanese Yen, a basis point is the second decimal place when quoted in currency terms or the sixth and seventh decimal places, respectively, when quoted in reciprocal terms.

Basis trading - Taking opposite positions in the cash and futures market with the intention of profiting from favorable movements in the basis.

Basket - A group of currencies normally used to manage the exchange rate of a currency. Sometimes referred to as a unit of account.

Bear market - A prolonged period of generally falling prices.

Bear - An investor who believes that prices are going to fall.

Bid - The price at which a buyer has offered to purchase the currency or instrument.

Book - The summary of currency positions held by a dealer, desk, or room. A total of the assets and liabilities. If the average maturity of the book is less than that of the assets, the bank is said to be running a short and open book. Passing the Book refers normally to transferring the trading of the Banks positions to another office at the close of the day, e.g. from London to New York.

Bretton Woods - The site of the conference which in 1944 led to the establishment of the post war foreign exchange system that remained intact until the early 1970s. The conference resulted in the formation of the IMF. The system fixed currencies in a fixed exchange rate system with 1% fluctuations of the currency to gold or the dollar.

Broker - Brings buyers and sellers together for a commission paid by the initiator of the transaction. Brokers do not take market positions.

Bull market - A prolonged period of generally rising prices.

Bull - An investor who believes that prices are going to rise.

Bundesbank - Central Bank of Germany.

Buying Rate - Rate at which the market and a market maker in particular is willing to buy the currency. Sometimes called bid rate.

- C -

Cable - A term used in the foreign exchange market for the US Dollar/British Pound rate.

Capital Risk - The risk arising from a bank having to pay to the counter party with out knowing whether the other party will or is able to meet its side of the bargain. see Herstatt.

Carry - The interest cost of financing securities or other financial instruments held.

Cash Delivery - Same day settlement.

Cash market - The market in the actual financial instrument on which a futures or options contract is based.

Cash - normally refers to an exchange transaction contracted for settlement on the day the deal is struck. This term is mainly used in the North American markets and those countries which rely for foreign exchange services on these markets because of time zone preference i.e. Latin America. In Europe and Asia, cash transactions are often referred to as value same day deals.

Cash and Carry - The buying of an asset today and selling a future contract on the asset. A reverse cash and carry is possible by selling an asset and buying a future.

Cash Settlement - A procedure for settling futures contract where the cash difference between the future and the market price is paid instead of physical delivery.

Central Bank - A nations main regulatory bank. Traditionally, its primary responsibility is development and implementation of monetary policy.

Central Rate - Exchange rates against the ECU adopted for each currency within the EMS.Currencies have limited movement from the central rate according to the relevant band.

Chartist - An individual who studies graphs and charts of historic data to find trends and predict trend reversals which include the observance of certain patterns and characteristics of the charts to derive resistance levels, head and shoulders patterns, and double bottom or double top patterns which are thought to indicate trend reversals.

Clean float - An exchange rate that is not materially effected by official intervention.

Closed position - A transaction which leaves the trade with a zero net commitment to the market with respect to a particular currency.

Commission - The fee that a broker may charge clients for dealing on their behalf.

Confirmation - A memorandum to the other party describing all the relevant details of the transaction.

Contract - An agreement to buy or sell a specified amount of a particular currency or option for a specified month in the future (See Futures contract).

Conversion Account - A general ledger account representing the uncovered position in a particular currency. Such accounts are referred to as Position Accounts.

Conversion - The process by which an asset or liability denominated in one currency is exchanged for an asset or liability denominated in another currency.

Conversion arbitrage - A transaction where the asset is purchased and buys a put option and sells a call option on the asset purchased, each option having the same exercise price and expiry.

Convertible currency - A currency that can be freely exchanged for another currency (and or gold) without special authorization from the central bank.

Copey - Slang for the Danish krone.

Correspondent Bank - The foreign banks representative who regularly performs services for a bank which has no branch in the relevant centre, e.g. to facilitate the transfer of funds. In the US this often occurs domestically due to inter state banking restrictions.

Counterparty - The other organisation or party with whom the exchange deal is being transacted.

Countervalue - Where a person buys a currency against the dollar it is the dollar value of the transaction.

Country risk - The risk attached to a borrower by virtue of its location in a particular country. This involves examination of economic, political and geographical factors. Various organisations generate country risk tables.

Cover - (1) To take out a forward foreign exchange contract. (2) To close out a short position by buying currency or securities which have been sold.

Covered Arbitrage - Arbitrage between financial instruments denominated in different currencies, using forward cover to eliminate exchange risk.

Covered Margin - The interest rate margin between two instruments denominated in different currencies after taking account of the cost of forward cover.

Crawling peg - A method of exchange rate adjustment; the rate is fixed/ pegged, but adjusted at certain intervals in line with certain economic or market indicators.

Credit Risk - Risk of loss that may arise on outstanding contracts should a counter party default on its obligations.

Cross deal - A foreign exchange deal entered into involving two currencies, neither of which is the base currency.

Cross rates - Rates between two currencies, neither of which is the US Dollar.

Current Account - The net balance of a country's international payment arising from exports and imports together with unilateral transfers such as aid and migrant remittances. It excludes capital flows.

- D -

Day trader - Speculators who take positions in commodities which are then liquidated prior to the close of the same trading day.

Deal date - The date on which a transaction is agreed upon.

Deal Ticket - The primary method of recording the basic information relating to a transaction.

Dealer - One who, as opposed to a broker, acts as a principle in all transactions, buying and selling for its own accounts.

Deflator - Difference between real and nominal Gross National Product, which is equivalent to the overall inflation rate.

Delivery date - The date of maturity of the contract, when the exchange of the currencies is made This date is more commonly known as the value date in the FX or Money markets.

Delivery Risk - A term to describe when a counterparty will not be able to complete his side of the deal, although willing to do so.

Depreciation - A fall in the value of a currency due to market forces rather than due to official action.

Desk - Term referring to a group dealing with a specific currency or currencies.

Details - All the information required to finalize a foreign exchange transaction, i.e. name, rate, dates, and point of delivery.

Devaluation - Deliberate downward adjustment of a currency against its fixed parities or bands, normally by formal announcement.

Direct quotation - Quoting in fixed units of foreign currency against variable amounts of the domestic currency.

Dirty Float - Floating a currency when the rate is controlled by intervention by the monetary authorities.

- E -

Easing - Modest decline in price.

Economic Indicator - A statistics which indicates current economic growth rates and trends such as retail sales and employment.

ECU - European Currency Unit.

EDI - Electronic Data Interchange.

Effective Exchange Rate - An attempt to summarize the effects on a country's trade balance of its currency's changes against other currencies.

EFT - Electronic Fund Transfer.

EMS - European Monetary System.

European Monetary System - A system designed to stabilize if not eliminate exchange risk between member states of the EMS as part of the economic convergence policy of the EU. It permits currencies to move in a measured fashion (divergence indicator) within agreed bands (the parity grid) with respect to the ECU and consequently with each other.

Exchange control - Rules used to preserve or protect the value of a countries currency.

Exotic - A less broadly traded currency.

Exposure - In foreign exchange, a potential for gain or loss because of movement in foreign exchange rate. There are three primary types of exposure:

Economic: The change in future earning power and cash flow arising from a change in exchange rates. In effect, it represents a change in the value of a company holding foreign currency.
Transnational: A potential gain or loss arising from transactions that will definitely occur in the future, are currently in progress, or could have already been completed. A signed but not shipped sales contract, a receivable or foreign currency payment collected but not converted to local currency would all be examples of transaction exposure.
Translation: The potential for change in reported earnings and/or the book value of the consolidated company equity accounts, as the result of a change in foreign exchange rates used to translate the foreign currency statements of subsidiaries and affiliates known as accounting exposure.

The History of Foreign Exchange

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History of Foreign Exchange

The foreign exchange market (fx or forex) as we know it today originated in 1973. However, money has been around in one form or another since the time of Pharaohs. The Babylonians are credited with the first use of paper bills and receipts, but Middle Eastern moneychangers were the first currency traders who exchanged coins from one culture to another. During the middle ages, the need for another form of currency besides coins emerged as the method of choice. These paper bills represented transferable third-party payments of funds, making foreign currency exchange trading much easier for merchants and traders and causing these regional economies to flourish.

From the infantile stages of forex during the Middle Ages to WWI, the forex markets were relatively stable and without much speculative activity. After WWI, the forex markets became very volatile and speculative activity increased tenfold. Speculation in the forex market was not looked on as favorable by most institutions and the public in general. The Great Depression and the removal of the gold standard in 1931 created a serious lull in forex market activity. From 1931 until 1973, the forex market went through a series of changes. These changes greatly affected the global economies at the time and speculation in the forex markets during these times was little, if any.

The Bretton Woods Accord

The first major transformation, the Bretton Woods Accord, occurred toward the end of World War II. The United States, Great Britain and France met at the United Nations Monetary and Financial Conference in Bretton Woods, N.H. to design a new global economic order. The location was chosen because, at the time, the U.S. was the only country unscathed by war. Most of the major European countries were in shambles. Up until WWII, Great Britain's currency, the Great British Pound, was the major currency by which most currencies were compared. This changed when the Nazi campaign against Britain included a major counterfeiting effort against its currency. In fact, WWII vaulted the U.S. dollar from a failed currency after the stock market crash of 1929 to benchmark currency by which most other international currencies were compared. The Bretton Woods Accord was established to create a stable environment by which global economies could restore themselves. The Bretton Woods Accord established the pegging of currencies and the International Monetary Fund (IMF) in hope of stabilizing the global economic situation.

Now, major currencies were pegged to the U.S. dollar. These currencies were allowed to fluctuate by one percent on either side of the set standard. When a currency's exchange rate would approach the limit on either side of this standard the respective central bank would intervene to bring the exchange rate back into the accepted range. At the same time, the US dollar was pegged to gold at a price of $35 per ounce further bringing stability to other currencies and world forex situation.

The Bretton Woods Accord lasted until 1971. Ultimately, it failed, but did accomplish what its charter set out to do, which was to re-establish economic stability in Europe and Japan.

The Beginning of the free-floating system

After the Bretton Woods Accord came the Smithsonian Agreement in December of 1971. This agreement was similar to the Bretton Woods Accord, but allowed for a greater fluctuation band for the currencies. In 1972, the European community tried to move away from its dependency on the dollar. The European Joint Float was established by West Germany, France, Italy, the Netherlands, Belgium and Luxemburg. The agreement was similar to the Bretton Woods Accord, but allowed a greater range of fluctuation in the currency values.

Both agreements made mistakes similar to the Bretton Woods Accord and in 1973 collapsed. The collapse of the Smithsonian agreement and the European Joint Float in 1973 signified the official switch to the free-floating system. This occurred by default as there were no new agreements to take their place. Governments were now free to peg their currencies, semi-peg or allow them to freely float. In 1978, the free-floating system was officially mandated.

In a final effort to gain independence from the dollar, Europe created the European Monetary System in July of 1978. Like all of the previous agreements, it failed in 1993.

The major currencies today move independently from other currencies. The currencies are traded by anyone who wishes. This has caused a recent influx of speculation by banks, hedge funds, brokerage houses and individuals. Central banks intervene on occasion to move or attempt to move currencies to their desired levels. The underlying factor that drives today's forex markets, however, is supply and demand. The free-floating system is ideal for today's forex markets. It will be interesting to see if in the future our planet endures another war similar to those of the early 20th century. If so, how will the forex markets be affected? Will the dollar be the safe haven it has been for so many years? Only time will tell.