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ovember 2006olume 3, No. 11

NEW YEAR,

SAME OLD DOLLAR?

2007 U.S. dollar and

economic outlook p. 8

EURO BY THE NUMBERS:

Tendencies, characteristics,

and patterns p. 12

CURRENCY TRENDS

and volatility p. 20

INTRADAY

CURRENCY SYSTEM:

CMO-forex p. 26

TRADE JOURNAL:Kiwi/U.S. dollar

trade analysis p. 42

REFCOFX CUSTOMERS

go to court p. 29

Strategies, News, and Analysis for Forex Trader

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Contributors . . . . . . . . . . . . . . . . . . . .6

Global Markets . . . . . . . . . . . . . . . . . .8Dollar doldrums

The buck outlook: Will the dull dollar

limp into a new year, or is it poised

for a new trend? Perhaps the economic

data holds some clues.

By Currency Trader Staff

Trading Strategies . . . . . . . . . . . . .12Breaking down the euro

Studying the euros daily and intraday

performance statistics offers guidelines

for systematic and discretionary traders.

by Currency Trader Staff

Advanced Strategies . . . . . . . . . . .20Currency trends and volatility

Interesting insights come from putting

currency volatility under a microscope.

By Howard L. Simons

Currency System Analysis . . . . . .26Intraday CMO-FX

Industry News

CME, CBOT join forces . . . . . . . . . .28The Chicago Mercantile Exchange and

the Chicago Board of Trade announced a

merger in late October, creating what would

be the worlds largest derivatives exchange.

Lawsuit latest twist

in RefcoFX saga . . . . . . . . . . . . . . . .29After twice having deals for the company

fall through and seeing RefcoFX cease

operations, customers of the brokerage

are filing suit to regain lost account balances.

Competition gives collegians

early entry into forex trading . . . . . .29Finance students from 15 colleges took

part in a forex trading contest.

CONTENTS

2 November 2006 CURRENCY TRADER

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4/454 November 2006 CURRENCY TRADER

CONTENTS

Have a question about something youve seen inCurrency Trader?

Submit your editorial queries or comments to

[email protected].

Looking for an advertiser?Consult the list below and click on the company name for a direct link to the ad in this months

issue ofCurrency Trader.

Index of advertisers

Currency Futures

FX futures hit

new volume highs . . . . . . . . . . . . . .32Forex futures at the Chicago Mercantile

Exchange post record volume in September.

Currency fund manager

performance . . . . . . . . . . . . . . . . . . .32

International

Market Summary . . . . . . . . . . . . . . .34

Global News Briefs . . . . . . . . . . . . .36

Events . . . . . . . . . . . . . . . . . . . . . . . . 38Conferences, seminars, and other events.

New products and Services . . . . .38

Key Concepts . . . . . . . . . . . . . . . . . . 39References and definitions.

Global Economic Calendar . . . . . .40Key dates for currency traders.

Forex Trade Journal . . . . . . . . . . . .42Will the kiwi provide a kick?

FXCM

Forex.com

InterbankFX

NewsTrader Pro

MetaStock

FXCM Currency Trading Expo

Las Vegas Traders Expo

Currency Trader Bookstore

Futures Trading Summit

PFG Forex
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Editor-in-chief: Mark Etzkorn

[email protected]

Managing editor: Molly Flynn

[email protected]

Contributing editors: Jeff Ponczak

([email protected]),

David Bukey ([email protected])

Contributing Writers:

Marc Chandler, Barbara Rockefeller

Editorial assistant and

Webmaster: Kesha Green

[email protected]

Art director: Laura Coyle

[email protected]

President: Phil Dorman

[email protected]

Publisher,

Ad sales East Coast and Midwest:

Bob Dorman

[email protected]

Ad sales

West Coast and Southwest only:

Allison Ellis

[email protected]

Classified ad sales: Mark Seger

[email protected]

Volume 3, Issue 11. Currency Traderis published monthly by TechInfo, Inc.,150 S. Wacker Drive, Suite 880, Chicago, IL 60606. Copyright 2006TechInfo, Inc. All rights reserved. Information in this publication may not bestored or reproduced in any form without written permission from the publisher.

The information in Currency Tradermagazine is intended for educational pur-poses only. It is not meant to recommend, promote or in any way imply theeffectiveness of any trading system, strategy or approach. Traders are advisedto do their own research and testing to determine the validity of a trading idea.Trading and investing carry a high level of risk. Past performance does notguarantee future results.

For all subscriber services:www.currencytradermag.com

A publication ofActive Trader

CONTRIBUTORSCONTRIBUTORS

Volker Knapp has been a trader, sys-

tem developer, and researcher for more

than 20 years. His diverse background

encompasses positions such as German

National Hockey team player, coach of the Malaysian

National Hockey team, and president of VTAD (the

German branch of the International Federation of

Technical Analysts). In 2001 he became a partner in

Wealth-Lab Inc., which he is still running.

Howard Simons is president of

Rosewood Trading Inc. and a strategist for

Bianco Research. He writes and speaks fre-

quently on a wide range of economic and

financial market issues.

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T he U.S. dollar story of late has been themarked lack of a story. Despite the expectedend of U.S. Federal Reserve tightening,nuclear tests by North Korea, a coup inThailand, rumblings in Iran, a drop in crude oil prices, andthe upcoming U.S. mid-term elections, the trade in thegreenback has been, well, boring (see Figures 1 and 2).

Implied volatility levels in euro/dollar (EUR/USD) anddollar/yen (USD/JPY) options have plunged, reflecting thestability or stagnation surrounding the dollar.

IFR-Forex Watch managing analyst Jamie Coleman notesthat major issues such as the North Korean nuclear test tra-ditionally would have sparked a surge in volatility.

In the old days, that would have gotten us rocking androlling, and today we just sit back and yawn, Colemansays.

SidewinderA look at a daily EUR/USD chart (Figure 3) shows the paircomfortably ensconced in a range between roughly $1.30and $1.2450 since mid-May.

The guys whose profits depend on movement inexchange rates are really struggling, says Bob Lynch, headof G-10 FX strategy-Americas for HSBC. We saw a bighedge fund blow up, as well as geopolitical events, and yetthey have not done anything to generate a breakout in thedollar.

Three-month statistical volatility is below 6 percent for

EUR/USD, the lowest on record since the euro waslaunched in January 1999, notes Sean Callow, senior cur-rency strategist at Westpac Institutional Bank.

One-year yen option volatilities are extremely low at7.75 percent, according to Brian Dolan, director of researchat Forex.com, a division of Gain Capital. He says a typicalrange for that option volatility is 9 to 12 percent.

Anything sub-9 percent is considered low, he says.

The $1.30 line in the sandIts no secret European finance ministers dont want to see theeuro/dollar push above $1.30. Concerns regarding exportcompetitiveness with a euro/dollar above $1.30 have kept

GLOBAL MARKETS

The dollar has been in a coma, despite a raft of notable economic and geopolitical catalysts.

Any number of events could eventually breathe life back into the market, but given past performance,

its difficult to conclude when the patient might come off life support.

Dollar doldrums


BY CURRENCY TRADER STAFF

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9/45CURRENCY TRADER November 2006 9

European finance ministers busy jawbon-ing the currency down from that level.

However, it is not just the Europeanswho seek to keep the U.S. dollar withinrecent ranges.

Various central banks have beenactively selling euros above $1.28 andbuying euros around $1.24 to 1.25, Dolansays.

IFRs Coleman says the euro/dollar stability reflects a structural change. Chinaand other Asian central banks have a vest-ed interest in U.S. dollar stability.

If they are going to be long a trillion

dollars, theyd rather not see it appreciateor depreciate rapidly, he says.

Chinese reserves of U.S. dollars totaledaround $769 billion as of the end ofSeptember, but speculation is rampantthat it will quickly hit the $1 trillion mark.

At the pollsMost market watchers expect the Nov. 7 U.S.midterm elections to come and go without ablip on forex screens. Analysts say the marketsare priced for the Democrats to regain control of

one or both of the houses in Congress. But thelikely resulting deadlock between a Republicanpresident and a democratic congress makes thescenario a non-event for the forex markets.

The surprise would be if Republicans main-tained control, says Jim Glassman, senior econ-omist at JP Morgan Chase. But even that, hesays, is not likely to spark currency action.

The markets just view it as a gridlocked gov-ernment, he says.

U.S. rates: The Feds next move

A more important factor for currency traders tomonitor is the U.S. Federal Reserve. The Fed has been on hold since its late-June interest-ratehike, which took the Fed funds rate to 5.25 per-cent.

Some analysts say the next move could be acut in early 2007, while others warn there couldbe additional monetary tightening in this cycle.The Fed is scheduled to meet next on Dec. 12,but for now market watchers expect no change in rates atthat meeting.

Unexpected resilience in the U.S. economy could put aFed rate hike back on the agenda, Westpacs Callow says.

He says if that were to occur, it should produce a downsiderange break in the euro/dollar.

Conversely, Dolan believes if the Fed shifts toward easing

The U.S. dollar index has chopped up and down in 2006 after establishing a

yearly low in May.

FIGURE 1 DOLLAR ON A LEASH AND COLLAR

Source: TradeStation

The monthly dollar index chart is, interestingly, similar to the daily

chart: A sell-off followed by a consolidation. The congestion in Figure

1 is simply part of a larger consolidation dating back to 2004.

FIGURE 2 DIFFERENT TIME FRAME, SAME STORY


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in 2007, the dollar could come off strong.The euro/dollar could challenge $1.30, he says.

U.S. economic overview

A distinct economic slowdown has been recorded in recentquarters in the U.S. After a whopping 5.6 percent grossdomestic product (GDP) reading in the first quarter of 2006,readings tapered off to 2.6 percent in the second quarter,with preliminary readings for the third quarter scheduledfor release on Nov. 29. Briefing.com forecasts a 2.0 percentQ3 reading.

The big question is the status of the U.S. slowdown andif we see a recovery into late 2006 and 2007, says Lisa

Finstrom, senior financial futures analystat Citigroup.

The main culprit behind the slowdown?

Analysts say the restrictive monetary poli-cy sparked a retreat within the housingsector.

Housing will have a strong and nega-tive ripple affect on the rest of the econo-my, says Paul Kasriel, chief economist atNorthern Trust & Co. A large portion of jobs created in this expansion were inhousing. House prices are falling now.Home ATM machines are no longer refill-ing. Housing is contracting and consumerspending has slowed.

Kasriel believes the U.S. economy is infor a number of quarters of growth below3.0 percent, even 2.5 percent or less. Hesays recession worries will bring Fed rate-cut talk to the FOMC table over the nextseveral months.

High crude oil prices have also been akey factor for the economy. Novembercrude oil futures have plummeted from

over $80 per barrel in mid-July to below $60 per barrel as oflate October. However, some believe the benefits may bemuted.

Even though $60 is better than $80, it is not like the ener-gy drop has given a huge shot in the arm to the economy,says Ken Goldstein, economist at The Conference Board inNew York City. We will end the year with consumer confi-dence that has cooled off considerably.

Factors to watchAs always, there are potential wildcards that could shakeup U.S. dollar action. The U.S. housing market still looms

large. While prices have decelerated insome parts of the U.S., if an all-outplunge were to occur, that could poten-

tially force the U.S. Federal Reserve toconsider cutting U.S. interest rates,which generally is considered a bearishfactor for the greenback.

Also, traders should keep on an eyeon upcoming trade deficit data. Thelatest numbers available in lateOctober revealed a $69.9 billion deficitin August, up from Julys $68 billiondeficit. However, Tim Mazanec, seniorforeign exchange strategist atInvestors Bank & Trust, says fallingcrude oil prices could help narrow the

GLOBAL MARKETS continued

The EUR/USDs extended range has dropped volatility readings (bottom)

to their lowest levels since the euros launch in 1999.

FIGURE 3 EURO/DULLER


HIT YOUR MARK!Advertise in

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Ad sales East Coastand Midwest

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trade deficit in the months ahead.So far, the trade deficit figures have

been expanding the wrong way, he

says. But we havent seen the impactfrom lower crude prices yet. That willhelp lower the deficit.

Mazanec speculates the trade deficitcould narrow toward the $63 or $62 bil-lion mark, which should emerge in thenext report or two, he says. That is oneitem that could break us out of the range it could send the euro to $1.23, henotes.

Traders can mark their calendars forNov. 9 at 7:30 a.m. ET, when September

trade balance data is scheduled forrelease.

These days, certain issues are neverfar from the minds of traders.

Another terror attack on U.S. soilwould spark U.S. dollar selling as theU.S. stock market reversed, WestpacsCallow says. Or, if China came out witha surprise relaxation of its FX regime,this would send dollar/yen sharply lower.

Another factor to watch are hedge funds, in the wake ofthe September news that Amaranth Advisors had lost more

than $3 billion from collapsing natural gas prices.It is entirely likely we havent seen the last hedge fund

to have problems, Goldstein says. If the U.S. stock and bond markets were to make quick U-turns, look for fire-works out of the financial markets, because there have beenso many speculative bets.

Gains Dolan points to Iran as another flashpoint.There is significant potential for U.S. military action

against Iran, he says. A significant regional crisis couldsend oil up toward $100 per barrel.That would disrupt U.S. and Europeaneconomies, and the dollar would prob-

ably be the biggest loser in that situa-tion.

Whats a forex trader to do?The euro/dollar rate has been rangy,Mazanec says. Trade the range withconfidence. He cites key levels at$1.2480 and $1.2750.

Westpacs Callow sees theEUR/USD at $1.28 at year-end, withpotential for USD/JPY to move toward114.00 over the next eight weeks.

Dollar/yen should be more lively

than euro/dollar into 2007, Callow says. The Bank of Japan has been paying attention to the huge amount ofmoney placed in yen carry trades and could upset thesetrades by monitoring those borrowing at the Lombard rate

(currently at 0.4 percent) more closely.December 2005 saw dollar/yen slide over four yen in

just two to three days, he adds. Attempts to lock in prof-its on carry trades in December could produce similar priceaction.

The bottom line is these ranges wont be sustained indef-initely.

The question is, when will the break occur and whatwill be the catalyst? HSBCs Lynch says.

The dollar/yen pair has rallied off its May low, and some market watchers

see more potential for movement in this rate than EUR/USD.

FIGURE 4 WHERE THE ACTION WILL BE?

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Picture this situation: Youve been bullish the

euro/U.S. dollar pair (EUR/USD), which has

sold off early in the morning and is now

down 0.0025 points. You step up and put on

a long position and, after taking a little heat five ticks or

so the market begins to move your way.

Then news hits the wires and propels the euro upward

and the price is now 0.0075 points above yesterdays close.

Do you look at this as a gift that should be accepted imme-

diately? Or should you hold on because this might be the

start of an unusually big day?

To be able to make a decision based on probabilities

rather than your gut feeling,

youd need to know the typical

behavior of the EUR/USD pair.

How many EUR/USD tradersknow what the average daily

range is for this 24-hour mar-

ket? What time of day is typi-

cally the most volatile?

Knowing the typical behavior

helps you make better decisions

during the trading day as well

as enhance trading systems.

The following study reviews

one year (Sept. 1, 2005 to Aug. 31,

2006) of EUR/USD price data.Figure 1, which is a daily bar

chart of the review period, shows

the analysis period contained

uptrending, downtrending, and

sideways market conditions.

Additionally, intraday analysis of

the most volatile periods of the

trading day was performed over

the period from Aug. 1, 2006 to

Sept. 15, 2006 using 60-minute

bars.

TRADING STRATEGIES

Breaking downthe euro

How far can the euro drop and still close higher on the day? If youre trading the EUR/USD rate,

this is just one of the stats you should have at your fingertips.

FIGURE 1 ANALYSIS PERIOD

Source: CQGNet (www.cqg.com)

The review period encompasses uptrends, downtrends, and trading ranges.

BY CURRENCY TRADER STAFF
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Daily price analysis:

Ranges and close-to-close changes

First, the ranges for each day are sorted from smallest to

largest, as shown in Figure 2. The smallest range was 0.0026points, the widest was 0.0233 points, and average was

0.0099 points.

Figure 3 is a frequency distribution that shows how often

daily ranges of different sizes occurred. The vertical axis

shows the number of occurrences. The horizontal axis

shows the different daily ranges. For example, 0.0050

shows the number of daily ranges that are greater than

0.0040 up to and including 0.0050; in this case, there were

13 occurrences. There was only one day with a range above

0.0020 up to and including 0.0030. (This happened to be

April 14, 2006, which had a range of 0.0026 points.)The most occurrences (33) fell in the 0.0070 category. The

daily range was larger than 0.0110 points only 33 percent of

the time, which means if the daily range has already

exceeded 0.0110 points, the probability the market will

extend its range are quickly diminishing.

Although the average daily range was 0.0099 points, the

average close-to-close change (up or down) was only 0.0050

points. If the market closed up, which occurred 125 times

during the review period, the average close-to-close gain

was 0.0055 points. If the market closed down, which

occurred 133 times, the average close-to-close loss was

0.0049 points. (The market closed unchanged only twice

during the review period.) Figure 4 shows the frequency

distribution for close-to-close differences. The absolute

value was used for negative closes.

There is a noticeable drop in close-to-close differences

continued on p. 14

FIGURE 2 DAILY RANGES


Sorting the daily ranges from smallest to largest does not

indicate there is any typical range.

FIGURE 3 DISTRIBUTION OF DAILY RANGES


Forty-five percent of daily ranges are clustered in the top four

categories (group 0.0070 to group 0.0100), which represent

daily ranges run larger than 0.0060 and up to 0.0100 points.

FIGURE 4 DISTRIBUTION OF

CLOSE-TO-CLOSE CHANGES


During the review period the close-to-close daily change was

0.0030 points or less 104 times (40 percent). The close-to-

close change exceeded 0.0080 only 18 percent of the time.
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TRADING STRATEGIES continued

larger than 0.0080 points (up or down).

Consequently, if the market is up or down more

than this amount, the chances of the close

exceeding this level drops off dramatically. In

fact, a close-to-close change larger than 0.0080

points occurred only 48 times (18 percent).Another perspective is to look at how far the

euro moved up or down from the previous

days close on up-closing days and down-clos-

ing days. Figure 5 shows the 125 days on which

the euro closed up for the day. The low, high,

and close for each bar is shown relative to the

previous days close (the zero line). On days the

euro closes higher, the market rarely moves

more than 0.0050 points below the previous days close.

For a clearer view of the down moves the euro makes on

up-closing days, Figure 6 shows the distribution of the dif-ferences between the low and the previous close for those

days the market closed higher. For example, if the market

FIGURE 6 MAX DOWN MOVES ON DAYS

THE EURO CLOSED HIGHER

Once the euro traded more than 0.0050 points below the pre-

vious days close, it had little chance of closing up on the day.

FIGURE 5 MOVES FROM PREVIOUS DAYS CLOSE


On most up-closing days, the euro usually did not trade more than

0.0050 below the previous days close.


Currency characteristics: Euro

Some insights from analyzing the euro from Sept. 1, 2005

to Aug. 31, 2006:

1. The euros average daily range was 0.0099, and the

range exceeded 0.0110 only 33 percent of the time.

The range was most often between 0.0060 and

0.0070.

2. The close-to-close change exceeded 0.0080 only 18

percent of the time.

3. Once the euro has traded more than 0.0050 pointsbelow yesterdays close, there is only a 4-percent

chance it will recover to close higher on the day.

4. Once the euro is up more than 0.0045 points from

yesterdays close, the odds are less than 10 percent

that it will close lower on the day.

5. The most volatile 60-minute bars were the 07:00

(CT) hour (0.0026-point median range) and the

09:00 hour (23-point median range).

continued on p. 16
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traded 0.0022 points below the previous days

close and the market closed in positive territo-

ry for the day, then that day landed in the

-0.0030 category.

The market opened above the previous

days close and never traded in negative terri-tory 10 times. Also, there were only 10 times

the market traded more than 0.0045 points

below the previous close and still closed high-

er. Once the euro has traded more than 0.0050

points below yesterdays close, there is only a

4-percent chance it will recover to close higher

on the day.

Figure 7 examines the opposite scenario: the

difference between the previous days close

and the high on the days the market closed

lower. It shows each down-closing days high,low, and close relative to the previous days

close. Figure 8 shows the distribution of the

differences between the high and the previous

close for those days the market closed lower. The market

was up by more than 0.0045 points and still closed down

24 times just less than 10 percent. The market traded up

by 0.0025 points or less and then reversed to close lower 30

percent of the time. The euro never traded above the pre-

vious close only two times.

Intraday analysisThe intraday analysis was based on 60-minute price bars,

using use a 24-hour clock referencing Central Time (CT).

Each Friday, the market closes at 15:00 (3:00 p.m. CT) and

reopens at 16:00 (4:00 p.m.) on Sunday. On the other days

of the week, the close occurs at 23:59 (11:59 p.m.) and the

market reopens at 0:00 (12:00 a.m.). Figures 9 and 10 are

60-minute bar charts of the euro.

Visual inspection suggests a pattern of short-term but

dramatic moves followed by trading ranges. To determine

which periods, if any, are more likely to trend, the high-

low range of each 60-minute bar was calculated and both

FIGURE 7 MAX UP MOVES ON DAYS THE EURO CLOSED LOWER


Each days price action is plotted relative to the previous days close

(the zero line).

FIGURE 8 DOWN-CLOSING DAYS: MAXIMUM

INTRADAY UP MOVES


The euro gained more than 0.0045 points and still closed

down less than 10 percent of the time.

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the average and the median

ranges were determined for

each 60-minute bar. (The

median is included because it

measures the center point in

the ranges; if the average dif-fers dramatically from the

median, outliers are skewing

the data.) Figure 11 shows

the average and median

ranges for each 60-minute

time period.

On average, the most

volatile 60-minute bar was

the 07:00 hour, which had an

average range of 0.0032

points (and a median of0.0026 points). Next in line

was the 09:00 hour, with an

average range of 0.0028

points (0.0023 points medi-

an).

Figure 12 displays the

individual ranges for the

07:00 hour. There was one

very large range of 0.0093

points. Three bars had ranges

that peaked out just above0.0060 points and three oth-

ers topped out just above

0.0050 points.

Figure 13 shows individ-

ual ranges for the 12:00 hour.

Although the ranges were as

large as 0.0025 points and as

low as 0.0008 points, the typ-

ical range was between

0.0010 and 0.0015 points.

FIGURE 10 60-MINUTE BARS, AUG. 23, 2006 THROUGH SEPT. 15, 2006


The euro exhibited dramatic short-term moves interspersed with consolidations.

FIGURE 9 INTRADAY PRICE ACTION


The intraday analysis was based on a 24-hour session. The market reopens at midnight each

night, except on Fridays, when the market closes at 15:00 and reopens at 16:00 Sunday.

continued on p. 18

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Operating with a map, not your gut

All markets have tendencies. Understanding them helps a

trader progress from relying upon intuition to working

with solid guidelines. Currency characteristics: Euro

summarizes some of the highlights from this analysis of the

euro. Such tendencies can provide the basis of a trading sys-

tem or, if nothing else, reduce discretionary traders likeli-

hood of second-guessing a decision in the middle of a busy

trading day.

One 0.0093-point outlier pushed the average range

figure higher than the median range.

FIGURE 11 60-MINUTE RANGES

(AUG. 1, 2006 AUG. 22, 2006)


Most of the time, the euros 60-minute ranges were

between 0.0010 and 0.0015 points. Between 07:00 and

09:00 CT, however, volatility climbed.

FIGURE 13 RANGE FOR THE 12:00 HOUR


The 12:00 bars are more consistent in size both the

average and median ranges were 0.0013 points.

Related reading

Trading the Euro inside out

Currency Trader, September 2005.

Analysis of inside and outside days in the Eurocurrency

futures offer some interesting surprises as well as

clues for how to trade this market.

The euro FX vs. the E-Mini S&P and 10-year T-note

Currency Trader, May 2005.

This article looks at the relationships between thesethree markets and examines the trending characteristics

of each over different time frames.

The euro and stock market indices

by Thom Hartle

Currency Trader, December 2005.

This article builds upon the relationships between the

euro and the stock market, looking at one sub index in

particular: the Morgan Stanley Commodity Index, an

equity index that tracks companies that produce basic

commodities.

Intraday euro FX momentum trading

Active Trader, April 2004.

The Polychromatic Momentum system previously used

to trade the QQQQs is tested on the euro futures to see

what it produces in a new market.

You can purchase and download articles at

www.activetradermag.com/purchase_articles.htm


FIGURE 12 RANGE FOR THE 7:00 HOUR
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Volatility is at once oneof the more fascinating,

useful and misun-derstood topics in

finance. The fascination stems fromits ephemeral nature. Volatility is themarkets cost of insuring againstuncertain events arriving at uncertaintimes with uncertain impacts. Risk isquantifiable; uncertainty is not. Butthe world is an uncertain place, andthus we must hedge ourselves thebest we can.

Why is volatility misunderstood?

Too many people view a time series ofvolatility as if it were a continuousprocess, such as a stock or bond price.It is not an asset, attempts by variousexchanges to make it one notwith-standing. Volatility has no naturalreturn such as a coupon or dividend.At best, volatility is an attribute ofother asset classes, not an asset classper se.

Finally, why is it so useful? Markets are a convergentsearch process (by price) for some underlying economic

value. As price rises and falls, the direction of volatility tellsus who the more anxious party is buyers or sellers. Thatis useful information. Moreover, volatility often leads pricechanges, as its patterns effectively carve a path of leastresistance in the market: Money flows toward calm andaway from anxiety.

Currency volatility

It stands to reason volatility would be particularly useful incurrency markets. The fundamental currency equation hasthree unknowns and therefore cannot be solved exactly, andmuch of the trade in currencies is in options and option-likeinstruments. Demand for caps and floors must, by defini-

tion, be reflected in the prices for these instruments, andhigher volatility by definition must discourage furtherdemand for these hedging vehicles.

Lets take a look at how volatility interacts with pricetrends over long periods of time for the Canadian dollar(CAD), Japanese yen (JPY), and British pound (GBP). Theeuro would be a preferable choice, but its history beganonly in 1999.

We need to define some of the measures used, particular-ly Parkinsons high-low-close (HLC) volatility and its asso-ciated trend oscillator. First, we need to create an N-daytrend speed, which represents the number of days between4 and 29 that minimizes the following function, in which Pis price, MA is a simple moving average and Vol2 is the N-day HLC volatility measure.

ADVANCED STRATEGIES

Currency trendsand volatility

Volatility can tell you a lot about

how a certain currency behaves

if youre ready to hear the unexpected truth.

BY HOWARD L. SIMONS

Although the CAD trend since January 2002 has been almost exclusively

higher, excess volatility trended lower (from its 1998 peak) until mid-2006.

FIGURE 1 DECREASING MARKET COMFORT WITH RISING CAD

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Function 1:

Once N is selected we can calculate thetrend oscillator, which is normally distrib-uted; movements outside the range of

0.40 tend to indicate overbought andoversold conditions.

Function2:

The HLC volatility is calculated from the same N-day critical trend speed. Thishistorical volatility has the advantage of incorporating both intraday true pricerange and interday change into its calculation.

As a market meanders in a trading range, intraday range dominates interday

change and volatility rises. As a market moves in a strong directional trend,interday price change dominates intraday range and volatility (uncertainty)falls.

Function 3:

Volatility does not exist in a vacuum, however. If we view the options market as

a form of insurance, we can readily see how forward-looking option impliedvolatility needs to be placed into context against backward-looking HLC volatil-ity. It is the excess of price insurance against a historic relative frequency meas-ure that counts similar to comparing flood insurance costs between coastaland upland regions. Yes, it costs more to buy flood insurance near the water, butrelative to the actual risk, the price of the insurance itself may be cheap. We willuse the ratio of implied volatility to HLC volatility to measure the fair value ofinsurance in a market.

Case study 1:

The Canadian dollar

Over the available data sample, the CAD has undergone one secular trend

Plotting excess volatility against the CADs trend oscillator shows excess

volatility rises during sell-offs, while it increases only modestly in very strong

uptrends. The implication: Put option (floor) buyers tend to be more anxious in

the CAD market.

FIGURE 2 CAD INSURANCE COSTS JUMP IN DOWNTRENDS

continued on p. 22

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ADVANCED STRATEGIES continued

change. It weakened precipitouslyinto 1998, stabilized and then made alow in January 2002 (Figure 1). Thetrend since then has been almost con-tinuously higher. Given the commentabove about HLC volatility decliningduring strong trends, we would bewithin our rights to expect excessvolatility to rise against this smallerdenominator.

In reality, however, excess volatilitytrended lower from its 1998 peak untilmid-2006. This could mean the mar-ket had been quite comfortable with

the rising trend level of the CAD.Until quite recently, those who werelong the CAD see no reason to paymore for floors, and those who were

short the CAD saw no reason to paymore for caps.The same phenomenon is apparent

when mapping excess volatilityagainst the CADs trend oscillator.The pattern is asymmetric: Excessvolatility rises during sell-offs such as1997-1998, while very strong uptrendsproduce only a modest increase inexcess volatility (Figure 2). From thiswe can conclude the more anxiousparty in the CAD market is the putoption, or floor buyer.

The yens dominant feature over the study period is the 1995-1998 sell-off. After

a violent rebound in October 1998, the yen mostly settled into a trading range

between 100 and 125. Although a large number of event-driven, excess-volatili-

ty spikes occurred during this period, no significant volatility trend is apparent.

FIGURE 4 YEN VOLATILITY JUMPS WITHIN TRADING RANGE

Both skewness and kurtosis in the CAD flattened when the euro was introduced

in 1999 evidence the euro led to significantly lower volatility in global

currency markets.

FIGURE 3 GREATER STABILITY OF RETURN FOR RISING CAD

AFTER INTRODUCTION OF EURO

Volatility often leads

price changes, as its

patterns carve a path of

least resistance: Money

flows toward calm and

away from anxiety.

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trend oscillator (Figure 5). The increase in insurance costs isrelatively symmetrical between strong uptrends and strongdowntrends. The market senses, correctly, that the Japaneseofficial policy will be to prevent emergence from the range.

Despite this symmetrical distribution of volatility, we

cannot conclude the sentiment of JPY traders is symmetri-cal. The six-month rolling skew of JPY returns remainsstrongly biased toward positive values, indicating the yencall option and cap buyers are the more anxious to seekprotection (Figure 6). The large quantities of JPY borrowedduring the 2001-2005 quantitative easing campaign created

a large number of traders with shortJPY positions. The JPY they borrowedhad to be repaid at some point, which biases the distribution of returns tothe upside.

Even with this positive skew, thedistributions of returns remain fairlynormally distributed around themean. Just as was the case for theCAD, the key date remains mid-1999,six months after the introduction ofthe euro. Prior to 1999, JPY returns

clustered about the six-month rollingmeans with little deviation. Traderssensed there was a right place to be inthis market, and everyone sensed it atonce.

Case study 3: The British

pound

The GBP/USD exchange rate isnowhere near as important to theBritish economy and its financialmarkets as is the GBP/EUR. As a

result, the pounds volatility vs. thedollar has been largely unresponsiveto price. There are only a few excep-tions, such as the January 1999 intro-duction of the euro and the stronguptrend in late 2003-early 2004(Figure 7).

Although we should expect trendand volatility to be somewhat unrelat-ed given these observations, the dataindicate otherwise (Figure 8). Thesame symmetrical increase in discom-

fort with strong trends we saw in theJPY occurs here, even though the GBPchart is replete with sustained pricetrends. Each move toward a trendextreme in invites an insuranceresponse.

Finally, both the skewness and kur-tosis of the GBP remains clusteredaround zero; this has especially beentrue since the 1999 introduction of theeuro (Figure 9). Traders in theGBP/USD rate have no particularhedge bias, and the relatively small

ADVANCED STRATEGIES continued

The symmetrical increase in discomfort with strong trends apparent in the JPY

is also evident in the GBP. Each move toward a trend extreme results in an

insurance response.

FIGURE 8 VOLATILITY RESPONSE TO TREND REMAINS MODEST

With the exception of a few episodes (e.g., the January 1999 euro introduction

and the 2003-early 2004 uptrend), the pounds volatility vs. the dollar has been

generally unaffected by price level.

FIGURE 7 POUND VOLATILITY UNRESPONSIVE TO PRICE

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importance of this rate relative to theGBP/EUR means few traders feelexposed in a major way.

Volatilitys lesson

Too many technicians persist in treat-

ing markets symmetrically. They sayeach one is just numbers with asmugness designed to hide their ownlaziness. The lesson from volatility,though, is each market has its ownunique characteristics and rhythms.Trading a single system on them as ifthey are substitutes is an approachdestined to end in failure.

For information on the author see p. 6.

Howard Simons will speak on How totrade the U.S. dollar at the Las VegasTraders Expo on Nov. 19 (www.lasveg-

astradersexpo.com).

Currencies and conventional U.S. investments

Currency Trader, October 2006.

The financial media often reports on moves in the stock and

bond markets vis--vis currency fluctuations, but these rela-

tionships might not be what you expect.

What does the dollar really affect?

Currency Trader, September 2006.

Find out how stocks, gold, and other markets actually respond

to changes in the dollar.

The dollar and its hidden risks

Currency Trader, August 2006.

A look at the dollar in light of its recent performance vs. the

yen and the euro.

Of commodities and currencies

Currency Trader, July 2006.

Analyzing historic market relationships reveals some

interesting facts about movements in many so-called

commodity currencies.

The yen carry trade, currencies, and U.S. bonds

Currency Trader, June 2006.

The latest source of anxiety for bond traders has some sur-

prising connections to the currency market. Find out the story

behind U.S. Treasuries, the Japanese yen, and the Chinese

yuan.

The euro index: The dollar index meets its match

Currency Trader, May 2006.

A look at the development of a viable and tradable euro

index.

The index approach to currency risk management

Currency Trader, April 2006.

Using dollar index futures to hedge non-dollar investments.

The yen stands alone

Currency Trader, March 2006.The usual rules of the currency world havent necessarily applied

to the Japanese yen. Will that continue to be the case?

Remember the forgotten currency

Currency Trader, February 2006.

Its often labeled a commodity currency, but the Canadian dollar

tends to be ruled by other factors. Heres a look at the factors

impacting Canadian dollar movements.

What drives the dollar index?

Currency Trader, January 2006.

Market watchers often point to deficits and interest-rate

differentials to explain the dollars behavior, but analysis shows

these factors might not be in the drivers seat after all.

The dollar index and firm exchange rates

Currency Trader, December 2005.

The majority of currency traders are familiar only with the current

floating-rate system. Are we about to enter a new firm exchange

rate era dominated by the dollar and euro?

Related readingOther Howard Simons articles:

The GBP skewness and kurtosis cluster around zero (especially since the 1999

introduction of the euro), which implies GBP/USD traders have no particular

hedge bias, while the relatively small importance of this rate relative to the

GBP/EUR means few traders feel major exposure.

FIGURE 9 GREATER STABILITY OF RETURN FOR GBP AFTER

INTRODUCTION OF EURO

Note: A special Howard Simons: Advanced Currency

Concepts, Vol. 1 article collection will be on sale until Dec. 3

through theActive Traderstore.

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26/45

Market: Euro/U.S. dollar rate (EUR/USD).

System concept: In his book The NewTechnical Trader (John Wiley & Sons, 1994),Tushar Chande introduced the ChandeMomentum Oscillator (CMO), a momentumindicator that ranges between +100 and -100and has default overbought and oversold levelsof +50 and -50, respectively.

The Trading System Lab in the December2003 issue ofActive Trader magazine incorporat-ed a daily CMO in the equity market. This testapplies a 14-period CMO on intraday forex data(2,500 hourly bars).

Initial chart analysis suggested the +50/-50rule overbought and oversold levels performedas well as trade triggers, especially when multi-ple entries are taken whenever the CMO cross-es below -50 (see Figure 1). After testing, how-ever, it was apparent this rule does a good jobmost of the time, but when it is wrong, it is real-

ly wrong.As a result, this system adds a conditional

time-based exit: If price is below the entry priceafter 20 bars, the system exits on the next barsopen. Also, a 0.2-percent profit target wasadded to help capture profits if the price goesup a little in the first 20 hourly bars and theCMO (14) does not cross above the overboughtlevel of +50. The system is long only.

The second entry signal in Figure 1 shows themarket missed the profit target and exited after20 bars with a small loss. The trade would have

been a winner if the system hadnt included thisexit rule, but that is the price you often pay forsecurity.

Rules:

1. Enter long at the next bars open if theCMO(14) crosses below -50.

2. Exit long if the CMO(14) crosses above +50.3. Exit long with a profit target of 0.2 percent.4. Exit long at the next bars open after 20 bars

if the price is below the entry price.

Starting equity: $20,000

CURRENCY SYSTEM ANALYSIS

Intraday CMO-FX


The CMO appears to catch the lows in this 60-minute chart of the

EUR/USD pair.

FIGURE 1 SAMPLE TRADES

Source for all figures: Wealth-Lab

STRATEGY SUMMARY

Profitability Trade statistics

Net profit $24,150 No. trades 47

Net profit (%) 20.75 Win/loss (%) 65.96

Exposure (%) 6.30 Avg. profit (%) 0.07

Profit factor 2.10 Avg. hold time 13.28

Payoff ratio 1.08 Avg. profit (winners) (%) 0.20

Recovery factor 1.92 Avg. hold time (winners) 9.19

Drawdown Avg. loss (losers) (%) -0.19

Max DD (%) 9.38 Avg. hold time (losers) 21.19

Longest flat days 26 Max consec. win/loss 8/3

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Money management/position sizing: Totrade one lot of the euro against the dollar($100,000), we assume a margin of $5,000. Eachsignal will buy one lot until there is not enough

margin to take another position.

Test data: The system was tested on 2,500 sixty-minute bars of EUR/USD from May 2006 untilSeptember 2006, using a 24-hour trading sessionstarting at midnight (ET).

Test results: The equity curve (Figure 2) has anice uptrend. The system produced $4,150 in prof-its in just about five months, which would trans-late into a 71-percent annualized gain.

The maximum drawdown was -$2,164 (only

9.38 percent), which occurred on Aug. 21, 2006(Figure 3).

Sixty-six percent of the tests 47 trades werewinners, and the average trade profit was $88.Remember, the system only trades on the fullhour, except when a profit target is hit, whichcould be at anytime. However, there were somerather large flat periods of approximately 26 days;for intraday traders this could represent a verylong time.

Bottom line: There are several issues to consid-

er with this strategy. First, the number of bars test-ed was probably not enough to draw extensiveconclusions even though 2,500 bars is theequivalent of approximately 10 years of daily data because it did not seem to encompass all typesof market scenarios. The parameters used herewere not optimized in any way, but it would beuseful to test more markets and more time peri-ods. However, the basic premise holds promise.

Volker Knapp of Wealth-Lab

Currency System Analysis strategies are tested on a

portfolio basis (unless otherwise noted) using Wealth-

Lab Inc.s testing platform. If you have a system youd

like to see tested, please send the trading and money-

management rules to:

[email protected].

Disclaimer: Currency System Analysis is intended foreducational purposes only to provide a perspectiveon different market concepts. It is not meant to rec-ommend or promote any trading system orapproach. Traders are advised to do their ownresearch and testing to determine the validity of atrading idea. Past performance does not guaranteefuture results; historical testing may not reflect a sys-tems behavior in real-time trading.

PERIODIC RETURNS ANALYSIS

This equity curve is the result of five months of intraday trading

using one lot per trade.

FIGURE 2 EQUITY CURVE

FIGURE 3 DRAWDOWN CURVE

Drawdown is shown here in terms of the initial account equity

($20,000). Drawdowns were modest, but the system did haverelatively long flat periods for an intraday approach.

% Max MaxAvg. Sharpe Best Worst Profitable consec. consec.

return ratio return return periods profitable unprofitable

Daily 0.18% 2.47 7.71% -7.75% 60.04% 4 3

Weekly 1.02% 3.55 5.61% -2.23% 63.16% 4 2

Monthly 3.87% 4.83 6.76% -0.50% 80.00% 3 1

CURRENCY TRADER November 2006 27
mailto:[email protected]:[email protected]:[email protected]

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As CEO of a company in the midst of one of themost successful IPOs in recent memory and a bal-

ance sheet flush with cash, Craig Donohue of theChicago Mercantile Exchange heard the question countlesstimes: When are you going to make an acquisition?

Donohue and the rest of the CME executives answeredthat with a bang in late October, merging with the ChicagoBoard of Trade in a deal that would create a company, calledthe CME Group, worth $25 billion and in control of almost90 percent of daily U.S. futures volume.

We have consistently responded that our primary tar-gets are derivatives exchanges that would potentially pro-vide cost synergies, extend our product offering, and buildupon our global business, Donohue said at a press confer-ence announcing the deal. We expect this transaction todeliver on these objectives for the benefits of our customersand our shareholders.

The merger hardly qualifies as a surprise. Although thetwo exchanges have been rivals bitter, at times fordecades, the winds of change have been blowing themtoward each other for several years.

The two reached a monumental clearing agreement in2003 through which all CBOT trades would clear throughthe CME clearinghouse. Also, in June 2005 the CBOT admit-ted it had expressions of interest from other companies,one of which turned out to be the CME.

However, the CBOT eschewed the offers and went for-

ward with a successful IPO of its own a few months later.While exchange consolidation talk has been constant for thepast couple of years, the rumor mill had the CME backingoff from the CBOT and looking at the New York futuresexchanges or even European exchanges.

But CME chairman Terry Duffy and his long-time friendCharles Carey, chairman of the CBOT, never gave up on theidea, and hammered out the details during one of theirweekly dinners at a Chicago steakhouse.

The idea to merge has been contemplated for decades,Duffy says. We have each spent the past several years lead-ing our organizations to dramatic and successful transfor-

mation of our business models. While there has been muchspeculation about a merger of our two companies, timing iseverything, and the time is now.

In my mind, one of the things that really helped was thecommon clearing agreement. That helped build the trustthat these companies could work together, and I thinkCharles Careys leadership at the CBOT was instrumentalin that. Charlie and I picked up talks in the last year or so.

Also helpful was the CBOTs successful IPO, which gavethe exchange a tradable currency. Getting a mergerapproved by CBOT shareholders was more likely than get-ting approval from the members of an essentially private

exchange, which the CBOT formerly was.

We had a lot of hurdles to clear, Carey says. The CMEwas first to become a publicly traded company. They creat-

ed a currency. We had no currency until the last year. Sonow you have the metrics, the currency, and the ongoing business relationship. All those things played into beingable to combine these two entities.

What changes?

By practically any measure the merger will create theworlds largest derivatives exchange. However, there aremany other issues that will have a much greater impact ontraders, such as:

When will the CBOTs product line (agricultural,

interest rate, Dow Jones, metals) begin trading onGlobex, the CMEs electronic trading platform? With a virtual monopoly over many of the domesti-

cally traded futures contracts, will the CME Groupraise fees?

Will the trading floor, which has increasingly lostmarket share to electronic trading at bothexchanges, continue to shrink?

The deal is not expected to close until the mid-2007, butmoving all CME Group products onto Globex will be one ofthe first moves made by the new company.

Exchange leaders wont talk about any pricing changesthat may occur when the new entity is formed, but for allthe conjecture that prices might increase because of the newexchanges unrivaled stature, there is equal evidence thatprices will remain the same or even decrease.

Certainly, the CME Group will have virtually no compe-tition in futures contracts based on interest rates, stockindices, currencies, and agricultural products. As such,higher prices are a possibility, as traders will have no otheroption if they want to trade those products.

On the other hand, there has hardly ever been any com-petition for the most popular products at both exchanges,so the ability to raise fees just for the sake of raising fees

already exists.Also, the exchanges believe the merger could create sig-

nificant cost savings, some of which could potentially bepassed along to customers.

We expect annual expense savings of more than $125million, Donohue says. The bulk of the synergies resultfrom reducing technology and administrative costs, andcreating more efficient trading floor operations.

As for the floor itself, the CME will move its floor opera-tions to the CBOT building. Because of cutbacks and clo-sures over the years, a portion of the CBOT trading floorwas being unused, so the consolidation is not expected to

cause overcrowding.

INDUSTRY NEWS


Futures central

CME, CBOT join forces

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Customers of RefcoFX.com received bad news lastOctober when Refco LLC, RefcoFXs parent compa-ny, declared bankruptcy after an accounting scandal.RefcoFX clients were still allowed to trade, although they

were not allowed to withdraw any funds. However, thingshavent gotten much better in the year since.

Early in 2006, Forex Capital Markets (FXCM) agreed to buyout RefcoFXs accounts for $110 million. This would haveallowed RefcoFX users to get all their money back and allowedthem to continue trading without switching brokerages.

However, that deal fell through when trustees in chargeof the Refco account decided the offer wasnt large enough.A few months later, forex brokerage Gain Capital made abid for RefcoFX. That deal also fell through, partly becauseRefcoFX customers objected to the terms of the agreement,which would have required them to trade frequently over along period of time before they were able to withdraw allthe money in their accounts.

But while many customers were glad the deal with Gainwas never consummated, the failure of the two firms tohook up also meant the end of RefcoFX. In announcing thatit and Gain had decided to terminate the potential agree-ment, RefcoFX also said it would cease operations.

This left almost 15,000 RefcoFX.com customers with tensof millions of collective dollars in their accounts, and nogood way to get it out. The only recourse for customers wasto make a claim against Refco and take their chances against

hundreds of other creditors not a very promising sce-nario considering the top priority of any bankrupt firm is topay off its large, corporate creditors first.

Nonetheless, RefcoFX.com customers are not taking thissituation lightly. In early October, they joined with FXCM tofile suit against Refco. The lawsuit asks for at least $10 mil-lion and claims Refco told RefcoFX customers it was safe tokeep trading and depositing money.

According to the suit, Refco took the assets ofRefcoFX.com and transferred them to its Refco CapitalMarkets unit, an unregulated division that is facing its ownlawsuit from customers.

Refco had already made an offer to RefcoFX.com clientsthat would pay them a little more than a quarter for everydollar they had in deposit, but the lawsuit essentially ren-ders that offer moot.

RefcoFX.com customers want a bankruptcy judge todeclare as much as $83 million of Refco Capital Marketsmoney as being property of the customers. However, as oflate October, the case was still in its preliminary stages withlawyers (35 different lawyers representing 29 different

groups) jockeying to make sure the guidelines of the trialare to their liking.

A group of traders affected by the FXCM closure have setup a Web site through Yahoo Finance so customers and otherinterested parties can stay up to date on the happenings. Thepage can be found at www.refcofxaccountholders.com.

Some college students with an interest in currencytrading were able to get a head start in Octoberthanks to a collegiate forex contest sponsored by

Global Forex Trading (GFT).GFT invited finance and business students from 15 univer-

sities across North America to gather in Texas for the SecondAnnual Texas A&M Inter-University FX Competition.

Students were given a $50,000 simulated account at GFTand allowed to make trades in real-time. Contest organizerssay the number of participants has tripled since last year.

This years contest was divided into two groups grad-uate and undergraduate students. The division winner

with the highest balance won a $10,000 trading account at

GFT. The account can be traded for six months, and anyprofits will be retained by the student.

We added the $10,000 trading account to allow studentsto apply what they have learned from the competition andexperience the difference of trading with real money, whichis an important transition, says Gary Tilkin, president andCEO of GFT.

All competitors were required to keep a log of their trades,listing the reason for the trade and the end result. After thefirst 15 days, the field was trimmed down and the eventualwinner was determined by highest rate of return. The top sixfinishers in each division received prize money, while the

school with the best average also received recognition.

Back to school

Competition gives collegians early entry into forex trading

Neither exchange has announced immediate plans toreduce the number of pits, but a slow erosion of the floor isa virtual certainty in todays marketplace, merger or not.

Donohue says the floor, as always, will be closely moni-tored to determine if any additional closures are necessary.

We have very similar rules that were adopted at thetime of each of our demutualizations with respect to main-

tenance of trading floor facilities for open outcry trading,he says. Thats an easy part of this agreement, which iswe have the same standards for volume and open inter-est.

This is an excerpt. For complete coverage of the CME-CBOT merg-

er, read the January 2007 issue ofActive Trader magazine.

Here we go again!

Lawsuit latest twist in RefcoFX saga
http://www.refcofxaccountholders.com/http://www.activetradermag.com/http://www.refcofxaccountholders.com/http://www.activetradermag.com/

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CURRENCY FUTURES

This information is for educational purposes only. Currency Traderprovides this data ingood faith, but assumes no responsibility for the use of this information. CurrencyTraderdoes not recommend buying or selling any market, nor does it solicit orders tobuy or sell any market. There is a high level of risk in trading, especially for traders

who use leverage. The reader assumes all responsibility for his or her actions in themarket.

LEGEND:

Sym: Ticker symbol.

Vol: 30-day average daily volume, in thousands.

OI: 30-day open interest, in thousands.

10-day move: The percentage price move from the close 10 days ago to todays close.



The % rank fields for each time window (10-day moves, 20-day moves, etc.) show thepercentile rank of the most recent move to a certain number of the previous moves of thesame size and in the same direction. For example, the % rank for 10-day move shows

how the most recent 10-day move compares to the past twenty 10-day moves; for the 20-day move, the % rank field shows how the most recent 20-day move compares to the

CURRENCY FUTURES SNAPSHOT

as of Oct. 26

The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of each marketsliquidity, direction, and levels of momentum and volatility. See the legend for explanations of the different fields.

Contract Pit Elec Exch Vol OI 10-day % 20-day % 60-day % Volatilitysym sym move rank move rank move rank ratio/% rank

Eurocurrency EC 6E CME 141.7 143.8 1.06% 100% -0.32% 14% -0.92% 83% .55 / 88%Japanese yen JY 6J CME 65.7 231.9 0.71% 100% -0.86% 40% -3.23% 69% .24 / 32%British pound BP 6B CME 61.3 105.4 1.75% 100% 0.71% 28% 0.59% 8% .40 / 63%Swiss franc SF 6S CME 42.0 88.0 1.14% 100% -0.90% 51% -1.94% 78% .43 / 70%Canadian dollar CD 6C CME 36.9 95.0 1.10% 100% -1.26% 72% 0.30% 16% .65 / 92%

Australian dollar AD 6A CME 21.0 64.8 1.77% 50% 2.10% 85% -0.04% 7% .38 / 73%Mexican peso MP 6M CME 17.7 64.5 1.69% 54% 2.73% 100% 2.23% 48% .19 /18%

U.S. dollar index DX NYBOT 3.4 24.6 -1.15% 100% 0.34% 21% 1.04% 81% .58 / 88%New Zealand dollar NE 6N CME 2.2 17.2 -0.33% 29% 0.23% 4% 5.81% 55% .20 / 22%Euro / Japanese yen EJ NYBOT 1.4 33.1 0.32% 47% 0.57% 30% 2.36% 43% .24 / 55%Note: Average volume and open interest data includes both pit and side-by-side electronic contracts (where applicable). Price activity is based on pit-traded contracts.

past sixty 20-day moves; for the 60-day move, the % rank field shows how the most recent60-day move compares to the past one-hundred-twenty 60-day moves. Areading of 100%means the current reading is larger than all the past readings, while a reading of 0% meansthe current reading is lower than the previous readings.

Volatility ratio/% rank: The ratio is the short-term volatility (10-day standard deviation ofprices) divided by the long-term volatility (100-day standard deviation of prices). The %rank is the percentile rank of the volatility ratio over the past 60 days.

FX futures hit new volume highs

As FXMarketSpace, the joint forex venture between theChicago Mercantile Exchange and Reuters, gained moreclients, foreign exchange futures volume at the CME set vol-ume records.

The exchange averaged 520,000 FX contracts per day inSeptember, a new monthly record and an increase of 26 per-cent from the same month in 2005. The contracts represent a

notional value of almost $62 billion per day, which wouldaccount for nearly 10 percent of the daily cash forex market,based on the latest Bank for International Settlements data.

For the third quarter of 2006, the CME averaged $51.5 bil-lion a day in notional value in FX contracts, with averagevolume of 423,000 contracts per day. Thats a 26-percentincrease from the same quarter a year earlier.

In 2005, the CME traded more than 84 million FX con-tracts with a notional value of more than $10.2 trillion.

Meanwhile, the number of institutions committed to join-ing the FXMarketSpace program grew to more than 40.These firms will help in the beta and launch phases of theprogram, which is scheduled to begin in early 2007.

FXMarketSpace will combine spot forex pricing with thecentralized clearing of an exchange.

Currency managers take pounding

Through the third quarter, professional currency traderswere suffering a horrible 2006, according to data from theBarclay Group. After a -0.88 percent loss in September,Barclay's Currency Trader index was down -2.17 percent.Also, the firms BTOP FX index, which tracks the 50 largestcurrency managers, was down -4.17 percent through Oct. 30.

Unless forex funds bounce back in the final quarter of theyear, 2005 and 2006 run the risk of being the first back-to-back losing years for currency fund managers since 1993-94.

Managed money: Barclay Trading Groupscurrency trader rankings for September 2006

Top 10 currency traders managing more than $10 million as of Sept. 30

ranked by September 2006 return

2006 $ UnderSeptember YTD mgmt.

Rank Trading advisor return return (millions)

1. Algorithmic Trading (Currency) 11.59 69.72 11.9M

2. Spot Forex Mgmt. (Zurich) 11.40 17.98 14.0M

3. Spot Forex Mgmt. (Geneva) 5.20 8.3 12.0M

4. Harmoney Invest. Mgrs. (ProFund FX) 3.54 2.77 47.3M

5. KMJ Capital (Currency) 2.76 18.81 23.5M

6. Greenbriar Global Mgmt (Currency) 2.49 10.44 104.0M

7. DKR Capital (DKR Strat. Currency) 2.35 -3.86 77.4M

8. Premium Currencies Ltd 1.52 6.4 69.1M

9. Orchard Capital (Systematic FOREX ) 1.45 6.45 13.8M

10. Geo Economic Mgmt System 1.27 11.11 14.7M

Top 10 currency traders managing less than $10 million and more than $1 million

as of Sept. 30 ranked by September 2006 return

1. Worldwide Capital Mgmt 3.00 74.11 3.0M

2. MIGFX Inc (Retail) 2.22 -2.62 2.5M

3. TradeCom Currency Trader 1.08 -6.87 1.0M4. Alderon Capital Mgmt. (Managed Accts) 1.07 41.42 5.2M

5. IFX Capital Management (IFX) 0.95 0.08 2.9M

6. Black Flag (Gl. Macro) 0.43 3.69 2.0M

7. Quay Capital Mgmt. (Forex) 0.07 -3.23 2.0M

8. SSgA Absolute Return Currency Fund 0.02 -1.29 8.4M

9. Lambay Capital Limited (Intraday) -0.31 -4.67 3.7M

10. Forex Funds -0.35 2.19 7.4M

Source: The Barclay Group (www.barclaygrp.com)

Based on estimates of the composite of all accounts or the fully funded subset method.

Does not reflect the performance of any single account.

PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE.
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INTERNATIONAL MARKET SUMMARY

Currentprice vs. 1-month 3-month 6-month 52-week 52-week Previous

Rank* Country Currency U.S. dollar gain/loss gain/loss gain/loss high low rank

1 Brazilian real 0.4658 3.12% 2.15% -1.50% 0.4867 0.4157 16

2 Indian rupee 0.02209 1.14% 3.32% -0.94% 0.02273 0.02123 2

3 Australian dollar 0.7602 1.12% 0.77% 2.03% 0.7792 0.7014 15

4 Thai baht 0.02695 0.75% 2.32% 1.24% 0.02706 0.02404 4

5 Singapore dollar 0.6359 0.74% 0.84% 0.95% 0.6408 0.5859 12

6 Chinese yuan 0.1267 0.24% 1.12% 1.36% 0.1267 0.1233 5

7 Hong Kong dollar 0.1285 0.00% -0.08% -0.39% 0.129 0.1283 10

8 South African rand 0.1305 -0.38% -8.68% -20.96% 0.1678 0.1253 17

9 Swedish krona 0.1366 -0.65% 0.15% 2.71% 0.1416 0.1206 13

10 Russian ruble 0.0372 -0.67% 0.19% 1.95% 0.03754 0.03447 7

11 New Zealand dollar 0.6614 -0.78% 5.84% 5.37% 0.7198 0.5925 1

12 Canadian dollar 0.8877 -0.87% 1.25% 0.79% 0.9148 0.8345 14

13 Taiwanese dollar 0.03003 -1.09% -1.51% -4.00% 0.03197 0.02958 11

14 British pound 1.8756 -1.41% 1.52% 4.96% 1.914 1.7048 3

15 Euro 1.2576 -1.60% -0.38% 1.46% 1.2978 1.1638 9

16 Japanese yen 0.00839 -2.31% -1.97% -3.82% 0.00917 0.00824 6

17 Swiss franc 0.7901 -2.40% -1.46% 0.25% 0.8383 0.7525 8

FOREX (vs. U.S. DOLLAR)

ACCOUNT BALANCE

Rank Country 2006 Ratio* 2005 2007+

1 Singapore 38.029 28.5 33.269 39.4612 Switzerland 50.737 13.3 50.709 52.8523 Russia 120.128 12.3 83.558 124.3684 Hong Kong 16.431 8.7 20.276 15.6655 Netherlands 50.091 7.6 39.986 55.9976 China 184.172 7.2 160.818 206.4787 Sweden 21.895 5.8 21.57 22.8468 Taiwan 20.68 5.8 16.116 22.049 Germany 120.579 4.2 114.896 120.68810 Japan 167.273 3.7 165.69 162.87111 Canada 25.48 2.0 26.261 25.422

12 Brazil 5.808 0.6 14.193 4.43

Rank Country 2006 Ratio* 2005 2007+

13 Mexico -0.478 -0.1 -4.789 -1.59214 France -38.648 -1.7 -33.577 - 40.11115 India -17.569 -2.1 -11.9 -25.10916 UK -55.943 -2.4 -48.332 -57.96317 South Africa -14.002 -5.5 -10.118 -12.88918 Australia -41.397 -5.6 -42.247 -42.32519 U.S. -869.129 -6.6 -791.504 -959.10920 Spain -100.577 -8.3 -83.001 -115.08

Totals in billions of U.S. dollars

*Account balance in percent of GDP +Estimate

Source: International Monetary Fund, World Economic Outlook

Database, September 2006

As of Oct. 26 *based on one-month gain/loss


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FOREX/INTERNATIONAL MARKET SUMMARYGLOBAL NEWS BRIEFS

Frances August unemployment rate increased 1.0 per-

cent from the previous month to 9.0. That marked a 0.9-per-

cent decline from August 2005.

The United Kingdoms August jobless rate stayed at

5.5 percent, the same as the July rate. Unemployment has

increased 0.7 percent from the same period in 2005.

With elections coming up Nov. 12, Polish Prime

Minister Jaroslaw Kaczynski is fighting back against polls

that show his unpopularity with the voting public by point-

ing to the countrys growing GDP and declining unem-

ployment. However, political opponents say the emigration

of more than 2 million Poles since 2004 is the reason for the

economic boom.

The European Central Bank raised the benchmark refi

rate 0.25 percent to 3.25 percent in October. The ECB has

been gradually raising rates since December 2005 after a

more than three-year period in which the interest rate

remained at 2 percent.

The National Bank of Denmark moved in step with the

ECB by raising the benchmark two-week CD rate 25 basis

points to 3.5 percent in October. Like the ECB, Denmark is

entering a loosening cycle after leaving interest rates alonefor more than three years.

For the fifth straight month, The National Bank of

Hungry raised its two-week deposit rate in October, this

time 0.25 percent to 8.0 percent. The rate was at 6 percent at

the beginning of 2006 after standing at 12.5 percent two

years earlier.

EUROPE

Brazils Q2 GDP grew 6.4 percent from the previous

quarter. The countrys central bank also dropped thebenchmark Selic interest rate 50 basis points to 13.75 per-

cent. The rate reduction was the 11th since the Selic stood

at 19.75 percent in May 2005.

Brazils Oct. 11 presidential election finalized nothing,

and caused a second vote between incumbent Luiz Inacio

Lula Da Silver, better known as Lula, and Geraldo

Alckmin. Lula had a comfortable lead heading into the

election but became the focus of a corruption scandal.

However, Lula won the second election.

Canadas September jobless rate fell 0.1 percent to 6.4

percent, a decline of 0.3 percent from September 2005.

AMERICAS

AFRICA

Indias second-quarter GDP for April-June grew a

robust 8.9 percent from the previous three-month period,

and 13.7 percent year-over-year.

Japans August unemployment rate remained at 4.1

percent, unchanged from both the previous month and

from August 2005.

The Bank of Indonesia continued its loosening cycle

of its benchmark Bank Indonesia (BI) reference rate by cut-

ting the rate 50 basis points to 10.75 percent. The decline

was the fifth straight by the Bank of Indonesia, and it fol-

lows more than two years of tightening, which saw the

rate grow from 7.4 percent at the end of 2004 to 12.75 per-

cent in January 2006.

The Bank of Israel dropped its benchmark short-term

lending rate 0.25 percent to 5.25 percent. The cut was the

first since January 2005; since then the rate had grown

from 3.5 percent to 5.5 percent.

The South African Reserve Bank increased their

repurchase rate 50 basis points to 8.5 percent. Prior to 2006,

the rate had changed only once in three years, but the lat-

est hike was the third in the last five months.


ASIA & THE SOUTH PACIFIC

Australias September unemployment rate was

unchanged from the month before at 4.8 percent a 0.3-

percent drop from September 2005.

Hong Kongs preliminary third quarter unemployment

rate fell to 4.7 percent, 1.0 percent less than the previous

quarter. The rate marked a huge drop 8.0 percent from

the same period a year earlier. A government spokesman

noted the labor market showed improvement in the quarter,

as employers increased their staffing levels amid the sus-

tained economic revival.

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EVENTS

Event: The Options Intensive

Dates: Nov. 9-10

Time: 8 a.m -5 p.m.

Location: The Options Institute at the CBOE,

Chicago

For more information: Call (877) THE-CBOE

Event: Futures Trading Summit

Date: Nov. 15-16

Location: Palms Hotel, Las Vegas

For more information: Visit www.fts.cme.com

Event: Second Annual MARHedge Trading Forum

Date: Nov. 16

Location: Stamford, Conn.

For more information: Visit www.marhedge.com

Event: The Traders Expo Las Vegas

Date: Nov. 16-19

Location: Mandalay Bay Hotel & Casino,

Las Vegas

For more information: Visit www.tradersexpo.com

Event: 22nd Annual Futures & Options Expo

Date: Nov. 28-30

Location: Hyatt Regency Chicago

For more information: Visit

www.futuresindustry.org/conferen-2156.asp

Event: FXCMs Currency Trading Expo

Date: Dec. 9-10

Location: MGM Grand, Las Vegas

For more information: Visitwww.fxcmexpo.com


eSignal has relaunched its free financial Web siteQuote.com. Acquired from Lycos Inc. in the spring of 2006and recently redesigned, the new Quote.com providesquotes, charts, news, mutual fund information, and a port-folio manager feature with e-mail alerts. Quote.com users

have free access to delayed worldwide quotes, charts, andfinancial news covering major markets and more than 50exchanges, including the NYSE, Nasdaq, the London StockExchange, and the Tokyo Stock Exchange. Coverage alsoincludes a wide range of global futures, options, and foreignexchange data from sources such as the CBOT, the CME, theNYMEX/COMEX, the ICE, Eurex, and Euronext. Quote.comprovides daily and intraday advanced charting with multi-ple indicators such as moving averages, Bollinger Bands,and Fibonacci. Quote.com presents thousands of financialnews stories each day as well as an extensive selection ofcommentary and analysis designed to provide insight andperspective on the markets. For additional information, visitwww.Quote.com or call (800) 833-1228.

Global Forex Trading (GFT) has added seven cur-rency pairs to its list of tradable currencies. The company nowoffers 64 currency pairs. The additional pairs are: euro/NewZealand dollar (EUR/NZD), euro/Czech koruna (EUR/CZK),South African rand/Japanese yen (ZAR/JPY), U.S.dollar/Hong Kong dollar (USD/HKD), Australiandollar/Hong Kong dollar (AUD/HKD), euro/Hong Kong dol-lar (EUR/HKD), and Hong Kong dollar/Japanese yen(HKD/JPY). These pairs can be traded through GFTsDealBook 360 trading software. For a complete list of GFTs

currency pairs, please www.gftforex.com/forex/benefits.asp .

GAIN Capital Group and Ninja Traderhave part-nered to provide forex traders with automated trading serv-ices via Ninja Traders platform. GAIN Capital Group willprovide real-time forex pricing and execution services for allforex trades carried out on the Ninja Trader platform. Ninja

Trader supports automated trade execution through mostthird-party charting applications using Ninja TradersAutomated Trading Interface (ATI). The Ninja Trader plat-form is currently available free of charge to professional usersat GAIN Capital (www.gaincapital.com) and to self-directedretail traders at FOREX.com, the retail division of GAINCapital Group (www.forex.com). Ninja Traders regular sub-scription fee is $50 per month. With Ninja Trader, forextraders can pre-define trade entry and exit methods in anautomated strategy, visualize all working orders, automatesubmission of stop-loss and profit-target orders directly onthe chart, automate updating of stop-loss and profit-targetorders when scaling in or out of a position, set auto-trail,auto-break even, and auto-chase order capabilities, anddefine multiple profit targets. Register for the simulation edi-tion to test strategies and Ninja Traders automated executioncapabilities in a real-time environment. Visitwww.forex.com/ninjatraderfor more information.

Note: The New Products and Services section is a forum for indus-

try businesses to announce new products and upgrades. Listings

are adapted from press releases and are not endorsements or rec-

ommendations from the Active Trader Magazine Group. E-mail

press releases to [email protected] . Publication is

not guaranteed.

NEW PRODUCTS AND SERVICES
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KEY CONCEPTS

Carry trades involve buying (or lending) a currency with

a high interest rate and selling (or borrowing) a currency

with a low interest rate. Traders looking to earn carry will

buy a high-yielding currency while simultaneously selling

a low-yielding currency.

Chande Momentum Oscillator: The Chande

Momentum Oscillator is calculated by dividing the differ-

ence between up-day and down-day activity by the sum of

up-day and down-day activity over a given period. The

result is multiplied by 100 to create an indicator that oscil-

lates between -100 and 100.

Using daily data as an example, if todays price (close) is

above yesterdays price, today is an up day, the up-day

activity is the difference between todays price and yester-

days price, and the down-day activity is zero. The opposite

is true when todays price is lower than yesterdays price.

CMO = ((up-day movement down-day movement)/

(up-day movement + down-day movement)) * 100

An oversold condition is typified by a CMO value of

below -50, while an overbought level is 50 or higher. For

more information on this indicator, see The New Technical

Trader by Tushar Chande and Stanley Kroll. Also, the

Trading System Lab in the December 2003 issue ofActive

Trader incorporated the CMO.

This system trades from the long side only, entering

when the indicators signal price is in an oversold condition.

Volatility: The level of price movement in a market.

Historical (statistical) volatility measures the price fluctua-

tions (usually calculated as the standard deviation of closing

prices) over a certain time period e.g., the past 20 days.

Implied volatility is the current market estimate of future

volatility as reflected in the level of option premiums. The

higher the implied volatility, the higher the option premium.
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14U.S.:

Retail sales;

PPI

Great Britain:

CPI

Germany:

CPI

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

CPI: Consumer Price

Index

ECB: European Central

Bank

FOMC: Federal Open

Market Committee

GDP: Gross domestic

product

ISM: Institute for Supply

Management

PPI: Producer Price Index

Legend

MONTH


27Japan:

Corporate service

price index

Brazil: Fiscal

policy

Israel: National

bank meeting

Monday Tuesday Wednesday Thursday Friday Saturday

GLOBAL ECONOMIC CALENDAR NOVEMBER/DECEMBER

13Japan: Balance of

payments; corporate

goods price index

Australia: Statement

on monetary policy

Italy: Balance of

payments

24Brazil:

Monetary policyannouncement

25

15Japan: Monetary

survey; monetary policy

meeting

Great Britain:

Unemployment

Canada: Manufacturing

survey

16U.S.: CPI

Japan: Monetary policy meeting

ECB: Governing council

meeting

Brazil: Domestic federal public

debt and open market

operations

17Brazil:

Monthly

survey of

trade

20U.S.: Leading indicators

Great Britain: Capitalissues

Germany: PPI

Canada: Wholesale trade

Hungary: Central bank

meeting

22Canada:

CPI

23Germany:

National accounts

Brazil: Monetary

policy and credit

operations; unem-

ployment

21Canada: Retail

trade; leadingindicators

28U.S.: Durable goods

Canada:

Unemployment

Poland: National

bank meeting

Slovakia: National

bank meeting

6Germany:

Orders

received and

manufacturing

turnover

8Great Britain:

Monetary

policy

committee

meeting

Germany:

Foreign trade

29U.S.: GDP

Canada: Trade

balance

Poland: National

bank meeting

30Germany: Retail turnover; unemployment

Canada: GDP

Australia: International reserves and

foreign currency liquidity

Italy: International reserves and foreign

currency liquidity

Czech Republic: National bank meeting

9U.S.: Wholesale

inventories; trade

balance

Great Britain: Monetary

policy committee meeting

Korea: Reserve bank

meeting

10Brazil: CPI

1U.S.: ISM

Japan:Account

balances

Australia: Index of

commodity prices

3U.S.:

Unemployment

4

7Germany: Production

index; insolvencies

Australia: Official reserve

assets; reserve bank meeting

Brazil: Monthly survey of

mining and manufacturing

physical production

18

1U.S.: ISM

Japan:Account

balances

Australia: Index of

commodity prices

Norway: Central bankmeeting

2Japan: Monetary base

ECB: Governing

council meeting

Germany:

Unemployment

Philippines: Centralbank meeting

4Japan:

Monetary

base

6Great Britain: Monetary

Policy Committee meeting

Germany: Orders received

and manufacturing turnover



physical production

5Canada: Interest rate

announcement

Australia: Reserve bank

meeting



physical production

11

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