Currency Trader 1213

December 2013
Volume 10, No. 12

Strategies, analysis, and news for FX traders
THE YENS YEAR-END POSITION P. 6
Butterfies and option volatility
in the FX majors p. 22
FX systems:
Single vs. multiple currencies p. 18
2014: On the forex horizon p. 12
Trading a head-and-shoulders
pattern in the Euro p. 33
2 December 2013 CURRENCY TRADER
CONTENTS
Contributors .................................................4
Global Markets
Is dollar/yen gearing up
for another run? .........................................6
Is the yen ready to make another signifcant
move after its multi-month consolidation?
By Currency Trader Staff
On the Money
What to worry about next year ..............12
A look at some of the issues looming over the
FX market as we head into a new year.
By Barbara Rockefeller
Trading Strategies
Is less more in forex? ..............................18
Traders tend to favor systems that test well
across multiple instruments, but should that be a
goal for FX traders?
By Daniel Fernandez
Advanced Concepts
Butterfies are free, and well worth it:
The majors ................................................22
Do butterfies offer an easy approach to trading
option volatility on the major currencies?
By Howard L. Simons
Global Economic Calendar ........................28
Important dates for currency traders.
Events .......................................................28
Conferences, seminars, and other events.
Currency Futures Snapshot .................29
BarclayHedge Rankings ........................29
Top-ranked managed money programs
International Markets ............................30
Numbers from the global forex, stock, and
interest-rate markets.
Forex Journal ...........................................33
Seeing if the Euro has a good head on its
shoulders.
Looking for an
advertiser?
Click on the company
name for a direct link to the
ad in this months issue.
Ablesys
FXCM
Interactive Brokers
Ninja Trader
Questions or comments?
Submit editorial queries or comments to
webmaster@currencytradermag.com
CONTRIBUTORS
Editor-in-chief: Mark Etzkorn
metzkorn@currencytradermag.com
Managing editor: Molly Goad
mgoad@currencytradermag.com
Contributing editor:
Howard Simons

Contributing writers:
Barbara Rockefeller,
Marc Chandler, Chris Peters
Editorial assistant and
webmaster: Kesha Green
kgreen@currencytradermag.com

President: Phil Dorman
pdorman@currencytradermag.com
Publisher, ad sales:
Bob Dorman
bdorman@currencytradermag.com
Classifed ad sales: Mark Seger
seger@currencytradermag.com
Volume 10, No. 12. Currency Trader is published monthly by TechInfo,
Inc., PO Box 487, Lake Zurich, Illinois 60047. Copyright 2013 TechInfo,
Inc. All rights reserved. Information in this publication may not be stored or
reproduced in any form without written permission from the publisher.
The information in Currency Trader magazine is intended for educational
purposes only. It is not meant to recommend, promote or in any way imply
the effectiveness of any trading system, strategy or approach. Traders are
advised to do their own research and testing to determine the validity of a
trading idea. Trading and investing carry a high level of risk. Past perfor-
mance does not guarantee future results.
For all subscriber services:
www.currencytradermag.com
A publication of Active Trader
CONTRIBUTORS
qHoward 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
fnancial market issues.
qDaniel Fernandez is an active trader with a strong
interest in calculus, statistics, and economics who has
been focusing on the analysis of forex trading strategies,
particularly algorithmic trading and the mathematical
evaluation of long-term system proftability. For the past
two years he has published his research and opinions on
his blog Reviewing Everything Forex, which also in-
cludes reviews of commercial and free trading systems and
general interest articles on forex trading (http://mechani-
calforex.com). Fernandez is a graduate of the National
University of Colombia, where he majored in chemistry,
concentrating in computational chemistry. He can be
reached at dfernandezp@unal.edu.co.
qBarbara Rockefeller (www.rts-forex.com) is an
international economist with a focus on foreign exchange.
She has worked as a forecaster, trader, and consultant at
Citibank and other fnancial institutions, and currently
publishes two daily reports on foreign exchange. Rockefel-
ler is the author of Technical Analysis for Dummies, Second
Edition (Wiley, 2011), 24/7 Trading Around the Clock, Around
the World (John Wiley & Sons, 2000), The Global Trader
(John Wiley & Sons, 2001), The Foreign Exchange Matrix
(Harriman House, 2013), and How to Invest Internationally,
published in Japan in 1999. A book tentatively titled How
to Trade FX is in the works. Rockefeller is on the board of
directors of a large European hedge fund.
Once you know the true market support levels, you know where you stand. You know when to be cautious, and when to let go and
let your profit run. If you had AbleTrend at your fingertips, you would always know exactly where the markets true support levels
are. Then you could:
a) Be able to sit tight and sustain your position during the market testing,
and enjoy the market when it soars;
b) Exit the market when it breaks the support levels (the small blue dots
below the bars) and cut your losses short.
If you do not know the true market support/resistance level then fear will drive you out of market when you should stay, or you
will stay in the market too long with losing positions. Its as simple as that. If you can read the chart with support levels, you could
do better than most fund managers and save a bundle in service fees.
Do you know someone who has lost thousands of dollars in trading, but who was not
willing to pay for time-tested trading signals? 15 years ago, people would say what an
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THESE RESULTS ARE BASED ON SIMULATED OR HYPOTHETICAL PERFORMANCE RESULTS THAT HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE THE RESULTS SHOWN IN AN ACTUAL PER-
FORMANCE RECORD, THESE RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, BECAUSE THESE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THESE RESULTS MAY HAVE UNDER-OR
OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED OR HYPOTHETICAL TRADING PROGRAMS IN GENERAL ARE ALSO
SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR
LOSSES SIMILAR TO THESE BEING SHOWN. THE TESTIMONIAL MAY NOT BE REPRESENTATIVE OF THE EXPERIENCE OF OTHER CLIENTS AND THE TESTIMONIAL IS NO GUARANTEE OF FUTURE
PERFORMANCE OR SUCCESS. TECHNICAL ANALYSIS OF STOCKS & COMMODITIES LOGO AND AWARD ARE TRADEMARKS OF TECHNICAL ANALYSIS, INC.
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Ablesys Corp. 20954 Corsair Blvd. Hayward, CA 94545 Tel: 510-265-1883 Fax: 510-265-1993
How many times has fear made you exit
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SINCE 1995
CTA
REGISTERED
WITH THE
CFTC
Scientific support levels help you to distinguish a retracement from a reversal
Underwater on a trade? You need to know
how far is too far, and whether the current
pull back is just a retracement or if its a reversal.
These pull backs tested the T2 support levels but did not break through,
therefore they are only retracements
Prices broke the T2 resistance level (small red dots above the bars) and
remained beyond them. Its a reversal. The trend has changed its direction!
Once you know the true market support levels, you know where you stand. You know when to be cautious, and when to let go and
let your profit run. If you had AbleTrend at your fingertips, you would always know exactly where the markets true support levels
are. Then you could:
a) Be able to sit tight and sustain your position during the market testing,
and enjoy the market when it soars;
b) Exit the market when it breaks the support levels (the small blue dots
below the bars) and cut your losses short.
If you do not know the true market support/resistance level then fear will drive you out of market when you should stay, or you
will stay in the market too long with losing positions. Its as simple as that. If you can read the chart with support levels, you could
do better than most fund managers and save a bundle in service fees.
Do you know someone who has lost thousands of dollars in trading, but who was not
willing to pay for time-tested trading signals? 15 years ago, people would say what an
advantage it would be to have AbleTrend! Today one would say what a disadvantage it
is not to have AbleTrend
Test Drive AbleTrend 7.0 and Discover the True Market
Support/Resistance Levels for the Markets You Trade
www.ablesys.com/ACT
30 DAY TRIAL
START TODAY!
$20 DISCOUNT
CODE: ACT1113
THESE RESULTS ARE BASED ON SIMULATED OR HYPOTHETICAL PERFORMANCE RESULTS THAT HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE THE RESULTS SHOWN IN AN ACTUAL PER-
FORMANCE RECORD, THESE RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, BECAUSE THESE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THESE RESULTS MAY HAVE UNDER-OR
OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED OR HYPOTHETICAL TRADING PROGRAMS IN GENERAL ARE ALSO
SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR
LOSSES SIMILAR TO THESE BEING SHOWN. THE TESTIMONIAL MAY NOT BE REPRESENTATIVE OF THE EXPERIENCE OF OTHER CLIENTS AND THE TESTIMONIAL IS NO GUARANTEE OF FUTURE
PERFORMANCE OR SUCCESS. TECHNICAL ANALYSIS OF STOCKS & COMMODITIES LOGO AND AWARD ARE TRADEMARKS OF TECHNICAL ANALYSIS, INC.
A
b
l
e
T
r
e
n
d

7
.
0
Award
Winning
Trading
Software
1997 - 2013
For Stocks,
Futures
FOREX &
Options
CTA Firm
Readers Choice Awards
1997-2013 in Stock Trading
System; Futures Trading System
& Option Trading System
LINKS
TRADERS'
RESOURC E
Get Started Today! www.ablesys.com/ACT
Ablesys Corp. 20954 Corsair Blvd. Hayward, CA 94545 Tel: 510-265-1883 Fax: 510-265-1993
How many times has fear made you exit
the market too soon and miss the big move?
SINCE 1995
CTA
REGISTERED
WITH THE
CFTC
Scientific support levels help you to distinguish a retracement from a reversal
Underwater on a trade? You need to know
how far is too far, and whether the current
pull back is just a retracement or if its a reversal.
These pull backs tested the T2 support levels but did not break through,
therefore they are only retracements
Prices broke the T2 resistance level (small red dots above the bars) and
remained beyond them. Its a reversal. The trend has changed its direction!
GLOBAL MARKETS
The Japanese yen has suffered dramatic
losses this year, but yen weakness was
an intentional policy move by Japanese
authorities designed to stimulate domes-
tic growth and inflation. As of Dec. 2,
the yen had dropped more than 30%
since October 2012 vs. the U.S. dollar
in response to the implementation of
Abenomics, the term given to the eco-
nomic policies by current Japanese Prime
Minister Shinzo Abe (Figure 1).
The three prongs of Abes economic
initiative include aggressive monetary
policy, fiscal policy, and growth strate-
gies aimed at lifting the Japanese econo-
my out of the deflationary fog it has been
in for two decades. In response, Japanese
equities rocketed higher, with the Nikkei
225 gaining about 50% on the year in
early December.
Is dollar/yen gearing
up for another run?
Is the yen ready to make another significant
move after its multi-month consolidation?
BY CURRENCY TRADER STAFF
FIGURE 1: WEEKLY YEN FUTURES
The USD/JPY rate has rallied strongly over the past year or so, with the yen
losing more than 30% vs. the dollar since fall 2012.
Source: TradeStation
CURRENCY TRADER December 2013 7
After hitting a high of 103.73 on May 22, the dollar/yen
rate (USD/JPY) consolidated, forming the triangle pat-
tern the currency pair eventually penetrated to the upside
in mid-November (Figure 2). By early December, the pair
was trading at its highest level since the end of May.
Economic upticks
For 2013, Moodys Analytics estimates 2013 Japanese gross
domestic product (GDP) growth at 1.7%, while forecasting
a 2% rate for 2014.
Fourth-quarter 2012 GDP came in at +1.1%, but jumped
to +4.1% in the first quarter of 2013 and +3.8% in Q2,
according to seasonally adjusted, annualized data from
Nomura. However, in Q3, GDP moderated to a 1.9% pace,
which sparked some concerns.
Wells Fargo economist Tim Quinlan contends Abenomics
is working so far, despite the apparent Q3 economic con-
traction. Abenomics has gotten the Japanese economy off
to a pretty decent trajectory in terms of economic growth,
he says. Some people point to the GDP slowdown in the
third quarter as an indication its not working, but that
was almost entirely a function of a drop-off in exports in
that quarter. There was better domestic demand during
that period.
A pick-up in inflation is a key component of Japans
economic strategy, and some progress has occurred on that
front already. Japanese consumer prices declined 0.2% in
the fourth quarter of 2012, 0.6% in the first quarter of 2013,
and 0.3% in Q2, but in Q3 they jumped 0.9%.
Quinlan notes that although imported fuel and energy
costs contributed to the uptick, the biggest driver of
inflation is inflation expectations. Bank of Japan (BOJ)
Governor Haruhiko Kuroda has exceeded financial mar-
ket expectations with his qualitative and quantitative
monetary policies, he says. The BOJ is buying exchange-
traded mutual funds and its buying real estate outright
with Japanese REITS. After 15 years of deflation, it has put
people in a mindset of, maybe this will work.
However, the work on this front is still just beginning,
Quinlan adds. To increase the rate of inflation, we will
need to see an increase in wage growth, he says.
Tax hike and other obstacles
While the Abenomics policies may have triggered an initial
economic reaction, several challenges remain, including an
increase in the consumption tax scheduled for April 2014.
In an attempt to combat Japans high debt-to-GDP ratio,
the sales tax will increase 3% to 8%.
FIGURE 2: DAILY DOLLAR/YEN
By early December the dollar/yen pair was in the process of challenging its
May high.
GLOBAL MARKETS
We are a little concerned, says Chris Rupkey, chief
financial economist at Bank of Toyko-Mitsubishi. Its
going to take a big chunk out of the economy it takes a
lot out of consumer spending.
Richard Cochinos, head of Americas G-10 FX Strategy
at Citigroup, says the upcoming tax hike is weighing on
consumer confidence. A 1997 sales tax hike, which had an
immediate and negative impact on GDP, is still alive in
the memories of many Japanese consumers. It knocked
growth off the table, he says.
I expect if we get past the consumer tax hike in the
spring and growth does not plummet, we should begin to
see confidence in Japanese households rise and that will
become the trigger to look at aggressively selling yen,
Cochinos adds. He also notes the potential for either addi-
tional fiscal stimulus or additional quantitative easing
(QE) to offset the negative
impact of the sales tax hike
on growth.
The sales tax hike isnt the
only potential hurdle. While
describing the BOJs mon-
etary policy actions as a good
way of priming the pump,
Quinlan notes it alone can-
not reverse the Japanese
economys course. It gives
the economy a little bit of
a boost, he says. But ulti-
mately, if you want to have
lasting economic growth,
it has to come from other
places besides expansive
monetary policy.
Quinlan says recommendations from the Organisation
for Economic Co-operation and Development (OECD),
which include efforts to encourage greater female partici-
pation in the workforce, could help Japans shrinking labor
pool. He says other options could be to liberalize trade or
open the door to immigration.
The winds from Abenomics are still blowing strong
for the moment, Rupkey says. But its been about a year
that weve been trading on it. We need some new factors.
Maybe a pickup in world growth would be bullish, since
Japanese corporations make a lot of sales in Europe.
According to Glenn Levine, economist at Moodys
Analytics, the big issue is whether Abe moves forward in
a meaningful way on the third arm of his economic plan
sweeping economic reform and whether this boosts
private non-residential investment and the economys pro-
ductive capacity. On this final point, the evidence so far
is mixed, but as Abes tenure drags on without substantial
policy progress, his political capital will erode and it will
become increasingly likely that his overall plan will fall
short, he says.
The yen trend
Thus far, the strong depreciation trend in the yen vs. the
dollar has largely resulted from the BOJs massive QE pro-
gram.
Ongoing monetary stimulus from the BOJ is the main
factor driving the yen, Levine says. We expect this to
continue, ensuring the yen will maintain a weakening bias.
The other big issue globally is the Fed taper. Although it
has little impact on the yen/dollar rate, it will drive the
yen cross rates, particularly with emerging market curren-
cies.
Rupkey explains the con-
nection to the yen and the
economy: The secret to the
Japanese economy is that it is
very much trickle down, he
says. If corporations are doing
well and exporters are getting
more dollars for their exports,
thats good for the economy.
Dollar/yen 120 is good, 75 is
not so good. Abenomics was
designed to push up the dollar
vs. the yen because its good for
the economy.
Charles St-Arnaud, execu-
tive director-Foreign Exchange
Research and Economics at
Nomura, says his firm continues to expect the yen to grad-
ually depreciate. Nomura has a target of 110 for the end of
2014.
BNP Paribas is also bearish on the yen, with a 118 dol-
lar/yen forecast for the end of 2014. Our sense is most
of the yen weakness this year was driven by Japanese
events and aggressive easing by the BOJ, says Vassili
Serebriakov, BNP Paribas currency strategist. But going
forward, the U.S. side of the equation will be more impor-
tant. We expect stronger U.S. growth, Fed tapering in
March, and rising U.S. yields, which should support dol-
lar/yen.
Global FX flow patterns
Cochinos has been monitoring how global capital is mov-
ing around the world. He analyzes FX order flow of Citis
client base placing all FX trades executed with Citi in a
database, which he breaks down into different categories,
including client type.
Selling yen has been predominantly a foreign trade, he
says. Historically, weve seen selling by European clients
and Americas clients, but there hasnt been a lot of domes-
tic selling in the yen weakness story. Dollar/yen rallies in
the Americas and European time zones, but its completely
flat in the Asian time zone. This shows me it is predomi-
nantly American and European accounts that are selling
it.
Cochinos says an additional client base will need to
enter the market and aggressively sell yen to break the dol-
lar/yen pair out of its wide range between roughly 103.75
and 93.75.
He notes Japanese household savings accounts have
approximately $8 trillion, or roughly 800 trillion Japanese
yen.
Japanese households have 54% of their assets sitting
in cash, which compares to roughly 14% in the U.S. and
36% in Europe, he says. The reason Japanese accounts
are sitting in cash is that the country has been mired in a
disinflationary or deflationary environment for the better
part of 15 years. If you buy into the story, which I do, that
Kuroda and Abe will re-engineer the return of growth and
inflation to Japan, then cash, which had been appreciat-
ing on an annual basis, will begin to depreciate. As infla-
tion begins to rise in Japan, households are likely to start
investing their cash in order to retain its real purchasing
power.
Cochinos says an increase in Japanese consumer con-
fidence will be needed to trigger a shift in these money
flows.
It has been predominantly foreign investors buying
USD/JPY that has caused dollar/yen to rally, he says.
For the next leg, were looking for Japanese households
to get involved. Confidence is highly correlated to out-
ward investment in securities. Ultimately, when consumer
confidence rises, youll see the animal spirits rising within
Japanese households, and they will invest some of their
money.
Cochinos notes consumer confidence numbers peaked
in May, just after the BOJ began its asset purchase pro-
gram. The confidence numbers have been falling since
[outside of an unsustainable spike in September], which
shows Japanese households havent bought into the pro-
gram yet, he says. Were unlikely to see the dollar/yen
meaningfully above 105 until we see greater outflows from
Japanese money managers and household selling of yen,
he says.
If consumer confidence picks up and Japanese house-
holds begin to reach for yield with overseas investments,
Cochinos sees the 125 level as a potential dollar/yen
objective. If you see broad portfolio flows out of Japan, it
would be a believable target, he says. A 5% reduction in
their savings used to purchase overseas assets would be
a $400 billion JPY negative order flow. It would certainly
take time, but thats the direction and magnitude consis-
tent with the amount of capital were talking about.
On the crosses
Looking at the crosses, Cochinos says he expects the New
Zealand dollar (NZD/JPY) and Aussie/yen (AUD/JPY)
rates to weaken significantly. We are seeing weaker eco-
nomic data across the APAC (Asia Pacific) region, which is
very bearish for the Aussie dollar, he says. Im looking
for the yen to weaken vs. the dollar, but regionally the yen
still remains a defensive currency.
Other market-watchers agree. We expect JPY to remain
under pressure on crosses into 2014 as the Bank of Japan
maintains its QE program at full pace until further notice,
says Sean Callow, senior currency strategist at Westpac
Institutional Bank. Indeed, as growth has decelerated and
the rise in inflation and reduction of deflation might not
prove durable, early in 2014 we could see increased discus-
sion of the BOJ increasing the scale of its QE, adding to
yen weakness.
Looking ahead, however, Callow notes there will be
pauses and pullbacks, given a speculative market that
seems very long USD/JPY already. But he adds that
USD/JPY may not be the best way to trade yen weakness.
We do not expect the U.S. economy to be strong enough
for the Fed to start reducing QE until at least Q3 2014,
which will keep a lid on U.S. yields and limit upside on
USD/JPY.
Callow believes a better play is to go long the NZD/
JPY pair. The Reserve Bank of New Zealand seems highly
likely to raise interest rates in 2014, probably by 100 basis
points, he says. This is broadly priced in, but once the
date for the first hike draws near, the kiwi should draw
fresh demand. The kiwi/yen is likely to be a buy on dips
into 2014, targeting 87-88.
Serebriakov also thinks the New Zealand currency has a
bullish outlook in the near future (see Figure 3). We think
the kiwi will be one of the strongest commodity-based cur-
rencies, he says. The New Zealand dollar will do well
against the yen. Looking at market expectations, we could
have three to four rate hikes by the RBNZ totaling 75-100
basis points.
Fed tapering
Once the U.S. Federal Reserve begins to taper its monthly
GLOBAL MARKETS
purchases of Treasuries and mortgage-
backed securities, the shift in monetary
policy is expected to be dollar-bullish,
and thus would further support a rise in
the dollar/yen rate.
Tapering is negative for U.S. bonds;
it will push yields higher and interest
rate differentials between U.S. bonds and
Japanese bonds would favor a stronger
dollar/yen, Cochinos says.
Fed tapering could trigger some move-
ment on the yen/emerging-market (EM)
crosses, with the yen rising and EM FX
falling (Figure 4). The Indian rupee
and the Indonesian rupiah are particu-
larly vulnerable within Asia. But all the
emerging market currencies Turkish
lira, Philippine peso, Thai baht, etc. are
exposed to the Fed, Levine says.
Safe haven
Last but not least, its worth remem-
bering the Japanese yen is viewed as a
safe-haven currency during times of
global economic turmoil or instability. If
financial market conditions grow more
turbulent in the future, the yen could rise
again, Rupkey says.
Rupkey says the Japanese banking
systems strength and stability supports
the yens safe-haven position. During
the financial crisis in 2008, the banking
system in Japan didnt get involved in
mortgage-related products, he says. It
is widely acknowledged the banking sys-
tem is sound.
Although U.S. equities have been on
a tear this year, many analysts have
warned of the potential for a correction,
which would be another factor that could
contribute to safe-haven yen buying. If
the stock market were to lose 10%, the
yen would probably appreciate on that,
Rupkey says.
y
FIGURE 3: KIWI/YEN
Some analysts see the potential for a long expect the New Zealand
dollar/yen play.
FIGURE 4: YEN/RUPEE
Fed tapering could trigger yen strength vs. emerging currencies,
including the Indian rupee.
Source: www.advfn.com
11-IB13-692
Member - NYSE, FINRA, SIPC. Lower investment costs will increase your overall return on investment, but lower costs do not guarantee that your
investment will be profitable Supporting documentation for any claims and statistical information will be provided upon request. The settlement date
of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may neces-
sitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades
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The same philosophy and technology that enables our
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futures, and bonds worldwide on over 100 markets.
Forex.
How proftable are you?
Interactive Brokers
Data provided by forexmagnates.com, includes the impact of any commissions
% Profit % Loss
Total
Accounts
Spread
Markups
Q3 2013
Percentage of profitable and unprofitable accounts as reported to the NFA
Interactive Brokers

OANDA
FXDD
ILQ
Gain Capital
IBFX/TradeStation
FXCM
MB Trading
44.0%

35.1%

29.1%

22.3%

31.0%

32.0%

28.0%

27.2%
56.0%

64.9%

70.9%

77.7%

69.0%

68.0%

72.0%

72.8%
23,759
20,812

5,118

1,138

11,425

8,718

22,055

3,365
NO
YES
YES
YES
YES
YES
YES
YES
LOWER YOUR COSTS TO MAXIMIZE YOUR RETURN
Big-picture forecasting is hardly ever a good idea. Mostly
you end up eating crow. And yet we all want to get at least
a broad outline of what to expect in the coming year, even
if the whole thing goes out the window at the first really
big shock.
And shocks are by definition something we are very bad
at predicting. We may know there will be a weather shock
or a financial sector failure, but not the exact form it will
take. For example, a large minority foresaw the housing
crash but nobody knew about AIG. And nobody foresaw
the Arab Spring, or that the Health Insurance Marketplace
website rollout would be a train wreck.
What are we missing this time? Heres a short list of
events in 2014 that we do know about:
Latvia joins the EMU. Greece takes over the rotating
EU presidency in January, and Italy gets it in June.
The European Central Bank (ECB) conducts capital
adequacy and stress tests before taking over bank
supervision.
Russia hosts the G8 in June.
China starts implementing its Third Plenum reforms,
which include relaxing the one-child policy, getting rid
of prison camps, opening up financial markets, and
possibly letting the yuan float more widely.
Janet Yellen takes over as Fed chairman and a slew of
new Fed officials come into office and onto the Federal
Open Market Committee (FOMC). We get the begin-
ning of tapering in 2014, if not in December 2013. We
may also start getting a press conference after every
policy meeting, like all the other major central banks.
In April Japan will raise the consumption tax from 5%
to 8%, a threat to Abenomics unless we also get the
third arrow structural reform, including putting
more income in wage-earner pockets.
We will get the outcome of the London fix investiga-
tion.
Europe
The Euros resilience is an astonishing phenomenon in the
history of foreign exchange. We saw another instance in
November. On Nov. 7, the ECB cut the key refi rate by 25
basis points to 0.25%, and the Euro already falling in
anticipation bottomed the very same day (Figure 1). The
Euro fell below the 20-day moving average (red) and the
50-day MA (turquoise), but didnt come close to the 200-
day MA (green). The Euro did put in a downside breakout
of the rising channel drawn off the July low, but for only a
week, after which it closed a few times back inside the ris-
ing channel.
This is classic sell on the rumor, buy on the news, but
when the news is authentically negative, and it is in this
case, the upward bounce is shallow and short-lived, and
sometimes a dead-cat bounce.
The catalyst for the reversal was a combination of really
good German data, including IFO, and fairly downbeat
U.S. data that suggested further delay in tapering. Even so,
the big picture on rates is the spread between the German
Bund and the U.S. 10-year T-note is at a full 100 bp. The
outlook is firmly Europe down, U.S. up. That the Euro
shrugged off the rate cut implies the imagined delay in
tapering was a more important factor than the actual rate
cut.
This has unhappy implications for the year ahead. Low
growth and inflation data out of the Eurozone (with the
exception of Germany) hints the ECB will be scraping the
bottom of the barrel for additional boosts. One idea gain-
ing widespread attention is a negative deposit rate for
banks parking surplus cash at the ECB. Bank chief Mario
Draghi took the unusual step of mentioning the negative
rate rumor, saying it was just something discussed in the
policy meeting and not likely to occur.
All the same, as the ECB investigates banks for non-
performing loans and other bad assets in the quest for
better capital adequacy and stress resistance, observers are
pretty sure some ugly stuff will be found under the rugs.
A separate agency, the Securities and Markets Authority,
has already discovered the big 39 banks in the region have
huge divergences in the way they disclose critical data,
including income itself, forbearance on non-performing
loans, derivatives, and even liquidity.
The Eurozone weathered the peripheral sovereign debt
crisis, which seems to be back-burnered for the moment,
but the banking sector could well turn out to be the 800-
On the Money
ON THE MONEY
What to worry about next year
A look at some of the issues looming over the FX market as we head into a new year.
BY BARBARA ROCKEFELLER
pound gorilla in the room. This is not to say Europe will
face a banking sector crisis like the U.S. did in 2008-2009,
but the chance of fireworks is pretty high. Also the ECB
cannot, literally, engage in troubled asset relief (TARP),
although it can possibly do TALF (term asset-backed loan
facility). But another thing the ECB cannot do is quantita-
tive easing. At a guess, it will be expedient to sweep a lot
of unhappy disclosures from the bank investigation back
under the rug.
Meanwhile, U.S. banks are cleaned up, or at least a lot
cleaner than they were, and busily paying fat fines for past
misbehavior. The dollar doesnt get any benefit from a rela-
tively healthy banking sector, but it seems lopsided that
the Euro doesnt get any drag from an unhealthy one. And
if rate cuts in Europe are not terribly Euro-negative and its
only the Fed that counts, the longer the Fed defers taper-
ing, the longer the dollar stays weak.
In fact, if the 10-year spread is already 100 points in
favor of the dollar, the key question is, how much more
premium does the U.S. have to pay to catch a break?
The Fed and tapering
In practice, the number that counts is payrolls, with the
November number due on December 6. If the U.S. econ-
omy is indeed stagnating, as former Treasury Secretary
Lawrence Summers asserts, we should expect a return to
low-ish numbers after Octobers surprise rise of 204,000,
which hardly anyone saw coming.
TrimTabs, like ADP with its paycheck business, uses real
data to make its estimates, the daily income tax deposits
to the Treasury from all salaried employees (including the
public sector). TrimTabs claims this data is live and real-
time, better than the BLS surveys, and more accurate in the
sense that once the BLS is finished revising (and revising
again), the final number is close to the TrimTabs number.
You cant get the TrimTabs forecast for November unless
you subscribe, but all year TrimTabs has been saying aver-
age monthly jobs gains are lower in 2013 than in 2012. For
October, for example, TrimTabs had a forecast of 91,000, or
half the published BLS number. If TrimTabs is right that
the BLS data meets its own forecast after revisions, we
need to expect a substantial revision to the October data,
perhaps as early as the December 6 release of November
data.
If the November jobs data is disappointing and/or the
October revision is a big cut, we will have a discrepancy
between the market and the too-optimistic Fed. Speaking
to the National Economics Club in New York, Fed chief
Ben Bernanke was thought to say the Fed had not ruled
out tapering as early as the December FOMC meeting on
Dec. 17-18. The 10-year yield rose as he was speaking.
Bernanke defended forward guidance. The Fed still
expects improvement in employment and a gradual rise in
inflation to its 2% target. But even when tapering begins,
the Fed funds base-case rate will remain near zero for a
very long time until perhaps well after unemployment
drops below 6.5%. Markets are beginning to appreciate
that they are separate tools and that the mix of those tools
will change somewhat over time, Bernanke said. Its the
most fundamental point I wanted to make.
Yeah, but the market doesnt believe it works that way.
One idea floated at an earlier FOMC was that lowering the
unemployment benchmark would convince traders that
the forward guidance of lower for longer was sincere.
Some analysts, notably at Deutsche Bank, were convinced
we would get the change, and of course its still possible.
FIGURE 1: RESILIENCE OF THE EURO
When the ECB cut its key refi rate 25 basis points on Nov. 7, the Euro sold off
intraday but rebounded strongly.
Source: Chart Metastock; data Reuters and eSignal
Barbara Rockefeller
Currency Trader May Dec 2013
Figure 1. Resilience of the Euro
ber
9 16 23 30
October
7 14 21 28 4
November
11 18 25 2
December
9
1.31
1.31
1.32
1.32
1.33
1.33
1.34
1.34
1.35
1.35
1.36
1.36
1.37
1.37
1.38
1.38
0.0%
23.6%
38.2%
50.0%
61.8%
100.0%
ON THE MONEY
The obsession with how, exactly, tapering is going to be
introduced is not misplaced. A story in the Financial Times
uses the word anguish to describe the Fed decision-
making process. The forward guidance process is weak.
For one thing, decision-makers are using proxies (the
unemployment rate) for overall economic performance.
For another, central bankers hearts are not really in it
the commitment to forward guidance is paper-thin. In a
nutshell, central bankers are skating on thin ice and they
know it.
Janet Yellen used the word ultimately multiple times
in her Senate Finance Committee confirmation hearing:
Ultimately, the Federal Reserve will remove its extreme
policies of monetary stimulus, because ultimately the U.S.
economy will stage a recovery. Yellens use of the word
ultimately was interpreted to mean she is in no hurry to
taper, and the absence of hawkish words means dovish-
ness by definition. Thus we go from uncertainty over cri-
teria for tapering and the timing of tapering to that awful
thing, forward guidance, which doesnt work well and is
not really credible even in the minds of the very people
using it for policy. What a pickle.
Its probably too much to hope for, but theres a glimmer
of a suggestion that tapering is not the only policy initia-
tive. Talk of cutting the deposit rate for banks from 0.25%
to zero has been around for a long time, but suddenly its
on the table again and the Fed board thinks its worth
considering at some stage. Yellen worried in her confir-
mation testimony that lowering the rate would impair
money market function, showing that once again the
Feds clientele is the banks, not the borrowing public.
Smart people disagree on the effect. Economist Alan
Blinder and Minneapolis Fed President Narayana
Kocherlakota say goosing lending is a good priority but
others think the effect would be small, including New
York Fed researchers. The researchers are likely looking at
mechanical models that fail to account for squishy things
like confidence.
One reason for interest on deposits is to siphon funds
out of the economy to manage inflation, so in the absence
of inflation, maybe letting some of it loose is appropriate.
Besides, it would save $199 million (2012) in interest pay-
ments, not a lot of cost, but so what? The cost is not the
point. If the ECB is considering a negative rate on bank
deposits, for the Fed to keep 0.25% is doubly dumb.
But the main event is tapering. St. Louis Fed President
James Bullard said tapering is definitely on the table but
data-dependent. A strong jobs report, I think, would
increase the probability some for a December taper, he
said. Not the best use of language increase the prob-
ability some. An interesting point is the idea of lowering
the unemployment threshold from 6.5%, to drive home the
point that meeting the threshold does not imply rate hikes,
was embraced by only a few.
A replay of the May-September drama would be a very
bad thing. Many thought the Fed-promised tapering
would start in September but, at the last minute and with-
out warning, the Fed retreated, saying the economy wasnt
good enough. Now the market is pricing in tapering in
December, and while we may deride traders for overre-
acting, if the Fed doesnt mean it, it should know better
than to poke a stick at a sleeping bear. The Fed can again
decline to taper in December but it will do so with its cred-
ibility intact only if it takes some other actions, like cutting
the deposit rate and getting more specific about what data
it needs to see (participation rate, etc.).
As the only federal institution left standing these days
with any authority and respect, the Fed cant afford to
fumble. What the Fed does or doesnt do in December
likely depends on the intelligence it gets about the budget.
No deal, no taper (in December). The budget deadline is
Jan. 15 and the FOMC meets Jan. 24-25. Therefore, January
is a far more likely date than December.
Nobody else is mentioning this timetable, but it seems
logical. Budget gridlock and government shutdown cant
be minor factors to the Fed. Surveys continue to show the
majority believe tapering will not begin until the March
meeting. Analysts note taper-date survey respondents
tend to favor dates that include a press conference, like
December and March, leading to the idea the Fed will
take away this bias by holding a press conference at every
meeting. Since the rest of the developed worlds central
banks have a press conference after every meeting, this
is not such a shocking change. In retrospect, the Fed was
right to delay tapering at the September meeting because
of the 16-day government shutdown and near default that
ensued in October. Ending tapering as this was going on
might have been disruptive in all kinds of pinball ways.
Its possible the Fed will delay in December for the same
reason. But if so, it really should say so out loud for its
own credibility, although the Fed likes to stay as far away
as possible from any comment that sounds remotely politi-
cal.
To summarize: We get both hawkish-seeming and dov-
ish-seeming remarks from top Fed officials. The consensus
is for tapering to start in March, but we could get some
additional change in the environment at the December
meeting, too, such as a cut to zero in the bank deposit
rate, a lowering of the unemployment threshold, or the
announcement of press conferences after every meeting.
Bottom line, uncertainty remains high and volatile, roil-
ing bond and FX markets in December, and Q1 cant be
ruled out.
China
Information on the reforms agreed to at the Third Plenum
is still a bit sketchy, but the reform agenda is reported to be
wide and deep. The reform covers 15 sectors and runs to
20,000 words. Reforms will include opening the financial
sector, relaxing restrictions on investment, and fixing the
IPO system. Markets loved the whole
idea, especially ending the one-child
policy, and the Shanghai rose 5.28% in
the seven days after the Plenum ended,
as shown in Figure 2s chart of the
Shanghai Composite index. An upside
breakout could be forming.
Two points that have emerged so far:
According to Gov. Zhou Xiaochuan,
the Peoples Bank of China (PBOC) will
widen the yuans trading band in an
orderly way and basically end nor-
mal intervention, as well as phase out
investment caps for both domestic and
foreign investors. In addition, PBOC
Deputy Gov. Yi Gang said Its no longer
in Chinas favor to accumulate foreign-
exchange reserves. The marginal cost of
accumulating foreign-exchange reserves has exceeded the
marginal gains.
While other countries (India, Indonesia) saw outflows
since June on the tapering story, China kept seeing inflows,
with reserves rising from $3.5 trillion to $3.8 trillion. Yi
also said the yuan appreciation benefits more people in
China than it hurts. Yi is head of the State Administration
of Foreign Exchange (SAFE), so he ought to know. But
obviously the yuan will spike if the government stops
intervening; besides where will they put the money if not
into reserves? Commodity stockpiles are one idea they
are not conventional monetary reserves but gold is a
conventional reserve, so its presumably not an option.
Maybe SAFE will give the money to the sovereign wealth
fund, the Chinese Investment Corporation or spend it.
What an idea.
One area where spending would be useful is the social
sector. The report contains this statement: More attention
also needs to be paid to employment, income levels, social
security and peoples health. Also: On economic matters,
Chinese leaders said they would establish a system for
insuring bank deposits, prepare a mechanism for finan-
cial bankruptcy and ease controls on prices for energy,
water, telecommunications and other services. They will
also increase the amount of profits that Chinas vast state-
owned enterprises pay to the government. It also said it
would ease curbs on offshore securities investments and
mergers and acquisitions, without providing detailsThe
document set few firm deadlines. One of them raises the
proportion of profits state companies must return to the
treasury, increasing that rate to 30% by 2020, from a cur-
rent range of 5% to 15%.
There are some important currency-relevant tidbits
here beyond just opening up the financial sector to higher
foreign participation. Deposit insurance and proper bank-
ruptcy rules are high on the list. While property rights are
probably not going to reach the Anglo-American standard,
elevating property rights puts China on a fully capitalist
track.
Investors are going to flock to China in even greater
numbers.
Japan
When the yield on your 10-year note is 111 bp below
Bunds and 211 bp below U.S. 10-year T-notes, you have to
expect your currency to be unpopular. This is what is hap-
pening to the Japanese yen, which made a four-year low
against the Euro and a five-month low against the dollar
in November. In recent months, the dollar/yen has been
underpinned by rising U.S. yields and hit 101 for the first
time since early July, above the magic 100 level.
This is exactly what Abenomics was designed to deliver,
but after reaching a high in May (103.73), the dollar/yen
wobbled as low as 93.79. The causes were a combination
of flight to safety by domestic traders, loss of confidence
in imminent tapering, and discouragement over whether
Abenomics can deliver the third arrow, structural
reform. The market is willing to believe the first arrow
(raising quantitative easing to astronomical heights) was
good and the second arrow (infrastructure spending) was
FIGURE 2: SSE COMPOSITE (SHANGHAI)
News of Chinas Third Plenum reforms was greeted favorably by the markets.
The Shanghai Composite index rose 5.28% in the seven days after the Plenum
ended.
Barbara Rockefeller
Currency Trader May Dec 2013
Figure 2. SSE Composite (Shanghai)
2012 August September November December 2013 February April May June July August September November 2014
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ON THE MONEY
pretty good, too. As a result, the Nikkei stock index rose a
stunning 80% between November and May (Figure 3).
Now, ahead of the hike in the consumption tax rate
from 5% to 8% on April 1, we need to see and have faith in
structural reform: lowering the corporate tax rate, remov-
ing restrictions on employment practices, and goosing
companies to find a better use for their hoard of 220 tril-
lion (according to the BOJ as of June 2013). Other initia-
tives already announced include payments to low-income
wage earners, tax incentives for home purchases, and gov-
ernment spending to boost health care and tourism.
Not to be dismissed is the Trans-Pacific Partnership,
which seeks to remove tariffs on many agricultural prod-
ucts, like the amazing 778% tariff on foreign rice. Japanese
rice is promoted as having magical properties; in that case,
why does it need such a killer tariff?
More details about the third arrow are due in early
December. The yield differential is wide against the yen
but if the third arrow is deemed weak or unworkable, or
if a crisis drives money home to the yen, we could see the
Nikkei and the dollar/yen pair sink.
The London fix
Big bank traders who participate in the London fix are
under the microscope of no fewer than eight regulators
from the U.S., UK, and Switzerland, plus a few transna-
tional agencies.
According to the Financial Times, there is a whistle blow-
er who charges some of the traders with collusion, mean-
ing they disclosed their buying or selling needs ahead of
time (4 p.m. London or 11 a.m. New York time) in order
to suit their own banks book and/or give them a head
start on adjusting their book. Additional charges include
disclosing the likely direction of FX prices at the fix to pals
with private trading accounts to let them front-run the fix.
Regulator are poring over not only official phone taps but
also social network chats and tweets.
What will they find? We guess probably the same
amount of malfeasance and fraud as would be found in
any investigation of any other business (say, stock trading),
or roughly 5-10%. The problem is not that some people
on trading floors are crooked, but that the regulators will
throw the baby out with the bath water, never having actu-
ally managed a trading book themselves.
Heres the shocking truth banks have always front-
run their FX customers. Its how that market works and is
inherent to professional FX trading. To outlaw front-run-
ning would be like telling the supermarket it cant stock
up on turkey and cranberry sauce ahead of Thanksgiving.
The traders need an inventory to meet customer needs and
need to know when supply is going to be big so they can
avoid a disruptive price crash. Market makers must always
make a two-way price, of course, but nowhere is it written
they must book massive and preventable losses.
The dividing line between sharing
inside information on pending supply
and demand with professional counter-
parts is an entirely different thing from
sharing it with non-professional pals in
order to front-run the fix for personal
gain. The first can be justified and the
second cannot. For the press to ramp
this up into a FX scandal deserving of
the regulatory hammer coming down
hard on the industry is a bad thing. It
can only increase volatility to no good
purpose. Catching crooks is one thing,
but tarring a whole industry with the
same brush is overkill.
By this time next year, the London
FX fix scandal will presumably be over
with. We may not like the outcome.
y

Barbara Rockefeller (www.rts-forex.com) is an
international economist with a focus on foreign
exchange, and the author of the new book The
Foreign Exchange Matrix (Harriman House).
For more information on the author, see p. 4.
FIGURE 3: USD/JPY (GREEN) VS. NIKKEI (LEFT SCALE)
Japans Nikkei stock index rallied 80% between November 2012 and May 2013
in response to Abenomics initiatives.
November December2013 February March April May June July August SeptemberOctober NovemberDecember 2014 Fe
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Barbara Rockefeller
Currency Trader Mag Dec 2013
Figure 3: USD/JPY (Green) vs. Nikkei (Left Scale)

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18 October 2010 CURRENCY TRADER
The idea of creating trading strategies that work on mul-
tiple instruments comes from the experience of trend-
following traders in the 1970s and 1980s, but it remains
a common piece of advice for algorithmic forex traders
today. Its natural to believe a trading system that tests
profitably on several currency pairs is robust, while a
system that works on a single pair is possibly optimized
and thus inherently vulnerable. A system that works on
multiple pairs, the logic goes, must be exploiting some
fundamental market characteristic.
Well explore this assumption by evaluating whether
trading systems that generate in-sample (IS) profits across
multiple currency pairs are, in fact,
more likely to generate positive
returns on future, unseen price
data.
To conduct this experiment
well use daily data for the Euro/
U.S. dollar (EUR/USD), British
pound/U.S. dollar (GBP/USD), and
U.S. dollar/Japanese yen (USD/
JPY) pairs from January 2000 to
September 2013. This data will be
split into an in-sample period span-
ning January 2000 to January 2006
and an out-of-sample (OS) period from January 2006 to
September 2013.
Generating systems
Well use the in-sample data to develop sample trading
systems to use in different test cases. First well create
1,000 in-sample profitable systems for each of the three
currency pairs (criteria: R2 > 0.8, minimum 10 trades per
year). Then well create an additional 1,000 systems for
each pair that also generates in-sample profits in the other
two pairs. This will allow us to compare the out-of-sample
results of strategies designed with the prerequisite of mul-
TRADING STRATEGIES
Is less more in forex?
Traders tend to favor systems that test well across multiple
instruments, but should that be a goal for FX traders?
BY DANIEL FERNANDEZ
TABLE 1: IN-SAMPLE VS. OUT-OF-SAMPLE PERFORMANCE
Profitable OS OS better than IS Mean OS P/L IS vs. OS (R)
EU 77.1% 12.6% 17.2% 0.34
GU 40.1% 3.3% -5.8% -0.12
UJ 66.5% 17.2% 8.5% -0.04
EU MPP 50.1% 4.6% 0.99% 0.057
GU MPP 33.6% 3.4% -12.32% -0.15
UJ MPP 61.1% 9.9% 5.31% -0.02
all MPP 48.2% 6% -2% -0.057
Systems developed for multiple-pair profitability (MPP) across all three symbols
performed much worse on out-of-sample data.
tiple-pair profitability (MPP) to the out-of-sample results
of those built only with the requirement of single-pair
profitably. (All systems were generated using the Kantu
Parameterless system generator with a starting balance of
$100,000.)
Similar to the results published in previous articles (see
Related reading), in-sample system generation in the
EUR/USD and the USD/JPY pairs leads to better-than-
random odds of achieving positive results in the out-of-
sample period, while the GBP/USD pair has a low prob-
ability of success. Figure 1 maps in-sample profitability vs.
out-of-sample profitability for the three currency pairs for
the systems that were generated for single-pair profitabil-
ity only.
Also in agreement with previous tests, the EUR/USD
pair has a positive correlation between in-sample prof-
itability and out-of-sample profitability implying a
reduced probability of data-dredging while the other
pairs exhibited negative or only slightly positive correla-
tions. Overall, the results suggest the 2000-2006 in-sample
period had a good chance of generating some level of out-
of-sample profitability in the 2006-2013 period only in the
EUR/USD and the USD/JPY pairs.
By comparison, the systems that were developed with
in-sample profitability for all three currency pairs pro-
duced conspicuously negative out-of-sample performance
results. Table 1 shows the number of profitable out-of-
sample results for all pairs drops considerably even for
the GBP/USD pair, which already had low out-of-sample
profitability. Figure 2 is the same as Figure 1 except it maps
the results for the systems that were generated for multi-
ple-pair profitability.
FIGURE 1: SYSTEMS DEVELOPED FOR
SINGLE-PAIR PROFITABILITY
GBP/USD
USD/JPY
EUR/USD
These results are interesting because they suggest trad-
ing only systems that were profitable across multiple
currency pairs (Figure 2 and the bottom half of Table 1)
would have performed worse in real trading on future,
unseen data. This is further highlighted by the mean out-
of-sample profits, which also dropped considerably when
multiple pair profitability was required.
Making sense of the results
Although this might initially seem completely counterin-
tuitive, there are, in fact, good reasons why trading a setup
with in-sample profitability across multiple currency pairs
will likely lead to worse results in out-of-sample trading.
Imagine that each currency pair had 10 fundamental
characteristics that could be used to create systems that
would be profitable in out-of-sample market conditions
but 100 characteristics that are spuriously correlated
with in-sample profitability that would lead to random,
negatively biased out-of-sample results. The success of
multiple-pair trading is determined by the degree to which
those 10 fundamental conditions overlap among the differ-
ent currency pairs. If nine of the 10 conditions are shared
while 50 of the spuriously correlated components are elim-
inated between the pairs, the odds of building a system
for multiple pairs that leads to more robust trading results
increases substantially. But if only one of the 10 conditions
is shared even if the same 50 spuriously correlated com-
ponents are cancelled the odds of success are reduced
considerably.
Heres the problem: Currency pairs tend to share more
spurious correlations than true fundamental correlations.
As a result, trading systems that work (in-sample) across
multiple pairs are not only less profitable, they are far less
TRADING STRATEGIES
FIGURE 2: SYSTEMS DEVELOPED FOR
MULTIPLE-PAIR PROFITABILITY
EUR/USD
GBP/USD
USD/JPY
likely to succeed in the future than a system developed for
a single currency pair. This means that when generating
strategies it makes more sense to attempt to exploit trad-
ing opportunities in specific pairs rather than attempting
to exploit a general market phenomenon across multiple
pairs.
The reason this is true in forex and not in other markets
has a lot to do with the significant differences in currency
pairs that are not as common in bonds, stocks, or com-
modities. For example, in the stock market all instruments
generally share a long-term positive bias; this makes creat-
ing systems designed to work across multiple stocks by
tackling fundamental market characteristics a good idea.
In other words, such systems tend to exploit a strong
underlying market bias not present in forex. A long-term
forex bias, such as carry, can change significantly over
time, as core characteristics (such as interest rates) change,
while in stocks core characteristics are more likely to be
permanent features of the market. The changing relation-
ships between countries, interest rates, central bank inter-
ventions, and so on, make different currency pairs behave
more like different markets instead of different instruments
within a market sharing fundamental characteristics.
Better to go with single-pair strategies
Its worth noting this analysis doesnt mean that building
systems that work across many currency pairs is not pos-
sible. As the results show, a certain percentage of systems
developed for the three different pairs worked historically.
What these results indicate is that, historically, it was not a
good idea to follow this path, at least during the in-sample
period used here and using these specific currency pairs.
Instead, it has been better to focus on generating systems
that exploit the fundamental characteristics of a single pair
this has led to better odds of achieving out-of-sample
profitable results.
Other questions to look into include whether this holds
true for larger portfolios, or for portfolios comprised of
different symbols (e.g., only JPY pairs) and much longer
in-sample periods.
y

Daniel Fernandez is an active trader focusing on forex strategy
analysis, particularly algorithmic trading and the mathematical
evaluation of long-term system proftability. For more information on
the author, see p. 4.
Measuring system quality with Ideal R
Currency Trader, July 2013
Calculating regressions on rolling time periods of an
equity curve provides a more accurate understanding of
a trading systems value.
FX trading system development:
Outperforming your tests
by Daniel Fernandez, Currency Trader, August 2013
When youre developing a forex trading strategy, how
much price data should you use?
System testing in dollar/yen and pound/dollar pairs
by Daniel Fernandez, Currency Trader, September 2013
Different currency pairs require different testing param-
eters when developing trading systems.
Avoiding data dredging in forex systems
by Daniel Fernandez, Currency Trader, October 2013
How do you know if your trading strategy is capitalizing
on a genuine market dynamic or just lucking out?
Related reading
TRADING STRATEGIES ADVANCED CONCEPTS
Certain words tend to turn certain traders off almost
immediately. Very few futures traders are comfortable
with swap terminology, even as the mandates of Dodd-
Frank have pushed swap clearing closer into the world of
futures. Non-option traders tend to react similarly to vari-
ous option terms such as boxes, butterflies, and the topic
of the past two months, risk reversals (see Going forward
with reversals, October and November 2013).
Both the October examination of risk reversals for major
currencies and the November counterpart for minor cur-
rencies concluded the relative anxiety between long and
short positions expressed in the different volatilities for
call and put options of similar delta was information-rich
for future market direction. This should not have been sur-
prising, as prices in any market are set by the willingness
of the buyer or seller at the margin to pay more or accept
less, respectively.
What about symmetric anxiety as measured in a but-
terfly trade? These trades consist of buying both the call
and the put of a similar delta and selling two at-the-money
options. We generally expect out-of-the-money volatility to
be higher as a matter of course to reflect the greater risks
involved in writing those options. In practice, however,
the smile of volatility often is skewed in such a way that
volatility in either the call or put wing is greater than the
at-the-money volatility, while the other wings volatility is
less than the at-the-money volatility.
How do butterflies relate to the carry return from bor-
Butterflies are free
and well worth it:
The majors

Do butterflies offer an easy approach to trading
option volatility on the major currencies?
BY HOWARD L. SIMONS
FIGURE 2: THE JAPANESE YEN AND
THREE-MONTH BUTTERFLIES
-0.2%
-0.1%
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
0.7%
0.8%
0.9%
1.94
1.96
1.98
2.00
2.02
2.04
2.06
2.08
2.10
2.12
2.14
J
a
n
-
0
6

J
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0
6

D
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-
0
6

J
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-
0
7

D
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-
0
7

J
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-
0
8

N
o
v
-
0
8

M
a
y
-
0
9

N
o
v
-
0
9

M
a
y
-
1
0

N
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v
-
1
0

A
p
r
-
1
1

O
c
t
-
1
1

A
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-
1
2

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t
-
1
2

A
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-
1
3

S
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p
-
1
3

T
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-
M
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t
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B
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l
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L
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1
0

U
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D

C
a
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y

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t
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I
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o

J
P
Y
,

J
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.

4
,

2
0
0
6

=

2
.
0
0

L
e
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T
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M
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t
h
s

Carry
3-Mo 25
3-Mo 35
FIGURE 1: THE EURO AND THREE-MONTH
BUTTERFLIES
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
0.7%
0.8%
0.9%
1.0%
1.98
2.00
2.02
2.04
2.06
2.08
2.10
2.12
J
a
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-
0
6

J
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6

D
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-
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6

J
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7

D
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7

J
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0
8

N
o
v
-
0
8

M
a
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-
0
9

N
o
v
-
0
9

M
a
y
-
1
0

N
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v
-
1
0

A
p
r
-
1
1

O
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t
-
1
1

A
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-
1
2

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t
-
1
2

A
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-
1
3

S
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p
-
1
3

T
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-
M
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B
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L
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1
0

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C
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n

I
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E
U
R
,

J
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.

4
,

2
0
0
6

=

2
.
0
0

L
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T
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o

M
o
n
t
h
s

The Euro And Three-Month Butterflies
Carry
3-Mo 25
3-Mo 35
rowing the USD and lending into the target currency? First,
lets map the butterfly values for both three-month 25- and
35-delta against the common logarithm of the total carry
return from the U.S. dollar into those currencies, re-indexed
to January 2006. This approach allows for the intuitively
appealing rising line depicting a stronger currency.
As in the case of risk reversals, if butterflies are to have
any value in trading and market analysis, they should lead
the return series. The same two-month lead-time on average
as used previously will be used here. However, we should
not expect the more symmetric risk measurement of the but-
terfly to be as strong a directional indicator as risk reversals.
Therefore, the second part of this discussion will focus on
butterflies as a mean-reverting indicator for future absolute
returns relative to recent absolute returns.
Butterflies and the majors
The Euro has lived in a near-permanent state of crisis since
the sovereign-debt woes of its weaker members came to the
fore in late 2009. However, no one should confuse tension
with price action; the common currency has been confined in
the upper half of the range it has occupied since its January
1999 inception. Given the number of stories about the bloc
fragmenting, the demand for option protection at the wings
was small, especially for the 35-delta butterfly, going into
May 2013 (Figure 1). That started to change in May 2013 with
speculation as to if and when the Federal Reserve would start
tapering bond purchases under QE3.
The yen, as is its wont, presents a very different picture
(Figure 2). While the 25-delta butterfly spiked higher during
the 2008 financial crisis, the 35-delta butterfly turned negative
evidence of a large demand for protection against large
moves combined with a lack of concern about small moves.
Both butterflies rose during the 2011 U.S. debt ceiling and
European sovereign credit situations and then fell as Japan
started to become much more aggressive in its attempts to
drive the JPY lower. Once taper-talk began in May 2013, the
25-delta butterfly rose.
Prior to 2013, butterflies for the Canadian dollar were
unusually active relative to the underlying moves in the cur-
FIGURE 5: THE SWISS FRANC AND
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
0.7%
0.8%
0.9%
1.0%
1.98
2.00
2.02
2.04
2.06
2.08
2.10
2.12
2.14
2.16
2.18
2.20
2.22
J
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6

J
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D
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6

J
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7

D
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J
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N
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M
a
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9

N
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9

M
a
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-
1
0

N
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-
1
0

A
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1

O
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1

A
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1
2

O
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2

A
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1
3

S
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p
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3

T
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B
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l
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L
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0

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C
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n

I
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C
H
F
,

J
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4
,

2
0
0
6

=

2
.
0
0

L
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M
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s

Carry
3-Mo 25
3-Mo 35
FIGURE 4: THE AUSTRALIAN DOLLAR AND
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.92
1.94
1.96
1.98
2.00
2.02
2.04
2.06
2.08
2.10
2.12
2.14
2.16
2.18
2.20
2.22
2.24
2.26
2.28
J
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6

J
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6

D
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-
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6

J
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0
7

D
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-
0
7

J
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0
8

N
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v
-
0
8

M
a
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-
0
9

N
o
v
-
0
9

M
a
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-
1
0

N
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v
-
1
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A
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1
1

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-
1
1

A
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2

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1
2

A
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3

T
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B
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L
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0

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I
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A
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D
,

J
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4
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2
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=

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0
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Carry
3-Mo 25
3-Mo 35
FIGURE 3: THE CANADIAN DOLLAR AND
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
0.7%
1.92
1.94
1.96
1.98
2.00
2.02
2.04
2.06
2.08
2.10
J
a
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6

J
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7

D
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J
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N
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0
8

M
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9

N
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9

M
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-
1
0

N
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-
1
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A
p
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-
1
1

O
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-
1
1

A
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1
2

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1
2

A
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1
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S
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3

T
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B
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L
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1
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I
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C
A
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J
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4
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2
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=

2
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L
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M
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s

Carry
3-Mo 25
3-Mo 35
ON THE MONEY
ADVANCED CONCEPTS
rency (Figure 3). The large spike in the 25-delta butterfly
during the 2008 financial crisis was to be expected, but the
spikes associated with the first rescue of Greece in May
2010 and yet another European debt crisis in October 2011
were almost as large. They were not associated with large
moves in the currency itself. Once the CAD settled into a
weak downtrend in 2013, the butterflies stopped flapping
about.
Butterflies for the Australian dollar exhibited a series of
spikes corresponding to periods of high tension in global
financial markets (Figure 4). With the exception of the 2008
financial crisis, these were unrelated to movements in the
AUDs carry return. As in the case of the Euro, butterfly
levels declined sharply following the November 2011
expansion of global currency swaps. The 25-delta butter-
fly rose during the first five months of 2013 as the AUD
turned lower and then declined once taper-talk began,
even as the AUD remained under pressure.
The Swiss francs butterfly history has been sedate given
the currencys volatility and imposed rate ceilings since
the financial crisis (Figure 5). It has the usual spikes during
the financial crisis, along with one following the imposi-
tion of the 1.20 CHF per EUR ceiling in September 2011,
but has been remarkably stable since that event.
The Swedish krona has not been as much of a repository
of flight capital from the Eurozone as the CHF has been,
but its butterfly history has been quite similar (Figure 6).
Its 25-delta butterfly declined steadily between the expan-
sion of currency swap lines in November 2011 and the
beginning of taper-talk in May 2013. Both butterflies have
been rising since then.
Finally, the British pounds butterfly history has declined
steadily since the 2008 financial crisis, with the two excep-
tions of the first rescue of Greece in May 2010 and the
European sovereign credit crisis of late 2011 (Figure 7). The
Bank of Englands aggressive monetary easing has kept
the GBP out of the spotlight and, most critically, within
fairly steady trading ranges against both the USD and the
EUR. The low butterfly levels reflected this narrative into
May 2013; the 25-delta butterfly then began to expand like
the Euros.
FIGURE 8: THREE MONTH-AHEAD RETURN
SHIFTS FOR THE EURO
FIGURE 7: THE BRITISH POUND AND
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
0.7%
0.8%
0.9%
1.0%
1.90
1.92
1.94
1.96
1.98
2.00
2.02
2.04
2.06
2.08
J
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M
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9

N
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9

M
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1

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3

T
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L
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1
0

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G
B
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,

J
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4
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2
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6

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2
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0
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s

The British Pound And Three-Month Butterflies
Carry
3-Mo 25
3-Mo 35
FIGURE 6: THE SWEDISH KRONA AND
-0.1%
0.1%
0.3%
0.5%
0.7%
0.9%
1.90
1.92
1.94
1.96
1.98
2.00
2.02
2.04
2.06
2.08
2.10
2.12
J
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D
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N
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M
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0
9

N
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0
9

M
a
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-
1
0

N
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1
0

A
p
r
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1

O
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t
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1

A
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1
2

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3

S
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3

T
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M
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L
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0

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I
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S
E
K
,

J
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4
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2
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=

2
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0
0

L
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s

Carry
3-Mo 25
3-Mo 35
Prospective returns
Now lets see whether absolute three month-ahead return
shifts appear to be a function of these butterflies and of the
forward rate ratio between six and nine months (FRR
6,9
) for
the major currencies (see Major currencies and The Great
LIBOR Kerfuffle, June 2013). The FRR
6,9
is the rate at
which borrowing can be locked in for three months starting
six months from now, divided by the nine-month rate itself.
The steeper the yield curve, the more this ratio exceeds
1.00; an inverted yield curve has an FRR
6,9
less than 1.00.
Prospective return shifts will be defined as the abso-
lute average daily return for the next three months minus
the average absolute daily return for the previous three
months. The goal here is to see whether 25-delta butterflies,
which measure the difference between out-of-the-money
and at-the-money volatility, lead changes in absolute return
levels. If so, traders can use them to place trading strate-
gies such as straddles or strangles, both of which are bets
on large or small absolute movement in either direction,
respectively.
In the remaining charts, positive absolute return shifts
are depicted with green bubbles, negative with red bub-
bles; the diameter of the bubble corresponds to the absolute
magnitude of the return. The last datum used, from the
beginning of June 2013, is highlighted and the end-August
2013 sample-end is marked with a crosshair.
In the case of the Euro, the results are indeterminate
(Figure 8). The steepening of the EUR FRR
6,9
combined
with the rising 25-delta butterfly in the taper-talk era has
placed prospective returns into a zone of mixed indica-
tions.
The yen, on the other hand, has moved into a zone of
negative prospective returns (Figure 9). It would take a
steeper JPY FRR
6,9
with a material shift either higher or
lower in the 25-delta butterfly to place the yen in a zone of
positive prospective returns.
The Canadian dollars map is poised to move into a zone
of positive prospective returns if the CAD FRR
6,9
and the
25-delta butterfly both decline (Figure 10). Moves toward
steeper yield curves and higher 25-delta butterfly levels
would put the CAD into a zone of negative prospective
returns.
SHIFTS FOR THE CANADIAN DOLLAR
SHIFTS FOR THE JAPANESE YEN
SHIFTS FOR AUSTRALIAN DOLLAR
ON THE MONEY
ADVANCED CONCEPTS
The collapse in 25-delta butterflies for the Australian
dollar has pushed the map into an unpopulated zone, a
sort of terra incognita similar to European maps before
the Age of Discovery (Figure 11). On a purely contrarian
basis if nothing else, the present configuration lies much
closer to zones from which positive returns on the AUD
have emerged.
The Swiss francs map has a very large and defined
zone of negative return shifts with 25-delta butterfly
levels greater than 0.40% and an FRR
6,9
less than 1.20
(Figure 12). It also has a cluster of positive prospective
returns with 25-delta butterflies near 0.30 and with CHF
FRR
6,9
levels greater than 2.50. However, trading the
CHF has been nothing other than an exercise in political
intelligence since the first large-scale interventions by the
Swiss National Bank at the end of 2009; no one should
assume either the option or money-market indicators are
related to free-market assessments.
The rising butterfly levels for the krona along with
its flatter SEK FRR
6,9
are keeping the SEK on a path of
prospective negative returns (Figure 13). The history of
this market has been very clear: Movements toward the
lower-right corner are associated with a weaker SEK.
Finally, the map for the British pound is moving in a
direction of positive prospective returns (Figure 14). A
reversal of conditions prevailing since May 2013 would
be required to push the outlook for the GBP in a negative
direction.
All mean-reverting strategies involving volatility
involve the problem of parameterization: The terms
high and low are meaningless by themselves; they
need to be placed into some reference of absolute real-
ized volatility, time-adjusted price proximity to a last
new high or low, or broader measure of intermarket
volatility.
It would be nice to think the butterfly market could
provide us with an easy mechanical approach to trad-
ing option volatility on the major currencies, but this
does not appear to be the case. We will see next month
whether this conclusion holds for the minor currencies as
well.
y

Howard Simons is president of Rosewood Trading Inc. and a
strategist for Bianco Research. For more information on the author,
see p. 4.
SHIFTS FOR THE SWEDISH KRONA
SHIFTS FOR THE SWISS FRANC
SHIFTS FOR THE BRITISH POUND
CPI: Consumer price index
ECB: European Central Bank
FDD (frst delivery day): The frst
day on which delivery of a com-
modity in fulfllment of a futures
contract can take place.
FND (frst notice day): Also
known as frst intent day, this is
the frst day on which a clear-
inghouse can give notice to a
buyer of a futures contract that it
intends to deliver a commodity in
fulfllment of a futures contract.
The clearinghouse also informs
the seller.
FOMC: Federal Open Market
Committee
GDP: Gross domestic product
ISM: Institute for supply
management
LTD (last trading day): The fnal
day trading can take place in a
futures or options contract.
PMI: Purchasing managers index
PPI: Producer price index
Economic Release
release (U.S.) time (ET)
GDP 8:30 a.m.
CPI 8:30 a.m.
ECI 8:30 a.m.
PPI 8:30 a.m.
ISM 10:00 a.m.
Unemployment 8:30 a.m.
Personal income 8:30 a.m.
Durable goods 8:30 a.m.
Retail sales 8:30 a.m.
Trade balance 8:30 a.m.
Leading indicators 10:00 a.m.
GLOBAL ECONOMIC CALENDAR
December
1
2
U.S.: November ISM manufacturing
report
3 Brazil: Q3 GDP
4
U.S.: October trade balance and fed
beige book
Australia: Q3 GDP
Canada: Bank of Canada interest-
rate announcement
5
France: Q3 employment report
UK: Bank of England interest-rate
announcement
ECB: Governing council interest-rate
announcement
6
U.S.: November employment report
Brazil: November CPI and PPI
Canada: November employment
report
LTD: December forex options;
December U.S. dollar index options
(ICE)
7
8
9
Mexico: Nov. 30 CPI and November
PPI
10 South Africa: Q3 employment report
11
Germany: November CPI
Japan: November PPI
South Africa: November CPI
12
U.S.: November retail sales
Australia: November employment
report
France: November CPI
Hong Kong: Q3 PPI
South Africa: November PPI
13 U.S.: November PPI
14
15
16
India: November PPI
LTD: December forex futures;
December U.S. dollar index futures
(ICE)
17
U.S.: November CPI
Hong Kong: September-November
employment report
UK: November CPI and PPI
18
U.S.: November housing starts and
FOMC interest-rate announcement
UK: Aug.-Oct. employment report
FDD: December forex futures;
December U.S. dollar index futures
(ICE)
19
Brazil: November employment
report
Hong Kong: Q3 GDP
20
U.S.: Q3 GDP
Canada: November CPI
Germany: November PPI
Japan: Bank of Japan interest-rate
announcement
Mexico: November employment
report
UK: Q3 GDP
21
22
23
U.S.: November personal income
Hong Kong: November CPI
Mexico: Dec. 15 CPI
24
U.S.: November durable goods
France: Q3 GDP
25
26
27
France: November PPI
Japan: November employment
report and CPI
28
29
30
31 India: November CPI
The information on this page is sub-
ject to change. Currency Trader is
not responsible for the accuracy of
calendar dates beyond press time.
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Date: Jan. 29 - Feb. 1
Location: Gaylord Palms Resort and Convention
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Date: Aug. 21-23
Location: San Francisco
EVENTS
CURRENCY FUTURES SNAPSHOT as of Nov. 29
The information does NOT constitute trade
signals. It is intended only to provide a brief
synopsis of each markets liquidity, direction,
and levels of momentum and volatility. See
the legend for explanations of the different
fields. Note: Average volume and open
interest data includes both pit and side-by-
side electronic contracts (where applicable).
LEGEND:
Volume: 30-day average daily volume, in
thousands.
OI: 30-day open interest, in thousands.
10-day move: The percentage price move
from the close 10 days ago to todays close.
The % rank fields for each time window
(10-day moves, 20-day moves, etc.) show
the percentile rank of the most recent move
to a certain number of the previous moves of
the same size and in the same direction. For
example, the % rank for the 10-day move
shows how the most recent 10-day move
compares to the past twenty 10-day moves;
for the 20-day move, it shows how the most
recent 20-day move compares to the past
sixty 20-day moves; for the 60-day move,
it shows how the most recent 60-day move
compares to the past one-hundred-twenty
60-day moves. A reading of 100% means
the current reading is larger than all the past
readings, while a reading of 0% means the
current reading is smaller than the previous
readings.
Volatility ratio/% rank: The ratio is the short-
term volatility (10-day standard deviation
of prices) divided by the long-term volatility
(100-day standard deviation of prices). The
% rank is the percentile rank of the volatility
ratio over the past 60 days.
BarclayHedge Rankings:
Top 10 currency traders managing more than $10 million
(as of Oct. 31 ranked by October 2013 return)
Trading advisor
October
return
2013 YTD
return
$ Under
mgmt.
(millions)
1 24FX Global Advisors 4.70% 26.24% 67.9
2 TMS (Arktos GCS II) 4.23% -1.42% 16.0
3 Gedamo (FX Alpha) 4.12% 14.24% 31.8
4 DynexCorp (Currency) 4.01% 4.61% 30.0
5 Swing Capital (FX) 3.26% 0.60% 48.0
6 Cambridge Strategy (Asian Mrkts) 2.90% 2.71% 122.0
7 Gedamo (FX One) 2.81% 8.41% 44.1
8 FDO Partners (Emerging Markets) 2.65% 8.57% 2174.0
9 Cambridge Strategy (Emerging Mkts) 2.24% -5.82% 57.0
10 JCI Capital (FX Macro) 1.97% 3.78% 23.8
Top 10 currency traders managing less than $10M & more than $1M
1 Investment Capital Adv (Managed Acts) 11.50% 48.67% 4.0
2 Four Capital (FX) 10.02% 37.20% 1.1
3 MFG (Bulpred USD) 4.75% 6.07% 1.7
4 Vortex (FX) 2.91% 0.41% 1.0
5 Hartswell Capital Mgmt (Apollo) 1.15% -7.61% 3.0
6 MDC Trading 0.80% 8.59% 1.5
7 MatadorFX (MFX1) 0.675 -11.56% 1.0
8 ROW Asset Mgmt (Currency) 0.50% 3.44% 10.0
9 Gloranis GmbH (Forex Private 1) 0.39% 1.31% 2.4
10 Blue Fin Capital (Managed FX) 0.15% -1.54% 3.0
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.
Market Sym Exch Vol OI
10-day
move / rank
20-day
move / rank
60-day
move / rank
Volatility
ratio / rank
EUR/USD EC CME 193.7 248.7 0.98% / 67% -0.04% / 4% 3.56% / 81% .29 / 45%
JPY/USD JY CME 113.8 182.8 -2.35% / 85% -4.04% / 100% -2.26% / 65% .65 / 100%
GBP/USD BP CME 91.0 180.4 1.91% / 91% 1.94% / 60% 4.94% / 76% .24 / 52%
AUD/USD AD CME 81.3 128.1 -2.22% / 80% -3.59% / 71% -0.25% / 0% .61 / 100%
CAD/USD CD CME 48.5 112.0 -1.30% / 95% -1.86% / 100% -1.18% / 37% .71 / 97%
CHF/USD SF CME 30.9 48.2 1.04% / 67% -0.17% / 7% 4.20% / 79% .29 / 43%
MXN/USD MP CME 30.0 114.6 -1.04% / 10% -0.65% / 31% 1.98% / 58% .33 / 43%
U.S. dollar index DX ICE 18.4 44.7 -0.30% / 50% -0.19% / 0% -1.84% / 46% .20 / 27%
NZD/USD NE CME 12.4 23.6 -1.67% / 71% -1.40% / 71% 3.10% / 20% .38 / 65%
E-Mini EUR/USD ZE CME 3.7 4.9 0.98% / 67% -0.04% / 4% 3.56% / 81% .29 / 45%
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.
INTERNATIONAL MARKETS
CURRENCIES (vs. U.S. DOLLAR)
Rank Currency
Nov. 27
price vs.
U.S. dollar
1-month
gain/loss
3-month
gain/loss
6-month
gain/loss
52-week
high
52-week
low
Previous
1 Great Britain pound 1.617095 0.03% 3.83% 6.91% 1.6286 1.4877 16
2 Hong Kong dollar 0.12899 0.01% 0.03% 0.14% 0.129 0.1288 13
3 Chinese yuan 0.163125 -0.15% 0.47% 0.88% 0.16337 0.1583 12
4 New Zealand dollar 0.82142 -0.80% 4.87% 1.46% 0.8619 0.7704 15
5 Taiwan dollar 0.03377 -0.82% 1.09% 1.24% 0.0345 0.0326 10
6 Canadian dollar 0.948805 -0.87% -0.28% -2.08% 1.0166 0.9445 17
7 Singapore dollar 0.799 -1.27% 2.25% 1.02% 0.8207 0.7792 5
8 Indian rupee 0.016075 -1.71% 3.64% -10.35% 0.0188 0.0147 2
9 Swiss franc 1.0993 -1.88% 1.42% 5.69% 1.1213 1.0274 8
10 Euro 1.35429 -1.89% 1.24% 4.72% 1.3802 1.2798 4
11 South African rand 0.098904 -2.81% 1.51% -5.29% 0.118 0.0961 14
12 Thai baht 0.031205 -3.20% -0.35% -6.52% 0.0348 0.0309 9
13 Russian ruble 0.030345 -3.54% 0.20% 0.51% 0.0337 0.0299 7
14 Swedish krona 0.152265 -3.82% -0.96% 1.11% 0.159 0.1464 6
15 Japanese yen 0.00986 -3.95% -2.76% -0.15% 0.0122 0.0097 11
16 Brazilian real 0.43658 -4.49% 3.40% -10.42% 0.5137 0.4082 1
17 Australian Dollar 0.915325 -4.51% 1.35% -5.17% 1.0568 0.8893 3
GLOBAL STOCK INDICES
Country Index Nov. 27
1-month
gain/loss
3-month
gain/loss
6-month
gain loss
52-week
high
52-week
low
Previous
1 Japan Nikkei 225 15,449.63 7.32% 14.08% 9.24% 15,942.60 9,308.35 15
2 Hong Kong Hang Seng 23,806.35 4.38% 8.83% 4.94% 23,944.70 19,426.40 14
3 Germany Xetra Dax 9,351.13 4.15% 13.45% 11.54% 9,363.48 7,265.44 6
4 U.S. S&P 500 1,807.23 2.56% 10.84% 8.87% 1,808.42 1,385.43 5
5 Mexico IPC 41,872.59 1.82% 5.59% 4.30% 46,075.00 37,034.30 12
6 France CAC 40 4,293.06 0.97% 8.17% 7.46% 4,356.28 3,479.16 10
7 Italy FTSE MIB 18,924.80 0.51% 14.14% 10.29% 19,371.90 15,056.60 1
8 Canada S&P/TSX composite 13,362.10 -0.07% 6.12% 5.24% 13,517.00 11,759.00 3
9 Switzerland Swiss Market 8,245.70 -0.55% 4.56% 1.01% 8,411.30 6,699.50 11
10 India BSE 30 20,420.26 -0.73% 13.65% 1.94% 21,293.90 17448.70 2
11 Singapore Straits Times 3,172.06 -1.12% 4.55% -6.46% 3,463.79 2,990.68 13
12 UK FTSE 100 6,649.50 -1.13% 3.24% -1.66% 6,875.60 5,755.20 4
13 South Africa FTSE/JSE All Share 44,564.01 -1.84% 3.44% 7.56% 46,192.91 37,801.67 8
14 Australia All ordinaries 5,324.90 -2.07% 3.78% 7.82% 5,453.10 4,448.60 7
15 Brazil Bovespa 51,861.00 -5.83% 3.53% -8.04% 63,473.00 44,107.00 9
NON-U.S. DOLLAR FOREX CROSS RATES
Rank Currency pair Symbol Nov. 27
1-month
gain/loss
3-month
gain/loss
6-month
gain loss
52-week
high
52-week
low
Previous
1 Pound / Aussie $ GBP/AUD 1.76669 4.75% 2.45% 12.74% 1.7684 1.4439 19
2 Pound / Yen GBP/JPY 164.055 4.19% 6.83% 7.09% 164.61 131.08 14
3 Canada $ / Real CAD/BRL 2.17329 3.79% -3.56% 9.31% 2.3271 1.8879 21
4 New Zeal $ / Yen NZD/JPY 83.33 3.31% 7.89% 1.63% 85.86 67.27 13
5 Canada $ / Yen CAD/JPY 96.255 3.25% 2.60% -1.93% 100.65 82.38 18
6 Euro / Aussie $ EUR/AUD 1.47948 2.73% -0.12% 10.42% 1.4948 1.2251 12
7 Euro / Real EUR/BRL 3.101795 2.71% -2.10% 16.89% 3.2599 2.5251 16
8 Franc / Yen CHF/JPY 111.525 2.21% 4.35% 5.87% 111.72 87.93 11
9 Euro / Yen EUR/JPY 137.38 2.19% 4.16% 4.87% 137.51 105.85 7
10 Pound / Franc GBP/CHF 1.471025 1.93% 2.38% 1.16% 1.5014 1.4062 17
11 Pound / Canada $ GBP/CAD 1.704345 0.90% 4.13% 9.19% 1.7087 1.5286 9
12 Yen / Real JPY/BRL 0.02258 0.53% -6.00% 11.45% 0.0259 0.0196 20
13 Euro / Franc EUR/CHF 1.23185 -0.03% -0.18% -0.92% 1.256 1.2036 10
14 Aussie $ / Real AUD/BRL 2.096595 -0.03% -1.98% 5.86% 2.2253 1.9633 15
15 Aussie $ / Yen AUD/JPY 92.86 -0.54% 4.28% -5.01% 105.05 85.61 6
16 Franc / Canada $ CHF/CAD 1.15861 -1.02% 1.71% 7.94% 1.17059 1.0528 3
17 Euro / Canada $ EUR/CAD 1.427235 -1.04% 1.52% 6.94% 1.4422 1.2752 2
18 Euro / Pound EUR/GBP 0.83741 -1.93% -2.50% -2.07% 0.8747 0.8048 5
19 Aussie $ / Franc AUD/CHF 0.83264 -2.68% -0.06% -10.27% 0.9942 0.8218 8
20 Aussie $ / Canada $ AUD/CAD 0.964715 -3.68% 1.64% -3.15% 1.0685 0.9224 1
21 Aussie $ / New Zeal $ AUD/NZD 1.114315 -3.72% -3.35% -6.56% 1.2732 1.1141 4
GLOBAL CENTRAL BANK LENDING RATES
Country Interest rate Rate Last change May 2013 November 2012
United States Fed funds rate 0-0.25 0.5 (Dec 08) 0-0.25 0-0.25
Japan Overnight call rate 0-0.1 0-0.1 (Oct 10) 0-0.1 0-0.1
Eurozone Refi rate 0.25 0.25 (Nov 13) 0.5 0.75
England Repo rate 0.5 0.5 (Mar 09) 0.5 0.5
Canada Overnight rate 1 0.25 (Sep 10) 1 1
Switzerland 3-month Swiss Libor 0-0.25 0.25 (Aug 11) 0-0.25 0-0.25
Australia Cash rate 2.5 0.25 (Aug 13) 2.75 3.25
New Zealand Cash rate 2.5 0.5 (Mar 11) 2.5 2.5
Brazil Selic rate 10 0.5 (Nov 13) 8 7.25
Korea Korea base rate 2.5 0.25 (May 13) 2.5 2.75
Taiwan Discount rate 1.875 0.125 (Jun 11) 1.875 1.875
India Repo rate 7.75 0.25 (Oct 13) 7.25 8
South Africa Repurchase rate 5 0.5 (Jul 12) 5 5
INTERNATIONAL MARKETS
GDP Period Release date Change 1-year change Next release
AMERICAS
Argentina Q2 9/20 2.6% 8.3% 12/20
Brazil Q2 8/30 5.3% 3.3% 12/3
Canada Q3 11/29 0.9% 3.5% 2/28
EUROPE
France Q2 9/27 0.5% 2.0% 12/24
Germany Q3 11/14 0.5% 3.3% 12/14
UK Q2 9/26 0.7% 1.3% 12/20
AFRICA S. Africa Q3 11/26 1.5% 8.0% 2/25
ASIA and S.
PACIFIC
Australia Q2 9/4 0.9% 2.5% 12/4
Hong Kong Q3 11/15 6.3% 2.9% 2/26
India Q3 11/29 3.4% 12.0% 2/28
Japan Q3 11/14 0.4% 1.6% 2/17
Singapore Q3 11/22 0.3% 6.3% NLT 2/21
Unemployment Period Release date Rate Change 1-year change Next release
AMERICAS
Argentina Q3 11/18 6.8% -0.4% -0.8% 2/19
Brazil Oct. 11/21 5.2% -0.2% -0.1% 12/19
Canada Oct. 11/8 6.9% 0.0% -0.5% 12/6
EUROPE
France Q2 9/5 10.5% 0.1% 0.7% 12/11
Germany Oct. 11/28 5.0% -0.1% -0.2% 1/7
UK July-Sep. 11/13 7.6% -0.2% -0.2% 12/18
ASIA and
S. PACIFIC
Australia Oct. 11/7 5.8% 0.0% 0.4% 12/12
Hong Kong Aug.-Oct 11/18 3.3% 0.0% -0.1% 12/17
Japan Oct. 11/29 4.0% 0.0% -0.2% 12/27
Singapore Q3 10/31 1.8% -0.3% -0.1% 1/29
CPI Period Release date Change 1-year change Next release
AMERICAS
Argentina Oct. 11/15 0.9% 10.6% 12/13
Brazil Oct. 11/7 0.6% 5.8% 12/6
Canada Oct. 11/22 -0.2% 0.7% 12/20
EUROPE
France Oct. 11/14 -0.1% 0.6% 12/6
Germany Oct. 11/12 -0.2% 1.2% 12/11
UK Oct. 11/12 0.1% 2.2% 12/17
AFRICA S. Africa Oct. 11/25 0.2% 5.5% 12/11
ASIA and
S. PACIFIC
Australia Q3 10/23 1.2% 2.2% 1/22
Hong Kong Oct. 11/21 2.7% 4.3% 12/23
India Oct. 10/31 1.3% 11.1% 12/31
Japan Oct. 11/29 0.1% 1.1% 12/27
Singapore Oct. 11/25 0.2% 2.0% 12/23
PPI Period Release date Change 1-year change Next release
AMERICAS
Argentina Oct. 11/14 1.1% 14.0% 12/13
Canada Oct. 11/28 -0.3% 0.8% 1/6
EUROPE
France Oct. 10/31 -0.2% -1.4% 12/20
Germany Oct. 11/20 -0.2% -0.7% 12/20
UK Oct. 11/12 -0.3% 0.8% 12/17
AFRICA S. Africa Oct. 10/31 0.5% 6.3% 12/12
ASIA and
S. PACIFIC
Australia Q3 11/1 1.2% 2.2% 1/31
Hong Kong Q2 9/12 -4.3% -2.4% 12/12
India Oct. 11/14 0.3% 7.0% 12/16
Japan Oct. 11/13 -0.1% 2.5% 12/11
Singapore Oct. 11/29 -0.6% -0.4% 12/27
As of Dec. 2 LEGEND: Change: Change from previous report release. NLT: No later than. Rate: Unemployment rate.
TRADE
Date: Dec. 1, 2013.
Entry: Short the Euro/U.S. dollar pair (EUR/USD) at
1.3597.
Reason for trade/setup: This was an experimental
trade in that it was based on purely subjective inter-
pretation of price action an approach not generally
recommended in these pages. In this case, the apparent
formation of a head-and-shoulders pattern in the EUR/
USD pair from September to November, with the head
(H) forming in late October and the two shoulders (S)
in early October and late
November, respectively.
The patterns classic
implication (which is based
on nothing but tradition)
is for price to retrace to
the patterns neckline,
or the trendline connect-
ing the two relative lows
that separate the shoulders
from the head. In this case,
the second of these lows
(in early November) was
much lower than the first
(in mid-October). The chart
shows this interpretation
implied a correction to at
least 1.3100.
The problem with analy-
sis of this type is it makes
objective historical comparisons and testing impossible.
For example, despite the obvious appearance of a high sur-
rounded by two relatively equidistant lower highs, some
analysts might argue the rally leading to the high was not
big (or stable) enough, although the pair rallied around
8.5% off the July 2013 low (and more than 14% since the
July 2012 low). Others might claim the lows forming the
neckline were too far apart. Again, some might quibble
with the size of the correction from the left shoulder to the
intervening relative low. Also, how do you know when the
pattern is complete and its time to enter sell or go short?
There is no end to the criticisms that could be made, the
point being there is no objective, specific consensus regard-
ing the patterns criteria.
The solution is to establish testable parameters for the
Seeing if the Euro has a good head on its shoulders.
FOREX TRADE JOURNAL
FOREX TRADE JOURNAL
pattern e.g., a 10% or larger rally that occurs in six
months or less, where the two shoulders are no more than
30 days and 4% distant from the head, and the two lows
connected by the neckline are no more than 2% apart.
These are not the only aspects of the pattern that could be
quantified, but they represent a start and they facilitate
the objective analysis of other instances of the pattern.
(The likely result of establishing objective parameters in
this fashion is the discovery of many qualifying patterns
the trader had not previously noticed, and the exclusion
of patterns the trader previously assumed to be head-and-
shoulders patterns.)
Getting back to our pattern, because this was an experi-
ment, a paper short trade was entered on Dec. 1 when
price rebounded after an early spike and sell-off the after-
noon/evening session. This weakness, combined with the
lower close on Nov. 29, suggested the right shoulder was
completed.
Initial stop: 1.3673.
Initial target: 1.3507.
Second target: 1.3402.
RESULT
Exit: Trade still open.
Profit/loss: +.0052, marked to market at 1.3545 around
1:15 ET on Dec. 2, 2013.
Outcome: The initial stop was placed a little above the
right shoulder (the higher of the two). Because of the per-
ceived improbability of the necklines price projection,
we set two much more modest targets loosely based on
anticipated retracements to the two trendlines shown on
the chart, both of which correspond to challenges of the
nearest whole-number prices to the downside.
Surprisingly, price turned down relatively sharply on
Dec. 2, trading as low as 1.3525. This confirmed (in the
context of our analysis) the right shoulder was, in fact,
complete. Accordingly, we lowered the stop to 1.3628, a
little above the Nov. 29 high. Too tight? Who knows, when
using subjective pattern analysis.
y
Note: Initial trade targets are typically based on things such as the historical
performance of a price pattern or a trading system signal. However, because in-
dividual trades are dictated by immediate circumstances, price targets are fexible
and are often used as points at which to liquidate a portion of a trade to reduce
exposure. As a result, initial (pre-trade) reward-risk ratios are conjectural by
nature.
TRADE SUMMARY
Date
Currency
pair
Entry
price
Initial
stop
Initial
target
IRR Exit Date
P/L
LOP LOL
Trade
length
point %
12/1/13 EUR/USD 1.3597 1.3673 1.3507 1.18 1.3545 1.3545 12/2/13 0.0052 0.38% 0.0072 1 day
Legend IRR: initial reward/risk ratio (initial target amount/initial stop amount). LOP: largest open profit (maximum available profit during lifetime of trade).
LOL: largest open loss (maximum potential loss during life of trade). MTM: marked-to-market the open trade profit or loss at a given point in time.

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Volume 10, No. 12

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