Notícias de Mercado de Ações Atual Análise de amp Real-Time After Hours Notícias de Pré-Mercado Flash Citação Resumo Citação Gráficos Interativos Configuração Padrão Por favor, note que uma vez que você fizer sua seleção, ela será aplicada a todas as futuras visitas à NASDAQ. Se, a qualquer momento, você estiver interessado em reverter para nossas configurações padrão, selecione a configuração padrão acima. Se você tiver alguma dúvida ou encontrar algum problema ao alterar suas configurações padrão, envie um e-mail para isfeedbacknasdaq. Por favor, confirme sua seleção: Você selecionou para alterar sua configuração padrão para a Pesquisa de cotação. Agora, essa será sua página de destino padrão, a menos que você altere sua configuração novamente ou exclua seus cookies. Tem certeza de que deseja alterar suas configurações Temos um favor a pedir Desative seu bloqueador de anúncios (ou atualize suas configurações para garantir que o JavaScript e os cookies estejam ativados), para que possamos continuar a fornecer a você as notícias do mercado de primeira linha e dados que você espera de nós. Forax on linemanual para negociação bem sucedida 1.Online ManualFor Successful Trading 2. ÍNDICECapítulo 1. Introdução 71.1. Câmbio no mercado financeiro 71.2. Câmbio Estrangeiro numa Perspectiva Histórica 81.3. Principais Estágios do Desenvolvimento Recente da Moeda Estrangeira9O Acordo de Bretton Woods 9O Fundo Monetário Internacional9Fluxo Livre de Moedas 10A União Monetária Européia 11O Fundo Europeu de Cooperação Monetária12O Euro121.4. Fatores Causados Crescimento do Volume de Câmbio 13 Volatilidade da Taxa de Interesse 13 Internacionalização do Negócio 13 Aumento do Interesse Corporativo13 Aumento da Sofisticação dos Comerciantes13Desenvolvimentos em Telecomunicações14Desenvolvimento de Computadores e Programação14FOREX. Manual on-line para negociação bem-sucedida ii 3. Capítulo 2. Tipos de principais moedas e sistemas de câmbio152.1. Principais Moedas15O Dólar Americano15O Euro 15O Iene Japonês 16A Libra Esterlina16O Franco Suíço162.2. Tipos de sistemas de bolsa 17 Negociação com Corretores17 Operação Direta18 Sistemas de Negociação 18 Sistemas de Correspondência182.3. O Sistema da Reserva Federal dos EUA e dos Bancos Centrais dos Outros Países do G-7 20O Sistema da Reserva Federal dos EUA20Os Bancos Centrais dos Outros Países do G-7 21Capítulo 3. Tipos de Mercado de Câmbio233.1. Mercado à vista 233.2. Mercado a prazo263.3. Mercado de Futuros273.4. Opções de moeda28Delta30Gamma30Vega 30Theta31FOREX. Manual on-line para o sucesso do Tradingiii 4. Capítulo 4. Análise Fundamental324.1. Fundamentos Econômicos 32 Teorias da Determinação da Taxa de Câmbio32 Paridade do Poder de Compra32 A Versão Relativa da PPP 33 Teoria das Elasticidades 33Teorias Monetárias Modernas sobre a Taxa de Câmbio de Curto Prazo3 A Abordagem Portfólio-Saldo 34Síntese das Perspectivas Monetárias Tradicional e Moderna 344.2. Indicadores Econômicos 35O Produto Interno Bruto (PNB) 35O Produto Interno Bruto (PIB) 35Consumo Gastos 36Capacidade de investimentos36Government Spending36Net Trade36Produção Industrial36CapacidadeServiços de Fabricação 37Consultas de Bens Duráveis 37Balanços de Negócios 37Indicadores de Construção37Indicadores de inflação 38Preço de Preços do Produtor (PPI) 39Indicador de Preços ao Consumidor (CPI) 39Produto Nacional Implícito Deflator 39Gross Produto Interno Deflator Implícito 39Commodity Research Índice de Futuros de Escritórios (CRB) 39Ox201CJournal of Commercex201D Índice de Preços Industriais (Joc) 40Balanço de Comércio de Mercadorias40Indicadores de Emprego40Índice de Custo de Emprego (ICE) 41Consumo de Gastos de Indicadores 41Auto Sales 41Leading Indicators 42Resultado Pessoal424.3. Fatores Financeiros e Sociopolíticos43 O Papel dos Fatores Financeiros 43 Eventos Políticos e Crises 44FOREX. Manual on-line para negociação bem-sucedida 5. Capítulo 5. Análise técnica 45 5.1. A Evolução e os Fundamentos da Teoria da Análise Técnica do Dow 45 Preço45 Volume e Juro Livre 47 5.2. Tipos de Cartas 49 Gráfico de Linhas 49 Gráfico de Barras50 Gráfico de Candlestick51 5.3. Tendências, Suporte e Resistência53 Tipos de Tendências53 Retração Percentual 55 A Trendline55 Linhas de Suporte e Resistência57 5.4. Padrões de reversão de tendência 59 Cabeça e ombros 59 Sinal gerado pelo padrão de cabeça e ombros 59 Cabeça e ombros invertidos 61 Topo duplo 61 Sinais fornecidos pela dupla formação superior 62 Fundo duplo63 Topo triplo e fundo triplo 63 O oposto é verdadeiro para o fundo triplo 64 Formações de topo e de fundo arredondadas65 Formação de diamantes65 5.5. Padrões de continuação de tendências 67 Formação de bandeiras 67 Formação de galhardetes67 Formação de triângulo 70 Formação de cunha75 Formação de retângulo76 5.6. Lacunas78 Lacunas Comuns78 Lacunas de Rompimento 78 Lacunas de Fuga 79 Sinais de Negociação para Falhas de Fuga 79 Lacunas de Exaustão80FOREX. Manual on-line para negociação bem-sucedida v 6. 5.7. Métodos de Negociação Matemática (Indicadores) 81Mover Médias81Trading Signals of Moving Averages 83Oscillators84Stochastics85Moving Average Convergence-Divergence (MACD) 86Momentum 87O Relative Strength Index (RSI) 88Taxa de Variação (ROC) 89Larry Williams R90Código de Canal de Commodities (CCI) 90BollingerBands93O Sistema Parabólico (SAR) 93O índice de movimento direcional (IED) 93Capítulo 6. A Análise de Fibonacci e a Teoria das Ondas de Elliott 956.1. A análise de Fibonacci956.2. A Onda De Elliott 96Básicas Da Análise De Ondas 96 Ondas De Impulsox2014Variações98Os Triângulos Diagônicos 100Falhas (Quintos Truncados) 102Capítulo 7. Riscos Cambiais1047.1. Risco de Taxa de Câmbio1047.2. Risco de Taxa de Juros1067.3. Risco de Crédito 1077.4. Risco do País108Termos Globais e Cambiais109Bibliografia 141FOREX. Manual on-line para negociação bem sucedida 7. CAPÍTULO 1 Introdução1.1. Câmbio como mercado financeiroO câmbio em moeda estrangeira é muito atraente tanto para os negociadores corporativos quanto para os individuais que ganham dinheiro com o Forex - um mercado financeiro especial para as divisas estrangeiras. As seguintes características tornam este mercado diferente de todos os outros setores do sistema financeiro mundial: maior sensibilidade para um número grande e continuamente variável de todos os negociantes nas principais moedas x2022 quantidade garantida e liquidez das principais moedas x 2022 maior consideração para várias moedas , o horário das horas que permite aos negociantes lidar depois do horário normal ou durante feriados nacionais em seu país, encontrando mercados no exterior abertos e extremamente alta eficiência em relação a outros mercados financeiros. Esse objetivo deste manual é apresentar traders iniciantes a todos os aspectos essenciais dos mercados estrangeiros. trocar de uma maneira prática e ser uma fonte de melhores respostas sobre as questões típicas: porque as moedas estão sendo negociadas, quem são os comerciantes, que moedas eles negociam, o que faz as taxas se moverem, que instrumentos são usados para o comércio? ser previsto e onde as informações pertinentes íon pode ser obtido a partir de. Dominando o conteúdo de uma seção apropriada, o usuário poderá tomar suas próprias decisões, testá-las e, por fim, usar as ferramentas e abordagens recomendadas para seu próprio benefício. FOREX. Manual on-line para negociação bem sucedida7 8. 1.2. Câmbio em uma perspectiva histórica O comércio de moedas tem uma longa história e pode ser rastreado até o Oriente Médio e a Idade Média quando o câmbio começou a tomar forma depois que os banqueiros internacionais elaboraram letras de câmbio, que transferiam pagamentos de terceiros que permitiam flexibilidade e crescimento. em transações cambiais estrangeiras. O moderno mercado cambial, caracterizado pelos consequentes períodos de maior volatilidade e estabilidade relativa, formou-se no século XX. Em meados da década de 1930, Londres tornou-se o principal centro de câmbio estrangeiro e a libra britânica serviu como moeda para o comércio e como moeda de reserva. Porque nos tempos antigos era negociado nas máquinas thetelex, ou cabo, a libra geralmente tem o apelido x201Ccablex201D. Em 1930, o Banco de Compensações Internacionais foi estabelecido em Basileia, na Suíça, para supervisionar os esforços financeiros dos países recém-independentes, surgidos após a Primeira Guerra Mundial, e para fornecer alívio monetário a países que enfrentam dificuldades temporais de balanço de pagamentos. Depois da Segunda Guerra Mundial, onde a economia britânica foi destruída e os Estados Unidos foram o único país sem guerra, o dólar americano tornou-se a principal moeda do mundo inteiro. Atualmente, as moedas de todo o mundo geralmente são cotadas em relação ao dólar norte-americano. Manual on-line para negociação bem sucedida8 9. 1.3. Estágios principais do recente desenvolvimento de câmbio exterior As principais fases do desenvolvimento do Forex em tempos modernos foram: x2022 a assinatura do acordo de Bretton Woods Accordx2022 do fundo monetário internacional (IMF) x2022 emergência dos mercados de câmbio flutuante livre x2022 criação de reservas de moeda x2022 constituição O Acordo de Bretton Woods foi firmado em julho de 1944 pelos Estados Unidos, Grã-Bretanha e França, que concordaram em tornar o mercado de câmbio estável, particularmente devido ao controle governamental da União Monetária Européia. controles sobre valores monetários. A fim de implementá-lo, dois grandes objetivos foram: enfatizou: fornecer o atrelamento (apoio de preços) das moedas e organizar o Fundo Monetário Internacional (FMI). De acordo com o Acordo de Bretton Woods, as principais moedas de negociação foram atreladas aos EUA. dólar, no sentido de que lhes era permitido flutuar apenas um por cento em ambos os lados daquela taxa. Quando uma moeda excedeu essa faixa, marcada por pontos de intervenção, o banco central encarregado teve que comprá-la ou vendê-la, e assim trazê-la de volta ao alcance. Por sua vez, o dólar americano estava atrelado a 35 por onça. Assim, o dólar americano tornou-se a moeda de reserva do mundo. O objetivo do FMI é consultar-se mutuamente para manter um sistema estável de compra e venda das moedas, de modo que os pagamentos em moeda estrangeira possam ocorrer entre os países de forma suave e oportuna. O FMI empresta dinheiro a membros que têm dificuldade em cumprir as obrigações financeiras com outros membros, sob a condição de que eles realizem reformas econômicas para eliminar essas dificuldades para seu próprio bem e para o bem de seus membros. No total, as principais tarefas do FMI são: x2022 promover a cooperação internacional, fornecendo os meios para consultar e colaborar em questões monetárias internacionais x2022 para facilitar o crescimento do comércio internacional e, assim, contribuir para altos níveis de emprego e renda real entre as nações-membros. promover a estabilidade das taxas de câmbio e os intercâmbios ordeiros, e desestimular a depreciação competitiva da moeda x2022 para promover um sistema multilateral de pagamentos internacionais, e buscar a eliminação das restrições cambiais que impedem o crescimento do comércio mundial x2022 para disponibilizar recursos financeiros aos membros, uma base temporária e com salvaguardas adequadas, para permitir que corrijam os desequilíbrios de pagamento sem recorrer a medidas destrutivas para a prosperidade nacional e internacional. FOREX. Manual on-line para negociação bem-sucedida 9. Para executar essas metas, o FMI utiliza instrumentos como Reserva, que permite que um membro sacar sua própria cota de reserva no momento do pagamento. Os desenhos de tranche e de stand-by são a forma padrão de pagamento. Empréstimos do FMI, a facilidade de financiamento compensatório estende ajuda financeira a países com problemas temporários gerados por reduções nas receitas de exportação, a facilidade de financiamento de estoque regulador que é voltada para auxiliar o estoque de commodities primárias a fim de assegurar a estabilidade de preços em uma propriedade específica. Ajudar os membros com problemas financeiros em montantes ou por períodos que excedam o escopo das outras instalações. Desde 1978, a flutuação livre de moedas foi oficialmente exigida pelo Fundo Monetário Internacional. Essa é a moeda que pode ser negociada por qualquer pessoa e seu valor é uma função das forças atuais de oferta e demanda no mercado, e não há pontos específicos de intervenção que devam ser observados. Naturalmente, o Federal Reserve Bank intervém irregularmente para alterar o valor do dólar americano, mas nenhum nível específico é imposto. Naturalmente, moedas com flutuações livres estão na demanda de negociação mais pesada. A flutuação livre não é a condição sine quanon para negociação. Liquidez também é uma condição indispensável. Uma ferramenta para pessoas e corporações protegerem investimentos em tempos de instabilidade econômica ou política é a reserva monetária para transações internacionais. Imediatamente após a Segunda Guerra Mundial, a moeda de reserva é mundialmente maior do que o dólar americano. Atualmente existem outras moedas de reserva: o euro e o iene japonês. A carteira de moedas de reserva pode mudar dependendo de condições internacionais específicas, por exemplo, pode incluir o franco suíço. A criação da União Monetária Européia foi o resultado de uma longa e contínua série de esforços pós-Segunda Guerra Mundial visando criar uma cooperação econômica mais estreita entre os países. países europeus capitalistas. Os objetivos estabelecidos oficialmente pela Comunidade Européia (CE) eram melhorar a cooperação econômica européia, criar uma área regional de estabilidade monetária e agir como um instrumento de estabilidade nos mercados monetários mundiais. Os primeiros passos nessa reconstrução foram dados em 1950, quando a União Européia de Pagamentos foi instituída para facilitar os assentamentos inter-europeus de transações comerciais internacionais. O objectivo da comunidade era promover o comércio inter-europeu em geral e eliminar as restrições ao comércio de carvão e aço bruto em particular. Em 1957, o Tratado de Roma estabeleceu a Comunidade Económica Europeia, com os mesmos signatários da Comunidade Europeia do Carvão e do Aço. . O objetivo declarado da Comunidade Econômica Européia era eliminar os direitos alfandegários e quaisquer barreiras contra o trânsito de capital, serviços e pessoas entre os países membros. A CE também começou a levantar barreiras comerciais contra pessoas de fora. FOREX. Manual on-line para o êxito do comércio 10 11. A Comunidade Europeia é composta por quatro órgãos executivos e legislativos: 1. A Comissão Europeia. O órgão executivo encarregado de fazer e observar a aplicação das políticas. Como não tem um mecanismo de fiscalização, a comissão deve contar com governos individuais para aplicar as políticas. Existem 23 departamentos, como assuntos externos, política de concorrência e agricultura. Cada país seleciona seus próprios representantes para mandatos de quatro anos. A delegação tem sede em Bruxelas e é composta por 17 membros.2. O Conselho de Ministros. Faz as principais decisões políticas. É composto por ministros dos 12 países membros. A presidência é realizada por seis meses por cada um dos membros, em ordem alfabética. As reuniões ocorrem em Bruxelas ou na capital da nação que detém a presidência. O Parlamento Europeu Revisa e altera propostas legislativas e tem o poder de adotar ou rejeitar propostas orçamentárias. Consiste em 518 membros selecionados. Baseia-se no Luxemburgo, mas as sessões ocorrem em Estrasburgo ou Bruxelas. O Tribunal Europeu de Justiça. Resolve disputas entre a CE e as nações membros. É composto por 13 membros e tem sede no Luxemburgo. Em 1963, foi assinado o Tratado de Cooperação Francês-Alemanha Ocidental. Este pacto foi concebido não só para acabar com séculos de rivalidade belicosa, mas também para solucionar a reconciliação do pós-guerra entre dois grandes inimigos. O tratado estipulava que a Alemanha Ocidental lideraria economicamente durante a guerra fria, e a França, a antiga potência diplomática, forneceria a liderança política. O princípio deste tratado estava obviamente correto em um ambiente definido por uma previsível guerra fria contínua a longo prazo e uma Alemanha dividida. Mais adiante, discutiremos as implicações para a era moderna desse pacto extremamente caro. Uma conferência de líderes nacionais em 1969 estabeleceu o objetivo de estabelecer uma união monetária dentro da Comunidade Européia. Esse objetivo deveria ser implementado em 1980, quando uma moeda comum foi planejada para ser usada na Europa. As razões para a unidade monetária comum proposta eram estimular o comércio intereuropeu e unir as economias dos países membros para competir com sucesso com as economias dos Estados Unidos e do Japão. Em 1978, os nove membros da Comunidade Européia ratificaram um novo plano de estabilidade xo Sistema Monetário Europeu. O novo sistema foi praticamente estabelecido em 1979. Sete países eram então membros efetivos x2014WestAlemanha, França, Holanda, Bélgica, Luxemburgo, Dinamarca e Irlanda. A Grã-Bretanha não participou de todos os acordos e a Itália compareceu sob condições especiais. A Grécia juntou-se em 1981, Espanha e Portugal em 1986. A Grã-Bretanha aderiu ao Mecanismo de Taxas de Câmbio em 1990.FOREX. Manual on-line para o êxito do comércio 11 12. O Fundo Europeu de Cooperação Monetária foi criado para gerir os acordos de crédito do SME. A fim de aumentar a aceitação da CEU, os países que detêm mais depósitos em ecus, ou aceitam como reembolso de empréstimos mais do que a sua parte em ecus, recebem juros sobre os depósitos em excesso de ecus e vice-versa. A taxa de juros é a média ponderada de todas as taxas de desconto de membros do SGA. Em 1998, o euro foi introduzido como uma moeda européia. Aqui estão as taxas de bloqueio oficiais das 11 moedas européias participantes em Teuuro (EUR). As taxas foram propostas pela Comissão da UE e aprovadas pelos ministros das finanças da UE em 31 de dezembro de 1998, antes do lançamento da euroat meia-noite de 1º de janeiro de 1999. A data real de início era segunda-feira, 4 de janeiro de 1999. As conversões são: 1 EUR 40,3399 BEF 1 EUR 1,95583 DEM1 EUR 166,386 ESP 1 EUR 6,55957 FRF1 EUR 0,787564 IEP1 1936,27 EUR ITL1 40,3399 EUR LUF 1 EUR 2,20371 NLG1 13,7603 EUR ATS 1 200,448 EUR PTE1 5,94573 EUR FIM As notas em euros são emitidas em valores de 5, 10, 20 , 50, 100, 200 e 500 euros. As moedas são emitidas em denominações de 1 e 2 euros e 50,20,10, 5, 2 e 1 cent. FOREX. Manual on-line para negociação bem sucedida12 13. 1.4. Fatores que Causam o Crescimento do Volume de Câmbio As operações de câmbio são geralmente conduzidas de maneira descentralizada, com exceção dos futuros e opções de moeda. As divisas estrangeiras experimentaram um crescimento espetacular em volume desde que as moedas puderam flutuar livremente umas contra as outras. Enquanto o volume de negócios diário em 1977 era de US $ 5 bilhões, aumentou para US $ 600 bilhões em 1987, alcançou US $ 1 trilhão em setembro de 1992 e estabilizou em torno de 1,5 trilhão até o ano 2000. Os principais fatores influenciam esse crescimento espetacular em volume. são indicadas abaixo. Para o câmbio, a volatilidade da moeda é um fator primordial no crescimento do volume. De fato, a volatilidade é uma condição sine qua non para negociação. Os únicos instrumentos que podem ser lucrativos em condições de baixa volatilidade nas opções de volatilidade. Volatilidade de taxas de juros A internacionalização econômica gerou um impacto significativo sobre os juros também. A economia tornou-se muito mais inter-relacionada e isso exacerbou a necessidade de mudar as taxas de juros mais rapidamente. As taxas de juros são geralmente modificadas para ajustar o crescimento da economia, e os diferenciais das taxas de juros têm um impacto substancial nas taxas de câmbio. Internacionalização de negócios Nas últimas décadas, no mundo dos negócios, a concorrência se intensificou, desencadeando uma busca mundial por mais mercados e matérias-primas e mão-de-obra mais barata. O ritmo da internacionalização econômica aumentou ainda mais nos anos 1990, devido à queda do comunismo na Europa e ao crescimento econômico e financeiro do Sudeste Asiático e da América do Sul. Essas mudanças foram positivas em relação ao câmbio, uma vez que foram adicionados mais transacionadores. Aumento do Interesse Corporativo O desempenho bem-sucedido de um produto ou serviço no exterior pode ser rebaixado do ponto de vista do lucro por condições adversas de câmbio e vice-versa. Um tratamento preciso da moeda estrangeira pode melhorar o desempenho global geral de um produto ou serviço. O tratamento adequado da troca externa geralmente aumenta substancialmente a taxa de retorno. Portanto, o interesse no câmbio aumentou na última década. Muitas corporações estão usando moedas não apenas para cobertura, mas também para capitalizar oportunidades que existam apenas nos mercados de câmbio. Aumento da Sofisticação dos TradersOs avanços em tecnologia, software e telecomunicações e a maior experiência aumentaram o nível de sofisticação dos traders. ThisFOREX. Manual on-line para negociações bem-sucedidas13 14. aumentou a confiança dos traders em sua capacidade de gerar lucros e lidar adequadamente com os riscos cambiais. Portanto, a sofisticação da negociação levou ao aumento do volume de vendas. Desenvolvimento de Telecomunicações A introdução de sistemas automatizados de negociação na década de 1980, de sistemas de correspondência no início dos anos 90 e do comércio pela Internet no final da década de 1990 alterou completamente o modo de condução do câmbio. Os sistemas de negociação são sistemas de computadores on-line que ligam os bancos em uma base de um para um, enquanto os sistemas de correspondência são corretores eletrônicos. Eles são confiáveis e muito mais rápidos, permitindo que os traders conduzam negócios mais simultâneos. Eles também são mais seguros, pois os comerciantes são capazes de ver os negócios que eles executam. Os sistemas de negociação tiveram um papel importante na expansão do negócio de câmbio devido à sua confiabilidade, velocidade e tecnologia de segurança e desenvolvimento de programação. Os computadores desempenham um papel significativo em muitos estágios da condução de câmbio externo. Além dos sistemas de negociação, os sistemas de correspondência conectam simultaneamente todos os operadores ao redor do mundo, duplicando eletronicamente o mercado de corretores. Os novos sistemas de escritório fornecem cobertura contábil completa, emissão de tíquetes, processamento de back-office e implementação de gerenciamento de risco em uma fração de seu custo anterior. O software avançado possibilita gerar todos os tipos de gráficos, ampliá-los com estudos técnicos sofisticados e colocá-los em contato com os usuários de maneira contínua a um custo bastante limitado. FOREX. Manual on-line para negociações bem-sucedidas 14 15. CAPÍTULO 2Dados das principais moedas e sistemas de câmbio2.1. Principais Moedas O Dólar dos EUA O dólar dos Estados Unidos é a moeda principal do mundo. Todas as moedas são geralmente cotadas em termos de dólares americanos. Sob condições de agitação econômica e política internacional, o dólar americano é a principal moeda porto-seguro que foi particularmente bem comprovada durante a crise do sudeste asiático de 1997-1998. O dólar norte-americano tornou-se a moeda líder no final da Segunda Guerra Mundial e centro do Acordo de Bretton Woods, já que as outras moedas estavam virtualmente atreladas a ele. A introdução do euro em 1999 reduziu a importância do dólar apenas marginalmente. As principais moedas negociadas em relação ao dólar americano são o euro, o iene japonês, a libra esterlina e o franco suíço. O Euro O euro foi projetado para se tornar a primeira moeda em negociações sendo simplesmente cotada em termos americanos. Como o dólar americano, o euro tem uma forte presença internacional, proveniente de membros da União Monetária Europeia. A moeda continua atormentada por crescimento desigual, alto desemprego e resistência do governo a mudanças estruturais. O par também foi pesado em 1999 e 2000 por saídas de investidores estrangeiros, particularmente japoneses, que foram forçados a liquidar seus investimentos perdedores em ativos denominados em euro. Além disso, os gestores financeiros europeus reequilibraram as suas carteiras e reduziram a sua exposição ao euro, à medida que as suas necessidades de cobertura do risco cambial na Europa diminuíram. Manual on-line para negociações bem-sucedidas15 16. O iene japonês O iene japonês é a terceira moeda mais negociada do mundo e tem uma presença internacional muito menor do que o dólar americano ou o euro. O iene é muito líquido em todo o mundo, praticamente o tempo todo. A demanda natural atingiu o iene concentrado principalmente entre os keiretsu japoneses, os conglomerados econômicos e financeiros. O iene é muito mais sensível às fortunas do índice Nikkei, do mercado acionário japonês e do mercado imobiliário. A tentativa do Banco do Japão de esvaziar a dupla bolha nesses dois mercados teve um efeito negativo sobre o iene japonês, embora o impacto tenha sido de curta duração. A libra britânica Até o final da Segunda Guerra Mundial, a libra era a moeda de referência. Seu nome, cabo, é derivado da máquina de telex, que foi usada para trocá-lo em seu auge. A moeda é fortemente negociada contra o euro e o dólar americano, mas tem uma presença irregular contra outras moedas. O período de dois anos com o Mecanismo de Taxa de Câmbio, entre 1990 e 1992, teve um efeito calmante na libra britânica, pois geralmente tinha que seguir as flutuações de marcos alemães, mas as condições de crise que precipitaram a retirada de libras do ERM tiveram um efeito psicológico Antes da introdução do euro, tanto a libra beneficiou de quaisquer dúvidas quanto à convergência cambial. Após a introdução do euro, o Bankof England está tentando aproximar as altas taxas do Reino Unido das taxas mais baixas na zona do euro. A libra poderia ingressar no euro no início dos anos 2000, desde que o referendo no Reino Unido seja positivo. O franco suíço O franco suíço é a única moeda de um grande país europeu que não pertence nem à União Monetária Européia nem aos países do G-7. a economia é relativamente pequena, o franco suíço é uma das quatro principais moedas, assemelhando-se à força e à qualidade da economia e da economia suíças. A Suíça tem uma relação econômica muito próxima com a Alemanha e, portanto, com a zona do euro. Portanto, em termos de incerteza política no Oriente, o franco suíço é geralmente favorecido em relação ao euro. Normalmente, acredita-se que o franco suíço é uma moeda estável. Na verdade, do ponto de vista cambial, o franco suíço aproxima-se dos padrões do euro, mas falta sua liquidez. Como a demanda por ela excede a oferta, o franco suíço pode ser mais volátil do que o euro. FOREX. Manual on-line para negociação bem sucedida 16 17. 2.2. Tipos de troca de sistemas de negociação com corretores Os corretores de câmbio, ao contrário dos corretores de ações, não tomam posições por si só eles só bancos de serviço. Seus papéis são: x2022 reunindo compradores e vendedores no mercado x2222 otimizando o preço que mostram aos seus clientes x2022 de forma rápida, precisa e fielmente executando as ordens de comerciantes. A maioria dos corretores de câmbio executar negócios via telefone. As linhas telefônicas entre Corretores e bancos são dedicados, ou diretos, e são geralmente instalados gratuitamente pelo corretor. Uma corretora de câmbio tem linhas diretas para bancos em todo o mundo. A maior parte do câmbio é executada por meio de um microfone de caixa aberta na frente do corretor que transmite continuamente tudo o que diz nas linhas telefônicas diretas para as caixas de alto-falante dos bancos. Desta forma, todos os bancos podem ouvir todos os negócios que estão sendo executados. Por causa do sistema de caixa aberta usado por corretores, um comerciante é capaz de monitorar todos os preços cotados se o lance foi atingido ou a oferta realizada e o preço a seguir. O que o trader não poderá ouvir são os valores das ofertas e ofertas particulares e os nomes dos bancos que mostram os preços. Os preços são anônimos e o anonimato dos bancos que negociam no mercado garante a eficiência dos mercados, já que todos os bancos têm uma boa chance de negociar. Os corretores cobram uma comissão que é paga igualmente pelo comprador e pelo vendedor. As taxas são negociadas individualmente pelo banco e pela corretora. Os corretores mostram a seus clientes os preços praticados por outros clientes e os preços bidirecionais (de oferta e oferta) ou os preços de uma forma (oferta ou oferta) de seus clientes. Os comerciantes mostram preços diferentes porque lêem o mercado de forma diferente, têm diferentes expectativas e interesses diferentes. Um corretor com mais de um preço em um ou nos dois lados otimizará automaticamente o preço. Em outras palavras, o corretor sempre mostrará o lance mais alto e a oferta mais baixa. Portanto, o mercado tem acesso ao spread mais estreito possível. As análises fundamentais e técnicas são usadas para prever a direção futura da moeda. Um trader pode testar o mercado fazendo uma oferta por uma pequena quantia para ver se há alguma reação. Os corretores não podem ser forçados a assumir um papel principal se o nome mudar mais do que o previsto. Outra vantagem do mercado de corretores é que os corretores podem fornecer seleção de bancos para seus clientes. Alguns bancos europeus e asiáticos têm mesas noturnas para que suas encomendas sejam normalmente feitas com corretores que possam negociar com os bancos americanos, aumentando a liquidez do mercado. FOREX. Manual on-line para negociação bem-sucedida 17 18. Negociação direta A negociação direta é baseada na reciprocidade comercial. Um criador de mercado - ao fazer o banco ou citar um preço - espera o banco que está chamando para retribuir com respeito a fazer um preço quando chamado. Negociação direta fornece mais negociação de negociação, em comparação a negociação no mercado de corretores. Às vezes, os comerciantes tomam vantagem dessa característica. O trato direto costumava ser feito principalmente por telefone. Lidar com erros era difícil de provar e ainda mais difícil de resolver. A fim de aumentar a segurança, a maioria dos bancos tocou as linhas telefônicas nas quais as negociações eram realizadas. Essa medida foi útil para registrar todos os detalhes da transação e permitir que os revendedores aloquem a responsabilidade por erros de forma justa. Mas os gravadores de tela não conseguiram evitar erros de negociação. A negociação direta foi mudada para sempre em meados dos anos 80, com a introdução de sistemas de negociação. Sistemas de negociação Os sistemas de negociação são computadores on-line que ligam os bancos contribuintes em todo o mundo numa base individual. O desempenho dos sistemas de negociação é caracterizado pela velocidade, confiabilidade e segurança. Acessar um banco através de um sistema de negociação é muito mais rápido do que fazer uma ligação telefônica. Os sistemas de negociação estão sendo aprimorados continuamente para oferecer o máximo de suporte à função principal do negociante: negociação. O software é muito confiável em captar a grande figura das taxas de câmbio e as datas de valor padrão. Além disso, é extremamente preciso e rápido entrar em contato com outras partes, alternando entre as conversas e acessando o banco de dados. O comerciante está em contato visual contínuo com as informações trocadas no monitor. É mais fácil de ver do que ouvir essas informações, especialmente ao alternar entre as conversas. A maioria dos bancos usa uma combinação de corretores e sistemas de negociação direta. As abordagens do Bothap alcançam os mesmos bancos, mas não as mesmas partes, porque as empresas, por exemplo, não podem negociar no mercado de corretores. Os comerciantes desenvolvem relações pessoais com corretores e negociadores nos mercados, mas selecionam seu meio de negociação com base na qualidade do preço, não em sentimentos pessoais. A participação de mercado entre os sistemas de negociação e os corretores flutua com base nas condições de mercado. Condições de mercado rápidas são benéficas para os sistemas de negociação, enquanto as condições de mercado regulares são mais benéficas para os corretores. Sistemas de Correspondência Ao contrário dos sistemas de negociação, nos quais a negociação não é anônima e é conduzida individualmente, os sistemas de correspondência são anônimos e os comerciantes individuais lidam com o restante do mercado, semelhante ao mercado de corretores. No entanto, ao contrário do mercado de corretores, não há indivíduos para trazer os preços ao mercado, e a liquidez pode ser limitada às vezes. Os sistemas de correspondência são bem adequados para negociar quantidades menores também. As características dos sistemas de negociação de velocidade, confiabilidade e segurança são detectadas nos sistemas correspondentes. Além disso, as linhas de crédito são automaticamente FOREX. Manual on-line para negociação bem-sucedida 18 19. gerenciado pelos sistemas. Traders input the total credit line for each counterparty. When the credit line has been reached, the system automatically disallowsdealing with the particular party by displaying credit restrictions, or shows thetrader only the price made by banks that have open lines of credit. As soon asthe credit line is restored, the system allows the bank to deal again. In theinterbank market, traders deal directly with dealing systems, matching systems, and brokers in a complementary fashion. FOREX. On-line Manual For Successful Trading 19 20. 2.3. The Federal Reserve System of the USA andCentral Banks of the Other G-7 CountriesThe Federal Reserve System of the USALike the other central banks, the Federal Reserve of the USA affects theforeign exchange markets in three general areas:x2022 the discount ratex2022 the money market instrumentsx2022 foreign exchange operations. For the foreign exchange operations most significant are repurchaseagreements to sell the same security back at the same price at a predetermineddate in the future (usually within 15 days), and at a specific rate of interest. Thisarrangement amounts to a temporary injection of reserves into the bankingsystem. The impact on the foreign exchange market is that the dollar shouldweaken. The repurchase agreements may be either customer repos or systemrepos. Matched sale-purchase agreements are just the opposite of repurchaseagreements. When executing a matched sale-purchase agreement, the Fed sellsa security for immediate delivery to a dealer or a foreign central bank, with theagreement to buy back the same security at the same price at a predeterminedtime in the future (generally within 7 days). This arrangement amounts to atemporary drain of reserves. The impact on the foreign exchange market is thatthe dollar should strengthen. The major central banks are involved in foreign exchange operations inmore ways than intervening in the open market. Their operations include paymentsamong central banks or to international agencies. In addition, the Federal Reservehas entered a series of currency swap arrangements with other central banks since1962. For instance, to help the allied war effort against Iraqs invasion of Kuwait in1990-1991, payments were executed by the Bundesbank and Bank of Japan to theFederal Reserve. Also, payments to the World bank or the United Nations are executedthrough central banks. Intervention in the United States foreign exchange markets by the U. S.Treasury and the Federal Reserve is geared toward restoring orderly conditionsin the market or influencing the exchange rates. It is not geared towardaffecting the reserves. There are two types of foreign exchange interventions: naked interventionand sterilized intervention. Naked intervention, or unsterilized intervention, refers to the sole foreignexchange activity. All that takes place is the intervention itself, in which theFOREX. On-line Manual For Successful Trading20 21. Federal Reserve either buys or sells U. S. dollars against a foreign currency. Inaddition to the impact on the foreign exchange market, there is also a monetaryeffect on the money supply. If the money supply is impacted, then consequentadjustments must be made in interest rates, in prices, and at all levels of theeconomy. Therefore, a naked foreign exchange intervention has a long-termeffect. Sterilized intervention neutralizes its impact on the money supply. As thereare rather few central banks that want the impact of their intervention in theforeign exchange markets to affect all corners of their economy, sterilizedinterventions have been the tool of choice. This holds true for the FederalReserve as well. The sterilized intervention involves an additional step to the originalcurrency transaction. This step consists of a sale of government securities thatoffsets the reserve addition that occurs due to the intervention. It may be easierto visualize it if you think that the central bank will finance the sale of a currencythrough the sale of a number of government securities. Because a sterilized intervention only generates an impact on the supplyand demand of a certain currency, its impact will tend to have a short-tomedium-term effect. The Central Banks of the Other G-7 Countries In the wake of World War II, both Germany and Japan were helped todevelop new financial systems. Both countries created central banks that werefundamentally similar to the Federal Reserve. Along the line, their scope wascustomized to their domestic needs and they diverged from their model. The European Central Bank was set up on June 1, 1998 to oversee theascent of the euro. During the transition to the third stage of economic andmonetary union (introduction of the single currency on January 1, 1999), it wasresponsible for carrying out the Communitys monetary policy. The ECB, whichis an independent entity, supervises the activity of individual member Europeancentral banks, such as Deutsche Bundesbank, Banque de France, and UfficioItaliano dei Cambi. The ECBs decision-making bodies run a European System ofCentral Banks whose task is to manage the money in circulation, conductforeign exchange operations, hold and manage the Member States official foreignreserves, and promote the smooth operation of payment systems. The ECB isthe successor to the European Monetary Institute (EMI).The German central bank, widely known as the Bundesbank, was themodel for the ECB. The Bundesbank was a very independent entity, dedicated toa stable currency, low inflation, and a controlled money supply. Thehyperinflation that developed in Germany after World War I created a fertileeconomic and political scenario for the rise of an extremist political party and forFOREX. On-line Manual For Successful Trading21 22. the start of World War II. The Bundesbanks chapter obligated it to avoid any sucheconomic chaos. The Bank of Japan has deviated from the Federal Reserve model in termsof independence. Although its Policy Board is still fully in charge of monetarypolicy, changes are still subject to the approval of the Ministry of Finance(MOF). The BOJ targets the M2 aggregate. On a quarterly basis, the BOJreleases its Tankan economic survey. Tankan is the Japanese equivalent of theAmerican tan book, which presents the state of the economy. The Tankansfindings are not automatic triggers of monetary policy changes. Generally, thelack of independence of a central bank signals inflation. This is not the case inJapan, and it is yet another example of how different fiscal or economic policiescan have opposite effects in separate environments. The Bank of England may be characterized as a less independent centralbank, because the government may overrule its decision. The BOE has not had aneasy tenure. Despite the fact that British inflation was high through 1991, reachingdouble-digit rates in the late 1980s, the Bank of England did a marvelous job ofproving to the world that it was able to maneuver the pound into mirroring theExchange Rate Mechanism. After joining the ERM late in 1990, the BOE was instrumental in keepingthe pound within its 6 percent allowed range against the deutsche mark, but thepound had a short stay in the Exchange Rate Mechanism. The divergencebetween the artificially high interest rates linked to ERM commitments andBritains weak domestic economy triggered a massive sell-off of the pound inSeptember 1992.The Bank of France has joint responsibility, with the Ministry of Finance, toconduct domestic monetary policy. Their main goals are non-inflationary growthand external account equilibrium. France has become a major player in theforeign exchange markets since the ravages of the ERM crisis of July 1993, whenthe French franc fell victim to the foreign exchange markets. The Bank of Italy is in charge of the monetary policy, financialintermediaries, and foreign exchange. Like the other former EuropeanMonetary System central banks, BOIs responsibilities shifted domesticallyfollowing the ERM crisis. Along with the Bundesbank and Bank of France, the Bankof Italy is now part of the European System of Central Banks (ESCB). The Bank of Canada is an independent central bank that has a tight rein onits currency. Due to its complex economic relations with the United States, theCanadian dollar has a strong connection to the U. S. dollar. The BOC intervenesmore frequently than the other G7 central banks to shore up the fluctuations ofits Canadian dollar. The central bank changed its intervention policy in 1999 afteradmitting that its previous mechanical policy, of intervening in increments ofonly 50 million at a set price based on the previous closing, was not working. FOREX. On-line Manual For Successful Trading22 23. CHAPTER 3Kinds Of ForeignExchange Market3.1. Spot Market Currency spot trading is the most popular foreign currency instrumentaround the world, making up 37 percent of the total activity (See Figure 3.1).37 571 5 1 2 3 4Figure 3.1.The market share of the foreign exchange instruments as of 1998:1- spot 2 x2013 options 3 x2013 futures 4 x2013 forwards and swaps. The fast-paced spot market is not for the fainthearted, as it featureshigh volatility and quick profits (and losses). A spot deal consists of a bilateralcontract whereby a party delivers a specified amount of a given currencyagainst receipt of a specified amount of another currency from acounterparty, based on an agreed exchange rate, within two business days ofthe deal date. The exception is the Canadian dollar, in which the spot deliveryis executed next business day. FOREX. On-line Manual For Successful Trading23 24. The name spot does not mean that the currency exchange occurs thesame business day the deal is executed. Currency transactions that requiresame-day delivery are called cash transactions. The two-day spot delivery forcurrencies was developed long before technological breakthroughs ininformation processing. This time period was necessary to check out all transactions detailsamong counterparties. Although technologically feasible, the contemporarymarkets did not find it necessary to reduce the time to make payments. Human errors still occur and they need to be fixed before delivery. Whencurrency deliveries are made to the wrong party, fines are imposed. In terms of volume, currencies around the world are traded mostlyagainst the U. S. dollar, because the U. S. dollar is the currency of reference. The other major currencies are the euro, followed by the Japanese yen, theBritish pound, and the Swiss franc. Other currencies with significant spotmarket shares are the Canadian dollar and the Australian dollar. In addition, a significant share of trading takes place in the currenciescrosses, a non-dollar instrument whereby foreign currencies are quotedagainst other foreign currencies, such as euro against Japanese yen. There are several reasons for the popularity of currency spot trading. Profits (or losses) are realized quickly in the spot market, due to marketvolatility. In addition, since spot deals mature in only two business days, thetime exposure to credit risk is limited. Turnover in the spot market has beenincreasing dramatically, thanks to the combination of inherent profitability andreduced credit risk. The spot market is characterized by high liquidity andhigh volatility. Volatility is the degree to which the price of currency tends tofluctuate within a certain period of time. Free-floating currencies, such as theeuro or the Japanese yen, tend to be volatile against the U. S. dollar. In an active global trading day (24 hours), the euro/dollar exchangerate may change its value 18,000 times. An exchange rate may fly 200 pipsin a matter of seconds if the market gets wind of a significant event. On theother hand, the exchange rate may remain quite static for extended periodsof time, even in excess of an hour, when one market is almost finishedtrading and waiting for the next market to take over. This is a commonoccurrence toward the end of the New York trading day. Since Californiafailed in the late 1980s to provide the link between the New York and Tokyomarkets, there is a technical trading gap between around 4:30 pm and 6 pmEDT. In the United States spot market, the majority of deals are executedbetween 8 am and noon, when the New York and European markets overlap(See Figure 3.2). The activity drops sharply in the afternoon, over 50 percentin fact, when New York loses the international trading support. Overnighttrading is limited, as very few banks have overnight desks. Most of the banksFOREX. On-line Manual For Successful Trading 24 25. send their overnight orders to branches or other banks that operate in theactive time zones.29 66 5 1 2 3 Figure 3.2. Distribution of the trading activity in the United States spot market in time: 1 x2013transactions volume between 12 p. m. e 4 da tarde 2 x2013 between 4 p. m. and 8 p. m. 3 x2013 between 8a. m. and 12 p. m. The major traders in the spot market are the commercial banks and theinvestment banks, followed by hedge funds and corporate customers. In theinterbank market, the majority of the deals are international, reflectingworldwide exchange rate competition and advanced telecommunicationsystems. However, corporate customers tend to focus their foreign exchangeactivity domestically, or to trade through foreign banks operating in the sametime zone. Although the hedge funds and corporate customers business inforeign exchange has been growing, banks remain the predominant tradingforce. The bottom line is important in all financial markets, but in currencyspot trading the antes always seem to be higher as a result of the demandfrom all around the world. The profit and loss can be either realized or unrealized. The realizedprofit and loss is a certain amount of money netted when a position is closed. The unrealized profit and loss consists of an uncertain amount of money thatan outstanding position would roughly generate if it were closed at thecurrent rate. The unrealized profit and loss changes continuously in tandemwith the exchange rate. FOREX. On-line Manual For Successful Trading 25 26. 3.2. Forward MarketThe forward currency market consists of two instruments: forwardoutright deals and swaps. A swap deal is unusual among the rest of theforeign exchange instruments in the fact that it consists of two deals, or legs. All the other transactions consist of single deals. In its original form, a swapdeal is a combination of a spot deal and a forward outright deal. Generally, this market includes only cash transactions. Therefore, currency futures contracts, although a special breed of forward outrighttransactions, are analyzed separately. According to figures published by the Bank for InternationalSettlements, the percentage share of the forward market was 57 percent in1998 (See Figure 3.1). Translated into U. S. dollars, out of an estimated dailygross turnover of US1.49 trillion, the total forward market representsUS900 billion. In the forward market there is no norm with regard to the settlementdates, which range from 3 days to 3 years. Volume in currency swaps longerthan one year tends to be light but, technically, there is no impediment tomaking these deals. Any date past the spot date and within the above rangemay be a forward settlement, provided that it is a valid business day for bothcurrencies. The forward markets are decentralized markets, with playersaround the world entering into a variety of deals either on a one-on-one basisor through brokers. In contrast, the currency futures market is a centralizedmarket, in which all the deals are executed on trading floors provided bydifferent exchanges. Whereas in the futures market only a handful of foreign currencies maybe traded in multiples of standardized amounts, the forward markets areopen to any currencies in any amount. The forward price consists of twosignificant parts: the spot exchange rate and the forward spread. The spotrate is the main building block. The forward price is derived from the spotprice by adjusting the spot price with the forward spread, so it follows thatboth forward outright and swap deals are derivative instruments. The forwardspread is also known as the forward points or the forward pips. The forwardspread is necessary for adjusting the spot rate for specific settlement datesdifferent from the spot date. It holds, then, that the maturity date is anotherdetermining factor of the forward price. Just as in the case of the spotmarket, the left side of the quote is the bid side, and the right side is the offerside. FOREX. On-line Manual For Successful Trading 26 27. 3.3. Futures MarketCurrency futures are specific types of forward outright deals whichoccupy in general a small part of the Forex market (See Figure 3.1). Becausethey are derived from the spot price, they are derivative instruments. Theyare specific with regard to the expiration date and the size of the tradeamount. Whereas, generally, forward outright dealsx2014those that mature pastthe spot delivery datex2014will mature on any valid date in the two countrieswhose currencies are being traded, standardized amounts of foreign currencyfutures mature only on the third Wednesday of March, June, September, andDecember. There is a row of characteristics of currency futures, which make themattractive. It is open to all market participants, individuals included. This isdifferent from the spot market, which is virtually closed to individuals - excepthigh net-worth individualsx2014because of the size of the currency amountstraded. It is a central market, just as efficient as the cash market, andwhereas the cash market is a very decentralized market, futures trading takesplace under one roof. It eliminates the credit risk because the ChicagoMercantile Exchange Clearinghouse acts as the buyer for every seller, andvice versa. In turn, the Clearinghouse minimizes its own exposure byrequiring traders who maintain a non-profitable position to post margins equalin size to their losses. Moreover, currency futures provide several benefits for traders becausefutures are special types of forward outright contracts, corporations can usethem for hedging purposes. Although the futures and spot markets tradeclosely together, certain divergences between the two occur, generatingarbitraging opportunities. Gaps, volume, and open interest are significanttechnical analysis tools solely available in the futures market. Yet theirsignificance extrapolates to the spot market as well. Because of these benefits, currency futures trading volume has steadilyattracted a large variety of players. For traders outside the exchange, the prices are available from on-linemonitors. The most popular pages are found on Bridge, Telerate, Reuters, and Bloomberg. Telerate presents the currency futures on composite pages, while Reuters and Bloomberg display currency futures on individual pagesshows the convergence between the futures and spot prices. FOREX. On-line Manual For Successful Trading 27 28. 3.4. Currency OptionsA currency option is a contract between a buyer and a seller that givesthe buyer the right, but not the obligation, to trade a specific amount ofcurrency at a predetermined price and within a predetermined period of time, regardless of the market price of the currency and gives the seller, or writer, the obligation to deliver the currency under the predetermined terms, if andwhen the buyer wants to exercise the option. Currency options are unique trading instruments, equally fit forspeculation and hedging. Options allow for a comprehensive customization ofeach individual strategy, a quality of vital importance for the sophisticatedinvestor. More factors affect the option price relative to the prices of otherforeign currency instruments. Unlike spot or forwards, both high and lowvolatility may generate a profit in the options market. For some, options are acheaper vehicle for currency trading. For others, options mean added securityand exact stop-loss order execution. Currency options constitute the fastest-growing segment of the foreignexchange market. As of April 1998, options represented 5 percent of theforeign exchange market. (See Figure 3.1) The biggest options trading centeris the United States, followed by the United Kingdom and Japan. Optionsprices are based on, or derived from, the cash instruments. Therefore, anoption is a derivative instrument. Options are usually mentioned vis-a-visinsurance and hedging strategies. Often, however, traders havemisconceptions regarding both the difficulty and simplicity of using options. There are also misconceptions regarding the capabilities of options. In the currency markets, options are available on either cash or futures. It follows, then, that they are traded either over-the-counter (OTC) or on thecentralized futures markets. The majority of currency options, around 81 percent, are traded over-the-counter. (See Figure 3.3) The over-the-counter market is similar to thespot or swap market. Corporations may call banks and banks will trade with each other eitherdirectly or in the brokers market. This type of dealing allows for maximumflexibility: any amount, any currency, any odd expiration date, any time. Thecurrency amounts may be even or odd. The amounts may be quoted in eitherU. S. dollars or foreign currencies. Any currency may be traded as an option, not only the ones available asfutures contracts. Therefore, traders may quote on any exotic currency, asrequired, including any cross currencies. FOREX. On-line Manual For Successful Trading28 29. 19 8112 Figure 3.3. Distribution of the options trading between over-the-counter (OTC) and theorganized exchange market: 1 x2013 the share of OTC 2 x2013 the share of organized exchanges. The expiration date may be quoted anywhere from several hours toseveral years, although the bulk of dates are concentrated around the evendatesx2014one week, one month, two months, and so on. The cash market nevercloses, so options may be traded literally around the clock. Trading an option on currency futures will entitle the buyer to the right, but not the obligation, to take physical possession of the currency future. Unlike the currency futures, buying currency options does not require aninitiation margin. The option premium, or price, paid by the buyer to theseller, or writer, reflects the buyers total risk. However, upon taking physical possession of the currency future byexercising the option, a trader will have to deposit a margin. Seven major factors have an impact on the option price: 1. Price of the currency. 2. Strike (exercise) price. 3. Volatility of the currency. 4. Expiration date. 5. Interest rate differential. 6. Call or put. 7. American or European option style. The currency price is the central building block, as all the other factorsare compared and analyzed against it. It is the currency price behavior thatboth generates the need for options and impacts on the profitability ofoptions. The impact of the currency price on the option premium is measured bydelta, the first of the Greek letters used to describe aspects of the theoreticalpricing models in this discussion of factors determining the option price. FOREX. On-line Manual For Successful Trading 29 30. DeltaDelta, or commonly A, is the first derivative of the option-pricing modelDelta may be viewed in three respects:x2022 as the change of the currency option price relative to a change inthe currency price. For instance, an option with a delta of 0.5 isexpected to move at one half the rate of change of the currency price. Therefore, if the price of a currency goes up 10 percent, then the priceof an option on that particular currency is expected to rise by 5 percent. x2022 as the hedge ratio between the option contracts and the currencyfutures contracts necessary to establish a neutral hedge. Therefore, anoption with a delta of 0.5 will need two option contracts for each of thecurrency futures contracts. x2022 as the theoretical or equivalent share position. In this case, delta isthe number of currency futures contracts by which a call buyer is longor a put buyer is short. If we use the same example of the delta of 5,then the buyer of the put option is short half a currency futurescontract. Traders may be unable to secure prices in the spot, forward outright, orfutures market, temporarily leaving the position delta unhedged. In order toavoid the high cost of hedging and the risk of unusually high volatility, tradersmay hedge their original options positions with other options. This method ofrisk neutralization is called gamma or vega hedging. GammaGamma (x413) is also known as the curvature of the option. It is thesecond derivative of the option-pricing model and is the rate of change of anoptions delta, or the sensitivity of the delta. For instance, an option with delta 0.5 and gamma 0.05 is expected to have a delta 0.55 if the currencyrises by 1 point, or a delta 0.45 if the currency decreases by 1 point. Gamma ranges between 0 percent and 100 percent. The higher the gamma, the higher the sensitivity of the delta. It may therefore be useful to think ofgamma as the acceleration of the option relative to the movement of thecurrency. VegaVega gauges volatility impact on the option premium. Vega (lt) is thesensitivity of the theoretical value of an option to a change in volatility. Forinstance, a vega of 0.2 will generate a 0.2 percent increase in the premiumfor each percentage increase in the volatility estimate, and a 0.2 percentdecrease in the premium for each percentage decrease in the volatilityestimate. The option is traded for a predetermined period of time, and when thistime expires, there is a delivery date known as the expiration date. A buyerwho intends to exercise the option must inform the writer on or beforeexpiration. The buyers failure to inform the writer about exercising the optionFOREX. On-line Manual For Successful Trading 30 31. frees the writer of any legal obligation. An option cannot be exercised pastthe expiration date. Theta Theta (T), also known as time decay, occurs as the very slow ornonexistent movement of the currency triggers losses in the optionstheoretical value. For instance, a theta of 0.02 will generate a loss of 0.02 in the premiumfor each day that the currency price is flat. Intrinsic value is not affected bytime, but extrinsic value is. Time decay accelerates as the option approachesexpiration, since the number of possible outcomes is continuously reduced asthe time passes. Time has its maximum impact on at-the-money options and itsminimum effect on in-the-money options. Times effect on out-of-the-moneyoptions occurs somewhere within that range. Bid-offer spreads in the market may make it too expensive to sell theoption and trade forward out rights. If the option shifts deeply into the money, the interest rate differentialgained by early exercise may exceed the value of the option. If the option amount is small or the expiration is close and the optionvalue only consists of the intrinsic value, it may be better to use the earlyexercise. Due to the complexity of its determining factors, option pricing isdifficult. In the absence of option pricing models, option trading is nothing butinefficient gambling. The one idea to make option pricing is that the option of buying thedomestic currency with a foreign currency at a certain price x is equivalent tothe option of selling the foreign currency with the domestic currency at thesame price x. Therefore, the call option in the domestic currency becomes theput option in the other, and vice versa. FOREX. On-line Manual For Successful Trading 31 32. CHAPTER 4 Fundamental AnalysisTwo types of analysis are used for the market movements forecasting:fundamental, and technical (the chart study of past behavior of commodityprices). The fundamental one focuses on the theoretical models of exchangerate determination and on the major economic factors and their likelihood ofaffecting the foreign exchange rates.4.1. Economic Fundamentals Theories of Exchange Rate Determination Fundamentals may be classified into economic factors, financial factors, political factors, and crises. Economic factors differ from the other threefactors in terms of the certainty of their release. The dates and times ofeconomic data release are known well in advance, at least among theindustrialized nations. Below are given briefly several known theories ofexchange rate determination. Purchasing Power ParityPurchasing power parity states that the price of a good in one countryshould equal the price of the same good in another country, exchanged at thecurrent ratex2014the law of one price. There are two versions of the purchasingpower parity theory: the absolute version and the relative version. Under theabsolute version, the exchange rate simply equals the ratio of the twocountries general price levels, which is the weighted average of all goodsproduced in a country. However, this version works only if it is possible to findtwo countries, which produce or consume the same goods. Moreover, theabsolute version assumes that transportation costs and trade barriers areinsignificant. In reality, transportation costs are significant and dissimilararound the world. Trade barriers are still alive and well, sometimes obvious andsometimes hidden, and they influence costs and goods distribution. Finally, this version disregards the importance of brand names. Forexample, cars are chosen not only based on the best price for the same typeof car, but also on the basis of the name (You are what you drive).FOREX. On-line Manual For Successful Trading 32 33. The PPP Relative Version Under the relative version, the percentage change in the exchange ratefrom a given base period must equal the difference between the percentagechange in the domestic price level and the percentage change in the foreignprice level. The relative version of the PPP is also not free of problems: it isdifficult or arbitrary to define the base period, trade restrictions remain a realand thorny issue, just as with the absolute version, different price indexweighting and the inclusion of different products in the indexes make thecomparison difficult and in the long term, countries internal price ratios maychange, causing the exchange rate to move away from the relative PPP. In conclusion, the spot exchange rate moves independently of relativedomestic and foreign prices. In the short run, the exchange rate is influencedby financial and not by commodity market conditions. Theory of ElasticitiesThe theory of elasticities holds that the exchange rate is simply theprice of foreign exchange that maintains the balance of payments inequilibrium. For instance, if the imports of country A are strong, then thetrade balance is weak. Consequently, the exchange rate rises, leading to thegrowth of country As exports, and triggers in turn a rise in its domesticincome, along with a decrease in its foreign income. Whereas a rise in thedomestic income (in country A) will trigger an increase in the domesticconsumption of both domestic and foreign goods and, therefore, moredemand for foreign currencies, a decrease in the foreign income (in countryB) will trigger a decrease in the domestic consumption of both country Bsdomestic and foreign goods, and therefore less demand for its own currency. The elasticities approach is not problem-free because in the short termthe exchange rate is more inelastic than it is in the long term and theadditional exchange rate variables arise continuously, changing the rules ofthe game. Modern Monetary Theories on Short-Term Exchange Rate VolatilityThe modern monetary theories on short-term exchange rate volatilitytake into consideration the short-term capital markets role and the long-termimpact of the commodity markets on foreign exchange. These theories holdthat the divergence between the exchange rate and the purchasing powerparity is due to the supply and demand for financial assets and theinternational capability. One of the modern monetary theories states that exchange ratevolatility is triggered by a one-time domestic money supply increase, becausethis is assumed to raise expectations of higher future monetary growth. The purchasing power parity theory is extended to include the capitalmarkets. If, in both countries whose currencies are exchanged, the demandFOREX. On-line Manual For Successful Trading33 34. for money is determined by the level of domestic income and domesticinterest rates, then a higher income increases demand for transactionsbalances while a higher interest rate increases the opportunity cost of holdingmoney, reducing the demand for money. Under a second approach, the exchange rate adjusts instantaneously tomaintain continuous interest rate parity, but only in the long run to maintainPPP. Volatility occurs because the commodity markets adjust more slowlythan the financial markets. This version is known as the dynamic monetaryapproach. The Portfolio-Balance ApproachThe portfolio-balance approach holds that currency demand is triggeredby the demand for financial assets, rather than the demand for the currencyper se. Synthesis of Traditional and Modern Monetary ViewsIn order to better suit the previous theories to the realities of themarket, some of the more stringent conditions were adjusted into a synthesisof the traditional and modern monetary theories. A short-term capital outflow induced by a monetary shock creates apayments imbalance that requires an exchange rate change to maintainbalance of payments equilibrium. Speculative forces, commodity marketsdisturbances, and the existence of short-term capital mobility trigger theexchange rate volatility. The degree of change in the exchange rate is afunction of consumers elasticity of demand. Because the financial markets adjust faster than the commoditiesmarkets, the exchange rate tends to be affected in the short term by capitalmarket changes, and in the long term by commodities changes. FOREX. On-line Manual For Successful Trading 34 35. 4.2. Economic Indicators Economic indicators occur in a steady stream, at certain times, and alittle more often than changes in interest rates, governments, or naturalactivity such as earthquakes etc. Economic data is generally (except of theGross Domestic Product and the Employment Cost Index, which are releasedquarterly) released on a monthly basis. All economic indicators are released in pairs. The first number reflectsthe latest period. The second number is the revised figure for the month priorto the latest period. For instance, in July, economic data is released for themonth of June, the latest period. In addition, the release includes the revisionof the same economic indicator figure for the month of May. The reason forthe revision is that the department in charge of the economic statisticscompilation is in a better position to gather more information in a monthstime. This feature is important for traders. If the figure for an economicindicator is better than expected by 0.4 percent for the past month, but theprevious months number is revised lower by 0.4 percent, then traders arelikely to ignore the overall release of that specific economic data. Economic indicators are released at different times. In the UnitedStates, economic data is generally released at 8:30 and 10 am ET. It isimportant to remember that the most significant data for foreign exchange isreleased at 8:30 am ET. In order to allow time for last-minute adjustments, the United States currency futures markets open at 8:20 am ET. Information on upcoming economic indicators is published in all leadingnewspapers, such as the Wall Street Journal, the Financial Times, and theNew York Times and business magazines, such as Business Week. Moreoften than not, traders use the monitor sourcesx2014Bridge Information Systems, Reuters, or Bloombergx2014to gather information both from news publicationsand from the sources own up-to-date information. The Gross National Product (GNP)The Gross National Product measures the economic performance of thewhole economy. This indicator consists, at macro scale, of the sum of consumptionspending, investment spending, government spending, and net trade. Thegross national product refers to the sum of all goods and services producedby United States residents, either in the United States or abroad. The Gross Domestic Product (GDP)The Gross Domestic Product (GDP) refers to the sum of all goods andservices produced in the United States, either by domestic or foreigncompanies. The differences between the two are nominal in the case of theeconomy of the United States. GDP figures are more popular outside theFOREX. On-line Manual For Successful Trading35 36. United States. In order to make it easier to compare the performances ofdifferent economies, the United States also releases GDP figures. Consumption SpendingConsumption is made possible by personal income and discretionaryincome. The decision by consumers to spend or to save is psychological innature. Consumer confidence is also measured as an important indicator ofthe propensity of consumers who have discretionary income to switch fromsaving to buying. Investment SpendingInvestmentx2014or gross private domestic spending - consists of fixedinvestment and inventories. Government SpendingGovernment spending is very influential in terms of both sheer size andits impact on other economic indicators, due to special expenditures. Forinstance, United States military expenditures had a significant role in totalU. S. employment until 1990. The defense cuts that occurred at the timeincreased unemployment figures in the short run. Net TradeNet trade is another major component of the GNP. Worldwideinternationalization and the economic and political developments since 1980have had a sharp impact on the United States ability to compete overseas. The U. S. trade deficit of the past decades has slowed down the overall GNP. GNP can be approached in two ways: flow of product and flow of cost. Industrial ProductionIndustrial production consists of the total output of a nations plants, utilities, and mines. From a fundamental point of view, it is an importanteconomic indicator that reflects the strength of the economy, and byextrapolation, the strength of a specific currency. Therefore, foreign exchangetraders use this economic indicator as a potential trading signal. Capacity Utilization Capacity utilization consists of total industrial output divided by totalproduction capability. The term refers to the maximum level of output a plantcan generate under normal business conditions. In general, capacityutilization is not a major economic indicator for the foreign exchange market. However, there are instances when its economic implications are usefulfor fundamental analysis. A normal figure for a steady economy is 81.5percent. If the figure reads 85 percent or more, the data suggests that theindustrial production is overheating, that the economy is close to full capacity. High capacity utilization rates precede inflation, and expectation in the foreignFOREX. On-line Manual For Successful Trading 36 37. exchange market is that the central bank will raise interest rates in order toavoid or fight inflation. Factory Orders Factory orders refer to the total of durable and nondurable goodsorders. Nondurable goods consist of food, clothing, light industrial products, and products designed for the maintenance of durable goods. Durable goodsorders are discussed separately. The factory orders indicator has limitedsignificance for foreign exchange traders. Durable Goods OrdersDurable goods orders consist of products with a life span of more thanthree years. Examples of durable goods are autos, appliances, furniture, jewelry, and toys. They are divided into four major categories: primarymetals, machinery, electrical machinery, and transportation. In order to eliminate the volatility pertinent to large military orders, theindicator includes a breakdown of the orders between defense and non-defense. This data is fairly important to foreign exchange markets because itgives a good indication of consumer confidence. Because durable goods costmore than nondurables, a high number in this indicator shows consumerspropensity to spend. Therefore, a good figure is generally bullish for thedomestic currency. Business Inventories Business inventories consist of items produced and held for future sale. The compilation of this information is facile and holds little surprise for themarket. Moreover, financial management and computerization help controlbusiness inventories in unprecedented ways. Therefore, the importance ofthis indicator for foreign exchange traders is limited. Construction IndicatorsConstruction indicators constitute significant economic indicators thatare included in the calculation of the GDP of the United States. Moreover, housing has traditionally been the engine that pulled the U. S. economy out ofrecessions after World War II. These indicators are classified into three majorcategories:1. housing starts and permits2. new and existing one-family home sales and3. construction spending. Private housing is monitored closely at all the major stages. (See Figure4.1.) Private housing is classified based on the number of units (one, two, three, four, five, or more) region (Northeast, West, Midwest, and South)and inside or outside metropolitan statistical areas. FOREX. On-line Manual For Successful Trading37 38. Figure 4.1. Diagram of construction of private housing Construction indicators are cyclical and very sensitive to the level ofinterest rates (and consequently mortgage rates) and the level of disposableincome. Low interest rates alone may not be able to generate a high demandfor housing, though. As the situation in the early 1990s demonstrated, despitehistorically low mortgage rates in the United States, housing increased onlymarginally, as a result of the lack of job security in a weak economy. Housing starts between one and a half and two million units reflect astrong economy, whereas a figure of approximately one million units suggeststhat the economy is in recession. Inflation Indicators The rate of inflation is the widespread rise in prices. Therefore, gauginginflation is a vital macroeconomic task. Traders watch the development ofinflation closely, because the method of choice for fighting inflation is raisingthe interest rates, and higher interest rates tend to support the local currency. Moreover, the inflation rate is used to deflate nominal interest rates and theGNP or GDP to their real values in order to achieve a more accurate measureof the data. The values of the real interest rates or real GNP and GDP are of theutmost importance to the money managers and traders of internationalfinancial instruments, allowing them to accurately compare opportunitiesworldwide. To measure inflation traders use following economic tools:x2022 Producer Price Index (PPI)x2022 Consumer Price Index (CPI)x2022 GNP Deflatorx2022 GDP Deflatorx2022 Employment Cost Index (ECI)x2022 Commodity Research Bureaus Index (CRB Index)x2022 Journal of Commerce Industrial Price Index (JoC).FOREX. On-line Manual For Successful Trading 38 39. The first four are strictly economic indicators they are released atspecific intervals. The commodity indexes provide information on inflationquickly and continuously. Other economic data that measure inflation are unemployment, consumer prices, and capacity utilization. Producer Price Index (PPI)Producer price index is compiled from most sectors of the economy, such as manufacturing, mining, and agriculture. The sample used to calculatethe index contains about 3400 commodities. The weights used for thecalculation of the index for some of the most important groups are: food - 24percent fuel - 7 percent autos - 7 percent and clothing - 6 percent. Unlikethe CPI, the PPI does not include imported goods, services, or taxes. Consumer Price Index (CPI)Consumer price index reflects the average change in retail prices for afixed market basket of goods and services. The CPI data is compiled from asample of prices for food, shelter, clothing, fuel, transportation, and medicalservices that people purchase on daily basis. The weights attached for thecalculation of the index to the most important groups are: housing - 38percent food - 19 percent fuel - 8 percent and autos - 7 percent. The two indexes, PPI and CPI, are instrumental in helping tradersmeasure inflationary activity, although the Federal Reserve takes the positionthat the indexes overstate the strength of inflation. Gross National Product Implicit DeflatorGross national product implicit deflator is calculated by dividing thecurrent dollar GNP figure by the constant dollar GNP figure. Gross Domestic Product ImplicitGross domestic product implicit deflator is calculated by dividing thecurrent dollar GDP figure by the constant dollar GDP figure. Both the GNP and GDP implicit deflators are released quarterly, alongwith the respective GNP and GDP figures. The implicit deflators are generallyregarded as the most significant measure of inflation. Commodity Research Bureaus Futures Index (CRB index) The Commodity Research Bureaus Futures Index makes watching forinflationary trends easier. The CRB Index consists of the equally weightedfutures prices of 21 commodities. The components of the CRB Index are: x2022 precious metals: gold, silver, platinum x2022 industrials: crude oil, heating oil, unleaded gas, lumber, copper, and cotton x2022 grains: corn, wheat, soybeans, soy meal, soy oilFOREX. On-line Manual For Successful Trading 39 40. x2022livestock and meat: cattle, hogs, and pork belliesx2022imports: coffee, cocoa, sugarx2022miscellaneous: orange juice. The preponderance of food commodities makes the CRB Index lessreliable in terms of general inflation. Nevertheless, the index is a popular toolthat has proved quite reliable since the late 1980s. The x201CJournal of commercex201D Industrial Price Index (JoC)The x201CJournal of commercex201D industrial price index consists of the pricesof 18 industrial materials and supplies processed in the initial stages ofmanufacturing, building, and energy production. It is more sensitive thanother indexes, as it was designed to signal changes in inflation prior to theother price indexes. Merchandise Trade Balanceis one of the most important economic indicators. Its value may triggerlong-lasting changes in monetary and foreign policies. The trade balanceconsists of the net difference between the exports and imports of a certaineconomy. The data includes six categories:1. food2. raw materials and industrial supplies3. consumer goods4. autos5. capital goods6. other merchandise. Employment Indicators The employment rate is an economic indicator with significance inmultiple areas. The rate of employment, naturally, measures the soundness ofan economy. (See Figure 4.2.) The unemployment rate is a lagging economicindicator. It is an important feature to remember, especially in times ofeconomic recession. Whereas people focus on the health and recovery of thejob sector, employment is the last economic indicator to rebound. Wheneconomic contraction causes jobs to be cut, it takes time to generatepsychological confidence in economic recovery at the managerial level beforenew positions are added. At individual levels, the improvement of the joboutlook may be clouded when new positions are added in small companiesand thus not fully reflected in the data. The employment reports aresignificant to the financial markets in general and to foreign exchange inparticular. In foreign exchange, the data is truly affective in periods ofeconomic transitionx2014recovery and contraction. The reason for the indicatorsimportance in extreme economic situations lies in the picture they paint of thehealth of the economy and in the degree of maturity of a business cycle. Adecreasing unemployment figure signals a maturing cycle, whereas theopposite is true for an increasing unemployment indicator. FOREX. On-line Manual For Successful Trading 40 41. Figure 4.2. The U. S. unemployment rate. Employment Cost Index (ECI) Employment cost index measures wages and inflation and provides themost comprehensive analysis of worker compensation, including wages, salaries, and fringe benefits. The ECI is one of the Feds favorite quarterlyeconomic statistics. Consumer Spending IndicatorsRetail sales is a significant consumer spending indicator for foreignexchange traders, as it shows the strength of consumer demand as well asconsumer confidence. component in the calculation of other economicindicators, such as GNP and GDP. Generally, the most commonly used employment figure is not themonthly unemployment rate, which is released as a percentage, but thenonfarm payroll rate. The rate figure is calculated as the ratio of thedifference between the total labor force and the employed labor force, dividedby the total labor force. The data is more complex, though, and it generatesmore information. In foreign exchange, the standard indicators monitored bytraders are the unemployment rate, manufacturing payrolls, nonfarm payrolls, average earnings, and average workweek. Generally, the most significantemployment data are manufacturing and nonfarm payrolls, followed by theunemployment rate. Auto SalesDespite the importance of the auto industry in terms of both productionand sales, the level of auto sales is not an economic indicator widely followedby foreign exchange traders. The American automakers experienced a long, FOREX. On-line Manual For Successful Trading 41 42. steady market share loss, only to start rebounding in the early 1990s. But carmanufacturing has become increasingly internationalized, with American carsbeing assembled outside the United States and Japanese and German carsassembled within the United States. Because of their confusing nature, autosales figures cannot easily be used in foreign exchange analysis. Leading Indicators The leading indicators consist of the following economic indicators: x2022 average workweek of production workers in manufacturing x2022 average weekly claims for state unemployment x2022 new orders for consumer goods and materials (adjusted forinflation) x2022 vendor performance (companies receiving slower deliveries fromsuppliers) x2022 contracts and orders for plant and equipment (adjusted forinflation) x2022 new building permits issued x2022 change in manufacturers unfilled orders, durable goods x2022 change in sensitive materials prices. Personal Incomeis the income received by individuals, nonprofit institutions, and privatetrust funds. Components of this indicator include wages and salaries, rentalincome, dividends, interest earnings, and transfer payments (Social Security, state unemployment insurance, and veterans benefits). The wages andsalaries reflect the underlying economic conditions. This indicator is vital for the sales sector. Without an adequate personalincome and a propensity to purchase, consumer purchases of durable andnondurable goods are limited. For the Forex traders, personal income is not significant. FOREX. On-line Manual For Successful Trading42 43. 4.3. Financial and Sociopolitical FactorsThe Role of Financial FactorsFinancial factors are vital to fundamental analysis. Changes in agovernments monetary or fiscal policies are bound to generate changes inthe economy, and these will be reflected in the exchange rates. Financialfactors should be triggered only by economic factors. When governmentsfocus on different aspects of the economy or have additional internationalresponsibilities, financial factors may have priority over economic factors. Thiswas painfully true in the case of the European Monetary System in the early1990s. The realities of the marketplace revealed the underlying artificiality ofthis approach. Using the interest rates independently from the real economicenvironment translated into a very expensive strategy. Because foreign exchange, by definition, consists of simultaneoustransactions in two currencies, then it follows that the market must focus ontwo respective interest rates as well. This is the interest rate differential, abasic factor in the markets. Traders react when the interest rate differentialchanges, not simply when the interest rates themselves change. For example, if all the G-5 countries decided to simultaneously lower their interest rates by0.5 percent, the move would be neutral for foreign exchange, because theinterest rate differentials would also be neutral. Of course, most of the time the discount rates are cut unilaterally, amove that generates changes in both the interest differential and theexchange rate. Traders approach the interest rates like any other factor, trading on expectations and facts. For example, if rumor says that a discountrate will be cut, the respective currency will be sold before the fact. Once thecut occurs, it is quite possible that the currency will be bought back, or theother way around. An unexpected change in interest rates is likely to trigger asharp currency move. Buy on the rumor, sell on the fact. . Other factors affecting the trading decision are the time lag betweenthe rumor and the fact, the reasons behind the interest rate change, and theperceived importance of the change. The market generally prices in adiscount rate change that was delayed. Since it is a fait accompli, it is neutralto the market. If the discount rate was changed for political rather thaneconomic reasons, what is a common practice in the European MonetarySystem, the markets are likely to go against the central banks, sticking to thereal fundamentals rather than the political ones. This happened in bothSeptember 1992 and the summer of 1993, when the European central bankslost unprecedented amounts of money trying to prop up their currencies, despite having high interest rates. The market perceived those interest ratesas artificially high and, therefore, aggressively sold the respective currencies. Finally, traders deal on the perceived importance of a change in the interestrate differential. FOREX. On-line Manual For Successful Trading 43 44. Political Events and CrisesPolitical events generally take place over a period of time, but politicalcrises strike suddenly. They are almost always, by definition, unexpected. Currency traders have a knack for responding to crises. Speed is essentialshooting from the hip is the only fighting option. The traders reflexes takeover. Without fast action, traders can be left out in the cold. There is no timefor analysis, and only a split second, at best, to act. As volume dropsdramatically, trading is hindered by a crisis. Prices dry out quickly, andsometimes the spreads between bid and offer jump from 5 pips to 100 pips. Getting back to the market is difficult. FOREX. On-line Manual For Successful Trading44 45. CHAPTER 5 Technical Analysis5.1. The Fundamentals Of Technical AnalysisTechnical analysis is appointed to analyze market movement (themovement of prices, volumes and open interests) using the informationobtained for a past time. Mainly, it is the chart study of past behavior ofcurrencies prices in order to forecast their future performance. It is one of themost significant tools available for the forecasting of financial markets. Suchanalysis has been an increasingly utilized forecasting tool over the last twocenturies. The main strength of technical analysis is the flexibility with regard tothe underlying instrument, regarding the markets and regarding the timeframe. A trader who deals several currencies but specializes in one may easilyapply the same technical expertise to trading another currency. A trader whospecializes in spot trading can make a smooth transition to dealing currencyfutures by using chart studies, because the same technical principles applyover and over again, regardless of the market. Finally, different players havedifferent trading styles, objectives, and time frames. Technical analysis is easy to compute what is important while thetechnical services are becoming increasingly sophisticated and reasonablypriced. Prior to this historic open market intervention, technical analysisprovided ample selling signals. PriceThe Fundamental Principles of Technical Analysis are based on the DowTheory with the following main thesis:1. The price is a comprehensive reflection of all the market forces. Atany given time, all market information and forces are reflected in the currencyprices.2. Price movements are historically repetitive.3. Price movements are trend followers. FOREX. On-line Manual For Successful Trading 45 46. 4. The market has three trends: primary, secondary, and minor. Theprimary trend has three phases: accumulation, run-up/run-down, anddistribution. In the accumulation phase the shrewdest traders enter newpositions. In the run-up/run-down phase, the majority of the market finallysees the move and jumps on the bandwagon. Finally, in the distributionphase, the keenest traders take their profits and close their positions whilethe general trading interest slows down in an overshooting market. Thesecondary trend is a correction to the primary trend and may retrace one-third, one-half or two-thirds from the primary trend. 5. O volume deve confirmar a tendência. 6. As tendências existem até que suas reversões sejam confirmadas. Figure 5.1. showsexample of reversals in a bearish currency market. The buying signals occurat points A and B when the currency exceeds the previous highs. Figure 5.1. A reversal of bearish currency Cycles of currency price change are the propensity for events to repeatthemselves at roughly the same time and are an important ground to justifythe Dow Theory. Cycle identification is a powerful tool that can be used in both the longand the short term. The longer the term, the more significance a cycle has. Figure 5.2. mostra uma série de três ciclos. The top of the cycle (C) is calledthe crest and the bottom (T) is known as trough. Analysts measure cyclesfrom trough to trough. Cycles are gauged in terms of amplitude, period, and phase. Theamplitude shows the height of the cycle, the period shows the length of thecycle, the phase shows the location of a wave trough. FOREX. On-line Manual For Successful Trading 46 47. Figure 5.2. The structure of cyclesFigure 5.3. The two gauging measures of a cycle: period and phase. Volume and Open InterestVolume consists of the total amount of currency traded within a periodof time, usually one day. For example, by year 2000, the total foreigncurrency daily trading volume was 1.4 trillion. But traders are naturally moreinterested in the volume of specific instruments for specific trading periods, because large trading volume suggests that there is interest and liquidity in acertain market, and low volume warns the trader to veer away from thatmarket. The risks of a low-volume market are usually very difficult toquantify orhedge. In addition, certain chart formations require heavy trading volume forsuccessful development. An example is the head-and-shoulderformation. Therefore, despite its obvious importance, volume is not easy to quantify inall foreign exchange markets. One method to estimate volume is to extrapolate the figures from thefutures market. Another is feeling the size of volume based on the numberFOREX. On-line Manual For Successful Trading47 48. of calls on the dealing systems or phones, and the noise from the brokersmarket. Open interest is the total exposure, or outstanding position, in a certaininstrument. The same problems that affect volume are also present here. Asit was already mentioned, figures for volume and open interest are availablefor currency futures. If you have access to printed or electronic charts onfutures, you will be able to see these numbers plotted at the bottom of thefutures charts. Volume and open interest figures are available from different sources, although one day late such as the newswires (Bridge Information Systems, Reuters, Bloomberg), newspapers (the Wall Street Journal, the Journal ofCommerce), Weekly printed charts (Commodity Perspective, CommodityTrend Service).FOREX. On-line Manual For Successful Trading48 49. 5.2. Types of chartsLine ChartThe line chart is the original type of chart. In order to plot it, a lineconnects single prices for a selected time period. The most popular line chartis the daily chart. Although any point in the day can be plotted, most tradersfocus on the closing price, which they perceive as the most important. (SeeFigure 5.4.) But an immediate problem with the daily line chart is the fact thatit is impossible to see the price activity for the balance of the day. Figure 5.4. An example of the line chartLine charts are considered for technical analysis because due to thesophistication of current charting services, daily price activity does not needto be lost. Daily line charts are useful when looking for the big picture or the majortrend because, without line charts, intraday activity would be-come anunimportant detail. When plotted over a long stretch of time, such as severalyears, a line chart is easier to visualize. Also, technical analysis goes wellbeyond chart formation in order to execute certain models and techniques, line charts are better suited than any of the other charts. FOREX. On-line Manual For Successful Trading 49 50. However the line chart is a continuous chart, and this is a disadvantagebecause price gaps cannot be charted on a continuous chart. Bar ChartThe bar chart is arguably the most popular type of chart currently inuse. It consists of four significant points (See figure 5.5.):x2022 the high and the low prices, which are united by a vertical barx2022 the opening price, which is marked with a little horizontal line to theleft of the barx2022 the closing price, which is marked with a little horizontal line to theright of the bar. Figure 5.5. An example of the bar chart. The opening price is not always important for analysis. Bar charts have the obvious advantage of displaying the currency rangefor the period selected. The most popular period is daily, followed by weekly. Other periods may be selected as well. An advantage of this chart is that, unlike line charts, the bar chart is able to plot price gaps that are formed inthe currency futures market. Although the currency futures market tradesaround the clock, physically it is open for only about a third of the tradingFOREX. On-line Manual For Successful Trading 50 51. day. (Chicago IMM is open for business 7:20 am to 2 pm CDT.) Therefore, price gaps may occur between two days price ranges. Incidentally, the barchart is the chart of choice among currency futures traders. Candlestick ChartThe candlestick chart is closely related to the bar chart. It also consistsof four major prices: high, low, open, and close. (See Figure 5.6.) In additionto the common readings, the candlestick chart has a set of particularinterpretations. It is also easier to view..Figure 5.6. An example of the candlestick chart The opening and closing prices form the body (jittai) of the candlestick. To indicate that the opening was lower than the closing, the body of the baris left blank. In its original form, the body was colored red. Current standardelectronic displays allow you to keep it blank or select a color of your choice. If the currency closes below its opening, the body is filled. In its original form, the body was colored black, but the electronic displays allow you to keep itfilled or to select a color of your choice. FOREX. On-line Manual For Successful Trading 51 52. The intraday (or weekly) direction on a candlestick chart can be tracedby means of two shadows: the upper shadow (uwakage) and the lowershadow (shitakage).Just as with a bar chart, the candlestick chart is unable to trace everyprice movement during a days activity. FOREX. On-line Manual For Successful Trading 52 53. 5.3. Trends, Support and ResistanceKinds Of TrendsThe trend shows a pending direction of the market movement. A trend may be:1. Upward (See Figure 5.7.)2. Downward (See Figure 5.8.)3. Sideways, also known as a flat market or trendless (See Figure5.9.)Because the markets do not move in a straight line in any direction, butrather in zigzags, it is the direction of these peaks and troughs that createsthe market trend. In addition to direction, trends are also classified by timeframe: major or long-term trends, secondary or medium-term trends, andnear-term or short-term trends. Any number of secondary and near-termtrends may occur within a major trend. The time frames for each class varywidely. The Dow Theory suggests a one-year length for a major trend. Currently, for a major trend, the market expects a time span of over oneyear. Secondary trends should last for a matter of months, and short-termtrends for a matter of weeks. Figure 5.7. An example of the up trendFOREX. On-line Manual For Successful Trading53 54. Figure 5.8. An example of the down trendFigure 5.9. An example of the sideways trendFOREX. On-line Manual For Successful Trading 54 55. Percentage RetracementForeign currencies, like all the other financial instruments, do not movestraight up or down, even in the healthiest of trends. Traders watch severalpercentage retracements, in search of price objectives. There are three typical percentage retracements:1. Charles Dow developed the traditional percentage retracementswhich are 1/3, 1/2, and 2/3 or 33 percent, 50 percent, and 66 percent. Aretracement past 66 percent is considered to be a trend failure.2. The Fibonacci ratios. These ratios are 0.382, 0.50, and 0.618, orapproximately 38 percent, 50 percent, and 62 percent.3. The Gann percentages attach importance to the one-eighth break-downs. The Trendline A trendline is the natural development in tracking a trend. It simplyconsists of a straight line connecting the significant highs (peaks) or thesignificant lows (troughs.) Following in the tracks of the trend directions, thetrendlines may be classified as: 1. Rising trendlines. (See Figure 5.10.) 2. Declining trendlines. (See Figure 5.11.) 3. Sideways trendlines. (See Figure 5.12.) To draw a trendline only two points are necessary and the third one isthe contact point confirmation. The currency maintains its general directionand velocity. A trendline exists until it is broken as a result of a significal moveof the price up or down. Hence, even after confirmation, the breakout is stilllikely to be followed by a period of consolidation It is relatively rare for atrendline to suddenly reverse its direction. If a consolidation period doesindeed occur, the longer it lasts, the steeper the following rally will be. Breakouts from up trendlines tend to test the strength of the former supportline, now turned into a resistance line. A price filter of 3 percents serves usually to test the validity of thebreakout. FOREX. On-line Manual For Successful Trading55 56. Figure 5.10. Example of a rising trendline. Figure 5.11. An example of the declining trendline. FOREX. On-line Manual For Successful Trading56 57. Figure 5.12. An example of the sideways trendlineThe trendline and a line drawn along the opposite edge of the trendpattern about to be parallel to the trendline form the trade channel (SeeFigure 5.13.). Then the both lines are known as the channel lines. Lines of Support and ResistanceThe upper and bottom borders of a trade channel (See Figure 5.14.)forme lines of support and resistance. The peaks represent the price levels atwhich the selling pressure exceeds the buying pressure are known asresistance levels. The troughs, on the other hand, represent the levels atwhich the selling pressure succumbs to the buying pressure. They are calledsupport levels. The longer the prices bounce off the support and resistancelevels, the more significant the trend becomes. Trading volume is also veryimportant, especially at the critical support and resistance levels. When thecurrency bounces off these levels under heavy volume, the significance of thetrend increases. The importance of support and resistance levels goes beyondtheir original functions. If these levels are convincingly penetrated, they tendto turn into just the opposite. A firm support level, once it is penetrated onheavy volume, will likely turn into a strong resistance level. Conversely, astrong resistance turns into a firm support after being penetrated. FOREX. On-line Manual For Successful Trading57 58. Figure 5.13. An example of the trade channelFigure 5.14. Example of the support turned into resistanceFOREX. On-line Manual For Successful Trading 58 59. 5.4. Trend Reversal PatternsChart formations are generally sorted on the basis of their significanceto the current trend of the underlying currency. Formations signaling the endof the trend are known as reversal patterns. Conversely, chart formations thatconfirm that the underlying currency trend is intact are called continuationpatterns. The most significant trend reversal patterns are:1. Head-and-shoulders and inverse head-and-shoulders.2. Double tops and double bottoms.3. Triple tops and triple bottoms. Head-And-Shoulders The head-and-shoulders pattern is one of the most reliable and well-known chart formations. It consists of three consecutive rallies. The first andthird ralliesx2014the shouldersx2014have about the same height, and the middleonex2014the headx2014is the highest. All three rallies are based on the same supportline (or on the resistance line in the case of the reversed head-and-shouldersformation), known as the neckline. Prior to point A, the neckline was a resistance line (see Figure 5.15.).Once the resistance line was broken, it turned into a significant support line. The price bounced off it twice, at points B and C. The neckline was eventuallybroken in point D, under heavy volume, and the trend reversal wasconfirmed. As the significant support line was broken, a retracement could beexpected to retest the neckline (E), now a resistance line again. If theresistance line held, the price was expected to eventually decline to aroundlevel F, which was the price target of the head-and-shoulders formation. Thetarget was approximately equal in amplitude to the distance between the topof the head and the neckline. The price target was measured from point D, where the neckline was broken. (See the dotted lines).Signals Generated by the Head-and-shoulders PatternThe head-and-shoulders formation provides excellent information:1. The support line. This is based on points B and C.2. The resistance line. After giving in at point D, the market mayretest the neckline at point E.3. The price direction. If the neckline holds the buying pressure atpoint E, then the formation provides information regarding the price direction:diametrically opposed to the direction of the head-and-shoulders (bearish).4. The price target. This is provided by the confirmation of theformation (by breaking through the neckline under heavy trading volume).FOREX. On-line Manual For Successful Trading 59 60. Figure 5.15. Diagram of a typical head-and-shoulders patternOne of the main requirements of the successful development of thisformation is that the breakout through the neckline occurs under heavymarket volume. A breakout on light volume is a strong warning that it is afalse breakout and will trigger a sharp backlash in the currency price. Thetime frame for this chart formations evolution is anywhere from severalweeks to several months. The intraday chart formations are not reliable. Thelonger the formation time is, the more significance should be attached to thispattern. The target is unlikely to be reached in a very short time frame. Whereas there is no immediate suggestion regarding the length of targetreaching time, common sense would link it to the duration of development ofthe chart pattern. It is reasonable to emphasize the importance of measuring the targetfrom the point where the neckline was broken. There is a tendency amongnew technicians to measure the target price not only from under the necklinebut also from the middle of the formation. This may happen as they measurethe height of the head. Most head-and-shoulders formations, of course, lookdifferent from that in Figure 5.16. Prices fluctuate enough to forego anypossibility of a clean-looking chart line. Also, the neckline is seldom a perfectlyhorizontal line. FOREX. On-line Manual For Successful Trading 60 61. Figure 5.16. Diagram of a typical inverse head-and-shoulders patternInverse Head-And-ShouldersThe inverse head-and-shoulders formation is a mirror image of theprevious pattern. Therefore, you can apply the same characteristics, potentialproblems, signals, and traders point of view from the preceding presentation. The underlying currency broke out of the downtrend ranged by the xx-yychannel. The currency retested the previous resistance line (the rally number3), now turned into a support line. Among the three consecutive rallies, theshoulders (1 and 3) have approximately the same height, and the head is thelowest. Prior to point A, the neckline was a support line. Once this line wasbroken, it turned into a significant resistance line. The price bounced off theneckline twice, at points x412 and C. The neckline was eventually broken at pointD, under heavy volume. As the significant resistance line was broken, aretracement could be expected to retest the neckline (E), now a support lineagain. If it held, the price was expected to eventually rise to around level F, which is the price target of the head-and-shoulders formation. The price objective is approximately equal in amplitude to the distancebetween the top of the head and the neckline, and is measured from thebreakout point D. Double TopAnother very reliable and common trend reversal chart formation is thedouble top. As the name clearly and succinctly describes, this pattern consistsof two tops (peaks) of approximately equal heights. (See Figure 5.17.). Aparallel line is drawn against a resistance line that connects the two tops. Weshould think of this line as identical to the head-and-shoulders neckline. As aresistance line, it is broken at point A. It turns into a strong support for priceFOREX. On-line Manual For Successful Trading61 62. level at C, but eventually fails at point E. The support line turns into a strongresistance line, which holds the market backlash at point F. The priceobjective is at level G, which is the average height of the double topformation, measured from point E. Figure 5.17. Diagram of a typical double-top formationSignals Provided by the Double Top FormationThe double top formation provides information on:1. The support line, set between points A and E.2. The resistance line, set between points x412 and D.3. The price direction. If the neckline holds the buying pressure atpoint F, then the formation provides information regarding the price direction:diametrically opposed to the direction of the peaks (bearish).4. The price target, provided by the confirmation of the formation (bybreaking through the neckline under heavy trading volume).Exactly as in the case of the head-and-shoulders pattern, a vitalrequirement for the successful completion of the double-top formation is thatthe breakout through the neckline occurs under heavy market volume. Again, please remember that gauging volume in traditional ways is only possible inthe currency futures market. Therefore, the trader must estimate the size ofthe cash market volume by extrapolating from The currency futures volume and the trading noise. A breakout onlight volume is a strong case for a false breakout, which would trigger a sharpbacklash in the currency price. The time frame for this chart formationsevolution is anywhere from several weeks to several months. The intradaychart formations are less reliable. There is a strong correlation between thelength of time to develop the pattern and the significance of the formation. FOREX. On-line Manual For Successful Trading 62 63. The target is unlikely to be reached in a very short time frame. There isno direct suggestion regarding the length of target reaching time but foreignexchange common sense links it to the duration of development. It is important to measure the target from the point where the necklinewas broken. Avoid the trap of measuring the target price from the middle ofthe formation under the neckline. This may happen as you measure theaverage height of the formation. Double Bottom The double bottom formation is a mirror image of the previous pattern.(See Figure 5.18.). Therefore, one may apply the same characteristics, potential problems, signals, and traders point of view from the precedingpresentation. Figure 5.18. Diagram of a typical double-bottom formationThe bottoms have about the same amplitude. A parallel line (theneckline) is drawn against the line connecting the two bottoms (B and D.) Asa support line, it is broken at point A. It turns into a strong resistance forprice level at C, but eventually fails at point E. The resistance line turns into astrong support line, which holds the market backlash at point F. The priceobjective is at level G, which is the average height of the bottoms, measuredfrom point E. (See the dotted lines).Triple Top And Triple BottomThe triple top is a hybrid of the head-and-shoulders and double-toptrend reversal formations. (See Figure 5.19.) Conversely, the triple bottom isa hybrid of the inverse head-and-shoulders and double-bottom formations.(See Figure 5.20.) Consequently, they have the same characteristics, potentialFOREX. On-line Manual For Successful Trading 63 64. problems, signals, and traders point of view as the double top or doublebottom, respectively. As shown in Figure 5.19. in a typical triple-top formation, the tops haveabout the same height. A parallel line (the neckline) is drawn against the lineconnecting the three tops (B, D, and F.) As a resistance line, the neckline isbroken at point A. It turns into a strong support for price levels at x421 and E, but eventually fails at point G. The support line turns into a strong resistanceline, which holds the market backlash at point H. The price objective is atlevel I, which is the average height of the three tops formation, as measuredfrom point D (see the dotted lines).Figure 5.19. Diagram of a triple-top formationAs a double top, the formation fails at point E. The price moves upsteeply toward point F. The resistance line is holding once more and the pricedrops sharply again toward point G. At this level, the market pressure is ableto penetrate the support line. After a possible retest of the neckline, theprices drop further, to eventually reach the price objective. The opposite is true for the triple bottomAs shown in Figure 5.19. in a triple-bottom formation, the bottomshave about the same amplitude. A parallel line (the neckline) is drawn againstthe line connecting the three bottoms (B, D, and F.) As a support line, theneckline is broken at point A. It turns into a strong resistance for price levelsat x421 and E, but eventually fails at point G. The resistance line turns into astrong support line, which holds the market backlash at point H. The priceobjective is at level I, which is the average length of the triple-bottomformation, as measured from point D (see the dotted lines).FOREX. On-line Manual For Successful Trading 64 65. Figure 5.20. Diagram of a typical triple-bottom formation. Rounded Top and Bottom Formations The rounded top and bottom, also known as saucers consist of a veryslow and gradual change in the direction of the market. These patterns reflectthe indecision of the market at the end of a trend. The trading activity is slow. It is impossible to know when the formation is indeed completed, and not fora lack of trying. Like any other consolidation pattern, the longer it takes tocomplete, the higher the likelihood of a sharp price move in the newdirection. Diamond Formation The diamond formation tends to occur at the top of the trend. The priceactivity may be outlined by a shape resembling a diamond (see Figure 5.21.).The increase and decrease in trading volume closely mimic the combination ofdivergent and convergent support and resistance lines. Upon breakout, volume picks up substantially. The price target is the height of the diamond, measured from the breakout point. The head-and-shoulders, the double top and bottom and the triple topand bottom, due to their significance in trend reversals, are generally knownas major reversal patterns. FOREX. On-line Manual For Successful Trading 65 66. Figure 5.21. A scheme of a diamond reversal formationFOREX. On-line Manual For Successful Trading66 67. 5.5. Trend Continuation Patterns Technical analysis provides charts that reinforce the current trends. These chart formations are known as continuation patterns. They consist offairly short consolidation periods. The breakouts occur in the same directionas the original trend. The most important continuation patterns are:1. Flags2. Pennants3. Triangles4. Wedges5. RectanglesFlag formationThe flag formation provides signals for direction and price objective. This formation represents a brief consolidation period within a solid and steepupward or downward trend. The consolidation itself is bordered by a supportline and a resistance line, which are parallel to each other or very mildlyconverging, making it look like a flag (parallelogram) and tends to be slopedin the opposite direction from the slope of the original trend, or is simply flat. The previous sharp trend is resembles a flagpole. If the original trend is going down, the formation is called a bearishflag. (See Figure 5.22.) As Figure 5.22. shows, the original trend is sharplydown. The flagpole is measured between points A and B. The consolidationperiod occurs between the support line B to E and the resistance line C to D. When the price penetrates the support line at point E, the trend resumes itsfall, with the price objective F, measured from E. The price target is of aboutequal amplitude with the flagpoles length (A to B), measured from thebreakout point through the support line (B to E.) In the numerical example, the height of the flagpole is measured as thedifference between 140.00 and 120.00 equals 2000 pips. Once the supportline is broken at 125.00, the price target is 105.00, as 2000 pips from 125.00.Pennant FormationThe pennants are closely related to the flags. The same principles apply. The sole difference is that the consolidation area better resembles a pennant, asthe support and resistance lines converge. If the original trend is bullish, thenthe chart pattern is a bullish pennant. In Figure 5.23. the pennant pole is A to BThe pennant-shaped consolidation is framed by C, B, and D. When the marketbreaks through the resistance line B to D, the price objective is E. Theamplitude of the target price is D to E, and it is equal to the pennant pole A to B. The price target measurement starts from the breakout point. FOREX. On-line Manual For Successful Trading67 68. Figure 5.22. Diagram of a bear flag formation In the numerical example, the height of the pennant pole is measured asthe difference between 1.5500 and 1.4500, or 1000 pips. Once the resistance lineis broken at 1.5200, the price target is 1.6200, as 1000 pips from 1.5200.Figure 5.23. Diagram of a bullish pennant. FOREX. On-line Manual For Successful Trading68 69. If the original trend is going down, then the formation is a bearishpennant. In Figure 5.24. the pennant pole is A to B. The pennant-shapedconsolidation is framed by C, B and D. When the market breaks through thesupport line B to D, the objective price is E. The amplitude of the target price is Dto E, and it is equal to the pennant pole A to B. The price target measurementstarts from the breakout point. In the numerical example, the height of the flagpole is measured as thedifference between 139.00 and 119.00, or 2000 pips. Once the support line isbroken at 120.00, the price target is 100.00, as 2000 pips from 120.00.Figure 5.24. Diagram of a bearish pennantFOREX. On-line Manual For Successful Trading 69 70. Triangle FormationTriangles can be visualized as pennants with no poles. There are fourtypes of triangles: symmetrical, ascending, descending, and expanding(broadening).A symmetrical triangle consists of two symmetrically converging supportand resistance lines, defined by at least four significant points. (See Figure 5.25.)The two symmetrically converging lines suggest that there is a balance betweensupply and demand in the foreign exchange market. Consequently, a breakmay occur on either side. In the case of a bullish symmetrical triangle, thebreakout will occur in the same direction, qualifying the formation as acontinuation pattern. Figure 5.25. A market example of a bearish pennantFOREX. On-line Manual For Successful Trading 70 71. As Figure 5.26. shows, the converging lines are symmetrical. The decliningline is defined by points B, D, and F. The rising support line is defined by pointsA, C, E, and G. The price target is either (1) equal to the width of the base ofthe triangle BB, measured from the breakout point H (HH) or (2) at theintersection of line BI (which is a parallel line to the rising line AG) with the priceline. Trading volume will visibly decrease toward the end of the triangle, suggesting the ambivalence of the market. The breakout is accompanied by a risein volume. In the numerical example, the price objective is either 1.5500, as thedifference between 1.5000 and 1.4000, measured from 1.4500 or 1.5300, as thedifference between 1.5000 and 1.4000, measured from 1.4300.Figure 5.26. Diagram of a bullish symmetrical triangleFOREX. On-line Manual For Successful Trading71 72. The ascending triangle consists of flat resistance line and a rising supportline. (See Figure 5.27.) The formation suggests that demand is stronger thansupply. The breakout should occur on the upside, and it consists of the width ofthe base of the triangle as measured from the breakout point. As you can see inFigure 5.28. the resistance line defined by points A, C, and E is flat. Theconverging bottom line, defined by points B, D, and F, is sloped upward. The priceobjective is the with of the base of the triangle (AA) measured above theresistance line from the breakout point G (GG.) In the numerical example, theprice objective is 106.00, as the 200-pip difference between 105.00 and 103.00,measured from 104.00.Trading volume is decreasing steadily toward the tip of the triangle, butincreases rapidly on the breakout. Figure 5.27. An example of a symmetrical triangleFOREX. On-line Manual For Successful Trading 72 73. Figure 5.28. Diagram of typical ascending triangleThe descending triangle is simply a mirror image of the ascending triangle. Itconsists of a flat support line and a downward sloping resistance line. (SeeFigure 5.29.) This pattern suggests that supply is larger than demand. Thecurrency is expected to break on the downside. The descending triangle alsoprovides a price objective. This objective is calculated by measuring the widthof the triangle base and then transposing it to the breakpoint. As shown inFigure 5.29. the support line, defined by points A, C, E, and G, is flat. Theconverging top line, defined by points B, D, F, and H, is sloped downward. Theprice objective is the width of the base of the triangle (AA), measured abovethe support line from the breakout point I (IF.) In the numerical example, the price objective is 1.3000, as the 1000-pipdifference between 1.5000 and 1.4000, measured from 1.4000.FOREX. On-line Manual For Successful Trading73 74. Figure 5.29. Diagram of a descending triangleTrading volume is decreasing steadily toward the tip of the triangle, butincreases rapidly on the breakout. The expanding (broadening) triangle consists of a horizontal mirror image ofa triangle, where the tip of the triangle is next to the original trend, rather than itsbase. (See Figure 5.30.) Volume also follows the horizontal mirror image switchand increases steadily as the chart formation develops. As shown in Figure 5.30,the bottom support line, defined by points B, D, and F, and the top line, defined bypoints A, C, and E, are divergent. The price objective should be the width, GG, ofthe base of the triangle, measured from the breakout point G. In the numerical example, the price objective is 102.00, as the 100-pipdifference between 101.00 and 100.00, measured from 101.00. FOREX. On-line Manual For Successful Trading 74 75. Figure 5.30. Diagram of an expanding triangle Wedge Formation The wedge formation is a close relative of the triangle and the pennantformations. It resembles both the shape and the development time of thetriangles, but it really looks and behaves like a pennant without a pole. Thewedge is markedly sloped, and the breakout occurs in the direction opposite to itsslope (see Figure 5.31.), but similar to the direction of the original trend. Thesignal we receive from the wedge formation is direction only. There is no reliableprice objective. Depending on the trend direction, there are two types ofwedges: falling (see Figure 5.31.) and rising. FOREX. On-line Manual For Successful Trading75 76. Figure 5.31. Diagram of a falling wedge Rectangle Formation Also known as a trading range (or congestion), the rectangle formationreflects a consolidation period. Upon breakout, it is likely to continue theoriginal trend. Its failure will change it from a continuation to a reversal pattern. This pattern is easy to spot, as it can be considered a minor side-ways trend. If it occurs within an uptrend and the breakout occurs on the upside, it iscalled a bullish rectangle. (See Figure 5.32.) The price objective is the height ofthe rectangle. As Figure 5.32. shows, the currency moves between well-defined, flat support and resistance levels. A valid breakout may occur oneither side from this consolidation period. The price target (GH) is equal to theheight of the rectangle (GH), measured from the breakout point H. In thenumerical example, the price objective is 1.6200, as the 100-pip differencebetween 1.6100 and 1.6000, measured from 1.6100.If the consolidation occurs within a downtrend and the breakout continuesthe original trend, then it is called a bearish rectangle. (See Figure 5.33.) Asshown in Figure 5.33. the currency moves between well-defined, flat supportand resistance levels. A valid breakout may occur on either side of thisconsolidation period. The price objective (HG) is equal in size to the height of therectangle (GH), measured from the breakout point H. In the numerical example, the price objective is 100.00, as the 100-pip difference between 102.00 and101.00, measured from 101.00.FOREX. On-line Manual For Successful Trading 76 77. Figure 5.32. Diagram of a typical bullish rectangleFigure 5.33. Diagram of a typical bearish rectangleFOREX. On-line Manual For Successful Trading77 78. 5.6. GapsAn opening outside the previous days or other periods range generatesa price gap. Price gaps, as plotted on bar charts, are very common in the currencyfutures market. Although currency futures may be traded around the clock, their markets are open for only about a third of the trading day. For instance, the largest currency futures market in the world, the Chicago IMM, is open forbusiness 7:20 am to 2:00 pm CDT. Since the cash market continues to tradearound the clock, price gaps may occur between two days price ranges in thefutures market. There are four types of gaps: common, breakaway, runaway, andexhaustionmon GapsCommon gaps have the least technical significance of all the types ofgaps. They do not indicate a trend start, continuation, reversal, or even ageneral direction of the currency other than in the very short term. Commongaps tend to occur in relatively quiet periods or in illiquid markets. When pricegaps occur in illiquid markets, such as distant currency futures expirationdates, they must be completely ignored. The entries for distant expirationdates in currency futures are made only on a closing basis, and they do notreflect any trading activity. Never trade in an illiquid market because gettingout of it is very difficult and expensive. When gaps occur within regulartrading ranges, the word on the street has been that, Gaps must be filled. mon gaps are short term. When currency futures open higher thanyesterdays high, they are quickly sold, targeting the level of the previousdays high. Breakaway GapsBreakaway gaps occur at the beginning of a new trend, usually at theend of long consolidation periods. They may also appear after the completionof some chart formations that tend to act as short-term consolidations. Breakaway gaps signify a brisk change in trading sentiment, and they occuron increasingly heavy trading. Traders are understandably frustrated byconsolidations, which are rarely profitable. Therefore, a breakout from theslow lane is embraced with optimism by the profit-hungry traders. The pricetakes a secondary place to participation. As always, naysayers follow theinitial breakout. Sooner rather than later, the pessimists have no choice but tojoin the new move, thus creating more volume. Breakaway gaps are not likely to be filled during the breakout and forthe duration of the subsequent move. In time, they may be filled during anew move on the opposite side. FOREX. On-line Manual For Successful Trading 78 79. In Figure 5.34. the currency futures trades sideways in a 100-pip rangebetween 0.6550 and 0.6690 for a period of time. A price gap between 0.6690and 0.6730 signals the breakaway from the range. Figure 5.34. A typical breakaway gap. Signals for Breakaway Gaps: 1. A breakaway gap provides the price direction. 2. There is no price objective. 3. Increasing demand for a currency ensures a solid move on goodvolume in the foreseeable future. Runaway GapsFrom a technical point of view, runaway, or measurement, gaps arespecial gaps that occur within solid trends. They are known as measurementgaps because they tend to occur about midway through the life of a trend. Thus, if you measure the total range of the previous trend and extrapolate itfrom the measurement gap, you can identify the end of the trend and yourprice objective. Since the velocity of the move should be similar on both sidesof the gap, you also have a time frame for the duration of the trend. Trading Signals for Runaway Gaps1. The runaway, or measurement, gap provides the direction of themarket. As a continuation pattern, this type of gap confirms the health andthe velocity of the trend.2. Volume is good because traders like trends, and confirmed trendsattract more optimism and capital. FOREX. On-line Manual For Successful Trading 79 80. 3. This is the only type of gap that also provides a price objective and atime frame. These characteristics are also useful for developing hedgingstrategies. Exhaustion GapsExhaustion gaps may occur at the top or bottom of a formation whentrends change direction in an atypically quick manner. There is noconsolidation next to the broken trend line: The trend reversal is very sharpthrough a bullish move, looks a lot like a measurement gap. So traders buythe currency and stay long overnight on that assumption. The following daythe market opens below the previous low, generating a second gap. If thesecond gap is filled or does not even occur, the trading signal remains thesame. Traders do not have to get caught badly in this exhaustion gap. Asudden trend reversal is unlikely to occur in an information void. Some sort ofidentifiable event triggers the movex2014maybe a government fall or a massiveand well-timed central bank intervention. Therefore, traders should at leastbe warned. FOREX. On-line Manual For Successful Trading80 81. 5.7. Mathematical Trading Methods (Indicators)The mathematical trading methods provide a more objective view ofprice activity. In addition, these methods tend to provide signals prior to theiroccurrence on the currency charts. The tools of the mathematical methodsare moving averages and oscillators. Moving Averages A moving average is an average of a predetermined number of pricesover a number of days, divided by the number of entries. The higher thenumber of days in the average, the smoother the line is. A moving averagemakes it easier to visualize currency activity without daily statistical noise. Itis a common tool in technical analysis and is used either by itself or as anoscillator. As one can see from Figure 5.35. a moving average has a smootherline than the underlying currency. The daily closing price is commonlyincluded in the moving averages. The average may also be based on themidrange level or on a daily average of the high, low, and closing prices. Figure 5.35. Examples of three simple moving averagesx20145-day (white), 20-day (red) and 60-day(green)It is important to observe that the moving average is a follower ratherthan a leader. Its signals occur after the new movement has started, not before. FOREX. On-line Manual For Successful Trading81 82. There are three types of moving averages: 1. The simple moving average or arithmetic mean. 2. The linearly weighted moving average. 3. The exponentially smoothed moving average. As described, the simple moving average or arithmetic mean is theaverage of a predetermined number of prices over a number of days, dividedby the number of entries. Traders have the option of using a linearly weighted moving average(See Figure 5.36.). This type of average assigns more weight to the morerecent closings. This is achieved by multiplying the last days price by one, and each closer day by an increasing consecutive number. In our previousexample, the fourth days price is multiplied by 1, the third by 2, the secondby 3, and the last one by 4 then the fourth days price is deducted. The newsum is divided by 9, which is the sum of its multipliers. Figure 5.36. Example of a 20-day simple moving average (red) as compared to a 20-dayweighted moving average (white) The most sophisticated moving average available is the exponentiallysmoothed moving average. (See Figure 5.37.) In addition to assigningdifferent weights to the previous prices, the exponentially smoothed movingaverage also takes into account the previous price information of theunderlying currency. FOREX. On-line Manual For Successful Trading 82 83. Figure 5.37. Example of a 20-day simple moving average (red) as compared to a 20-dayexponential moving average (white)Trading Signals of Moving AveragesSingle moving averages are frequently used as price and time filters. Asa price filter, a short-term moving average has to be cleared by the currencyclosing price, the entire daily range, or a certain percentage (chosen at thediscretion of the trader).The envelope model (See Figure 5.38.) serves as a price filter. Itconsists of a short-term (perhaps 5-day) closing price based moving averageto which a small percentage (2 percent is suggested for foreign currencies.)are added and substracted. The two winding parallel lines above and belowthe moving average will create a band bordering most price fluctuations. When the upper band is penetrated, a selling signal occurs. When the lowerband is penetrated, a buying signal occurs. Because the signals generated bythe envelope model are very short-term and they occur many times againstthe ongoing direction of the market, speed of execution is paramount. Thehigh-low band is set up the same way, except that the moving average isbased on the high and low prices. As a time filter, a short number of daysmay be used to avoid any false signals. FOREX. On-line Manual For Successful Trading 83 84. Figure 5.38. An envelope model define the edges of the band. A close above the upperband sends a buying signal and one below the lower band gives a selling signal Usually traders choose a number of averages to use with a currency. Asuggested number is three, as more signals may be available. It may behelpful to use intervals that better encompass short-term, medium-term, andlong-term periods, to arrive at a more complex set of signals. Some of themore popular periods are 4, 9, and 18 days 5, 20, and 60 days and 7, 21,and 90 days. Unless you focus on a specific combination of moving averages(for instance, 4, 9, and 18 days), the exact number of days for each of theaverages is less important, as long as they are spaced far enough apart fromeach other to avoid insignificant signals. A buying signal on a two-moving average combination occurs when theshorter term of two consecutive averages intersects the longer one upward. Aselling signal occurs when the reverse happens, and the longer of twoconsecutive averages intersects the shorter one downward. (See Figure 5.39.)OscillatorsOscillators are designed to provide signals regarding overbought andoversold conditions. Their signals are mostly useful at the extremes of their scalesand are triggered when a divergence occurs between the price of the underlyingcurrency and the oscillator. Crossing the zero line, when applicable, usuallygenerates direction signals. Examples of the major types of oscillators are moving FOREX. On-line Manual For Successful Trading 84 85. averages convergence-divergence (MACD), momentum and relative strengthindex (RSI). Figure 5.39. Examples of a sell signal (first and third crossovers) and a buy signals (secondcrossover) provided by the 5-day (red) and 20-day (white) moving averages Stochastics Stochastics generate trading signals before they appear in the priceitself. Its concept is based on observations that, as the market gets high, theclosing prices tend to approach the daily highs whereas in a bottoming market, the closing prices tend to draw near the daily lows. The oscillator consists of two lines called K and D. Visualize K as theplotted instrument, and D as its moving average. The formulas for calculating the stochastics are: K (CCL - L9)I(H9 - L9) 100, whereCCL current closing priceL9 - the lowest low of the past 9 daysH9 - the highest high of the past 9 daysand D(H3/L3) 100,whereH3 the three-day sum of (CCL - L9) L3 the three-day sum of (H9 - L9) FOREX. On-line Manual For Successful Trading85 86. The resulting lines are plotted on a 1 to 100 scale, with overbought andoversold warning signals at 70 percent and 30 percent, respectively. The buying(bullish reversal) signals occur under 10 percent, and conversely the selling(bearish reversal) signals come into play above 90 percent after the currencyturns. (See Figure 5.40.) In addition to these signals, the oscillator-currency pricedivergence generates significant signals. Figure 5.40. An example of the stochasticThe intersection of the D and K lines generates further trading signals. There are two types of intersections between the D and K lines:1. The left crossing, when the K line crosses prior to the peak of theD line.2. The right crossing, when the K line occurs after the peak of the Dline. Moving Average Convergence-Divergence (MACD)The moving average convergence-divergence (MACD) oscillator, developed by Gerald Appel, is built on exponentially smoothed moving averages. The MACD consists of two exponential moving averages that are plottedagainst the zero line. The zero line represents the times the values of the twomoving averages are identical. FOREX. On-line Manual For Successful Trading 86 87. In addition to the signals generated by the averages intersection withthe zero line and by divergence, additional signals occur as the shorteraverage line intersects the longer average line. The buying signal is displayedby an upward crossover, and the selling signal by a downward crossover.(See Figure 5.41.)Figure 5.41. An example of MACD Momentum Momentum is an oscillator designed to measure the rate of pricechange, not the actual price level. This oscillator consists of the net differencebetween the current closing price and the oldest closing price from apredetermined period. The formula for calculating the momentum (M) is:MCCP-OCP, where CCP - current closing price OCP - old closing price for the predetermined period. The new values thus obtained will be either positive or negativenumbers, and they will be plotted around the zero line. At extreme positivevalues, momentum suggests an overbought condition, whereas at extremeFOREX. On-line Manual For Successful Trading87 88. negative values, the indication is an oversold condition. (See Figure 5.42.)The momentum is measured on an open scale around the zero line. Figure 5.42. An example of the momentum oscillatorThis may create potential problems when a trader must figure outexactly what an extreme overbought or oversold condition means. On thesimplest level, the relativity of the situation may be addressed by analyzingthe previous historical data and determining the approximate levels thatdelineate the extremes. The shorter the number of days included in thecalculations, the more responsive the momentum will be to short-termfluctuations, and vice versa. The signals triggered by the crossing of the zeroline remain in effect. However, they should be followed only when they areconsistent with the ongoing trend. The Relative Strength Index (RSI)The relative strength index is a popular oscillator devised by WellesWilder. The RSI measures the relative changes between the higher and lowerclosing prices. (See Figure 5.43.)FOREX. On-line Manual For Successful Trading 88 89. Figure 5.43. An example of the RSI oscillatorThe formula for calculating the RSI is:x41B5/100-100/(1RS), where RS - (average of X days up closes/average of X days down closes) X - predetermined number of days The original number of days, as used by its author, was 14 days. Currently, a 9-day period is more popular. The RSI is plotted on a 0 to 100 scale. The 70 and 30 values are usedas warning signals, whereas values above 85 indicate an overboughtcondition (selling signal) and values under 15 indicate an oversold condition(buying signal.) Wilder identified the RSIs forte as its divergence versus theunderlying price. Rate of Change (ROC) The rate of change is another version of the momentum oscillator. Thedifference consists in the fact that, while the momentums formula is basedon subtracting the oldest closing price from the most recent, the ROCsformula is based on dividing the oldest closing price into the most recent one.(See Figure 5.44.)FOREX. On-line Manual For Successful Trading 89 90. Figure 5.44. An example of the rate of change (ROC) oscillatorROC (CCP/OCP) 100, whereCCP - current closing priceOCP old closing price for the predetermined period LarryWilliams R. The Larry Williams RThe Larry Williams R is a version of the stochastics oscillator. Itconsists of the difference between the high price of a predetermined numberof days and the current closing price, which difference in turn is divided bythe total range. This oscillator is plotted on a reversed 0 to 100 scale. Therefore, the bullish reversal signals occur at under 80 percent, and thebearish signals appear at above 20 percent. The interpretations are similar tothose discussed under stochastics. (See Figure 5.45.) Commodity Channel Index (CCI) The commodity channel index was developed by Donald Lambert. Itconsists of the difference between the mean price of the currency and theaverage of the mean price over a predetermined period of time (See Figure5.46.). A buying signal is generated when the price exceeds the upper (100)line, and a selling signal occurs when the price dips under the lower (-100)line. (See Figure 5.46.)FOREX. On-line Manual For Successful Trading90 91. forexSwissChapter 5Figure 5.45. An example of the Larry Williams R oscillatorFigure 5.46. An example of the commodity channel indexFOREX. On-line Manual For Successful Trading91 92. forexSwiss Chapter 5 Bollinger Bands The Bollinger bands combine a moving average with the instrumentsvolatility. The bands were designed to gauge whether prices are high or lowon a relative basis via volatility. The two are plotted two standard deviationsabove and below a 20-day simple moving average. The bands look a lot like an expanding and contracting envelope model. When the band contracts drastically, the signal is that volatility is low andthus likely to expand in the near future. An additional signal is a succession oftwo top formations, one outside the band followed by one inside. If it occursabove the band, it is a selling signal. When it occurs below the band, it is abuying signal. (See Figure 5.47.)The Parabolic System (SAR)The parabolic system is a stop-loss system based on price and time. The system was devised to supplement the inadvertent gaps of the othertrend-following systems. The name of the system is derived from its parabolicshape, which follows the price gyrations. It is represented by a dotted line. When the parabola is placed under the price, it suggests a long position. Conversely, when placed above the price, the parabola indicates a shortposition. (See Figure 5.48.) The parabolic system can be used with oscillators. SAR stands for stop and reverse. The stop moves daily in the direction of thenew trend. The built-in acceleration factor pushes the SAR to catch up withthe currency price. If the new trend fails, the SAR signal will be generated. The Directional Movement Index (DMI) The directional movement index provides a signal of trend presence inthe market. The line simply rates the price directional movement on a scaleof0 to 100. The higher the number, the better the trend potential of amovement, and vice versa. (See Figure 5.49.) This system can be used byitself or as a filter to the SAR system. Traders use different combinations of technical tools in their dailytrading and analysis. Some of the more popular oscillators are shown inFigure 5.50.FOREX. On-line Manual For Successful Trading 92 93. forexSwiss Chapter 5Figure 5.47. A market example of Bollinger bandsFigure 5.48. An example of the SAR parabolic studyFOREX. On-line Manual For Successful Trading 93 94. forexSwiss Chapter 5Figure 5.49. Example of the directional movement index (DMI)Figure 5.50. Example of oscillator combinations used for tradingFOREX. On-line Manual For Successful Trading 94 95. CHAPTER 6Fibonacci Analysis andElliott Waves Theory6.1. Fibonacci AnalysisThe Fibonacci analysis gives ratios which play important role in theforecasting of market movements. This theory is named after LeonardoFibonacci of Pisa, an Italian mathematician of the late twelfth and earlythirteenth centuries He introduced an additive numerical series - Fibonaccisequence. The Fibonacci sequence consists of the following series of numbers:1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987,1597, 2584, 4181, (etc.), which exhibit several remarkable relationships, in particular the ratio of any term in the series to the next higher term. Thisratio tends asymptotically to 0.618 (the Fibonacci ratio). In addition, the ratioof any term to the next lower term in the sequence tends asymptotically to1.618, which is the inverse of 0.618. Similarly constant ratios exist betweennumbers two termsGolden spirals appear in a variety of natural objects, from seashells tohurricanes to galaxies. The financial markets exhibit Fibonacci proportions in a number ofways, particularly it constitute a tool for calculating price targets and placingstops. For example, if a correction is expected to retrace 61.8 percent of thepreceding impulse wave, an investor might place a stop slightly below thatlevel. This will ensure that if the correction is of a larger degree of trend thanexpected, the investor will not be exposed to excessive losses. On the otherhand, if the correction ends near the target level, this outcome will increasethe probability that the investors preferred price move interpretation isaccurate. FOREX. On-line Manual For Successful Trading95 96. forexSwiss Chapter 66.2. The Elliott WavesBasics of Wave AnalysisThe Elliott waves principle is a system of empirically derived rules forinterpreting action in the markets. Elliott pointed out that the market unfoldsaccording to a basic rhythm or pattern of five waves in the direction of thetrend at one larger scale and three waves against that trend. In a risingmarket, this five wave/three-wave pattern forms one complete bullmarket/bear market cycle of eight waves. The five-wave upward movementas a whole is referred to as an impulse wave, and the three-wavecountertrend movement is described as a corrective wave (See Figure 6.1).Within the five-wave bull move, waves 1, 3 and 5 are themselves impulsewaves, subdividing into five waves of smaller scale while waves 2 and 4 arecorrective waves, subdividing into three smaller waves each. As shown inFigure 6.1, subwaves of impulse sequences are labeled with numbers, whilesubwaves of corrections are labeled with letters. Figure 6.1. The basic Elliott Wave patternFollowing the cycle shown in the illustration, a second five-wave upsidemovement begins, followed by another three-wave correction, followed byone more five-wave up move. This sequence of movements constitutes a five-wave impulse pattern at one larger degree of trend, and a three-wavecorrective movement at the same scale must follow. Figure 6.2 shows thislarger-scale pattern in detail. As the illustration shows, waves of any degree in any series can besubdivided and resubdivided into waves of smaller degree or expanded intowaves of larger degree. FOREX. On-line Manual For Successful Trading 96 97. forexSwissChapter 6Figure 6.2. The larger pattern in detailThe following rules are applicable to the interpretation of Elliott Waves:1. A second wave may never retrace more than 100 percent of a firstwave for example, in a bull market, the low of the second wave may not gobelow the beginning of the first wave.2. The third wave is never the shortest wave in an impulse sequenceoften, it is the longest.3. A fourth wave can never enter the price range of a first wave, exceptin one specific type of wave pattern, the form of market movements isessentially the same, irrespective of the size or duration of the movements. Furthermore, smaller-scale movements link up to create larger-scalemovements possessing the same basic form. Conversely, large-scalemovements consist of smaller-scale subdivisions with which they share ageometric similarity. Because these movements link up in increments of fivewaves and three waves, they generate sequences of numbers that the analystcan use (along with the rules of wave formation) to help identify the currentstate of pattern development, as shown in Figure 6.3.FOREX. On-line Manual For Successful Trading97 98. forexSwissChapter 6Figure 6.3. A complete market cycleAs the market swings of any degree tend to move more easily with thetrend of one larger degree than against it, corrective waves often are difficultto interpret precisely until they are finished. Thus, the terminations ofcorrective waves are less predictable than those of impulse waves, and thewave analyst must exercise greater caution when the market is in ameandering, corrective mood than when prices are in a clearly impulsivetrend. Moreover, while only three main types of impulse wave exist, theremuch more basic corrective wave patterns, and they can link up to formextended corrections of great complexity. A most important thing toremember about corrections is that only impulse waves can be x201Cfivesx201D. Thus, an initial five-wave movement against the larger trend is never a completecorrection, but only part of it. Impulse Wave VariationsIn any given five-wave sequence, a tendency exists for one of the threeimpulse subwaves (i. e. wave 1, wave 3, or wave 5) to be an extensionx2014anelongated movement, usually with internal subdivisions. At times, thesesubdivisions are of nearly the same amplitude and duration as the largerdegree waves of the main impulse sequence, giving a total count of ninewaves of similar size rather than the normal count of five for the mainsequence. In a nine-wave sequence, it is sometimes difficult to identify whichwave is extended. However, this is usually irrelevant, because a count of nineand a count of five have the same technical significance. Figure 6.4. showswhy this is so examples of extensions in various wave positions make it clearthat the overall significance is the same in each case. Extensions can alsooccur within extensions. Although extended fifth waves are not uncommon, FOREX. On-line Manual For Successful Trading98 99. forexSwissChapter 6extensions of extensions occur most often within third waves, as shown inFigure 6.5.Figure 6.4. Wave extensionsFOREX. On-line Manual For Successful Trading99 100. forexSwiss Chapter 6Figure 6.5. Wave extensionsExtensions can provide a useful guide to the lengths of future waves. Most impulse sequences contain extensions in only one of their threeimpulsive subwaves. Thus, if the first and third waves are of about the samemagnitude, the fifth wave probably will be extended, especially if volumeduring the fifth wave is greater than during the third. The Diagonal TrianglesThere are some patterns familiar from the Technical Analysis theory, particularly two types of triangles, which should be noticed in frame of Elliottswaves consideration. The diagonal triangle type 1 occurs only in fifth waves and in x421 waves, and it signals that the preceding move has, in accordance to Elliott, gone toofar, too fast. All of the patterns sub-waves, including waves 1, 3, and 5,consist of three-wave movements, and their fourth waves often enter theprice range of their first waves, as shown in Figures 6.6. and 6.7. A risingdiagonal triangle type 1 is bearish, because it is usually followed by a sharpdecline, at least to the level where the formation began. In contrast, a fallingdiagonal type 1 is bullish, because an upward thrust usually follows. FOREX. On-line Manual For Successful Trading100 101. forexSwiss Chapter 6Figure 6.6. A bullish patternFigure 6.7. A bearish patternFOREX. On-line Manual For Successful Trading101 102. forexSwissChapter 6 The diagonal triangle type 2 occurs even more rarely than type 1. Thispattern, found in first-wave or A-wave positions in very rare cases, resemblesa diagonal type 1 in that it is defined by converging trendlines and its firstwave and fourth wave overlap, as shown in Figure 6.8. However, it differssignificantly from type 1 in that its impulsive subwaves (waves 1, 3, and 5)are normal, five-wave impulse waves, in contrast to the three-wave subwavesof type 1. This is consistent with the message of the type 2 diagonal triangle, which signals continuation of the underlying trend, in contrast to the type 1 smessage of termination of the larger trend. Figure 6.8. Failures (Truncated Fifths) Elliott described as a failure an impulse pattern in which the extreme ofthe fifth wave fails to exceed the extreme of the third wave. Figures 6.9 and6.10 show examples of failures in bull and bear markets. As the illustrationsshow, the truncated fifth wave contains the necessary impulsive (i. e. five-wave) substructure to complete the larger movement. However, its failure tosurpass the previous impulse waves extreme signals weakness in theunderlying trend, and a sharp reversal usually follows. FOREX. On-line Manual For Successful Trading 102 103. forexSwissChapter 6 Figure 6.9. Bull market failure Figure 6.10. Bear market failureFOREX. On-line Manual For Successful Trading 103 104. CHAPTER 7 Foreign Exchange Risks On the foreign exchange market one discerns the following kinds of therisks: x2022 exchange rate risk x2022 interest rate risk x2022 credit risk x2022 country risk. 7.1. Exchange Rate Risk Exchange rate risk is a consequence of the continuous shift in theworldwide market supply and demand balance on an outstanding foreignexchange position. A position will be a subject to all the price changes as longas it is outstanding. In order to cut losses short and ride profitable positionsthat losses should be kept within manageable limits. The most popular stepsare the position limit and the loss limit. The limits are a function of the policyof the banks along with the skills of the traders and their specific areas ofexpertise. There are two types of position limits: daylight and overnight.1. The daylight position limit establishes the maximum amount of acertain currency which a trader is allowed to carry at any single time during. The limit should reflect both the traders level of trading skills and the amountat which a trader peaks. 2. The overnight position limit which should be smaller than daylightlimits refers to any outstanding position kept overnight by traders. Really, themajority of foreign exchange traders do not hold overnight positions. The loss limit is a measure to avoid unsustainable losses made bytraders which is enforced by the senior officers in the dealing center. Theloss limits are selected on a daily and monthly basis by top management. FOREX. On-line Manual For Successful Trading104 105. forexSwissChapter 7The position and loss limits can now be implemented more convenientlywith the help of computerized systems which enable the treasurer and thechief trader to have continuous, instantaneous, and comprehensive access toaccurate figures for all the positions and the profit and loss. This informationmay also be delivered from all the branches abroad into the headquartersterminals. FOREX. On-line Manual For Successful Trading 105 106. forexSwiss Chapter 77.2. Interest Rate RiskInterest rate risk is pertinent to currency swaps, forward out rights, futures, and options. It refers to the profit and loss generated by both thefluctuations in the forward spreads and by forward amount mismatches andmaturity gaps among transactions in the foreign exchange book. An amountmismatch is the difference between the spot and the forward amounts. For anactive forward desk the complete elimination of maturity gaps is virtuallyimpossible. However, this may not be a serious problem if the amountsinvolved in these mismatches are small. On a daily basis, traders balance thenet payments and receipts for each currency through a special type of swap, called tomorrow/next or rollover. To minimize interest rate risk, management sets limits on the total sizeof mismatches. The policies differ among banks, but a common approach is toseparate the mismatches, based on their maturity dates, into up to sixmonths and past six months. All the transactions are entered in computerizedsystems in order to calculate the positions for all the delivery dates and theprofit and loss. Continuous analysis of the interest rate environment isnecessary to forecast any changes that may impact on the outstanding gaps. FOREX. On-line Manual For Successful Trading106 107. forexSwiss Chapter 77.3. Credit Risk Credit risk is connected with the possibility that an outstanding currencyposition may not be repaid as agreed, due to a voluntary or involuntary actionby a counter party. In these cases, trading occurs on regulated exchanges, where all trades are settled by the learing house. On such exchanges, tradersof all sizes can deal without any credit concern. The following forms of credit risk are known: 1. Replacement risk which occurs when counter parties of the failedbank find their books unbalanced to the extent of their exposure to theinsolvent party. To rebalance their books, these banks enter newtransactions. 2. Settlement risk which occurs because of different time zones ondifferent continents. Such a way, currencies may be credited at differenttimes during the day. Australian and New Zealand dollars are credited first, then Japanese yen, followed by the European currencies and ending with theU. S. dólar. Therefore, payment may be made to a party that will declareinsolvency (or be declared insolvent) immediately after, but prior to executingits own payments. The credit risk for instruments traded off regulated exchanges is to beminimized through the customers creditworthiness. Commercial andinvestment banks, trading companies, and banks customers must have creditlines with each other to be able to trade. Even after the credit lines areextended, the counter parties financial soundness should be continuouslymonitored. Along with the market value of their currency portfolios, endusers, in assessing the credit risk, must consider also the potential portfoliosexposure. The latter may be determined through probability analysis over thetime to maturity of the outstanding position. For the same purposes netting isused. Netting is a process that enables institutions to settle only their netpositions with one another not trade by trade but at the end of the day, in asingle transaction. If signs of payment difficulty of a bank are shown, a groupof large banks may provide short-term backing from a common reserve pool. FOREX. On-line Manual For Successful Trading107 108. 7.4. Country Risk The failure to receive an expected payment due to governmentinterference amounts to the insolvency of an individual bank or institution, asituation described under credit risk. Country risk refers to the governmentsinterference in the foreign exchange markets and falls under the jointresponsibility of the treasurer and the credit department. Outside the majoreconomies, controls on foreign exchange activities are still present andactively implemented. For the traders it is important to know or be able to anticipate anyrestrictive changes concerning the free flow of currencies. If this is possible, though trading in the affected currency will dry up considerably, it is still amanageable situation. FOREX. On-line Manual For Successful Trading 108 109. Glossary AndForeign Exchange TermsAAccumulation swing index (ASI) An oscillator based on the swing index (SI.) A buying signal is generated when the daily high exceeds the previous SI significant high, and a selling signal occurs when the daily low dips under the significant SI low. American style currency optionAn option that may be exercised at any valid business date throughout the life of the option. Arbitrage A risk-free type of trading in which the same instrument is bought and sold simultaneously in two different markets in order to cash in on the divergence between the two markets. Ascending triangleA triangle continuation formation with a flat upper trendline and a bottom sloping upward trendline. (See Triangle.)Ascending triple top A bullish point-and-figure chart formation that suggests that the currency is likely to break a resistance line the third time it reaches it. Each new top is higher than the previous one. Atekubi A bearish two-day candlestick combination. It consists of a blank bar that closes at the daily high the current closing price equals the previous days low. The original days range is a long black bar. At par forward spread Forward price is zero therefore, the spot price is similar to the forward price. It reflects the fact that the foreign interest rate is similar to the U. S. interest rate for that particular period. At-the-money (ATM) option An option whose present currency price is approximately equal to the strike price. FOREX. On-line Manual For Successful Trading109 110. At the price stop-loss order A stop-loss order that must be executed at the precise requested level, regardless of market conditions. Average options Options that refer to the average rate of the underlying currency that existed during the life of the option. This rate becomes the strike in the case of the average strike options or it becomes the underlying, determining the intrinsic value when compared to a predetermined fixed strike in the case of average rate options. Average options can be based on the spot rate (spot style) or on the forward underlying the option (forward style.) The average can be calculated arithmetically or geometrically, and the rates can be tabulated with a variety of frequencies. BBalance-of-paymentsAll the international commercial and financial transactions of the residents of one country. Bank of Canada (BOC) The central bank of Canada. Bank of England (BOE)The central bank of the United Kingdom. It is a less independent central bank. The government may overwrite its decision. Bank of France (BOF) The central bank of France. Bank of Italy (BOI) The central bank of Italy. Bank of Japan (BOJ) The Japanese central bank. Although its Policy Board is still fully in charge of the monetary policy, changes are still subject to the approval of the Ministry of Finance (MOF). The BOJ targets the M2 aggregate. Bar chartA type of chart that consists of four significant points: the high and the low prices, which form the vertical bar the opening price, which is marked with a little horizontal line to the left of the bar and the closing price, which is marked with a little horizontal line to the right of the bar. Barrier options (trigger options, cutoff options, cutout options, stop options, down/up-and-outs/ins, knockups)Options very similar to European style vanilla options, except that a second strike price (the trigger) is specified that, when reached in the market, automatically causes the option to be expired (knockout options) or inspired (knockin options).FOREX. On-line Manual For Successful Trading110 111. Bearish tasukiA bearish two-day candlestick combination. It consistsof a long blank bar that has a low above 50 percent of the previousdays long black body, and closes marginally above the previousdays high. The second days rally is temporary, as it is caused onlyby profit-taking. The sell-off is likely to continue the next day. Bearish tsutsumi (the engulfing pattern)A bearish two-day candlestickcombination. It consists of a second-day bearish candlestick whosebody engulfs the previous days small bullish body. Bilateral gridAn exchange rate system that links all the centralrates of the EMS currencies in terms of the ECU. Black closing bozuA bearish candlestick formation that consists of along black bar (upper shadow).Black marubozu (shaven head)A bearish candlestick formation thatconsists of a long black bar (no shadow).Black opening bozuA bearish candlestick formation that consists of along black bar (lower shadow).Black-Scholes fair value modelThe original option pricing model, whichholds that a stock and the call option on the stock are comparableinvestments and thus a risk less portfolio may be created by buyingthe stock and selling the option on the stock, as a hedge. Themovement of the price of the stock is reflected by the movement ofthe price of the option, but not necessarily by the same amplitude. Therefore, it is necessary to hold only the amount of the stocknecessary to duplicate the movement of the price of the option. Blank closing bozuA bullish candlestick formation that consists of along blank bar (lower shadow).Blank marubozu (shaven head)A bullish candlestick formation thatconsists of a long blank bar (no shadows).Blank opening bozuA bullish candlestick formation that consists of along blank bar (upper shadow).Bollinger bands A quantitative method that combines a movingaverage with the instruments volatility. The bands were designed togauge whether the prices are high or low on a relative basis. Theyare plotted two standard deviations above and below a simplemoving average. The bands look like an expanding and contractingenvelope model. When the band contracts drastically, the signal isthat volatility will expand sharply in the near future. An additionalsignal is a succession of two top formations, one outside the bandfollowed by one inside. If it occurs above the band, it is a sellingsignal. When it occurs below the band, it is a buying signal. Book method Point-and-figure charts original name. Box spread A compound option strategy that consists of four options with acommon expiration date: a long call and a short put at one strikeprice, and a long put and a short call at a different strike price. Breakaway gap A price gap that occurs in the beginning of a newtrend, many times at the end of a long consolidation period. It mayalso appear after the completion of major chart formations. FOREX. On-line Manual For Successful Trading 111 112. Breakout of a spread triple bottom A bearish point-and-figure chartformation that suggests that the currency is likely to break a supportline the third time it reaches it. The currency failed to reach thesupport line once. Breakout of a spread triple topA bullish point-and-figure chartformation that suggests that the currency is likely to break aresistance line the third time it reaches it. The currency failed toreach the resistance line once. Breakout of a triple bottom A bearish point-and-figure chart formationthat suggests that the currency is likely to break a support line thethird time it reaches it. Breakout of a triple topA bullish point-and-figure chart formation thatsuggests that the currency is likely to break a resistance line the thirdtime it reaches it. Bullish tasukiA bullish two-day candlestick combination. It consistsof a long black bar that has a high above 50 percent of the previousdays long blank body, and closes marginally below the previousdays low. Bullish tsutsumi (the engulfing bar) A bullish two-daycandlestickcombination. It consists of a second bullish candlestick whose bodyengulfs the previous days small bearish body. BundesbankThe German central bank. In addition to its domesticobligations, the Bundesbank has had international obligations since1979 as the front player of the European Monetary System. TheBundesbank is a very independent central bank. Business firms (establishment) survey Survey of the payroll, workweek, hourly earnings, and total hours of employment in the non farmsector. Business InventoriesAn economic indicator that consists of the itemsproduced and held for future sale. Butterfly spread A compound option strategy that consists of a combinationof a bull spread and a bear spread, using either calls or puts. CCalendar combinationA compound option strategy that consists of thesimultaneous call calendar spread and put calendar spread, in whichthe strike price of the calls is higher than the strike price of the puts. FOREX. On-line Manual For Successful Trading112 113. Calendar spread A combination option of two similar types of options, either calls or puts, with the same strike price but different expirationdates. The dissimilarity between the expiration dates allows this typeof spread to capitalize on both the impact of the time decay and theinterest rate differentials. Calendar straddle A compound option strategy that consists ofsimultaneous buying of a longer-term straddle and a near-termstraddle with a common strike price. Call ratio backspread A compound option strategy that consists ofshort calls with a lower strike price and more long calls with a higherstrike price. The profit is twofold. The maximum upside profitpotential is unlimited. The downside profit potential consists of thetotal premium received. The maximum loss potential occurs whenthe currency price reaches the higher strike price at expiration. Candlestick chart A type of chart that consists of four major prices: high, low, open, and close. The body (jittai) of the candlestick bar isformed by the opening and closing prices. To indicate that theopening was lower than the closing, the body of the bar is left blank. If the currency closes below its opening, the body is filled. The restof the range is marked by two shadows: the upper shadow(uwakage) and the lower shadow (shitakage).Capacity utilizationAn economic indicator that consists of total industrialoutput divided by total production capability. The term refers to themaximum level of output a plant can generate under normalbusiness conditions. Cardinal square A Gann technique for forecasting future significantchart points by counting from the all-time low price of the currency. It consists of a square divided by a cross into four quadrants. Theall-time low price is housed in the center of the cross. All of thefollowing higher prices are entered in clockwise order. The numberspositioned in the cardinal cross are the most significant chart points. Channel lineA parallel line that can be traced against the trendline, connecting the significant peaks in an uptrend, and the significanttroughs in a downtrend. Chaos theoryA theory that holds that statistically noisy behavior mayoccur randomly, even in simple environments. This seeminglyrandom behavior may be predicted with decreasing accuracy if thesource is known. CHIPS (Clearing House Interbank Payments System)Acomputerizedsystem used for foreign exchange dollar settlements. Christmas tree spread A compound option strategy that consists ofseveral short options at two or more strike prices. Classes of optionsThe types of options: calls and putsbination spread (synthetic future) A compound option strategythat consists of a long call and a short put, or a long put and a shortcall, with a common expiration date. FOREX. On-line Manual For Successful Trading113 114. Commodity Channel Index (CCI) An oscillator that consists of the difference between the mean price of the currency and the average of the mean price over a predetermined period of time. A buying signal is generated when the price exceeds the upper (100) line, and a selling signal occurs when the price dips under the lower (- 100) linemodity Futures Trading Commission (CFTC) An independent agency created by Congress in 1974 with a mandate to regulate commodity futures and options markets in the United States. The CFTCs responsibilities are to ensure the economic utility of futures markets, via competitiveness and efficiency ensure the integrity of these markets and protect the participants against manipulation, fraud, and abusive practices. The Commission, based in Washington, D. C. regulates the activities of 285 commodity brokerage firms 48,211 salespeople 8017 floor brokers 1325 commodity pool operators (CPOs) 2733 commodity trading advisers (CTAs) and 1486 introducing brokers (IBs)modity Research Bureaus (CRB) Futures IndexIndex formed from the equally weighted futures prices of 21 commodities. The preponderance of food commodities makes the CRB Index less reliable in terms of general inflationmon gap A price gap that occurs in relatively quiet periods or in illiquid markets. It has limited technical significance. Condor spreadA compound option strategy that consists of either four same-type options with a common expiration datex2014two long options with consecutive strike prices, one short option with an immediately lower strike price, and one short option with an immediately higher strike price or four same-type options with a common expiration datex2014two short options with consecutive strike prices, one long option with an immediately lower strike price, and one long option with an immediately higher strike price. Consumer Price Index (CPI)An economic indicator that gauges the average change in retail prices for a fixed market basket of goods and services. Consumer sentiment A survey of households designed to gauge the individual propensity for spending. There are two studies conducted in this area, one survey by the University of Michigan, and the other by the National Family Opinion for the Conference Board. The confidence index measured by the Conference Board is sensitive to the job market, whereas the index generated by the University of Michigan is not. Continuation patterns Technical signals that reinforce the current trends. Cost of carryThe interest rate parity, whereby the forward price is determined by the cost of borrowing money in order to hold the position. Council of MinistersThe legislative body of the European Economic Community in charge of making the major policy decisions. It isFOREX. On-line Manual For Successful Trading 114 115. composed of ministers from all the 12 member nations. Thepresidency rotates every six months by all the 12 members, inalphabetical order. The meetings take place in Brussels or in thecapital of the nation holding the presidency. Country (sovereign) riskA trading risk emerging from agovernments interference in the foreign exchange markets. Covered interest rate arbitrage An arbitrage approach that consists ofborrowing currency A, exchanging it for currency B, investingcurrency B for the duration of the loan, and, after taking off theforward cover on maturity, showing a profit on the entire set ofdeals. Covered longA compound option strategy that consists of selling acall against a long currency position. A covered long is synonymouswith a short put. Covered short A compound option strategy that consists of shorting aput against a short currency position. A covered short is synonymouswith a short call. Cox, Ross, and Rubinstein pricing model An option pricing model thattakes into consideration the early exercise provision of the Americanstyle options. As it assumes that early exercise will occur only if theadvantage of holding the currency exceeds the time value of theoption, their binomial method evaluated the call premium byestimating the probability of early exercise for each successive day. The theoretical premium is compared to the holding cost of the cashhedge position, until the options time value is worth less than theforward points of the currency hedge and the option should beexercised. Credit risk The possibility that an outstanding currency position maynot be repaid as agreed, due to a voluntary or involuntary action bya counterparty. Cross rates Currencies traded against currencies other than the U. S.dollar. A cross rate is a non-dollar currency. Currency call A contract between the buyer and seller that holds that thebuyer has the right, but not the obligation, to buy a specific quantityof a currency at a predetermined price and within a predeterminedperiod of time, regardless of the market price of the currency. Thewriter assumes the obligation of delivering the specific quantity of acurrency at a predetermined price and within a predetermined periodof time, regardless of the market price of the currency, if the buyerwants to exercise the call option. Currency fixingsAn open auction executed in Europe on a daily basis inwhich all players, regardless of size, are welcome to participate withany amount. Currency futuresA specific type of forward outright deal withstandardized expiration date and size of the amount. Currency option A contract between a buyer and a seller, also knownas writer, that gives the buyer the right, but not the obligation, toFOREX. On-line Manual For Successful Trading115 116. trade a specific quantity of a currency at a predetermined price andwithin a predetermined period of time, regardless of the market priceof the currency and gives the seller the obligation to deliver or buythe currency under the predetermined terms, if and when the buyerwants to exercise the option. Currency putA contract between the buyer and the seller that holdsthat the buyer has the right, but not the obligation, to sell a specificquantity of a currency at a predetermined price and within apredetermined period of time, regardless of the market price of thecurrency. The writer assumes the obligation to buy the specificquantity of a currency at a predetermined price and within apredetermined period of time, regardless of the market price of thecurrency, if the buyer wants to exercise the call option. Current account balanceThe broadest current dollar measure of U. S.trade, which incorporates services and unilateral transfers into themerchandise trade data. DDaylight position limitThe maximum amount of a certain currency a trader is allowed to carry at any single time, between the regular trading hours. Dead crossAn intersection of two consecutive moving averages that move in opposite directions and should technically be disregarded. Dealing systemsOn-line computers that link the contributing banks around the world on a one-on-one basis. Delta (A) (1) The change of the currency option price relative to a change in the currency price (2) the hedge ratio between the option contracts and the currency futures contracts necessary to establish a neutral hedge ( 3) the theoretical or equivalent share position. In the third case, delta is the number of currency futures contracts a call buyer is long or a put buyer is short. Delta ranges between 0 and 1.Descending triangleA triangle continuation formation with a flat lower trendline and a downward-sloping upper trendline. (See Triangle.)Descending triple bottom Bearish point-and-figure chart formation that suggests that the currency is likely to break a support line the third time it reaches it. Each new bottom is lower than the previous one. FOREX. On-line Manual For Successful Trading 116 117. Diagonal spreadA compound option strategy that consists of several same-type options, in which the long side and the short side have different strike prices and different expirations. DiamondA minor reversal pattern that resembles a diamond shape. Direct dealing An aggressive approach in which banks contact each other outside the brokers market. Directional Movement Index A signal of trend presence in the market. The line simply rates the price directional movement on a scale of 0 to 100. The higher the number, the better the trend potential of a movement, and vice versa. Discount forward spreadA forward price that is deducted from a spot price to calculate a forward price. It reflects the fact that the foreign interest rate is lower than the U. S. interest rate for that particular period. Discount rateThe interest rate at which eligible depository institutions may borrow funds directly from the Federal Reserve Banks. The rate is controlled by the Federal Reserve and is not subject to trading. Discretion for range to trader stop-loss orderA stop-loss order that gives the trader a number of discretionary pips within which the order has to be filled. Double bottoms A bullish reversal pattern that consists of two bottoms of approximately equal heights. A parallel (resistance) line is drawn against a line that connects the two bottoms. The break of the resistance line generates a move equal in size to the price difference between the average height of the bottoms and the resistance line. Double topsA bearish reversal pattern that consists of two tops of approximately equal heights. A parallel (support) line is drawn against a resistance line that connects the two tops. The break of the support line generates a move equal in size to the price difference between the average height of the tops and the support line. Downside tasuki gapA bearish two-day candlestick combination. It consists of a second-day blank bar that closes an overnight gap opened on the previous day by a black bar. Downward breakout of a bearish support line A bearishpoint-and - figure chart formation that confirms the currencys breakout of a support line the third time it reaches it. Downward breakout of a bullish support line A bearishpoint-and - figure chart formation that confirms the currencys breakout of a support line the third time it reaches it. The support line is sloped upward. Downward breakout from a consolidation formation A bearish point - and-figure chart formation that resembles the inverse flag formation. A valid downside breakout from the consolidation formation has a price target equal in size to the length of the previous downtrend. Durable Goods Orders An economic indicator that measures the changes in sales of products with a life span in excess of three years. FOREX. On-line Manual For Successful Trading117 118. EEconomic exposureReflects the impact of foreign exchange changes on the future competitive position of a company. Elliott Wave Principle A system of empirically derived rules for interpreting action in the markets. It refers to a five-wave/three - wave pattern that forms one complete bull market/bear market cycle of eight waves. Envelope model A band created by two winding parallel lines above and below a short-term moving average that borders most price fluctuations. When the upper band is penetrated, a selling signal occurs when the lower band is penetrated, a buying signal is generated. Because the signals generated by the envelope model are very short-term and occur many times against the ongoing direction of the market, speed of execution is paramount. Eurocurrency Currency deposit outside the country of origin. EurodollarsU. S. dollar deposits placed in commercial banks outside the United States. European Coal and Steel CommunityEuropean entity established in 1951 by the Treaty of Paris, with the purpose of promoting inter-European trade in general, and eliminating restrictions on the trade of coal and raw steel in particular. West Germany, France, Italy, the Netherlands, Belgium, Luxembourg, and Great Britain formed this community. European CommissionThe executive body of the European Economic Community in charge of making and observing the enforcement of policy. It consists of 23 departments, such as foreign affairs, competition policy and agriculture. Each country selects its own representatives for four-year terms, but the commissioners may only act for the benefit of the community. The commission is based in Brussels and consists of 17 members. European Court of Justice The European Economic Community body in charge of settling disputes between the EC and member nations. It consists of 13 members and is based in Luxembourg. European currency unit A basket of the member currencies. As a composite unit, the ECU consists of all the European Community currencies, which are individually weighted. It was created by the European Monetary System with the eventual goal of replacing the individual European member currencies. European Economic CommunityA community established by the Treaty of Rome in 1951, with the goal of eliminating customs duties and any barriers against the transit of capital, services, and people among the member nations. The signatories were West Germany, France, Italy, the Netherlands, Belgium, and Luxembourg. FOREX. On-line Manual For Successful Trading 118 119. European Joint Float Agreement Europeanmonetarysystem established in April 1972 by the EC members: West Germany, France, Italy, the Netherlands, Belgium, and Luxembourg. Great Britain, Ireland, and Denmark were admitted by January 1973. The agreement allowed the member currencies to move within a 2.25 percent fluctuation band (nicknamed the snake). As a joint group, the agreement allowed these currencies to gyrate within a 4.5 percent band (nicknamed the tunnel). The entire agreement was known as the snake in the tunnel. European Monetary Cooperation FundEMS fund established to manage the EMS credit arrangements. European Monetary Institute (EMI) The new European Central Bank created to govern the EMS. As of March 1994, it did not have any power over inter-EMS monetary policy. European Monetary System European monetary system established in March 1979 by seven full members: West Germany, France, the Netherlands, Belgium, Luxembourg, Denmark, and Ireland. Great Britain did not participate in all of the arrangements and Italy joined under special conditions. New members: Greece in 1981, Spain and Portugal in 1986. Great Britain joined the Exchange Rate Mechanism in 1990. Also in 1990, West Germany became Germany as a result of its political unification with East Germany. European ParliamentThe European Economic Community body in charge of reviewing and amending legislative proposals. It has the power to reject the budget proposals. It consists of 518 members who are elected. It is based in Luxembourg, but the sessions take place in Strasbourg or Brussels. European Payment Union European entity instituted in 1950 to facilitate the inter-European settlements of international trade transactions. European-style currency option An option that may only be exercised on the expiration date. European Union TreatyTreaty signed by the 12 EMS members in February 1992 in the Dutch city of Maastricht, with the stated goal of forming a closer union among the peoples of Europe. Exchange for physical (EFP)Consists of deals executed in the cash market, outside the exchanges, for amounts equivalent to the currency futures amount, on forward outright prices valued for the futures expiration. EFPs are generally quoted by commercial and investment banks, even during regular trading hours. Exchange rate risk (1) Foreign exchange risk that is the effect of the continuous shift in the worldwide market supply and demand balance on an outstanding foreign exchange position. (2) Trading risk pertinent to market fluctuation. Exercise (strike) priceThe price at which the underlying currency will be delivered upon exercise. FOREX. On-line Manual For Successful Trading 119 120. Exhaustion gapPrice gap that occurs at the top or the bottom of a V - reversal formation. The trend changes direction in a rather uncharacteristically quick manner. Expanding (broadening) triangle A triangle continuation formation that looks like a horizontal mirror image of a triangle the tip of the triangle is next to the original trend, rather than its base. (See Triangle.)Expiration date The delivery date. Exponentially smoothed moving averageA moving average that also takes into account the previous price information of the underlying currency. FFactory OrdersAn economic indicator that refers to total orders for durable and nondurable goods. The nondurable goods orders consist of food, clothing, light industrial products, and products designed for the maintenance of the durable goods. FASB 8 (Financial Accounting Standards Boards Statement Number 8) The original accounting rules regarding foreign exchange were standardized in 1975, which set the procedures for foreign currency translations into U. S. dollars in the consolidated balance sheets of U. S. multinational corporations. FASB 52 (Financial Accounting Standards Boards Statement Number 52) A complex set of rules designed in 1981, whose main objective is to move the foreign exchange PampL from current income into shareholders equity. Federal funds (Fed funds)Immediately available reserve balances at the federal reserves. The Fed funds are widely used by commercial banks or large corporations to lend to each other on an overnight basis. Although their level is established by the Fed, the prices fluctuate because they are traded in the market. Federal Open Market Committee (FOMC) A committee established in 1935, through the Banking Act, to replace the Open Market Policy Conference (OMPC.) Currently active. Federal Reserve The central bank of the United States. It was established in 1913 when Congress passed the Federal Reserve Act. The Act held that role of the Federal Reserve was to furnish an elastic currency, to afford the means of rediscounting commercialFOREX. On-line Manual For Successful Trading 120 121. paper, to establish a more effective supervision of banking in the United States, and for other purposes. Federal Reserve BoardThe board consists of a Governor and four other regular members. The Secretary of the Treasury and the Comptroller of the Currency are closely consulted. The 12 regional Federal Reserve Banks around the country have sufficient autonomy to manage financial conditions in their districts. They are also managed by governors. Fedwire An automated communications and settlement system linking the Federal Reserve banks with other banks and with depository institutions. Fence A compound option strategy that consists of either a long currency positionx2014a long out-of-money put and a short out-of-the - money call, where the options have the same expiration date (risk conversion) or a short currency positionx2014a short out-of-the-money put and a long out-of-the-money call, where the options have the same expiration date (risk reversal).Fibonacci percentage retracementsPrice retracements of 0.382 and 0.618, or approximately 38 percent and 62 percent. Fibonacci ratio0.618 and 0.312.Fibonacci sequence Takes a sequence of numbers that begins with 1 and adds 1 to it, then takes the sum of this operation (2) and adds it to the previous term in the sequence (1). Next it takes the sum of the second operation (3) and adds it to the previous term in the sequence (the sum of the first operation, i. e. 2). The Fibonacci sequence continues iterating in this manner, adding the most recent sum to the previous term, which is itself the sum of the two previous terms, etc. This yields the following series of numbers: 1 1 2 3 5 8 13 21 34 55 89 144 233 377 610 987 1597 2584 4181 (etc.).FINEX A currency market that is part of the New York Cotton Exchange (NYCE), the oldest futures exchange in New York. The exchange lists futures on the European Currency Unit and the USDX, a basket of ten currencies: deutsche mark, Japanese yen, French franc, British pound, Canadian dollar, Italian lira, Dutch guilder, Belgian franc, Swedish krona, and Swiss franc. Fisher effectA theory holding that die nominal interest rate consists of the real interest rate plus the expected rate of inflation. FlagA continuation formation that resembles the outline of a flag. It consists of a brief consolidation period within a solid and steep upward trend or downward trend. The consolidation itself tends to be sloped in the opposite direction from the slope of the original trend, or simply flat. The consolidation is bordered by a support line and a resistance line, which are parallel to each other or very mildly converging, making it look like a flag (parallelogram). The previous sharp trend is known as the flagpole. When the currency resumes its original trend by breaking out of the consolidation, theFOREX. On-line Manual For Successful Trading121 122. price objective is the total length of the flagpole, measured from the breakout price level. Floor brokersAny individuals on the exchange floor engaged in executing orders for another person. They may also trade for their own accounts, with the primary responsibility of executing the customers orders first. Brokers are licensed by the federal government. Floor traders (locals) Exchange members who execute their own trades by being physically present in the pit, or place for futures trading. Foreign exchange The mechanism that values foreign currencies in terms of another currency. Foreign exchange brokers Intermediaries among banks who bring together buyers and sellers to the market, optimize the prices they show to their customers, and do not take positions for themselves. Foreign exchange exposureThepotentialeffect of currency fluctuations on shareholders equity. Foreign exchange rateThe price of one currency in terms of another. Forward outright Foreign exchange deal that matures at a day past the spot delivery date (generally two business days).Forward spread (forward points or forward pips)Forward price used to adjust a spot price to calculate a forward price. It is based on the current spot exchange rate, the interest rate differential, and the number of days to delivery. Fractal geometry Geometry theory that refers to the fact that certain irregular objects have a fractal number of dimensions. In other words, an object cannot fill an integer number of dimensions. French-West German Treaty of Cooperation A treaty signed in 1963 by President Charles de Gaulle and Chancellor Konrad Adenauer, which established that West Germany would lead economically through the cold war and France, the former diplomatic powerhouse, would provide the political leadership. Fuzzy logicMethod that attempts to weigh the quality of the patterns recognized by neural networks. Because not all patterns have equal financial significance for foreign currency forecasting, this method qualifies the degree of certainty of the results. GGamma The rate of change of an options delta, or the sensitivity of the delta. FOREX. On-line Manual For Successful Trading122 123. Gann percentage retracementsThe Gann theory focuses mostly on theeighths, along with retracements in thirds. GapThe price gap between consecutive trading ranges (i. e. the low ofthe current range is higher than the high of the previous range).Genetic algorithmsMethod used to optimize a neural network. Trialand error are applied to an evolutionlike system, which mimicsnatural selection for financial forecasting purposes. GLOBEXAn electronic trading system conceived in 1987 as an after-hours trading system and geared toward global futures tradingcreated through a joint venture of the Chicago Mercantile Exchange(CME), the Chicago Board of Trade (CBT), and Reuters PLC. Golden crossAn intersection of two consecutive moving averagesthat move in the same direction and suggest that the currency willmove in the same direction. Gross Domestic ProductThe sum of all goods and servicesproduced in the United States. Gross National ProductThe sum of government expenditure, private investment, and personal consumption. Gross National Product Implicit Deflator Deflator tool designed toadjust the Gross National Product for inflation. It is calculated bydividing the current dollar GNP figure by the constant dollar GNPfigure. HHarami barA wait-and-see two-day candlestick combination. Itconsists of two consecutive ranges having opposite directions, but itdoes not matter which one is first. The second days range resultsfall within the previous days body. Head-and-shoulders A bearish reversal pattern that consists of a series ofthree consecutive rallies, such that the first and third rallies (theshoulders) have about the same height and the middle one (thehead) is the highest. The rallies are based on the same support line, known as the neckline. When the neckline is broken, the price targetis approximately equal in amplitude to the distance between the topof the head and the neckline. Hedging A method used to minimize or eliminate the risk ofexchange rate fluctuations. FOREX. On-line Manual For Successful Trading123 124. High-low bandA band created by two winding parallel lines above and below a short-term moving average that borders most price fluctuations. The moving average is based on the high and low prices. The resulting two moving averages define the edges of the band. A close above the upper band suggests a buying signal and a close below the lower band gives a selling signal. Hoshi (star) A wait-and see two-day candlestick combination. It consists of a tiny body that appears the following day outside the original body. It is not important whether the star reaches the previous days shadows. The direction of the two consecutive ranges is also irrelevant. Households survey Consists of the unemployment rate, the overall labor force, and the number of people employed. IImplied volatilityMethod of measuring volatility by considering thepremiums currently trading in the market and calculating the figurebased on the level of the option premium. In-the-money (ITM) callA call whose present currency price is higherthan the strike price. In-the-money (ITM) put A put whose present currency price is lower thanthe strike price. Industrial ProductionAn economic indicator that consists of the totaloutput of a nations plants, utilities, and mines. Initiation margin A margin paid by the trading party in order to tradecurrency futures. A traders daily loss cannot exceed the size of thismargin. Interest rate risk Amount of mismatches and maturity gaps amongtransactions in the foreign exchange book. International Fisher effect Theory holding that investors will hold assetsdenominated in depreciating currencies only to the extent thatinterest rates are sufficiently high to balance the expected currencylosses. FOREX. On-line Manual For Successful Trading 124 125. International Monetary Market The major currency futures andoptions on currency futures market in the world. It is a division ofthe Chicago Mercantile Exchange in Chicago. Intrinsic value The amount by which an option is in-the-money. Inthe case of a call, the intrinsic value equals the difference betweenthe underlying currency price and the strike price. In the case of theput, the intrinsic value equals the difference between the strike priceand the present currency price, when beneficial. Inverse head-and-shoulders A bullish reversal pattern that consists of aseries of three consecutive sell-offs. Among the three consecutivesell-offs, the shoulders have approximately the same amplitude, andthe head is the lowest. The formation is based on a resistance linecalled the neckline. After the neckline is penetrated, the target isapproximately equal in amplitude to the distance between the top ofthe head and the neckline. Irikubi A bearish two-day candlestick combination. It consists of amodified atekubi bar. All the characteristics are the same, exceptthat the second days closing high is marginally higher than theoriginal days low. Island reversal An isolated range or ranges that occur at the tip of aV-formation. ISO codes Standardized currency codes developed by the InternationalOrganization for Standardization (ISO).JJ-Curve theoryDevaluation of a currency will trigger export gains inthe long term, rather than the short term, because of previouscontracts, existing inventories, and behavior modification. Jittai Body of the candlestick(See Candlestick charts.)Journal of Commerce Index Index that consists of the prices of 18industrial materials and supplies used in the initial stages ofmanufacturing, building, and energy production. It is more sensitivethan other indexes, as it was designed to signal changes in inflationprior to the other price indexes. FOREX. On-line Manual For Successful Trading 125 126. KKabuse (dark cloud cover)Abearishtwo-daycandlestick combination. It consists of a second-day long black bar that opens above the high of the previous days blank bar and closes within the previous days range (in an uptrend).Karakasa (hangman at the top, hammer at the bottom) A bearish candlestick at the top of the trend, bullish at the bottom of the trend. The candlestick can be either blank or black. The body of the candlestick is very small and only half the length of the shadow. Kenuki (tweezers)A wait-and-see two-day candlestick combination. It consists of consecutive bars that have matching highs or lows. In a rising market, a tweezers top occurs when the highs match. The opposite is true for a tweezers bottom. Key reversal day The daily price range on the bar chart of the reversal day fully engulfs the previous days range also, the close is outside the preceding days range. Kirikomi A bullish two-day candlestick combination. It consists of a blank marubozu bar that opens the second day lower (than the previous low of a long black line) and closes above the 50 percent level of the previous days range. KnockinA plain vanilla option that does not exist until the trigger is reached. Knockout a plain vanilla option that goes away if the trigger is reached. Koma (spinning tops) A reversal candlestick formation that consists of a short bar, either blank or black. This candlestick may also suggest lack of direction. LLarry Williams R A version of the stochastics oscillator. It consists of the difference between the high price of a predetermined number of days and the current closing price that difference in turn is divided by the total range. This oscillator is plotted on a reversed 0 to 100 scale. Therefore, the bullish reversal signals occur at under 80FOREX. On-line Manual For Successful Trading 126 127. percent and the bearish signals appear at above 20 percent. The interpretations are similar to those discussed under stochastics. Leading Indicators Index An economic indicator designed to offer a six - to nine-month future outlook of economic performance. It consists of the following economic indicators: average workweek of production workers in manufacturing average weekly claims for state unemployment new orders for consumer goods and materials (adjusted for inflation) vendor performance (companies receiving slower deliveries from suppliers) contracts and orders for plant and equipment (adjusted for inflation) new building permits issued change in manufacturers unfilled orders for durable goods change in sensitive materials prices index of stock prices money supply, adjusted for inflation and the index of consumer expectations. Line chart The line connecting single prices for each of the time periods selected. Linearly weighted moving average A moving average that assigns more weight to the more recent closings. Long legged shadows dojiA reversal candlestick formation that consists of a bar in which the opening and closing prices are equal. Long straddleA compound option that consists of a long call and a long put on the same currency, at the same strike price, and with the same expiration dates. The maximum loss for the buyer is the sum of the premiums. The upside break-even point is the sum of the strike price and the premium on the straddle. The downside break-even point is the difference between the strike price and the premium on the straddle. The profit is unlimited. Long strangleA compound option that consists of a long call and a long put on the same currency, at different strike prices, but with the same expiration dates. The profit is unlimited. MMlMoney supply measure that is composed of currency in circulation (outside the Treasury, the Fed, and depository institutions), travelers checks, demand deposits, and other checkable deposits negotiable order of withdrawal (NOW) accounts, automatic transfer service (ATS) accounts, etc..M2Money supply measure that consists of Ml plus repurchase agreements, overnight Eurodollars, money market deposit accounts, FOREX. On-line Manual For Successful Trading 127 128. savings and time deposits (in amounts under 100,000), and balances in general accounts. M3 Money supply measure that is composed of M2 plus time deposits over 100,000, term Eurodollar deposits, and all balances in institutional money market mutual funds. Margin The amount of money or collateral deposited by a customer with a broker, by a broker with a clearing member, or by a clearing member with the clearinghouse in order to insure the broker or clearinghouse against loss on outstanding futures positions. Mark-to-market Daily cash flow system used by the U. S. futures exchanges to maintain a minimum level of margin equity for a specific currency future or option by calculating the profit and loss at the end of each trading day in each contract position resulting from the price fluctuation. Matched sale-purchase agreements Daily operations executed by the Federal Reserve, in which the Fed sells a security for immediate delivery to a dealer or a foreign central bank, with the agreement to buy back the same security at the same price at a predetermined time in the future (generally within seven days). This arrangement amounts to a temporary drain of reserves. Matching systems Electronic systems duplicating the traditional brokers market. A price shown by a bank is available to all traders. Maturity dateThe date when a foreign exchange contract expires. Merchandise Trade BalanceAn economic indicator that consists of the net difference between the exports and imports of a certain economy. The data includes food, raw materials and industrial supplies, consumer goods, autos, capital goods, and other merchandise. Momentum An oscillator designed to measure the rate of price change, not the actual price level. This oscillator consists of the net difference between the current closing price and the oldest closing price from a predetermined period. The momentum is measured on an open scale around the zero line. Moving average An average of a predetermined number of prices over a number of days, divided by the number of entries. Moving average convergence-divergence (MACD)An oscillator that consists of two exponential moving averages (other inputs may be chosen by the trader as well) plotted against the zero line. The zero line represents the times the values of the two moving averages are identical. A buying signal is generated when this intersection is upward, whereas a selling signal occurs when the intersection takes place on the downside. Moving averages oscillator An oscillator in which the values of two consecutive moving averages are subtracted from each other (the larger number of days from the previous one) and the new values are plotted. FOREX. On-line Manual For Successful Trading128 129. NNaked intervention (unsterilized intervention)A central bank intervention in the foreign exchange market that consists solely of the foreign exchange activity. This type of intervention has a monetary effect on the money supply and a long-term effect on foreign exchange. National Association of Purchasing Managers Index (NAPM) A survey of 250 industrial purchasing managers, conducted in order to gauge the changes in new orders, production, employment, inventories, and vendor delivery speed. National Futures Association (NFA) A self-regulatory organization that consists of futures commission merchants (FCMs), commodity pool operators (CPOs), commodity trading advisers (CTAs), introducing brokers (IBs), leverage transaction merchants (LTMs), commodity exchanges, commercial firms, and banks. It is responsible for certain aspects of the regulation of FCMs, CPOs, CTAs, IBs, and LTMs, focusing primarily on qualifications and proficiency, financial conditions, retail sales practices, and business. NettingA process that enables institutions to settle only their net positions with one another at the end of the day, in a single transaction, not trade by trade. Neural networks Computer systems that recognize patterns. They may be used to generate trading signals or to be part of trading systems. Neutral spread (delta-neutral spread) A compound option strategy that consists of a long option position and a short option position whose respective total delta positions are relatively equal. Next best price stop-loss order A stop-loss order that must be executed after the requested level is reached. Nonfarm sector Jobs in government, manufacturing, services, construction, mining, retail and others. Nostro account (clearing account) The account for each foreign currency in the country of origin maintained by the financial institutions for purchase and receiving (PampR) purposes. FOREX. On-line Manual For Successful Trading129 130. OOpen interestThe total outstanding position in a currency. Open Market Investment Committee (OMIC) Committee established in 1923 in order to coordinate the Reserve Bank operations. It was composed of the Governors of the Federal Reserve Banks in New York, Boston, Philadelphia, Chicago, and Cleveland. Not currently active. Open Market Policy Conference (OMPC) Committee established in 1930 to replace the OMIC. It consisted of 12 Federal Reserve Banks governors and the members of the Board. Not currently active. Optimal optionsOptions that refer to the most favorable rate of the underlying currency that existed (from the holders perspective) during the life of the option. This rate becomes the strike in the case of optimal strike options, or it becomes the underlying, determining the intrinsic value when compared to a predetermined fixed strike in the case of optimal rate options. Optimals can be based on the spot rate (spot style) or the forward rate (forward style).Option currency spread A long currency option and an offsetting short currency option, generally in the same currency. Option writers Option sellers. Oscillators Quantitative methods designed to provide signals regarding overbought and oversold conditions. Out-of-the-money (OTM) call A call whose present currency price is lower than the strike price. Out-of-the-money (OTM) putA put whose present currency price is higher than the strike price. Overnight position limit A position kept overnight by traders. PParabolic systemA stop-loss technical system, based on price and time. The system was devised to supplement the inadvertent gaps of the other trend-following systems. Although not technically an oscillator, the parabolic system can be used with the oscillators. SAR stands for stop-and-reverse. The stop moves daily in the direction of the new trend. The built-in acceleration factor pushes the SAR to catch up with the currency price. If the new trend fails, the SAR signal will be generated. The name of the system is derived from its parabolic shape, which follows the price gyrations. It is represented by aFOREX. On-line Manual For Successful Trading 130 131. dotted line. When the parabola is placed under the price, it suggestsa long position. Conversely, a price above the parabola indicates ashort position. PennantsA continuation formation that resembles the outline of apennant. It consists of a brief consolidation period within a solid andsteep upward trend or downward trend. The consolidation itselftends to be sloped in the opposite direction from the slope of theoriginal trend, or simply flat. The consolidation is bordered by asupport line and a resistance line, which converge, creating atriangle. The previous sharp trend is known as the pennant pole. When the currency resumes its original trend by breaking out of theconsolidation, the price objective is the total length of the pole, measured from the breakout price level. Personal Income An economic indicator that consists of the incomereceived by individuals, nonprofit institutions, and private trust funds. Some of the components of this indicator are wages and salaries, rental income, dividends, interest earnings, and transfer payments(Social Security, state unemployment insurance, and veteransbenefits).Philadelphia Stock Exchange (PHLX)The oldest U. S. securities exchange, it offers currency futures and options on currency futures. Point-and-figure chartA type of chart that plots price activity withoutregard to time. When the currency moves up, the fluctuations aremarked with Xs. The moves on the downside are plotted with Os. The direction on the chart only changes if the currency reverses by acertain number of pips. Premium The price of the option paid by the buyer to the seller. Premium forward spreadForward price that is added to a spot priceto calculate a forward price. It reflects the fact that the foreigninterest rate is higher than the U. S. interest rate for that particularperiod. Prime rateThe rate that commercial banks charge customers, which isbased on the discount rate. Producer Price IndexAn economic indicator that gauges the averagechanges in prices received by domestic producers for their output atall stages of processing. Purchasing power parity (PPP) Model ofexchange ratedetermination stating that the price of a good in one country shouldequal the price of the same good in another country, exchanged atthe current rate (the law of one price).Put-call-forward exchange parity (PCFP) theory A relationship betweena call option and a put option established through the forwardmarket. The theory holds that the option of buying the domesticcurrency with a foreign currency at a certain price X is equivalent tothe option of selling the foreign currency with the domestic currencyat the same price X. Therefore, the call option in the domesticcurrency becomes the put option in the other, and vice versa. FOREX. On-line Manual For Successful Trading131 132. Put ratio backspread A compound option strategy that consists of short puts with a higher strike price and more long puts with a lower strike price. The profit is twofold. The maximum upside profit potential consists of the total premium received. The downside profit potential is unlimited. The maximum loss potential occurs when the currency price reaches the lower strike price at expiration. RRandom walk theory An efficient market hypothesis, stating that prices move randomly versus their intrinsic value. Therefore, no one can forecast market activity based on the available information. Rate of change A momentum oscillator in which the oldest closing price is divided into the most recent one. Ratio call spreadA compound option strategy that consists of a number of long calls with lower strike prices and a larger number of short calls with a higher strike price. The maximum profit is realized when the currency price is at the higher strike price. This combination has two break-even points. The downside break-even point consists of the sum of the lower strike price and the debit, divided by the number of long calls. The upside break-even point consists of the sum of the higher strike price and the maximum profit potential, divided by the number of naked calls. The maximum loss is twofold. The maximum downside risk is the net premium. The upside risk is unlimited. Ratio put spread A compound option strategy that consists of a number of long puts with higher strike prices and a larger number of short puts with a lower strike price. The maximum profit is realized when the currency price is at the lower strike price. This combination has two break-even points. The downside break-even point consists of the difference between the lower strike price and the maximum profit potential, divided by the number of naked puts. The upside break-even point consists of the difference between the higher strike price and the debit, divided by the number of long calls. The maximum loss is twofold. The maximum downside risk is unlimited. The upside risk is the net premium. FOREX. On-line Manual For Successful Trading132 133. Ratio spreadA compound option strategy in which the number of long options is different from the number of short options. Rectangle A continuation formation that resembles the outline of a parallelogram. The price objective is the height of the rectangle. Regulation QRegulation passed by the Federal Reserve that prohibited payment of interest on demand deposits and prescribed maximum rates banks could pay on time deposits. These ceilings had been imposed since 1933 by the U. S. government. The regulation is not currently in effect. Relative Strength Index An oscillator that measures the relative changes between the higher and lower closing prices. The RSI is plotted on a 0 to 100 scale. The 70 and 30 values are used as warning signals, whereas values above 85 indicate an overbought condition (selling signal), and values under 15 suggest an oversold condition (buying signal).Replacement riskA form of credit risk that holds that counterparties of failed banks will find their books unbalanced to the extent of their exposure to the insolvent party. In order to rebalance their books, these banks must enter new transactions. Repurchase agreements (repos) Daily operations executed by the Federal Reserve. A repurchase agreement between the Federal Reserve and a government securities dealer consists of the Feds purchasing a security for immediate delivery, with the agreement to sell the same security back at the same price at a predetermined date in the future (usually within 15 days). This arrangement amounts to a temporary injection of reserves in the banking system. Resistance levelThe peaks representing the price level at which supply exceeds demand. Reversal patterns Patterns that occur at the end of the trend, signaling the trend change. Rollover (tomorrow/next or torn/next) swap A swap designed for spot trades maintenance. It was designed to change the old spot date to the current spot date (on the front offices side) and to enable the bank to make the payments to the counterparty (on the back offices side).Rounded bottomA bullish reversal pattern that consists of a very slow and gradual change in the direction of the market. Rounded top (saucer)A bearish reversal pattern that consists of a very slow and gradual change in the direction of the market. Runaway or measurement gapA price gap that occurs within solid trends. It is also called a measurement gap because it tends to occur about midway through the life of a trend. FOREX. On-line Manual For Successful Trading 133 134. SSangu (three gaps)A reversal candlestick signal applicable in either a steeply rising or falling market, when the daily limits will break the trading. The theory holds that after the third gap, the market will reverse at least to the second gap. Sanpei (three parallel bars) A reversal candlestick combination. It refers to the similarity in direction and velocity of three consecutive bars, as otherwise all the entries are parallel. They generate a reversal formation after an extended rally. When bullish, the formation is known as the three soldiers. When bearish, the name is the three crows. Sanpo (three methods) A candlestick combination that advises that retracements are in order before the market will reach new highs and new lows. Sansen (three rivers) method A reversal candlestick combination. It consists of three daily entries. The first day is a long blank bar (a bullish move), followed by a bullish but short-range one-day island. The third entry is a bearish long black line. Sanzan (three mountains) A reversal candlestick combination. It consists of a triple-top formation. Sashikomi A bearish two-day candlestick combination. It consists of a modified irikubi bar. The difference is that the opening of the second days blank bar is much lower than that of the irikubi bars. Despite the wider gap thus formed, the blank candlestick closes only slightly above the previous days low. Settlement riskA form of credit risk that may occur due to the time zones separating the nations. Payment may be made to a party who will declare insolvency (or be declared insolvent) immediately after receipt, but prior to executing its own payments. Shitakage Lower shadow of the candlestick. (See Candlestick chart.)Short straddle A compound option that consists of a short call and a short put on the same currency, at the same strike price, and with the same expiration dates. The maximum profit consists of the combined premium of the two individual options. The loss occurs when the level of the premium is overpassed by the currency swing, and the loss is unlimited. Short strangle A compound option that consists of a short call and a short put on the same currency, with the same expiration dates, but with different strike prices. The maximum profit consists of the combined premium of the two individual options. The loss is unlimited. Simple moving average or arithmetic mean An averageofa predetermined number of prices over a number of days, divided by the number of entries. FOREX. On-line Manual For Successful Trading 134 135. Slow stochasticsA version of the original stochastic oscillator. The new, slow K line consists of the original D line. The new, slow D lineformula is calculated from the new K line. Snake The nickname of the European Joint Float Agreements 2.25percent fluctuation band for the European currencies against eachother, derived from its curvaceous movement. SpeedlinesSupport or resistance lines that divide the range of the trendinto thirds on a vertical line. The two resulting speedlines are plottedby using as coordinates the origin and the 1/3 and 2/3 pricesrespectively. Spot deal A foreign exchange deal that consists of a bilateral contractbetween a party delivering a certain amount of a currency againstreceiving a certain amount of another currency from a secondcounterparty, based on an agreed exchange rate, within twobusiness days of the deal date. The exception is the Canadian dollar, in which the spot delivery is executed within one business day. Spot next (S/N) A foreign exchange deal that matures one businessday past the spot date, or three business days. Sterilized interventionA central bank intervention in the foreignexchange market that consists of a sale of government securitiesthat offsets the reserve injection which occurs due to the foreignexchange intervention. The money market activity sterilizes theimpact of the foreign exchange intervention on the money supply. Sterilized interventions have a short - to medium-term effect. Stochastics Oscillators that consist of two lines called K and D. Visualize K as the plotted instrument and D as its movingaverage. The resulting lines are plotted on a 1 to 100 scale. Just asin the case of the RSI, the 70 percent and 30 percent values areused as warning signals. The buying (bullish reversal) signals occurat under 10 percent and the selling (bearish reversal) signals comeinto play at above 90 percent. Strike priceSee Exercise price. Support level The troughs representing the level at which demandexceeds supply. Swap deal A foreign exchange deal that consists of a spot deal and aforward outright deal. A party simultaneously buys and sells (or sellsand buys) the same amount of a currency with another counterpartythe two legs of the transaction mature on different dates (one of thedates being the spot date) and are traded at different exchange rates(one of the exchange rates being the spot rate). Exceptions may bemade with regard to the value dates (forward-forward) and amount(different amounts).SWIFT (Society of Worldwide Interbank Financial Telecommunications)An automated system set up to send standardized paymentinstructions for foreign currencies among international banks. Swing Index (SI) A momentum oscillator that is plotted on a scaleof -100 to 100. The spikes reaching the extremes suggest reversal. FOREX. On-line Manual For Successful Trading135 136. Symmetrical triangle A triangle continuation formation in which the support and resistance lines are symmetrical. (See Triangle.)Synthetic call optionA combination of a long currency and a long currency put. Synthetic put option A combination of a short currency and a long currency call. TTan Book An economic report prepared by the Federal Reserve forFOMC meetings. Tankan Economic SurveyThe Japanese equivalent of the AmericanTan Book, which is released by the Federal Reserve. The survey isreleased on a quarterly basis. Technical analysisThe chart study of past behavior of commodityprices for purposes of forecasting their future performance. Theory of elasticitiesA model of exchange rate determination statingthat the exchange rate is simply the price of foreign exchange thatmaintains the BOP in equilibrium. The degree to which the exchangerate responds to a change in the trade balance depends entirely onthe elasticity of demand to a change in price. Theta (T) or time decay Occurs as the very slow or nonexistentmovement of the currency triggers losses in the options theoreticalvalue. Three Buddha top formationA reversal candlestick combination. Itconsists of a head-and-shoulders formation, or three consecutiverallies in which the first and the third are of approximately the sameheight, and the second is the highest. Threshold of divergence A safety feature for the EMS that createsan emergency exit for currencies that become the singular focus ofvarious adverse forces. The threshold of divergence indicates whenthe specific country with the pressured currency should takeadditional steps other than simple central bank intervention in theforeign exchange markets. Time decaySee Theta. Time value (time premium or extrinsic value)The difference betweenthe option premium and its intrinsic value. Tohbu (gravestone doji) A reversal candlestick formation. Tomorrow/next (T/N) deal A foreign exchange deal that matures the nextbusiness day, or one day prior to the spot date. FOREX. On-line Manual For Successful Trading 136 137. Tonbo (dragonfly)A reversal candlestick formation. Traditional (Charles Dow) percentage retracements Occurat 33 percent, 50 percent, and 66 percent. Transaction exposure Potential profit and loss generated by current foreign exchange transactions. Translation exposure The risk of change of the consolidated corporate earnings as a result of past volatility in the base currency. TrendThe general direction of the market, as shown by the significant peaks and troughs of the currency fluctuations. TrendlineA straight line connecting the significant highs (peaks) in a downtrend, and the significant lows (troughs) in an uptrend. Triangle A continuation formation that resembles the outline of a pennant, but without the pole. It consists of a brief consolidation period within a solid and steep upward trend or downward trend. The consolidation itself tends to be sloped in the opposite direction from the slope of the original trend, or simply flat. The consolidation is bordered by converging support and resistance lines, making it look like a triangle. When the currency resumes its original trend by breaking out of the consolidation, the price objective is the height of the triangle, measured from the breakout price level. Triple bottomA bullish reversal pattern that consists of three bottoms of approximately equal heights. A parallelx2014resistancex2014line is drawn against a support line, which connects these tops. The break of the resistance line generates a move equal in size to the price difference between the average height of the bottoms and the resistance line. Triple topA bearish reversal pattern that consists of three tops of approximately equal heights. A parallelx2014supportx2014line is drawn against a resistance line, which connects these tops. The break of the support line generates a moveequal in size to the price difference between the average height of the topsand the support line. TRIX Index An oscillator that consists of a one-day ROC calculation of a triple exponentially smoothed moving average of the closing price. Tunnel The nickname of the European Joint Float Agreements total fluctuation band of the European currencies. FOREX. On-line Manual For Successful Trading137 138. UUnemployment RateAn economic indicator released as a percentagethat is calculated as the ratio of the difference between the totallabor force and the employed labor force, divided by the total laborforce. Upside gap tasukiBullish two-day candlestick combination. Itconsists of a second-day black bar that closes an overnight gapopened on the previous day by a blank bar. Upward breakout of a bearish resistance line Bullishpoint-and-figurechart formation that confirms the currencys breakout of a resistanceline the third time it reaches it. The resistance line is slopeddownward. Upward breakout of a bullish resistance line Bullishpoint-and-figurechart formation that confirms the currencys breakout of a resistanceline the third time it reaches it. Upward breakout from a consolidation formationBullish point-and-figurechart formation that resembles the flag formation. A valid upsidebreakout from the consolidation formation has a price target equal insize to the length of the previous uptrend. USDXCurrency index that consists of the weighted average of theprices of ten foreign currencies against the U. S. dollar: deutschemark, Japanese yen, French franc, British pound, Canadian dollar, Italian lira, Dutch guilder, Belgian franc, Swedish krona, and Swissfranc. Uwakage Upper shadow of the candlestick. (See Candlestick chart.)VValue at risk The expected loss from an adverse market movement, with a specified probability over a particular period of time. Variation (maintenance) marginMargin paid by the trading party in order to fully cover any unrealized loss. Any trader holding an overnight position with a negative PampL must post it in cash. It must be kept on deposit at all times. VegaThe sensitivity of the theoretical value of an option to a change in volatility. FOREX. On-line Manual For Successful Trading 138 139. Velocity of money The rate at which money is turning over on an annual basis to facilitate income transactions. Vertical bear call spreadA compound option strategy of buying twooptions with a common expiration date one option is a short callwith a lower strike price and the other is a long call with a higherstrike price. The sellers maximum profit is limited to the premiumpaid for the two options. The break-even point is calculated as thesum of the lower strike price and the total premium. The maximumloss consists of the dollar difference between the two strike prices, minus the total premium received. Vertical bear put spread A compound option strategy of buying twooptions with a common expiration date one option is a long put witha higher strike price and the other is a short put with a lower strikeprice. The buyers maximum profit consists of the dollar differencebetween the two strike prices, minus the total premium paid. Thebreak-even point is calculated as the difference between the higherstrike price and the total premium. The maximum loss is limited tothe premium paid for the two options. Vertical bear spreadAn option combination whose theoretical valuewill decline to a predetermined maximum profit if the price of theunderlying currency declines and whose maximum loss is alsopredetermined. Vertical bull call spread A compound option strategy of buying twooptions with a common expiration date one option is a long call witha lower strike price and the other is a short call with a higher strikeprice. The buyers maximum profit consists of the dollar differencebetween the two strike prices, minus the total premium paid. Thebreak-even point is calculated as the sum of the lower strike priceand the total premium. The maximum loss is limited to the premiumpaid for the two options. Vertical bull put spreadA compound option strategy of buying twooptions with a common expiration date one option is a long put witha lower strike price and the other is a short put with a higher strikeprice. The buyers maximum profit consists of the net premium paidfor the two options (one paid, the other received). The break-evenpoint is calculated as the difference between the higher strike priceand the total premium received. The maximum loss is limited to thedollar difference between the two strike prices, minus the totalpremium received. Vertical bull spreadAn option combination whose theoretical valuewill rise to a predetermined maximum profit if the price of underlyingcurrency rises, and whose maximum loss is also predetermined. Vertical spread A compound option that consists of two similar options(i. e. calls or puts), one being bought and the other sold, on thesame currency and with the same expiration date, but with differentstrike prices. FOREX. On-line Manual For Successful Trading139 140. V-formation (spike)Reversal formation that shows sudden trend changes and is accompanied by heavy trading volume. This pattern may include a key reversal day, or an island reversal and an exhaustion gap. VolatilityThe degree to which the price of currency tends to fluctuate within a certain period of time. VolumeThe total amount of currency traded within a period of time, usually one day. Vostro accountA vostro account from the point of view of the counterparty. WWedge A continuation formation that resembles the outline of apennant, but without the pole. It consists of a brief consolidation periodwithin a solid and steep upward trend or downward trend. The consolidationis sharply angled in the opposite direction from the slope of the original trend. The consolidation is bordered by a support line and a resistance line thatconverge, making it look like a sharply angled triangle. When the currencyresumes its original trend by breaking out of the consolidation, the priceobjective is the height of the wedge, measured from the breakout price level. FOREX. On-line Manual For Successful Trading140 141. BIBLIOGRAPHY1. Luca, C. Trading in the Global Currency Markets. 2ª edição. NewYork Institute of Finance. New York, 1999. 2. Luca, C. Technical Analysis Applications in the Global CurrencyMarkets. 2ª edição. Instituto de Finanças de Nova York. New York, 2000. 3. Achelis, S. B. Technical Analysis from A to Z. 2nd Edition. New York. McGraw-Hill, 20004. An Introduction to Technical Analysis. John Wiley amp Sons, 1999.5. Edwards, R. D. Magee John. Análise Técnica de Tendências de Estoque. 7thEdition. AMACOM, 1998.FOREX. On-line Manual For Successful Trading 141Forex Crowd Positioning Leaves us in Favor of Euro Strength Rec eive the Weekly Speculative Sentiment Index report via PDF via Davids e-mail distribution list. EURUSD - The ratio of long to short positions in the EURUSD stands at -2.13 as 32 of traders are long. Yesterday the ratio was -2.37 30 of open positions were long. Long positions are 0.1 higher than yesterday and 8.6 above levels seen last week. Short positions are 10.0 lower than yesterday and 10.0 below levels seen last week. Open interest is 7.0 lower than yesterday and 4.1 below its monthly average. We use our SSI as a contrarian indicator to price action, and the fact that the majority of traders are short gives signal that the EURUSD may continue higher. A multidão de comerciantes cresceu menos líquida do que ontem e na semana passada. A combinação do sentimento atual e as mudanças recentes dão um novo viés de negociação mista. To receive the Speculative Sentiment Index and other reports from this author via e-mail, sign up for his distribution list via this link. Contact David via DailyFX provides forex news and technical analysis on the trends that influence the global currency markets. Learn forex trading with a free practice account and trading charts from FXCM . On the surface, rising tourism rates in Cuba might look like an injection of cash into the struggling hellip More All these new tourists are literally taking the food off the plates of Cubans Former Super Bowl champion Casey Crawford on his transition from football to working in real estate and hellip More Former Super Bowl champ tackles the housing market When you compile your list of must-haves in a home and compare it with whats on the market, a finished hellip More Homebuyers: 7 Red Flags to Search for When Touring a Basement United Airlines, the subsidiary of United Continental Holdings Inc. (UAL), announced that it will launch hellip More United Airlines to Introduce New Boeing Aircraft to Fleet Bostons winter weather has a reputation for chilling its real estate market. During the winter, single-family hellip More 6 Tips for Selling Your Boston Home in Winter Rising interest rates pose a dilemma for people who love their mortgage more than they hate their house. hellip More Rising Mortgage Rates Could Threaten Housing Demand in 2017 A new report of the state of real estate is telling first-time homebuyers in the countrys key urban hellip More First-time home buyers in Toronto, Vancouver advised to rent instead Just 10.1 per cent of Germanys young workers, between the ages of 20 and 24, are not in school or out hellip More Global economy could be 1.1T richer by following German youth employment model There are many things buyers should consider when purchasing a new home is it close to their work hellip More Buyer boo-ware: What happens if you buy a haunted house The restaurant industry generates 75 billion in annual sales and employs more than 1.2 million people hellip More The reason why so many good restaurants fail Three-and-half million people are standing between a landmark trade agreement involving 500 million citizens hellip More Why one region in Belgium has thrown a wrench in Canadas trade deal with the EU At the centre of the regulations are a built-in stress test for all insured mortgages. Theres another hellip More Bad credit can hurt you under new mortgage rules Amazon is just one of the retailers taking umbrage with the duty charged on parcels shipped to Canada. hellip More Ebay, Amazon want Canada39s duty-free limit raised on foreign online purchases When I was getting cold feet after signing the purchase agreement for a home a few years ago, I confessed hellip More Common real estate scams and how to avoid them Home prices making you sick Renting is always an option Moshe Milevsky has noticed a change of attitude in the 20-somethings he teaches in his finance class hellip You can get out of the grocery store faster, and the solution may surprise you. More How to spend less time in grocery store lines Fueled by its red-hot real estate market, Vancouver has become Canadas first city of millionaires, hellip More Vancouver is Canadas first city of millionaires: analysis Instead of getting coffee, the gintern would get to travel around Europe sampling gin, while also stuffing hellip More U. K. company offering internship to taste gin for 34K a year According to a report published by Project: Time Off, an initiative created by the U. S. Travel Association, hellip More Culture of millenial work martyrs leads them to forfeit vacation time: study More than one-third of Canadians say expenses are the top stressor when doing back to school shoppin hellip More Worried about expensive back-to-school shopping Youre not alone With the cost of living going up and up, the last thing people want to think about is the cost of dying. hellip More How to organize a cost-effective funeral without seeming cheap A pair of Vancouver real estate agents are apologizing for a sympathy note they mailed to a recently hellip More Vancouver realtors slammed for offering to help widower sell his home A recent study says separating your work life from your home life may be harder than you think, and the hellip More Rude coworkers can have a toxic effect on your family life: study OTTAWA (Reuters) - Canada is sticking to plans to run an open competition for fighter jets and Lockheed hellip More Canada vows open competition for jets that includes Lockheed39s F-35 TORONTO (Reuters) - A surge in shares of energy companies helped push Canada39s main stock index higher hellip More TSX rises with energy stocks as oil prices jump The Canadian Magazine Awards/Grands prix du magazine are proud to announce that submissions for the inaugural hellip More The Magazine Grands Prix Now Open for Submissions A Halifax prison video of a vici ous beating was shown at the trial of the inmate found guilty of the hellip More Video shows brutal jail beating as watchdog says incidents rising U. S. crude prices were up 4.49 percent at 53.81 a barrel after the Organization of the Petroleum Exporting hellip More C strengthens to fresh seven-week high as oil surges The stars of La La Land say one of the Canadian actor39s actual auditions made it into the script More Emma Stone teases Ryan Gosling about an audition Managing receipts just got a lot easier. Sensibill has launched eReceipts, a mobile receipt management hellip More eReceipts powered by Sensibill is Now Available for Scotiabank Customers Sun, Dec 11: Nearly five million Syrian refugees are now registered in neighbouring countries. It was hellip More Syrian refugees still looking for work in Canada Immigration Minister John McCallum says he39s proud of how Canadians have welcomed Syrian refugees. hellip More Syrians speak of challenges one year after arrival in Canada CBC News speaks with Mayada Alzaal, a government-sponsored refugee, and Joanne Green, who is sponsoring hellip More Challenges for Syrian refugees in Canada Toronto-Dominion Bank did not set out to change consumer habits when it offered its TD MySpend app in hellip More Red means stop Banking app cuts customer spending Robert Praet was living in an Ottawa shelter until he was contacted by members of VETS Canada, which hellip More 39What a Christmas present39 says homeless veteran Severe weather is taking a toll on Canadian cities like Toronto, damaging infrastructure and forcing hellip More Canadian cities hit by climate change A fruit company with a Canadian connection hires people who39ve been impacted by Colombia39s v hellip More Pineapples for peace By David Ljunggren OTTAWA (Reuters) - The Canadian government on Friday reached a deal with eight of hellip More Canada agrees on national carbon price, but tensions remain Canada needs a comprehensive system of universal drug coverage to eliminate variations between the provinces hellip More Citizen panel calls for universal pharmacare in Canada By Alastair Sharp TORONTO (Reuters) - Canada39s main stock index barely extended a 19-month high on hellip More TSX gains 1.7 percent on week, miners weigh on the day The owners of The Farmers Daughter in Nova Scotia attribute the overwhelming interest in part to a Trump hellip More Remote Canadian general store offering jobs and free land got over 100,000 applications (Reuters) - Department store operator Sears Canada Inc reported a bigger third-quarter loss as it same-store hellip More Sears Canada posts bigger quarterly loss
No comments:
Post a Comment