setting trade targets

• TRADING TACTICS: 

Progressive entry 

technique 

• JAPAN: 

Land of the partially 

rising sun 

• THE “OTHER” DOLLAR: 

Canadian buck stuck? 

• HOW “G” MEETINGS 

impact the FX market 

• BIG PICTURE: 

What the pros know 

SETTING TRADE 

TARGETS: 

Analyzing your way 

to better 

exits and stops

CONTENTS 

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

Letters . . . . . . . . . . . . . . . . . . . . . . . . . .8 

Forex Resources . . . . . . . . . . . . . . . . .9 

Industry News 

Eurex begins trading 

currency futures . . . . . . . . . . . . . . . .10 

Eurex is entering the currency futures 

market and will offer 10 currency pairs. 

By Jeff Ponczak 

Global Economy 

Japanese yen . . . . . . . . . . . . . . . . . .12 

Analysts debate the import of the recent 

economic data out of Japan and the 

prospects for the yen in the months to come. 

By Currency Trader Staff 

Canadian dollar: 

2004 top likely to hold . . . . . . . . . . . .14 

An in-depth look at the economic growth 

prospects, central bank outlook, and other 

factors affecting the Canadian dollar. 


Spot Check 

Dollar/Swiss . . . . . . . . . . . . . . . . . . . .18 

Has the U.S. dollar/Swiss franc train already 

left the station? 


Big Picture 

What professional traders know 

that you don’t . . . . . . . . . . . . . . . . . .22 

What separates the pros from the posers 

in trading? 

By Barbara Rockefeller 

Trading Strategies 

Finding price targets 

and risk points . . . . . . . . . . . . . . . . . .26 

Simple calculations can prevent guesswork 

when it comes to stop placement and profit 

taking, no matter what kind of trading system 

you use. 

By Thom Hartle 

Progressive entry technique . . . . . . .32 

Entering a trade in stages is sometimes 

better than going in all at once. 

By Boris Schlossberg 

continued on p. 4 

2 July 2005 • CURRENCY TRADER

CONTENTS 

“G” meetings: 

Do they move the market? . . . . . . . . .34 

A look at the impact of G7/G8 meetings on the 

dollar on the eve of July’s annual meeting. 

By David Bukey and Carlise Peterson 

Calendar . . . . . . . . . . . . . . . . . . . . . . .36 

Have a question about something you’ve seen in 

Currency Trader? 

Submit your editorial queries or comments to 

webmaster@currencytradermag.com. 

Looking for an advertiser? 

Consult the list below and click on the company name for a direct link to the ad in this month’s 

FXCM Refco 

Gain Capital 

Chicago Expo 

ChoiceTrade 

issue of Currency Trader. 

Index of Advertisers 

Currency Futures 

CME engages retail traders . . . . . . . .37 

The futures exchange wants to bring more 

retail traders into the currency futures market. 

By Carlise Peterson 

International Market Summary . . .38 

Global News Briefs . . . . . . . . . . . . .40 

Forex Diary . . . . . . . . . . . . . . . . . . . . .42 

Key Concepts and Definitions . . . .43 

FX Praxis 

Forex For Small Speculators 

WorldCupAdvisor.com 

Forex Expo Moscow 


A publication of Active Trader ® 

For all subscriber services: 

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Editor-in-chief: Mark Etzkorn 

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Volume 2, Issue 7. Currency Trader is published monthly by TechInfo, Inc., 

150 S. Wacker Drive, Suite 880, Chicago, IL 60606. Copyright © 2005 

TechInfo, Inc. All rights reserved. Information in this publication may not be 

stored or reproduced in any form without written permission from the publisher. 

The information in Currency Trader magazine is intended for educational purposes 

only. It is not meant to recommend, promote or in any way imply the 

effectiveness of any trading system, strategy or approach. Traders are advised 

to do their own research and testing to determine the validity of a trading idea. 

Trading and investing carry a high level of risk. Past performance does not 

guarantee future results. 

CONTRIBUTORS 

CONTRIBUTORS 

Thom Hartle is a private trader 

and president of Market Analytics Inc. 

(www.thomhartle.com). In a career 

spanning more than 20 years, Hartle 

has been a commodity account executive 

for Merrill Lynch, vice president of 

financial futures for Drexel Burnham Lambert, trader for 

the Federal Home Loan Bank of Seattle, and editor for 

nine years of Technical Analysis of Stocks & Commodities 

magazine. 

Barbara Rockefeller (www.rts-forex.com) is an 

international economist with a focus on foreign 

exchange. She has worked as a forecaster, trader, and consultant 

at Citibank and other financial institutions, and 

currently publishes two daily reports on foreign 

exchange. Rockefeller is the author of Technical Analysis 

for Dummies (2004), 24/7 Trading Around the Clock, Around 

the World (John Wiley & Sons, 2000), The Global Trader 

(John Wiley & Sons, 2001), and How to Invest 

Internationally, published in Japan in 1999. A book tentatively 

titled How to Trade FX is in the works. 

Boris Schlossberg is a senior currency 

strategist at Forex Capital Markets 

in New York. He is also a guest lecturer 

at www.fxstreet.com, covering proper 

risk management, trader psychology, 

and true market structure. Schlossberg is 

a frequent commentator for Reuters and Dow Jones/CBS 

Marketwatch currency and bond market sections. He has 

been an independent trader since 1999, trading a variety 

of instruments including stocks, options, futures, and 

currencies. 


LETTERS 

Code name: 

Pharos 

In each issue of Currency Trader 

you feature a currency trading 

system. In the June edition, 

you published “Pharos FX 

System.” Where can I get the 

Wealth-Lab code for this? 

—Alex Hinder 

Switzerland 

Not a fake letter 

Iam a subscriber to Currency 

Trader, your excellent magazine 

on forex trading. I have yet to see 

a better forex magazine. I love my electronic 

copies so much, I want to obtain 

hard copies so I can read them when 

I’m away from my computer. 

—Patrick 

The code is proprietary, but we are 

working to get a version to post on our 

code page (www.activetradermag.com 

/code.htm). 

Thank you very much. You’ll have 

to print out your favorite pages of 

Currency Trader — it’s electronic only 

because we have a global readership 

we want to reach at the same time each 

month. Try printing out the pages that 

don’t require color in black-and-white 

to save on ink and printing time. 

The FX option 

Iwould like to know where I could 

go to read up on forex options, in 

particular what the different 

strategies are called vs. regular 

options. Are “spreads” call “spreads” 

in forex? For example, can you place a 

bull call spread in forex — that is can 

you buy and sell two call options at 

the same time? 

Spot forex options are a breed apart, 

actually. The article “Forex options” in 

the June issue of Options Trader 

explains the terminology and illustrates 

different kinds of strategies.

FOREX RESOURCES 

MetaQuotes Software 

Corp. has released 

MetaTrader 4, the latest version 

of their forex trading 

system. MetaTrader 4 is 

designed to organize brokerage 

services for forex, CFD, 

and futures. It includes both 

a client terminal to be 

installed on the trader’s 

computer and back office 

components to process trading 

operations on the broker’s 

side. MetaTrader 4’s 

client terminal processes a 

wide array of orders: market 

orders, pending orders (buy 

stop, buy limit, sell stop, sell 

limit), stop loss and take 

profit, and trailing stop. 

eSignal and Hotspot 

FX Inc. announced the 

availability of Hotspot FX’s 

foreign exchange data via 

eSignal’s market data and news platforms. Hotspot FX is 

known for its multibank data, and its participating banks 

are fully integrated into the Hotspot FX marketplace, providing 

ongoing liquidity and a virtual clearinghouse network. 

eSignal products are available for purchase online or 

by calling (800) 833-1228. Visit eSignal’s Web site 

(www.esignal.com) for a complete list of features and pricing 

options. 

To trade on Hotspot FX, individuals, broker/dealers, and 

FCMs representing retail traders can establish omnibus or 

direct accounts with Hotspot FX’s fully regulated Futures 

Commission Merchant (FCM). To trade on Hotspot FXi, 

Hotspot FX’s institutional marketplace, establish an 

account with any of the top-rated clearing banks and prime 

brokers in Hotspot FXi’s network. 

CNBC World’s new and only global program, 

“Foreign Exchange,” brings together the worldwide 

resources of CNBC and Dow Jones providing up-to-theminute 

news and analysis about the forex market. “Foreign 

Exchange” is anchored by The Wall Street Journal’s Bob 

O’Brien in New York with Dow Jones Newswires’ Nick 

Hastings reporting from London. The 15-minute show airs 

weekdays at 8:30 a.m. ET. 

Forex Revolution: An Insider’s Guide to the Real World of Foreign Exchange Trading 

By Peter Rosenstreich 

Financial Times Prentice Hall, 2005 

Hardback, 277 pages 

$34.95 

Rosenstreich gives an overview of foreign exchange trading without touting any particular 

trading strategy. Real trading experiences are supplemented with basic definitions. The 

book’s last three chapters cover fundamental and technical trading methods and currency 

trends, among other topics. 

CURRENCY TRADER • July 2005 9

MARKET NEWS BY JEFF PONCZAK 

Eurex vs. the CME 

Eurex begins trading currency futures 

Eurex, the world’s top derivatives 

exchange by volume, 

had virtually no success 

the first time it tried to 

compete against an established U.S. 

futures market. However, that’s not 

stopping the Frankfurt, Germanybased 

exchange from trying 

again. 

In mid-June, Eurex 

announced it would 

begin trading currency 

futures, competing with 

not only the Chicago 

Mercantile Exchange, 

which has the lion’s share 

of exchange-traded currency 

futures volume, 

but also the enormous 

interbank market. 

“Our core strengths lie 

in the equity, fixed 

income, and index markets,” says 

Rudolf Ferscha, CEO of Eurex. “The 

foreign exchange market is adjacent to 

those markets and very often linked 

directly to trade on those markets. 

“The system we have — the infrastructure, 

the trading engine — is very 

suitable to high-volume financial products, 

so we will have very low marginal 

costs added to what we run currently. 

We don’t need to reinvent the 

wheel.” 

The futures will trade on Eurex U.S. 

because the American exchange can 

trade 23 hours a day, something the 

European platform is not capable of. 

“Forex fills the gaping hole in the 

financial asset category Eurex is trading,” 

Ferscha says. “We are trading 

them on Eurex U.S. because they can 

trade 23 hours a day and also because 

the main users of futures in the FX 

space are American, and there is a very 

established behavior in the states that 

uses FX futures rather than using the 

interbank or other venues to express 

views on what is going on in the forex 

market.” 

Eurex will begin with 10 currency 

pairs: The Euro, British pound, Japanese 

yen, Swiss franc, Canadian dollar, and 

Australian dollar, vs. the U.S. dollar, and 

the Euro vs. yen, Euro vs. pound, Euro 

vs. franc, and pound vs. yen. 

“We wanted to start with the core 

products,” says Satish Nandapurkar, 

CEO of Eurex U.S. “These 

are the ones where we 

could really bring the market 

making together with 

the end users immediately 

from the U.S. and Europe. 

But these are by no means 

the only FX products we 

will ever have. 

“This is a complete commitment 

into the FX space, 

and as such we will enter 

into the market and we 

will expand the market as 

we see customer demand. 

Going into some of these emerging 

markets currencies as we get established 

is a good way to go.” 

Early fall launch 

The products will begin trading Sept. 

23, and each contract will have a 

notional value of $250,000 — twice 

that of a CME contract. All fees will be 

waived for the remainder of 2005, 

although the standard fee will be 50 

cents per contract side. 

“If you add in clearing fees, our con- 

tracts will cost between $5 and $8 per 

million, which makes us competitive 

with OTC and much cheaper than existing 

exchange fees,” Nandapurkar says. 

Eurex will set up an incentive program 

through the end of 2007 that will 

allow market makers and proprietary 

trading firms that do a minimum volume 

and/or provide continuous twosided 

markets to get free or reduced 

trading costs and participate in a revenue-sharing 

plan. 

“We are changing the model,” 

Nandapurkar says. “Many electronic 

platforms are charging their liquidity 

providers for the privilege of providing 

liquidity. We’re enfranchising the liquidity 

providers by waiving their fees 

and letting them share in our success.” 

Besides the 23-hour trading day, the 

decision to list the products on Eurex 

U.S. also gives the floundering 

exchange another chance at making an 

impact in the derivatives world. In 

announcing its decision to trade currency 

futures, Eurex U.S. also announced it 

would no longer actively promote its 

U.S. treasury products (see “Eurex U.S. 

shifts from Treasuries to currencies,” 

Active Trader, September 2005). 

“We are refocusing our resources 

toward index and FX products,” 

Nandapurkar says. “The window of 

opportunity with treasuries has 

passed. The existing treasury products 

Euro ETF coming soon? 

Rydex Investments has applied for permission to trade the first-ever currency 

ETF pegged to the price of the Euro. The Euro Currency Trust would 

trade under the symbol FXE if approved by the Securities and Exchange 

Commission. 

Each share of the ETF will represent 40 Euros, and the price will be based 

on the Federal Reserve Bank of New York’s noon buying rate. So, if the rate 

is 1.25, the ETF will be priced at $50. 

Although the ETF represents a cheap way to trade the Euro, it may have 

difficulty drawing customers, as currency traders aren’t likely to switch and 

lose the 50- or 100-to-1 leverage available to them in the spot forex and currency 

futures markets, while other traders may be leery of anything associated 

with the forex market. 


will remain listed but no new sales, 

marketing or incentive programs will 

be initiated. 

Nandapurkar blames anti-competitive 

measures by the CME and 

Chicago Board of Trade for Eurex 

U.S.’s failure to compete with the 

CBOT in the treasury market. 

“The delays in the Global Clearing 

Link, which we feel were impacted by 

efforts by our competitors, and also 

predatory pricing by the CBOT put 

into place when they cut their fees to 

zero right when we launched, really 

pushed us past that window [of 

opportunity] and are the key aspects 

of our anti-trust litigation against the 

CBOT and CME.” 

Ferscha says he hopes Phase II of the 

Global Clearing Link, which will completely 

link Eurex U.S. and Eurex customers, 

both from a clearing and trading 

standpoint, will be approved 

quickly. 

And, while Eurex’s direct competitor 

on the exchange side will be the 

CME, there are numerous players in 

the forex arena. 

“We are competing with all venues 

that are active in forex,” Ferscha says. 

“Many are interbank, many are whitelabels 

(i.e., introducing brokers), and 

many are cleared by prime brokerages 

and so on. So we are competing with a 

multitude of players, and I think that’s a 

good thing. We are delivering the product 

at a low cost, and we can do that 

because it is only a marginal cost to us.” 

The CME has already made efforts 

to tap into the spot forex market by 

hooking up with Reuters. 

Nandapurkar says Eurex is exploring 

similar arrangements. 

“Forex is a fragmented space, and 

we are always interested in knowing 

what’s going on,” he says. “As we are 

a new player, it is our desire to talk to 

all different marketplaces and under- 

stand if there is some way we can 

work together.” 

Nandapurkar also says Eurex has 

plans to list options on the currency 

futures, but no timetable for that has 

been announced. 

The CME is not concerned with 

Eurex’s recent decision to drop 

Treasuries and pick up Forex. 

“We are refocusing our resources toward index and FX products. The 

window of opportunity with treasuries has passed.” 

— Satish Nandapurkar, CEO Eurex U.S. 

CME lowers fees for forex 

hedge funds and CTAs 

Beginning Aug. 1, the CME will 

introduce a one-year incentive 

program designed to attract large 

hedge funds and commodity trading 

advisors (CTAs) to its foreign 

exchange markets. Large hedge 

funds and CTAs with more than $2 

billion under management will be 

eligible to trade CME forex products 

on Globex for $0.60 per side, 

vs. the current electronic trading 

fee of $1.60. 

“We are clearly well ahead of them,” 

says Rick Sears, director of foreign 

exchange at the CME. “We already 

compete with a whole host of platforms, 

and we’ve had FX futures for 34 

years. We have a lot of competition. 

We’ve lowered prices for hedge funds 

and CTAs — we are well aware of our 

competition.” 

HIT YOUR MARK! 

Advertise in 

Active Trader and Currency Trader Magazines 

Contact Bob Dorman 

Ad sales East Coast 

and Midwest 

bdorman@activetradermag.com 

(312) 775-5421 

Allison Ellis 

Ad sales West Coast 

and Southwest 

aellis@activetradermag.com 

(626) 497-9195 

Mark Seger 

Account Executive 

mseger@activetradermag.com 

(312) 377-9435 


GLOBAL ECONOMY 

As of mid-June, U.S. dollar/Japanese 

yen bulls 

have pressed the 

USD/JPY rate to the 

highest levels seen in 2005 — up to 

109.70. However, some ana- 

lysts believe the recent up 

move is running out of steam 

and the odds favor a reversal 

to lower levels in the months 

ahead — despite some strong 

economic numbers recently. 

Analysts have pointed to 

signs of improvement in the 

Japanese economy as a factor 

supporting the yen. In the first 

quarter, GDP data surprised 

economists with an unexpected 

4.9-percent annualized 

reading. Most market watchers 

had only expected a 2.6 percent 

gain. 

“In general, things are looking 

more constructive in the 

economy,” says Robert Sinche, 

head of global currency strategy 

at Bank of America. 

“Corporate sector balance sheets and 

profitability are looking quite solid.” 

The Ministry of Finance’s most 

recent Financial Statements Statistics of 

Corporations by Industry report suggests 

Japan’s corporate sector is performing 

well despite higher oil prices 

and a slowdown in foreign demand. 

On an all-industries basis, sales rose 

1.5 percent quarter-on-quarter, the 

fastest growth in three quarters. 

Japanese yen 

Strong first quarter Japanese GDP growth surprised analysts, and some market watchers believe the 

dollar/yen has topped out for the time being. 

Also, Sinche points out “nominal 

wages were actually up on a yearover-year 

basis [this spring]. For years 

households have been looking at 

declining nominal wages.” 

FIGURE 1 — DOLLAR/YEN 

U.S. dollar/Japanese yen (USD/JPY), daily 

Sizzling pace to slow? 

Despite these impressive-looking 

growth numbers, many Japan watchers 

don’t expect the Japanese economy 

to keep up that growth pace through 

the remainder of the year. 

“Much of the growth reflected a 

rebound from special factors that 

depressed growth in the fourth quarter, 

including earthquakes, typhoons, and 

unseasonably warm weather,” explains 

Peter Morgan, chief economist at HSBC 

Securities Japan. “The growth from 

here is likely to be slower.” 

The slow growth of Japanese 

The U.S. dollar/Japanese yen recently made new 2005 highs, but market watchers are 

looking for signs of weakness. 

27 4 11 18 25 1 8 15 22 29 6 13 20 27 3 10 17 24 31 7 14 21 28 7 14 21 28 7 11 18 25 2 9 16 23 30 6 13 20 

October November December 2005 February March April May June 

Source: eSignal 

BY CURRENCY TRADER STAFF 

exports and possible economic slowdowns 

in the U.S. and China are factors, 

which could also weigh on 

Japanese growth prospects throughout 

the remainder of 2005. 

Nonetheless, Jim Glassman, senior 

economist at JP Morgan Chase in New 

York is upbeat on the overall outlook 

for the Japanese economy. 

“In general, we feel things are turning 

better there,” he says. “I don’t 

12 July 2005 • CURRENCY TRADER 

112.0 

111.0 

110.0 

109.0 

108.0 

107.0 

106.0 

105.0 

104.0 

103.0 

102.0

elieve anyone thinks, ‘OK, we are off 

to the races now,’ but we expect 

Japan’s growth in the quarters ahead 

to be around 2 percent.” 

Deflation continues to be a concern 

in Japan, and until it disappears, most 

analysts don’t see significant yen 

appreciation. However, it appears the 

end of that cycle may be near. 

“At -1.2 percent year-overyear, 

deflation is still significant 

at the GDP level,” Morgan 

says. 

However, he also says at the 

core consumer price index 

(CPI) level, deflation doesn’t 

look as bad, with a recent -0.2 

percent year-over-year reading. 

He expects CPI growth to 

stay negative in 2005, but turn 

positive in 2006. 

When looking at the Far 

East as a whole, Brian Dolan, 

director of research at Gain 

Capital, is optimistic. 

“The Asian region continues 

to be quite strong and there are 

few signs it’s slowing,” he 

says. “Taiwan, Korea, and Singapore 

are all doing very well. The Asian trajectory 

still looks very solid.” 

That compares favorably to Europe 

and the U.S., where most analysts 

expect slowing growth this year. 

Goose eggs: 

Monetary policy still on hold 

The Bank of Japan’s (BOJ) overnight 

rate remains at zero and many analysts 

believe the zero-interest rate policy is 

likely to persist through year-end. 

Recent comments from the BOJ reiterated 

the Bank’s commitment to an easy 

monetary policy stance, while deflation 

continues to linger. 

“They are not anywhere near ready 

to pull the plug on the zero-interest 

rate policy,” says Glassman. 

Looking ahead, Glassman says key 

economic factors to watch are structural 

improvement and increased consumer 

spending. 

Dollar/yen toppy near 110.00 

Given the overall strength in the Asian 

region, Dolan believes the dollar/yen 

is close to a top in the 110.00 area as of 

mid-June. Ultimately, he looks for dollar/yen 

to retreat and consolidate in 

the 104.00/105.00 zone in the fall 

months. However, as signs emerge of 

FIGURE 2 — EURO/YEN 

Euro/Japanese yen (EUR/JPY), daily 

additional strength in the Japanese 

and Asian region overall, he expects a 

move toward the 100/98.00 region by 

year-end. 

Dolan’s advice: “Look for the 

opportunity to buy yen on the crosses 

(non-dollar cross rates), and buy yen on 

dollar strength into the 109.00/111.00 

area,” he says. “Be prepared right now 

for some consolidation around 

104.00/105.00. But traders need to 

keep an eye on the downside. When 

the 104.00/104.20 area is broken, it will 

unleash a flood of yen buying.” 

Sinche calls risk/reward levels 

attractive for the short side at current 

levels, around 109.00 in mid June. 

“We are near the upper end of the 

dollar/yen range,” he says. 

While China continues to be a wild 

card, some analysts now expect flexibility 

in its currency (which is currently 

pegged to the U.S. dollar) as early as 

this summer, which ultimately should 

support the yen. 

Sinche sees potential for the dollar/yen 

to retreat back below 105.00 in 

the near term and overall hover in a 

103.00/109.00 range in the second half. 

On the crosses 

Most analysts believe the yen is a 

strong buy on many major crosses, 

Few analysts see the Euro holding up against the yen in the near future. 

13 20 27 3 10 17 24 31 7 14 21 28 7 14 21 28 4 11 18 25 2 9 16 23 30 6 13 20 

2005 

Source: eSignal 

February March April May June 

including the Euro/yen (EUR/JPY), 

Swiss franc (CHF/JPY), and the British 

pound (GBP/JPY). 

“The European economy and the 

UK continue to stagnate, with no plan 

or ammunition to rejuvenate growth,” 

says Dolan. “[I don’t see] anything in 

the next couple of years which will 

help the European economy to 

rebound, while the Asian region is the 

story for the next several years.” 

The EUR/JPY rate, which was trading 

around 131.50 mid-June, could fall 

toward 130.00 initially, but eventually 

retreat to the 124.00/125.00 area in the 

second half, according to Dolan. 

Tom Rogers, senior currency analyst 

at Thomson Financial, agrees. He sees 

potential for Euro/yen to retreat to the 

126.00/125.00 area. 

“There is interest to sell Euro/yen,” 

he says. “People hate the Euro because 

of all the political stuff that is going on 

over there. There is no real hope for 

Euro/yen.” 

CURRENCY TRADER • July 2005 13 

142.0 

140.0 

138.0 

136.0 

134.0 

132.0

GLOBAL ECONOMY continued 

After scoring 11 1/2 year 

highs vs. the U.S. dollar 

in late 2004, the 

Canadian dollar has 

backed off those lofty levels in the first 

half of 2005. The surge in the greenback 

has played a part in the decline of 

the U.S. dollar/Canadian dollar 

(USD/CAD) rate (Figure 1), but internal 

Canadian dynamics also have contributed 

to the depreciation in the 

Canadian currency. 

Given the stronger U.S. dollar, the 

Bank of Canada’s (BOC) concern for 

significant currency appreciation, and 

the negative interest rate differential 

between Canada and the U.S., the 

$1.17 USD/CAD level set in 

November 2004 may represent an 

important top for the Canadian dollar 

vs. the U.S. buck, analysts say. 

Canadian economy: 

Not great, but still good 

While Canadian growth data may not 

look stellar, it is in positive territory 

and is supported by strong internal 

consumer demand. 

Recent economic numbers have 

elicited surprise on the upside. For 

example, the May employment report 

revealed 35,000 new jobs vs. forecasts 

for a 16,000 increase. Also, on the trade 

Canadian dollar: 

2004 top likely to hold 

Canada has enjoyed good news on the domestic economic front recently. 

Is it enough to bring the Canadian dollar back to its lofty 2004 levels vs. the U.S. buck? 

BY CURRENCY TRADER STAFF 

FIGURE 1 — ROUGH RIDE IN '05 

The USD/CAD low in November 2004 marked the height of the Canadian 

dollar's rise against the U.S. buck. Since then, the USD/CAD rate has zig 

zagged higher. 

U.S. dollar/Canadian dollar (USD/CAD), daily 

Dec. 2005 Feb. March April May June 

Source: TradeStation 

front, there was a higher-than-expected 

C$5.1 billion (vs. a C$4.5 billion 

estimate) April surplus. 

The latest gross domestic product 

(GDP) numbers have come in under 

the BOC’s 3-percent growth target; the 

first quarter saw a 2.3 percent reading. 

Johnathon Basile, economist at Credit 

Suisse First Boston, expects second- 

quarter GDP to come in at 2.9 percent. 

Looking into the second half, Basile is 

more upbeat, with a forecast for 3.7 

percent GDP growth for both the third 

and fourth quarters. 

The inflation picture remains relatively 

well-contained, as core CPI 

inflation eased to a 1.7-percent yearover-year 

reading in April, which 


1.26 

1.24 

1.22 

1.20 

1.18

FIGURE 2 — THREE-YEAR RUN 

The Canadian dollar's big run vs. the U.S. dollar began at the beginning of 

2002, when the USD/CAD rate was up around 1.61. 

U.S. dollar/Canadian dollar (USD/CAD), monthly 

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 


remains below the BOC’s 2-percent 

target rate. 

Too much currency strength? 

A longer-term monthly chart of 

USD/CAD (Figure 2) shows a substantial 

appreciation in the Canadian 

currency from January 2002, when the 

pair was trading at $1.61, to the 

USD/CAD bottom in November 

2004. 

By the end of 2004, economists said 

the hefty appreciation in the Canadian 

currency actually began to dampen 

the export sector and was a factor in 

slowing the growth. 

“BOC members weren’t too happy 

with the strength in the Canadian dollar,” 

says Tim Mazanec, senior forex 

strategist at Investors Bank and Trust. 

“A dollar-seventeen was too strong.” 

Fourth quarter 2004 GDP data came 

in at 3.0 percent. But the weakening of 

the export sector, with 3-percent annualized 

declines in both the third and 

fourth quarters in 2004, translated into 

slower economic growth in early 2005. 

However, domestic demand seems 

to have stepped in to fill at least some 

of the void. 

“There has been a reversal in the 

drivers of growth in Canada,” 

explains Charmaine Buskas, economist 

at Economy.com. “In 2003 and 

2004, exports were driving the economy. 

But by the end of 2004, exports 

started to soften as we saw a very 

strong currency. We also had a slowdown 

in global and U.S. demand for 

Canadian exports.” 

Nonetheless, a surge in domestic 

demand, with improving employment 

numbers and signs of stronger retail 

sales data, has been carrying the 

Canadian economy. 

“Domestic demand is a very large 

portion of the Canadian economy,” 

says Buskas. “But I don’t think the 

Canadian consumer has enough 

wherewithal to pick up the entire 

drop-off from the export side.” 



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GLOBAL ECONOMY continued 

Key economic challenge 

“The domestic economy is in good 

shape, but it still needs to work 

through an inventory adjustment,” 

Basile says. He points to the manufacturing 

sector, particularly vehicle production 

and auto parts, as an area that 

still presents challenges to the 

Canadian growth picture. 

“Demand and supply got out of balance,” 

he adds. “Supply ran too fast 

after the shock of the currency appreciation 

in 2004.” 

Basile also believes the surplus of 

autos in the U.S. is a negative factor for 

Canada. 

“We had too many light trucks and 

bigger SUVs in the U.S. that weren’t 

selling,” he says. “[General Motors] 

notably had trouble selling bigger 

SUVs. There was an inventory problem 

in the U.S.; dealer lots were overstocked 

and they had to cut production 

in the U.S. and Canada.” 

However, looking beyond the summer 

months, Basile believes the inventory 

adjustment will be resolved. 

Pointing to his 3.7 percent GDP forecasts 

for the third and fourth quarters, 

which are above BOC forecasts, he 

explains, “I think we will get a bigger 

swing from inventories.” 

Negative interest-rate 

differentials 

Most analysts think the BOC is currently 

on hold, with the bank-lending 

rate sitting at 2.5 percent. However, 

most forecasters see a potential tightening 

as early as the Sept. 7 BOC meeting, 

especially if faster growth numbers 

emerge. But given the overall gap 

between Canadian and U.S. rates, this 

differential should continue to act as a 

bearish factor for the Canadian dollar 

FIGURE 3 — THE EURO PLAY 

Some analysts believe the EUR/CAD rate could continue to weaken because of 

perceived political bickering and continued economic malaise in Europe. 

Euro/Canadian dollar (EUR/CAD), daily 

Dec. 2005 Feb. March April May June 


in the months ahead. 

“The spread between short-term 

rates favors the U.S. dollar and it doesn’t 

look like the Fed will stop its tightening 

anytime soon,” Basile says. 

His forecast for the U.S. fed funds 

rate is 4 percent by year-end, vs. a 

3-percent Canadian bank rate. 

“The rate spread has turned in favor 

of U.S. assets,” agrees Buskas. “Global 

investors looking for yield have turned 

to the U.S.” 

Dollar/Canada forecast 

Most analysts believe the $1.17 area in 

dollar/Canada will not be revisited 

anytime soon. In fact, most favor a 

continuation of the recent uptrend, 

with targets around $1.27 over a threemonth 

horizon and $1.30 over a 

twelve-month horizon. 

“I don’t expect us to retest $1.17 or 

even $1.20,” says Mazanec. 

He points to $1.28 as his year-end 

target for the USD/CAD rate. 

“I’d be buying dips in 

dollar/Canada,” he says. 

On the crosses 

In recent weeks, the Canadian dollar 

appreciated significantly vs. the Euro, 

as Euro/Canadian dollar (EUR/USD) 

has moved from the $1.60 area in May 

to $1.50 in mid June (Figure 3). Traders 

looking for opportunities on the crosses 

may want to consider a short 

Euro/long Canadian dollar play, given 

the struggling economic picture seen 

in the Euro zone, according to Jamie 

Coleman, managing analyst at IFR- 

Forex Watch. 

“Sell strength toward $1.56, with a 

target at $1.49 and then $1.42,” he says. 

Coleman actually called buying the 

Canadian dollar vs. the Euro (rather 

than the U.S. dollar) “a safer plan 

because the U.S. dollar will continue to 

strengthen.” 

Questions or comments? Click here. 


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SPOT CHECK 

FIGURE 1 — USD/CHF, DAILY 

The strength of the current dollar/Swiss rally is shown by how long two common 

oscillators — the relative strength index (RSI) and stochastics — have been at 

or near their typical overbought levels. 

U.S. dollar/Swiss franc (USD/CHF), monthly 


U.S. dollar/Swiss franc (USD/CHF), daily 

Stochastic 

RSI 

February March April May June 


FIGURE 2 — LONG-TERM PERSPECTIVE 

In late 2004, the USD/CHF rate virtually matched its 1995 low of 1.1172. May 

and June 2005 were particularly strong months for the currency pair. 

1995 2000 2005 

In mid-June, much of the news 

in the forex world revolved 

around the implications of the 

EU constitution no-votes on 

the Euro, whether the U.S. dollar 

would be able to sustain its first-half 

performance, and whether Japan’s 

recent strong economic numbers 

would continue to buoy the yen. 

The fact that the U.S. dollar/Swiss 

franc rate (USD/CHF) had gained the 

most ground over the preceding three 

months of any major currency pair 

(up more than 800 pips, or 7 percent, 

as of June 29) managed to slip under 

the radar. Is there more room for the 

dollar to gain ground against the 

franc, or has the explosive part of the 

rally already completed? 

“Swiss miss” (Currency Trader, May 

2005) pointed out the strength in the 

dollar/Swiss rate was driven by 

somewhat unexpected dollar bullishness 

early in the year against a backdrop 

of persistent Swiss economic 

malaise. 

Even then, however, some analysts 

were predicting a temporary decline 

in the dollar/Swiss. As of late June, it 

hadn’t happened. The currency pair 

has essentially marched upward without 

interruption since April 21, and 

virtually every off-the-shelf momen- 


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Dollar/Swiss 

Statistics argue for at least 

a temporary drop in the 

USD/CHF rate, but 

trend-followers are long and 

history shows conspicuous 

examples of the market 

extending its trend. 

BY CURRENCY TRADER STAFF

FIGURE 3 — MEETING RESISTANCE 

tum indicator (stochastics, RSI, et al.) 

has been signaling the market as 

“overbought” since mid May — a testament 

to the strength of the uptrend 

as well as the inefficacy of such tools 

(Figure 1). 

The issue now is whether an 

inevitable (not to be confused with 

“imminent”) decline in the 

dollar/Swiss will be a temporary 

pause in a longer-term up move, or an 

actual trend reversal. 

In December 2004 USD/CHF just 

missed matching its 1995 low of 1.1172 

before embarking on the first leg of its 

current uptrend (Figure 2), a development 

that no doubt caught the attention 

of chart watchers who were wondering 

if the market would successfully 

test this level. 

Figure 3 shows the currency pair at 

another notable technical level — the 

resistance implied by the August and 

September 2004 highs around 1.2850. 

Given the dramatic run-up in spring 

2005, this level would be a likely technical 

candidate to at least temporarily 

turn back the market, as many chartoriented 

traders would be compelled 

to take profits on existing long positions 

while others would look to go 

short. Similarly, a breakout above this 

level would trigger a flurry of technical 

buying. 

Figure 3 also shows something else: 

trade signals from a representative 

breakout system that triggered a long 

position (based on surpassing the 24week 

high) the week of May 20. This 

trigger level was determined by calculating 

the average and median 

number of weeks for the 20 look-back 

periods with the highest net profit 

over the past 30 years. The range was 

12 weeks to 36 weeks, the average 

24.9 weeks, and the median was 24 

weeks, so 24 was selected as a representative 

value. The point is many 

trend-following approaches are likely 

long this currency pair. The June 24 


high of 1.2841 missed the Aug. 6, 2004 

high by 16 points (pips); a solid move 


above 1.2857 — which coincides with the fact that the 

aforementioned resistance level will trigger more buying 

from technical systems going long on a move above the 52- 

The market has reached resistance implied by the August and September 2004 

highs — just as it has completed an eighth consecutive week of higher highs 

and higher lows (potentially nine if the pair closes the week ending July 1 with a 

higher low). The trade signals are representative of longer-term trend following 

systems, which would put many trend-followers on the long side today. 

U.S. dollar/Swiss franc (USD/CHF), weekly 

The market has surpassed its current nine-week run of higher highs and lows only 

during the three weeks ending Feb. 21, 1997, after which the market dropped. 

U.S. dollar/Swiss franc (USD/CHF), weekly 

July October 1997 April July 

week high. (As of mid-morning on June 29, the USD/CHF 

rate had rallied to 1.2858.) 



Buy 

2004 April July October 2005 April July 

FIGURE 4 — CONTINUED RALLY 

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SPOT CHECK continued 

Reality check: What 

the numbers say 

Now let’s look at what 

some quantitative analysis 

says about the actual price 

behavior. Statistical analysis 

on the daily and weekly 

time frames indicates the 

market is in a relatively 

unique situation. As of June 

29, the dollar/Swiss had 

posted nine weeks of consecutive 

higher weekly 

highs and lows — something 

it has done only three 

times before, and then only 

in string of three consecutive 

weeks from Feb. 7 to 

Feb. 21, 1997 (Figure 4). The 

market moved sideways to 

lower after the third week 

in this series. 

Considering consecutive 

higher highs only painted a 

more bearish picture based 

on 16 prior instances. Six 

weeks after concluding nine 

weeks of consecutive higher 

highs, USD/CHF was 

down more than 2 percent 

68.7 percent of the time — despite the fact that five of these 

occurrences were consecutive weeks of gains from Feb. 8, 

1985 to March 8, 1985 (which means the longest streak of 

consecutive weeks of higher highs is 13). 

Another model of the current market condition produced 

similar results. The USD/CHF on June 24 made the highest 

high in 26 weeks and gained more than .1000 over the previous 

26 weeks; the low 25 weeks ago was the lowest low in 

26 weeks. Eight other instances of this pattern produced 

mixed results over the following twelve weeks, with more 

TABLE 1 — USD/CHF PERFORMANCE AFTER 1,100-PIP GAIN OVER 10 WEEKS 

After rallying 1,100 points (pips) or more over 10 weeks, the market has shown a tendency to 

move lower. 

Week 1 LUM LDM W2 LUM LDM W3 LUM LDM 

Avg. -0.02% 1.13% -1.04% 0.03% 1.72% -1.60% -0.06% 2.17% -2.04% 

Med. 0.19% 0.96% -0.75% 0.31% 1.36% -0.94% 0.17% 1.93% -1.57% 

Std. 1.83% 0.89% 1.32% 2.45% 1.37% 1.69% 3.16% 1.70% 2.10% 

%>0 56.32% 55.17% 51.72% 

W4 LUM LDM W5 LUM LDM W6 LUM LDM 

Avg. -0.12% 2.57% -2.46% -0.28% 2.91% -2.85% -0.70% 3.14% -3.31% 

Med. -0.05% 2.28% -2.10% -0.25% 2.43% -2.26% -0.15% 2.67% -2.51% 

Std. 3.52% 2.01% 2.41% 4.05% 2.28% 2.70% 4.54% 2.39% 3.10% 

%>0 48.28% 45.98% 48.28% 


Avg. -0.92% 3.37% -3.68% -1.05% 3.57% -4.04% -1.10% 3.75% -4.41% 

Med. -0.36% 2.78% -2.87% -0.51% 3.29% -3.38% -0.29% 3.42% -3.47% 

Std. 4.68% 2.49% 3.37% 4.90% 2.54% 3.59% 5.40% 2.65% 3.86% 

%>0 45.98% 47.13% 47.13% 


Avg. -1.17% 4.09% -4.86% -1.20% 4.07% -4.95% -1.47% 4.28% -5.24% 

Med. -0.17% 3.62% -3.79% -1.08% 3.67% -3.81% -1.66% 3.67% -4.20% 

Std. 5.51% 2.68% 3.86% 5.46% 2.84% 4.03% 5.60% 2.92% 4.03% 

%>0 45.98% 47.13% 44.83% 

Legend: Avg = average gain/loss; Med = median gain loss; Std = standard deviation; %>0 = percentage of gains; 

LUM = largest up move, measured from the closing price of the final bar of the pattern to the highest high of each weekly interval; 

LDM = largest down move, measured from the closing price of the final bar of the pattern to the lowest low of each weekly interval. 

gains than losses at most of the weekly intervals, but several 

large losses skewed the results lower. 

These statistics are not overly exciting (and unfortunately 

they are based on relatively small sample sizes), but they 

support a bearish perspective over the next several weeks 

— with the caveat that conspicuous cases in the past (1985 

and 1997, for example) underscore the market’s potential to 

continue rallying ferociously. 

The rally from April 22 to June 29 spanned 10 weeks and 

1,100 pips (.1100 points). Table 1 shows the performance of 

the USD/CHF pair following previous rallies of 1,100 pips 

over 10 weeks. This time, there were 87 prior instances, and 

after mixed results the first few weeks, on average, the bias 

was to the downside. 

On the fundamental side, there is little on the near-term 

horizon that argues for a change in a bearish outlook for the 

Swiss franc — Switzerland’s export-driven economy is 

unlikely to rebound overnight. The outlook for the U.S. 

buck is what will continue to drive the pair. 

A final note: As it posted a strong first half of 2005 after 

pundits had warned it was on its deathbed at the end of 2004, 

it’s reasonable to wonder if the greenback isn’t ready for 

some kind of correction now that almost everyone has turned 

dollar bull. However, that doesn’t mean the relative values of 

the dollar and the Swiss franc are poised to invert. 


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THE BIG PICTURE 

What professional traders know 

that you don’t 

Most professionals don’t have amazing powers or secret knowledge, 

but they do know how do things such as taking losses and avoiding getting 

“married” to a particular market outlook. 

The professionals’ “secret” 

is not a trading rule like 

“buy the opening breakout 

if yesterday’s close 

was at the high.” Each trader has his 

own trading rules, and each set of rules 

is equally valid — there is more than 

FIGURE 1 — EURO BUYING OPPORTUNITY? 

one right (profitable) way to trade a 

market. 

You can find trading rules for each 

style of trading, generally organized 

according to how long you plan to 

hold positions. Trading rules can be 

roughly categorized as belonging to 

The Euro has broken out above a down trendline, and the stochastic oscillator is rising 

sharply. Should you buy the Euro? 

Stochastic Oscillator (46.02) 

Euro (EUR), daily 

BY BARBARA ROCKEFELLER 

18 25 2 9 16 23 31 6 13 20 27 4 

May June July 

Data source: Reuters; Charts: MetaStock 

the day-trading style (holding period 

of minutes), swing trading style (holding 

period of a few hours to a few 

days), and position trading (holding 

period of several days to several 

months). 

The secret is that professionals 

know the difference between a 

good loss and a bad loss. 

The good loss 

How can any loss be “good,” 

you ask? A good loss is the 

result of taking the right position 

given the information 

available at the time. You 

weighed the information — 

fundamental, technical, or 

both — and believed you had 

a realistic expectation of a 

profit. You took the position, 

but the fates intervened and 

threw a fresh piece of information 

into the market, or a new 

participant with different 

ideas. Your position turned 

into a loser, and your riskmanagement 

rules forced you 

to exit with a loss. Next case. 

Notice how many assumptions 

about the trading business 

are embedded in the preceding 

sentences. First, you 

gathered a lot of information 

to make the trading decision. 


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It doesn’t matter whether the 

decision was largely or even 

entirely informed by technical 

indicators. Technical indicators 

distill market sentiment, 

and are as valid a decision tool 

as any other. In fact, most 

forex market observers believe 

about 90 percent of all forex 

traders use technical analysis 

in some form. 

Second, if you had a realistic 

expectation of profit, you 

had an idea of the probable 

scope of the upcoming move 

— in other words, a profit target. 

This is an important difference 

between professionals 

and amateurs: Professionals 

know where they plan to exit a 

trade, whereas most amateurs 

do not. Moreover, amateurs 

kick themselves for exiting a 

trade too early, no matter how 

stupendous their gain. If the 

price continued to move further, 

they mourn the lost opportunity. 

Professionals make note of this, but 

they don’t get emotional about it. 

To evaluate a trade, however, you 

need more than the profit expectation. 

You also need to know the potential 

loss. Let’s say you can realistically 

expect to make $1,000 on the trade. Are 

you willing to lose $3,000 to make 

$1,000? No. You would soon be out of 

the trading business if your trades had 

that risk-reward profile. 

If you want to keep losses smaller 

than gains, your stop-loss exit point 

has to be a smaller distance away from 

the entry point than the expected profit-taking 

level. If you expect to make 

$1,000, your stop has to deliver a loss 

of less than $1,000. Traders would love 

to get a 3:1 or higher reward-risk ratio, 

meaning a $3 gain for every $1 loss. In 

FIGURE 2 — FALSE BREAKOUT 

The Euro failed to sustain the upward momentum. The chart offered clues the breakout 

was going to fail, but if you had a preconceived notion the Euro was oversold and should 

rise — and you couldn’t let go of the idea — you might have stuck with a losing trade. 

Stochastic Oscillator (30.63) 

Euro (EUR), daily 

4 11 18 25 2 9 16 23 31 6 13 20 27 4 

April May June July 

Data source: Reuters; Charts: MetaStock 

practice, they are sometimes lucky to 

get 1.5:1. 

Professionals with losing trades 

already know how big the loss will be 

— say $350 in the case here — and 

therefore it hurts less when they have 

to take it. The loss is not a surprise and 

it’s also not a disaster. 

Professional traders are always 

Professionals know where they plan to exit a trade; 

most amateurs do not. 

ready to move on to the next case. 

Losses are a natural part of trading. 

Everyone takes losses. Anyone who 

can’t take losses either doesn’t have 

enough capital to be trading in the first 

place, or lacks the psychological makeup 

to be a trader. Professionals can 

ride out losses both financially and 

psychologically; they are confident 

about their trading abilities even as 

they contemplate taking a loss, and 

even after they take it. 

The bad loss 

If a “good” loss is one where you made 

the right decision but lost anyway, a 

“bad” loss is one where you made a 

bad decision and took a loss, or made 

the right trading decision but applied 

the wrong risk-management rules. A 

bad trading decision, by definition, is 

one in which you didn’t start out with 

a positive expectancy of a gain. 

When you get the price direction 

wrong, it’s almost always the result of 

ignoring important factors or chart 

indicators because you are looking for 

what you want to see instead of what is 

really there. This is a critical difference 

between professionals and amateurs. 

Professionals clearly see what they are 

looking at and are able to restrain their 

prejudices and preconceptions about 

what “should” be there. 

For example, look at the chart in 

Figure 1. The Euro has broken out 

above a down trendline, and the stochastic 

oscillator is rising sharply. The 

rising stochastic means the Euro had 

been oversold and is now in the 



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THE BIG PICTURE continued 

process of correcting upward. On the 

last bar, the close is below the close the 

day before and below the open — two 

important warnings — but the upside 

breakout is compelling. You buy the 

Euro. (Actually, some professionals 

bought the Euro, too, but they didn’t 

buy them for a sustained holding period.) 

What happened next? 

Figure 2 shows the Euro failed to sustain 

the upward move. The correction 

fizzled. The next day after the warning 

bar, the Euro put in a higher high than 

the day before, but not higher than the 

previous two days. It’s an old rule that 

you want a three-day high (and prefer- 

ably a three-day higher close, too) before 

you buy into a new move. This is a rule 

you could use if you are a swing-trader 

or a position trader. There is no doubt 

that some day-traders made money 

going long the Euro on the day after the 

warning day — the Euro did venture 

higher — but they had to be nimble to 

exit with a gain. It was not a well-judged 

trade for anyone other than a day-trader. 

For a real position trader, it was not even 

tempting. The position trader would 

have required a close (or two or three) 

over the 10-day or 20-day moving averages, 

too. Instead, the price surpassed 

the 10-day moving average only once, 

and never surpassed the 20-day moving 

average. 

This move was, therefore, a false 

breakout, and a pretty minor one, at 

that. The chart gave plenty of clues 

that the breakout was going to fail, but 

if you were enamored of the idea the 

Euro was oversold and should rise, it 

was easy to talk yourself into buying 

it, and then taking a loss when the 

breakout failed. 

Let’s say you saw the warning signs 

but decided to change your usual 

timeframe. You thought you could easily 

switch timeframe concepts to daytrading 

when your usual style is 

swing-trading. Unless you sit down 

and carefully recalculate potential 

gains and losses for the new timeframe, 

you will not have realistic 

expectations for the trade. 

Changing timeframes is not something 

you can do intuitively or on-thefly. 

You need to apply a little arithmetic 

to arrive at new parameters. 

Otherwise, you are just guessing, 

which is always the wrong tactic in 

trading. Trading is a business that 

requires business tools. (We may think 

that in the end almost every trading 

decision is little more than an educated 

guess, anyway, but there is a vast dif- 

Amateurs would rather be right than make money, 

while professionals are willing to admit they are 

wrong, and make money anyway. 

ference between an unfounded guess 

and an educated guess.) 

The outcome of guessing is to apply 

the wrong risk-management rules. You 

could buy the Euro the day after the 

warning day and make a profit, but 

you would have had to adjust your 

gain/loss expectations considerably. 

Let’s say you are used to swingtrading 

over a three-day period. The 

daily average range is 120 points and 

your aim is to capture 75 percent of 

that (90 points) per trade. You are willing 

to lose 45 points per trade for a 

gain/loss ratio of 2:1. These metrics 

are part of your trading plan. (The 

other part is your technique for identifying 

the direction and strength of the 

upcoming move.) Now you shift to a 

day-trading mode, where you intend 

to get in and out in three hours. What 

is the maximum, minimum, and average 

gain you can expect? If you don’t 

know, you can’t set a reasonable stop 

or a reasonable profit target. 

In this instance, the hourly average 

range shrinks to only 20 points. Let’s 

say you plan to hold for three hours, 

meaning the maximum gain you could 

expect would be 60 points. To aim for 

75 percent of that move would be to 

target a 45-point profit, and if you keep 

your stop at half that, you would exit 

on a drop of 23 points below your 

entry. As it happens, you would have 

made the 45 points if you had entered 

at the Chicago open. But how many 

traders can change gears like this? 

Professional traders can change 

gears like this. If the market is offering 

a messy situation, they develop a new 

strategy to take advantage of it — in 

this instance, changing the timeframe 

of the trade. If the world is going to 

hell in a handbasket, they don’t judge 

it — they find the currency most 

affected, and trade it short. 

The flexibility of the professional 

trader extends to the asset being traded, 

too. If their usual currency starts 

trading dead flat, they can shift to a 

different one. When the Canadian dollar 

gets stuck in a sideways range, they 

turn attention to, as an example, the 

Swiss franc. Are all the major-traded 

currencies moribund? What’s happening 

in the exotics (the lesser-traded 

currencies such as the Swedish krona 

and Mexican peso)? 

The big-picture perspective 

That brings us to the final point: professionals 

believe there is always 

something to trade. Amateurs may 

complain the market isn’t trending like 

it used to, or it’s too choppy. 

Professionals don’t have the luxury of 

complaining about the market. It’s 

their job to make money no matter 

what the market is doing. Amateurs 

would rather be right than make 

money, while professionals are willing 

to admit they are wrong, and make 

money anyway. 

The lesson is that to trade like a professional, 

you have to work a little 

harder (seeing the warning signs in the 

bar configuration), be ruthless in abandoning 

preconceived ideas about what 

“should” happen (taking the loss), and 

adapt your trading style (switching 

timeframes). Then you can have confidence 

that the market is a playground 

in which you can make money, and not 

a battlefield on which you will suffer 

more losses than gains. 

For information on the author see p. 6. 


TRADING STRATEGIES 

Finding price targets 

and risk points 

BY THOM HARTLE 

There’s more to trading than entry setups. To get the most out 

of a trading approach, you have to move beyond the obvious. 

Find out how to analyze trades to determine the best places 

to set stops and take profits. 

Most new traders are focused on finding entry signals for their 

trades. They spend time studying indicators and technical 

patterns, looking to create combinations that lead to “highprobability” 

entry points. After finding reasonable setups, 

many traders stop their research and start placing trades, ignoring the question 

of where to exit. 

If they become dissatisfied with how their trades turn out, they might review 

any number of popular trading books, which will inform them to “let your 

profits run and limit your losses.” The idea is to capture the occasional big 

winners that will more than make up for a larger number of 

small losses. However, a profitable trade will often turn 

into a loss, leaving traders wishing they had exited 

earlier. After suffering through a few 

such trades, conflicts can start to 

form in the trader’s mind 

that lead 

to second-guessing and 

other psychological pitfalls that 

hinder trading. 

The solution is to research exit strategies to the 

same degree as entry setups. With the addition of 

sound exit strategies, trading reaches a point 

where it is more about following procedures and 

less about moment-to-moment judgment. 

One way to determine exit points is to walk 

through trades individually and analyze maximum 

favorable excursion (MFE) and maximum 


adverse excursion (MAE) statistics. 

This analysis can be applied to both 

historical back-tests and to track realtime 

trades. 

Best- and worst-case 

scenarios 

Maximum favorable excursion and 

maximum adverse excursion were 

terms coined by John Sweeney and 

detailed in his book, Campaign Trading: 

Tactics and Strategies to Exploit the 

Markets (Wiley Finance Editions, 

1996). MFE is the largest open profit 

attained during a trade. The MAE is 

the largest open loss while in a trade. 

For example, Figure 1 is a 45-minute 

Euro/U.S. dollar (EUR/USD) chart 

with the moving average convergence-divergence 

(MACD) histogram, 

which is the difference between the 

MACD line and the signal line. For 

illustration purposes, the chart shows 

an entry based on a simple momentum 

strategy: Hold a long position if 

5/9/05 

the histogram bars are rising, and hold 

a short position if the histogram bars 

are falling. When the histogram bars 

change direction, the trade is exited. 

At point A, the histogram bar turns up for the first 

time, so the trade is to go long at 1.2798 and exit when 

the histogram bar turns down (point B, 1.2828) — a 30pip 

gain. The trade’s MFE was 47 pips and the MAE was 

9 pips. In this example, the profit was 30 pips, which 

means approximately one-third of the open profit was 

lost before the trade was exited. 

Reviewing positions this way reveals that trades fall 

into one of three categories, as shown in Figure 2. Group 

1 consists of the type of trades everyone likes — when 

the position becomes profitable immediately and there 

is no open loss (MAE), and the trade is exited near the 

highest open profit (MFE). Group 2 trades go into negative 

territory, but recover and are closed out for profits. 

Group 3 trades might be profitable at first and then 

reverse to become losses, or they are losses from the 

start and never recover. 

A trading strategy can be tailored to manage risk in a 

more intelligent fashion by putting it in sync with typical 

market volatility. There are two objectives. The first 


FIGURE 1 — MFE AND MAE 

MFE is the largest open profit attained during a trade. The MAE is the largest 

open loss while in a trade. For this long trade, the MFE was 47 pips, the MAE 

was 9 pips, and the profit was 30 pips, which means the exit captured a little 

less than two thirds of the potential. 

Euro/U.S. dollar (EUR/USD), 45-minute 


A 

A 

MAE 

MFE 

Source: Fibonacci Trader (www.fibonaccitrader.com) 

FIGURE 2 — TRADE BREAKDOWN 

B 

B 

1.2840 

1.2830 

1.2820 

1.2810 

1.2800 

1.2790 

1.2780 

-0.00058 

-0.00045 

-0.00033 

Trades can be placed in one of three categories — trades 

that become profitable immediately and are exited near the 

highest open profit, trades that go into negative territory but 

recover and become profitable, and trades that turn into losses 

quickly and never recover. 

Maximum favorable excursion 

Maximum adverse excursion 

Group 1 

Group 2 

Group 3

TRADING STRATEGIES continued 

Gann swing trading 

In his book, A W. D. Gann Treasure Discovered 

(1996), Robert Krausz detailed the “two-bar 

swing” concept: If price makes two consecutive 

higher highs, the swing is up. If price makes two 

consecutive lower lows, the swing is down. 

If price trades above a previous peak defined by 

an up swing and a down swing, the trend is up. If 

price trades below a previous valley defined by a 

down swing and an up swing, the trend is now 

down. 

In Figure A, if the trend is up, the price swings 

are denoted by a solid green line. If the trend is 

down, the swings are marked with a dashed red 

line. 

FIGURE 3 — BUY SETUP 

If the trend is up, the system goes long when the market pulls back by forming 

a pivot low. 

Long 

1 

2 

Pivot low 


3 

Exit 

1 

Long 

3 

2 

Pivot low 

5/10/05 


FIGURE A — TWO-BAR SWING TECHNIQUE 

Swing 

is up 

2 

is to determine the point at which 

trades that are likely to be Group 3 

trades can be exited sooner, but not 

too soon as to remove the chance of 

them becoming Group 2 trades. 

The second objective is to find a 

high-probability target point at which 

to take profits. This profit level should 

be a level trades reach on a regular 

basis. Traders can take complete profits 

at this point, or take partial profits 

and use the trend-following rule to 

exit the remainder of the position. 

However, to perform this analysis, 

the trading strategy must consist of set 

procedures — as opposed to discretionary 

procedures, which cannot be 

back tested. Don’t think you will 

know when to pick a “good” entry 

signal vs. a “bad” one. If you think 

you will be able to determine in realtime 

trading which buy setups will 

work and which won’t, you’re setting 

yourself up for emotional turmoil and 

poor decision making. 

This analysis is best applied to trading 

strategies that reverse when an 

entry signal in the opposite direction 

occurs. If the strategy uses a predeter- 


1 

1 

2 

Swing 

is down 

1.2870 

1.2860 

1.2850 

1.2840 

1.2830 

1.2820 

1.2810 

1 

Swing 

is up 

2 

Valley is broken 

Trend is now down 

1 

2 

Swing 

is down 

Peak is broken 

Trend is now up 

Swing 

is up 

1 2 


1 

2 

1 

Swing 

is down 

2

mined profit limit, for example, the 

MFE analysis will be cut short. 

Testing a swing-trading 

strategy 

A strategy for trading 45-minute bars 

of the EUR/USD will be used to illustrate 

the application of MFE and MAE 

analysis. The strategy tracks the market 

trend, and if the trend is up, it buys 

after a pullback has occurred. If the 

trend is down, the strategy goes short 

after a rally. 

The trend is determined using a 

concept devised from Gann swing 

trading: If the market makes three consecutive 

higher highs, the “swing” is 

up until the market makes three consecutive 

lower lows, at which point 

the swing is down. The trend turns up 

when price breaks above (by a certain 

number of ticks) a previous resistance 

point established by a swing peak. The 

trend turns down when a previous 

support level formed by a swing bottom 

is broken by a certain number of 

ticks. 

This strategy uses a two-bar swing 

rule. Figure 3 is an example of a buy 

setup. If the trend is up, go long when: 

1. The market pulls back by forming 

a pivot low and then trading 

five pips above the high of the 

low bar, which is the setup bar. 

(The setup bar cannot be the high 

bar of the recent uptrend and 

entry cannot occur at the trend’s 

previous high or new high.) 

2. If not filled in the next bar when 

the bar is an inside bar, the buy 

signal moves to five pips above 

the high of the inside bar, which 

becomes the new setup bar. 

3. If filled, place an initial stop five 

pips below the setup bar’s low. 

4. If long, once a bar makes a low 


FIGURE 4 — SELL SETUP 

Sell setups reverse the rules of long trades. If the trend is down, the system 

goes short when the market rallies and forms a pivot high. 


1 2 Pivot high 

3 

Exit 

Short 

1 

Pivot high 

2 

3 

Short 

5/3/05 


FIGURE 5 — MFE AND MAE ANALYSIS 

The gain was 15 pips, but the average MFE was 20 pips. This implies some 

trades had open profits that vanished by the time the positions were exited. 

Points (pips) 

0.0080 

0.0060 

0.0040 

0.0020 

0.0000 

-0.0020 

-0.0040 

-0.0060 


Exit 

MFE MAE P/L 

1.2865 

1.2860 

1.2855 

1.2850 

1.2845 

1.2840 

1.2835 

1.2830 

1.2825 

1.2820

TRADING STRATEGIES continued 

TABLE 1 — INITIAL INTRADAY SWING-TRADE SYSTEM RESULTS 

Testing the swing strategy over two weeks of 45-minute EUR/USD bars resulted in 25 trades (eight winners vs. 16 losers 

and one breakeven) with an overall loss of 107 pips. The average winner was a 15-pip gain and the average loser was a 

14-pip loss. 

Date Time Open High Low Close # L/S Entry MFE MAE Exit P/L 

4/18/05 1:30 1.2904 1.2908 1.2877 1.2881 1 S 1.2899 0.0026 -0.0005 1.2887 0.0012 

4/18/05 13:30 1.2964 1.2999 1.2956 1.2998 2 L 1.2987 0.0057 -0.0019 1.3018 0.0031 

4/18/05 21:00 1.3010 1.3021 1.3007 1.3020 3 L 1.3020 0.0011 -0.0012 1.3008 -0.0012 

4/19/05 1:30 1.3014 1.3032 1.3008 1.3027 4 L 1.3030 0.0005 -0.0017 1.3013 -0.0017 

4/19/05 9:00 1.3034 1.3036 1.2996 1.3003 5 L 1.3036 0.0000 -0.0045 1.2991 -0.0045 

4/19/05 19:30 1.3030 1.3057 1.3022 1.3055 6 L 1.3036 0.0041 -0.0005 1.3051 0.0015 

4/20/05 0:00 1.3060 1.3065 1.3054 1.3059 7 L 1.3070 0.0012 -0.0007 1.3070 0.0000 

4/20/05 6:45 1.3067 1.3076 1.3057 1.3063 8 L 1.3076 0.0000 -0.0023 1.3053 -0.0023 

4/20/05 13:30 1.3043 1.3046 1.2988 1.2996 9 S 1.3033 0.0046 -0.0022 1.3055 -0.0022 

4/20/05 18:00 1.3085 1.3098 1.3077 1.3094 10 L 1.3092 0.0011 -0.0016 1.3080 -0.0012 

4/21/05 0:00 1.3085 1.3106 1.3078 1.3100 11 L 1.3095 0.0016 -0.0007 1.3094 -0.0001 

4/21/05 22:30 1.3056 1.3059 1.3040 1.3051 12 S 1.3041 0.0024 -0.0016 1.3039 0.0002 

4/22/05 19:30 1.3053 1.3076 1.3044 1.3071 13 L 1.3059 0.0017 -0.0004 1.3055 -0.0004 

4/25/05 8:15 1.3027 1.3035 1.3016 1.3030 14 S 1.3016 0.0062 -0.0017 1.2977 0.0039 

4/25/05 15:00 1.2976 1.2978 1.2952 1.2973 15 S 1.2966 0.0014 -0.0022 1.2988 -0.0022 

4/25/05 22:30 1.2995 1.2999 1.2984 1.2988 16 S 1.2988 0.0013 -0.0013 1.3001 -0.0013 

4/26/05 7:30 1.3006 1.3010 1.2982 1.2990 17 S 1.2995 0.0030 -0.0003 1.2990 0.0005 

4/26/05 14:15 1.2993 1.2997 1.2973 1.2988 18 S 1.2975 0.0032 -0.0013 1.2971 0.0004 

4/26/05 23:15 1.2988 1.2991 1.2978 1.2982 19 S 1.2976 0.0013 -0.0003 1.2979 -0.0003 

4/27/05 9:45 1.2922 1.2923 1.2909 1.2915 20 S 1.2910 0.0001 -0.0024 1.2934 -0.0024 

4/27/05 15:00 1.2974 1.2982 1.2955 1.2967 21 S 1.2955 0.0037 -0.0016 1.2943 0.0012 

4/27/05 20:15 1.2933 1.2936 1.2923 1.2931 22 S 1.2927 0.0016 -0.0007 1.2928 -0.0001 

4/28/05 5:15 1.2923 1.2931 1.2917 1.2926 23 S 1.2917 0.0000 -0.0019 1.2936 -0.0019 

4/28/05 17:15 1.2914 1.2916 1.2889 1.2895 24 S 1.2895 0.0016 -0.0005 1.2900 -0.0005 

4/29/05 10:30 1.2958 1.2972 1.2953 1.2963 25 L 1.2968 0.0005 -0.0020 1.2948 -0.0020 

above the setup bar’s high, thes top moves up to five 

pips below the low of the most recent bar or, if a 

pivot-low forms, five pips below thepivot low. 

Figure 4 shows a sell setup which reverses the rules of a 

long trade. 

Table 1 contains the results of testing this strategy over 

two weeks of 45-minute EUR/USD bars. The system 

assumes the moment a bar closes, the position can be 

entered at the same price on the next bar. 

There were only eight winning trades (16 losers, 1 

breakeven), for a total loss of 107 pips. The average winner 

was 15 pips and the average loser was 14 pips. However, 

the average MFE was 20 pips and the average MAE was 14 

pips. This implies some trades had open profits that vanished 

by the time they were exited. 

Figure 5 shows the profit/loss (P/L), MFE, and MAE for 

all the trades sorted by MAE. The majority of the large losing 

trades had very little, if any, positive MFE and most of 

these trades had MAEs larger than -20 pips. This suggests 

setting the maximum stop-loss point at 20 pips could reduce 

the size of the worst losses without giving up profits. 

The average MFE was 20 pips, and trades reached an open 

profit of 10 pips or more 76 percent of the time. Taking this 

information into account and setting a 10-pip target and a 20pip 

stop for each trade, a second back-test resulted in the 

equity line shown in Figure 6. Using the MFE-MAE analysis 

to set trade management parameters transformed this losing 

system to a profitable one on a hypothetical back-test. 

This is only the first step — the research and development 

of the procedures. The next step would be to review 

more data (from a different period), as these parameters 


and procedures may be working only 

because of a volatility level unique to 

0.0120 

the particular time period that was 

tested. (This article has shown “in- 

0.0100 

sample” development of trading 

parameters and procedures. Applying 

0.0080 

these to other price data is called “out- 

0.0060 

of-sample” testing.) 

Also, keep in mind that volatility 

0.0040 

does trend. Therefore, procedures that 

worked or did not work two years ago 

0.0020 

will not necessarily perform similarly 

0.0000 

today. The lesson is that once you have 

settled on a trading approach based on 

-0.0020 

both in-sample and out-of-sample 

testing, this MFE and MAE analysis 

should be performed on real-time 

trades on a regular basis. Then you can 

adjust your procedures to exploit the current market conditions. 

When you are trading in real-time you can compare how 

well you are executing your strategy under the pressure of 

real-time conditions vs. what the procedures call for you to 

be doing. This ongoing training process helps raise your 

trading skills to a level above trading on hunches. 

Moving beyond simple trade setups 

Developing trading strategies goes well beyond finding setups 

to generate buy and sell signals. The results of using maximum 

Other articles by Thom Hartle detailing MAE and MFE 

analysis: 

“On-target trading,”(Active Trader, July 2001). 

Taking profits is a balancing act: Hold on too long and you 

risk giving back your gains. Get out too soon and your 

gains might not be worth holding on to. You can establish 

intelligent profit targets by using a scientific approach. 

“Taking the guesswork out of stop orders,” (Active Trader, 

October 2001). Stops work best when they are based on 

thorough understanding of market conditions. Here’s 

analysis you can use to make your stops more effective. 

“The method trader,” (Active Trader, April 2004). 

The trading world is filled with truisms and generalities, but 

there are no magical indicators or secret recipes when it 

comes to trading well. Profitable trading is grounded in how 

you approach your trading. 

FIGURE 6 — REVISED SYSTEM RESULTS 

Using the information from Figure 5 and setting a 10-pip target and a 20-pip 

stop for each trade resulted in the equity line shown in Figure 6. The system 

was transformed from a losing to a winning approach. 

Points (pips) 

1 3 5 7 9 11 13 

Trades 

15 17 19 21 23 25 

Related reading 

favorable excursion and maximum adverse excursion analysis 

led to developing procedures for managing the risk and taking 

profits at more opportune points than simply waiting for the 

market to reverse direction enough to stop you out. 

The most valuable lesson is that having tested procedures 

moves you from worrying about what the market will do 

and toward taking the appropriate action based on what the 

market actually does. 



More information on the Gann swing trading technique: 

“Retracement tendencies,” (Active Trader, March 2004). 

Learn how to objectively define trends and retracements, 

and use the Gann swing technique to find patterns in price 

behavior. 

More information on system testing: 

“The optimization trap,”by Dennis Meyers (Active Trader, 

November 2001). Learn how to conduct realistic out-ofsample 

testing and avoid historical back-testing pitfalls. 

Special notice: From August 1 to 31, these articles will be 

available for 30 percent off through the Active Trader online 

store (www.activetradermag.com/purchase_articles.htm). 

You can download them directly to your computer as PDF 

files for easy viewing and printing. 



Unlike the stock market, 

which can be affected 

by many companyspecific 

factors, the 

currency market is almost uniformly 

focused on macroeconomic trends. 

In the stock market, prices can rise 

in the morning on good news from 

Microsoft only to collapse later in the 

day on a warning from General 

Motors. In the currency market, however, 

price moves driven by major fundamental 

adjustments are more likely 

to continue. As a result, many traders 

like to buy breakouts and sell breakdowns 

with the goal of capturing 

additional price movement in the 

direction of the original price thrust. 

If it was truly that simple, however, 

every forex breakout trader would be a 

multi-millionaire. In reality, the breakout 

trade, like every setup, requires 

nuanced understanding and proper 

Progressive 

entry technique 

A staggered trade-entry approach allows you to be more flexible 

and structure your trade depending on market developments. 

BY BORIS SCHLOSSBERG 

planning and execution to be profitable. 

The trade-management approach 

outlined here, which enters a 

position incrementally based on price 

movement after the initial trade signal, 

should provide you with some ideas 

for your own trading. 

Fibonacci ratios 

and dividing by three 

Human beings love to classify things 

into threes. Drinks come small, medium, 

and large. Steaks are prepared 

rare, medium, and well-done. We 

In reality, the breakout trade, like every setup, 

requires nuanced understanding and proper 

planning and execution to be profitable. 

often take two steps back to take one 

step forward. This natural inclination 

to divide things into thirds applies to 

trading as well. 

Most traders are aware Fibonacci 

ratios are present in everything from 

the organization of flower petals to the 

optimum spacing of facial f e a t u res. The 

two most common Fibonacci ratios are 

38.2 percent and 61.9 percent. 

Although some traders attach an 

almost mystical importance to 

Fibonacci numbers, there is a far more 

pragmatic approach to these percentages: 

They essentially divide price 

action into thirds. 

Fibonacci ratios can be used to 

apply an incremental entry technique 

that helps reduce risk. 

Trend or countertrend 

You can use Fibonacci ratios regardless 

of whether you enter a position expecting 

immediate continuation or if 

you’re trading on a pullback. Because 

trend trading is usually a more common 

technique for most traders, let’s 

look at that approach first. 

Say you spot a strong breakout on 

an hourly chart of the Euro/U.S. dollar 

rate (EUR/USD). Although it’s impossible 

to be sure the move will follow 

through, a trend trader would go long 

in anticipation of further upside price 

movement. 

To trade this setup, you could use 

the following technique: Enter only 

half your total trade size on the breakout, 

add a quarter more if the trade 

goes your way at 138.2 percent of the 

initial breakout move, and enter the 


final quarter at 161.8 percent of the 

move. 

For example, if the high of the 

breakout bar was 1.3250, the length of 

the breakout candle was 100 pips and 

you wanted to commit a total of 20 

mini lots (requiring approximately 

$2,000 in margin) to the trade, you 

would do the following: 

1. Buy 10 lots at 1.3250 (initial 

level). 

2. Buy 5 lots at 1.3288 (the low of 

the breakout bar plus 138.2 

percent of the length of the bar). 

3. Buy 5 lots at 1.3311 (the low of 

the breakout bar plus 161.8 

percent of the length of bar). 

Average cost = 1.3275. 

4. Place a sell stop-loss order at 

1.3150 (low of the breakout bar). 

This strategy is known as “pressing 

the trade” and is a variation of an idea 

in Josh Lukeman’s book The Market 

Maker’s Edge (McGraw-Hill, 2003). 

This concept has several advantages. 

First, it minimizes risk by committing 

only half the capital at the beginning of 

the trade. In this case, if the trade 

moves against the position, you would 

lose only $1,000 instead of the full 

$2,000 investment. On the other hand, 

if the trade becomes profitable, you 

would add 50 percent more capital to 

the trade without significantly increasing 

your average cost. 

Reversing the process: 

Averaging down 

The same entry strategy can be 

reversed to add to a trade at more 

favorable prices in a pullback situation. 

Let’s use the same example but 

assume there is strong chance of a 

retracement. You would make an initial 

purchase of five mini lots (one- 

quarter of the total position) at 1.3250, 

add another five lots at 1.3212 (a 38.2percent 

retracement of the move) and, 

finally, add the remaining half of the 

trade — 10 lots — at 1.3188 (a 61.8-percent 

retracement of the move). Overall, 

the position would look like this: 

1. Buy 5 lots at 1.3250 (initial level). 

2. Buy 5 lots at 1.3212 (38.2 percent 

retracement of the entry bar). 

3. Buy 10 lots at 1.3188 (61.8 

percent retracement of the entry 

bar). Average cost = 1.3209. 

4. Stop 1.3150. 

In this case, using a stop of 1.3150 

and target 1.3350, you would earn 

$1,410 for every $590 of risk if the 

move retraced all the way to 61.8 

Fibonacci level. Indeed, the trade 

would already be profitable even if 

price simply returned to the initial 

entry point. 

A note on paying the spread 

Unlike many other financial markets, 

retail spot forex trading is almost 

always a spread market — that is, you 

buy at the offer and sell at the bid, 

always paying the spread between the 

two as a transaction cost. For that reason 

alone, successful scalping is 

extremely difficult in spot forex. 

For example, assume you enter a long 

scalp trade with an expected profit of 10 

pips and a stop-loss 10 pips below the 

entry point. If you pay a typical threepip 

spread, you could earn only seven 

pips profit but you stand to lose 13 pips 

if the trade goes against you. 

Potential drawbacks 

Every trading approach has its drawbacks. 

In the first example, you are 

vulnerable to a quick reversal if price 

just reaches the 161.8-percent target 

level and then quickly falls back 

through the original entry level — and 

perhaps through the stop — resulting 

Unlike many other financial markets, retail spot 

forex trading is almost always a spread market — 

that is, you buy at the offer and sell at the bid, 

always paying the spread between the two as 

a transaction cost. 

in a larger loss than if you had simply 

entered all at once at the original price 

of 1.3250. In the second example you 

are vulnerable to being under-invested 

if price moves favorably right away 

and over-invested in a losing position 

if it doesn’t. 

Ultimately, these strategies can help 

you to better manage positions by 

responding to market action. As 

Lukeman contends in his book, professionals 

understand prices are always 

fluid and they never make the mistake 

of committing all their speculative 

capital to a single price point. 





“G” meetings: Do they move the market? 

With the annual G7/G8 meeting scheduled for early July, 

we look at how these summits tend to impact the U.S. dollar. 

Of the many economic numbers 

and market events forex 

traders tend to monitor, the 

annual Group of Seven/Group of Eight 

(G7/G8) meetings, which are summits 

of many of the world’s most economically 

influential nations, tend to get less 

attention than more frequent events 

such as the monthly employment 

report. 

The G8 meeting this month has 

attracted little attention outside the narrow 

range of economic policy wonks 

and currency desk traders, but there is 

evidence these gatherings can be tied to 

certain behavior patterns in the U.S. 

dollar. 

Is the G7 — or G8, depending on 

who’s involved — a major event to the 

currency market? And how can currency 

traders take advantage of meeting 

days, regardless of the meeting’s outcome? 

History of the G8 

The G8 has its roots in the 1973 oil crisis 

and subsequent global recession. It led 

the U.S. to form the Library Group, a 

gathering of senior financial officials 

from the U.S., Europe, and Japan, to discuss 

economic issues. In 1975 French 

President Valéry Giscard d’Estaing invited 

the heads of state of six major industralized 

democracies to a summit and 

proposed regular meetings. 

The participants agreed to an annual 

meeting organized under a rotating 

presidency, forming what was then the 

Group of Six: France, West Germany, 

Italy, Japan, UK, and the U.S. At the following 

year’s summit in Puerto Rico, it 

became the Group of Seven (G7) when 

Canada joined. 

Following the end of the Cold War in 

1991, Russia (then the USSR) began to 

meet with the G7 after the main summit. 

Russia was allowed to participate 

more fully beginning at the 1998 

Birmingham summit. At the urging of 

former U.S. President Bill Clinton, the 

BY DAVID BUKEY AND CARLISE PETERSON 

Group of Seven became the Group of 

Eight, because the Russians began 

attending most sessions. 

The presidency of the G8 rotates 

among the member states annually, 

with the new president assuming 

responsibility on the first of the year. 

The country holding the presidency 

hosts a series of less important meetings 

leading up to a mid-year, threeday 

summit with the heads of state. 

This year, the summit will be held July 

6 to 9 in Gleneagle, Scotland. 

They discuss health, law enforcement, 

labor, and other issues of mutual 

or global concern. Some meetings feature 

only the original G7, and there also 

is a “G8+5” meeting for the finance 

ministers of the full G8, as well as 

China, Mexico, India, Brazil, and South 

Africa. 

The annual summits are often the 

focus of anti-globalization movement 

protests, such as what occurred at the 

27th G8 summit in Genoa in 2001. 

The location of the summit meetings 

rotates annually among member coun- 

Average gain/loss (%) 

0.15 

0.10 

0.05 

0 

-0.05 

-0.10 

-0.15 

-0.20 

tries in the order in which each nation 

joined the group: France, U.S., UK, 

Germany, Japan, Italy, Canada, Russia. 

Impact on the U.S. dollar 

To determine how currency markets 

have behaved surrounding annual 

meetings of the G7/G8 countries, we 

analyzed the Federal Reserve’s nominal 

U.S. dollar major currencies index 

around each of these 30 events since the 

group’s formation in 1975. 

Figure 1 shows the average daily gains 

or losses on the 10 days before the summit, 

each of the meeting’s three days 

(MDs 1 to 3), and the 10 subsequent 

days. 

Overall, the U.S. dollar tended to 

slide in anticipation of meetings. The 

dollar sold off in the second week prior 

to these events and then traded sideways 

on the five days leading up to 

them. The index fell an average 0.36 

percent from the 10th to the seventh 

day, but moved less than 0.05 percent 

(up or down) from the sixth day to the 

day before meetings. 

FIGURE 1 — ANNUAL MEETING’S INFLUENCE ON THE U.S. DOLLAR 

Although the Fed's U.S. dollar major currencies index tended to sell off the second 

week prior to annual G7 meetings since the group's 1975 founding, it went 

nowhere in the five days leading up to the event. However, the greenback rose 

an average 0.12 percent on the day following the meeting's end before it fell 0.20 

percent the next day — the largest move (up or down) in the analysis window. 

U.S. dollar major currencies index before/after G7/G8 meetings 

(1975 to 2004) 

Day -10 

Day -9 

Day -8 

Day -7 

Day -6 

Day -5 

Day -4 

Day -3 

Day -2 

Day -1 

MD 1 

MD 2 

MD 3 

Day 1 

Day 2 

Day 3 

Day 4 

Day 5 

Day 6 

Day 7 

Day 8 

Day 9 

Day 10 

Days before, during (MD 1, MD 2, MD 3), and after G7/G8 meetings 


The dollar’s most intriguing pattern 

appeared after the summit: It climbed 

an average 0.12 percent on day 1 before 

dropping off a cliff the next day (-0.20 

percent) — the study’s largest daily 

move in either direction. Although the 

index headed higher in the remaining 

eight days, it posted gains on just five 

of those days and no distinct pattern 

emerged. 

Table 1 divides the analysis period 

into three sections: The 10 days prior to 

the summit, its three-day duration, and 

the following 10 days. The table compares 

each day’s average performance 

to its median and shows its benchmark 

(a loss of less than 0.01 percent) as well 

as maximum and minimum moves. 

Standard deviations and percentage of 

gains are also shown. 

The U.S. dollar’s average values 

match their medians, which implies 

Figure 1’s gains and losses are fairly 

accurate. However, there are two exceptions 

to this rule. For instance, day -4’s 

median is more bullish than its average 

(0.12 vs. -0.02 percent, respectively), and 

the opposite scenario occurred on day 3 

(-0.09 vs. 0.08 percent). 

Each day’s percentage of gains also 

reinforces the U.S. dollar’s pattern of 

slumping prior to G7 meetings and 

rebounding, somewhat, after them. For 

example, eight of the 10 days before 

these events have a win percentage of 

less than 50 percent, which means the 

index is likely to lose ground during 

this period. Similarly, five of the subsequent 

10 days have win percentages 

greater than 50, and day 2’s biggest loss 

(0.20 percent) also has just a 33.33-percent 

change of losing ground. 

This year’s meeting 

The G8 met in June of this year, and 

kept up pressure on developing Asian 

economies to adopt market-based 

exchange rates. But the meeting produced 

no clues as to when China will 

relax the peg of its renminbi currency to 

the dollar. This topic is expected to be 

the center of huge debate at the meeting 

in July. 

Traders have said, judging from the 

reduction in dollar/yen positions, that 

it appears the threat of Chinese revaluation 

still remains. This is especially 

true following China’s announcement 

of plans to attend the G8 Summit. 

Traders do not seem to be worried 

about a slide in the dollar before the 

July meeting (the dollar was up for the 

week as of June 30), but some say they 

are cautious about the days leading up 

to the summit. Edinburgh, Scotland, 

will likely shut down during the 

protests that routinely accompany G8 

meetings, as a local business leader 

called on businesses to close amid security 

fears. Financial institutions such as 

the Royal Bank of Scotland and 

Standard Life are seen as likely targets 

of the anti-G8 demonstration. 


TABLE 1 — U.S. DOLLAR STATS 

Overall, these statistics reinforce the U.S. dollar index's pattern of falling in anticipation of G7/G8 meetings and rebounding 

after them. (Day 2's sell-off is one major exception to this rule.) 

Day -10 Day -9 Day -8 Day -7 Day -6 Day-5 Day -4 Day -3 Day -2 Day -1 

Instances 30 30 30 30 30 30 30 30 30 30 

Average: -0.05% -0.12% -0.11% -0.09% -0.02% -0.01% -0.02% -0.04% 0.02% 0.02% 

Median: -0.04% -0.16% -0.13% -0.06% -0.05% -0.03% 0.12% -0.06% -0.02% 0.08% 

Benchmark: 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 

Max: 0.54% 1.26% 0.75% 1.04% 0.89% 0.75% 0.80% 0.93% 1.15% 0.79% 

Min: -1.03% -0.98% -1.28% -1.48% -0.64% -0.66% -1.22% -0.76% -0.97% -1.48% 

Standard deviation: 0.32% 0.39% 0.42% 0.52% 0.34% 0.32% 0.49% 0.39% 0.42% 0.41% 

Pct. > 0: 33.33% 36.67% 33.33% 43.33% 43.33% 43.33% 60.00% 36.67% 46.67% 60.00% 

Meeting Meeting Meeting 

Day 1* Day 2* Day 3* 

Instances 28 16 7 

Average: -0.01% 0.10% 0.07% 

Median: 0.03% 0.07% 0.02% 

Benchmark: 0.00% 0.00% 0.00% 

Max: 0.65% 0.79% 0.61% 

Min: -1.31% -0.61% -0.27% 

Standard deviation: 0.41% 0.48% 0.29% 

Pct. > 0: 50.00% 62.50% 57.14% 

* Not all G7/G8 meetings have lasted three days. MDs 1 to 3 have 

less than 30 instances because they track the U.S. dollar’s gains and 

losses during days in which the G7/G8 met and the U.S. dollar traded. 

Otherwise, the index traded consecutively from Day -1 to Day 1 

(the day preceding and following the summit, respectively). 

Day 1 Day 2 Day 3 Day 4 Day 5 Day 6 Day 7 Day 8 Day 9 Day 10 

Instances 30 30 30 30 30 30 30 30 30 30 

Average: 0.12% -0.20% 0.08% 0.05% 0.01% 0.06% -0.04% 0.14% -0.01% -0.01% 

Median: 0.15% -0.15% -0.09% 0.05% 0.00% 0.02% 0.01% 0.09% -0.02% 0.07% 

Benchmark: 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 

Max: 1.02% 0.59% 1.13% 0.74% 0.80% 1.36% 0.66% 0.96% 1.69% 0.59% 

Min: -0.95% -1.23% -0.56% -1.38% -0.58% -0.97% -0.68% -0.92% -0.78% -1.00% 

Standard deviation: 0.43% 0.44% 0.44% 0.41% 0.36% 0.52% 0.31% 0.40% 0.47% 0.33% 

Pct. > 0: 63.33% 33.33% 43.33% 56.67% 50.00% 56.67% 50.00% 70.00% 36.67% 56.67% 


GLOBAL ECONOMIC CALENDAR JULY/AUGUST MONTH 

Monday Tuesday Wednesday Thursday Friday Saturday 

Legend 

CPI: Consumer Price Index 

ECB: European Central Bank 

GDP: Gross Domestic Product 

FOMC: Federal Open Market 

4 

Japan: Monetary 

base 

11 

Great Britain: 

PPI 

5 6 


Monetary Policy 

Committee meeting 

Germany: Orders 

received and 

manufacturing turnover 

G7 meeting 

12 

Japan: 

Corporate 

goods price 

index 


CPI 

13 

U.S.: Trade 

balance 

Japan: Balance 

of payments 


Employment 

7 

ECB: Governing council 

meeting 

Great Britain: Monetary 

Policy Committee meeting 

Australia: Official reserve 

assets 

G7 meeting 

14 

U.S.: Retail sales; CPI 

Japan: Monetary survey 

Canada: Manufacturing 

survey 

Germany: CPI 

15 

U.S.: PPI 

Germany: 

Bankruptcies 

8 

U.S.: Employment; 

Wholesale 

inventories 

Germany: 

Production index; 

Foreign trade 

G7 meeting 

Italy: Balance of 

payments 

18 19 

20 

21 

22 

23 

Germany: PPI 

25 26 

Japan: Corporate 

service price index 

1 

U.S.: ISM report 

Japan: Account 

balances 

2 

Japan: Monetary 

base 

Australia: Index of 

commodity prices 

Committee 

ISM: Institute for Supply 

Management 

PPI: Producer Price Index 


Capital issues 

Canada: 

Wholesale trade; 

Leading indicators 

27 

U.S.: Durable 

goods 

3 


Monetary Policy 

Committee 

meeting 

U.S.: Leading 

indicators 

ECB: Governing 

council meeting 

28 

Canada: 

Employment 

Germany: 

Employment 

4 

ECB: Governing Council 

meeting 

Great Britain: Monetary 

Policy Committee meeting 

Germany: Orders received 

and manufacturing 

turnover 

1 

U.S.: ISM report 

Japan: Account balances 

Germany: Retail turnover 

Great Britain: Productivity 

Australia: Index of 

commodity prices 

Canada: CPI; 

Retail trade 


GDP 

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


1 6 

9 

29 

U.S.: GDP 

Canada: GDP 

Germany: Retail turnover 

Australia: International reserves 

and foreign currency liquidity 

Italy: International reserves and 

foreign currency liquidity 

5 

U.S.: 

Employment 

Germany: 

Production 

index 

6 

2

CURRENCY FUTURES BY CARLISE PETERSON 

CME engages retail traders 

The Chicago Mercantile Exchange 

(CME) is trying to 

attract the spot foreign 

exchange traders by instituting 

a retail partner program with 

nine futures commission merchants 

(FCMs) in the U.S. and three in Europe 

(UK, Spain, and Denmark). 

The goal is to attract new traders, 

such as active stock traders and cash 

forex traders, into the futures marketplace, 

as well as “extend the life” of 

existing traders, according to Mark 

Omens, associate director of equity 

products at the CME. 

This year the CME is promoting E- 

Mini futures and options and forex 

futures and options. They’ve conducted 

50 live and online seminars this 

year, and they held 23 live workshops 

and 148 online seminars last year. They 

also started a CME seminar of the 

month program which highlights 

upcoming product launches, such as 

exchange-traded fund futures (ETFs), 

as well as topics relevant to the target- 

CURRENCY FUTURES SNAPSHOT 

as of 6/23/05 

The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of each market’s 

liquidity, direction, and levels of momentum and volatility. See the legend for explanations of the different fields. 

Contract Pit Elec Exch Vol OI 10-day % 20-day % 60-day % Volatility 

sym sym move rank move rank move rank ratio/% rank 

Euro FX EC 6E CME 132.8 133.9 -1.62% 42% -4.32% 85% -6.93% 82% .19 / 3% 

Japanese yen JY 6J CME 42.5 135.7 -1.46% 62% -0.45% 7% -1.06% 20% .25 / 7% 

Canadian dollar CD 6C CME 27.2 72.9 1.91% 100% 2.60% 88% -1.23% 31% .53 / 81% 

British pound BP 6B CME 26.4 69.2 -0.25% 24% -1.17% 26% -3.45% 63% .22 / 7% 

Swiss franc SF 6S CME 25.4 60.8 -2.03% 80% -3.64% 69% -6.25% 84% .16 / 5% 

Australian dollar AD 6A CME 15.7 67.1 0.73% 33% 0.96% 35% 0.21% 4% .64 / 85% 

Mexican peso MP 6M CME 11.4 93.2 1.16% 50% 0.30% 12% 4.07% 95% .28 / 22% 

U.S. dollar index DX NYBOT 4.1 23.4 1.23% 42% 3.09% 63% 5.66% 84% .22 / 8% 

Euro / Japanese yen EJ NYBOT 1.1 11.1 -0.15% 0% -3.97% 100% 5.94% 96% .25 / 32% 

Euro / Swiss franc RZ NYBOT 0.8 12.0 0.43% 50% -0.68% 68% -0.68% 52% .38 / 42% 

Note: Average volume and open interest data includes both pit and side-by-side electronic contracts (where applicable). Price activity is based on pit-traded contracts. 

LEGEND: 

Sym: Ticker symbol. 

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

OI: 30-day open interest, in thousands. 

10-day move: The percentage price move from the 

close 10 days ago to today’s close. 





ed audience. The partner firms promote 

the seminars as well. 

“Our definition of an active trader is 

a committed, sophisticated, online 

trader — and an individual whose 

sole income is not just trading, 

necessarily,” Omens says. 

“When you look at retail, it 

could be a [person] who trades 

one to three times a month, or 

every day, all day long. We want 

to provide a sound understanding of 

futures trading for everyone and want 

to help them become better traders.” 

The average retail account lasts just 

12 to 15 months, and most new traders 

don’t make it past six months, Omens 

says. He feels there is a big difference 

between trading in the spot markets 

and trading futures. 

“We need to educate them,” he says. 

“Some [new traders] just start trading 

really recklessly.” 

Omens says the CME’s “Webinars” 

are designed to instill the money-management 

knowledge that makes their 

The “% rank” fields for each time window (10-day 

moves, 20-day moves, etc.) show the percentile rank of 

the most recent move to a certain number of the previous 

moves of the same size and in the same direction. 

For example, the % rank for 10-day move shows how 

the most recent 10-day move compares to the past 

twenty 10-day moves; for the 20-day move, the % rank 

field shows how the most recent 20-day move compares 

to the past sixty 20-day moves; for the 60-day 

move, the % rank field shows how the most recent 60day 

move compares to the past one-hundred-twenty 60day 

moves. A reading of 100% means the current read- 

primary business successful — say, a 

dentist, a small-business owner, an 

analyst, or a retiree. 

“A brokerage will not give you 

rules,” Omens says, which is why 

the exchange wants to work with 

brokerages to educate traders 

and extend the life of existing 

traders. The CME does not give 

trade recommendations, but 

orchestrates seminars on its products, 

the users, and discusses leverage. 

Dan Gramza, the primary CME educator, 

focuses mainly on technical indicators. 

The courses do not offer buying 

or selling tips. 

The CME sends its live Webcasts to 

all of its customers and the brokerage 

firms it has partnered with, and 

archives them as well. Firms that are 

not current partners can access the 

seminars also. 

Eight U.S. brokerages are partners in 

the program, and there are three outside 

of the U.S. in London, Spain, and 

Denmark. 

ing is larger than all the past readings, while a reading 

of 0% means the current reading is lower than the previous 

readings. These figures provide perspective for 

determining how relatively large or small the most 

recent price move is compared to past price moves. 

Volatility ratio/% rank: The ratio is the short-term 

volatility (10-day standard deviation of prices) divided by 

the long-term volatility (100-day standard deviation of 

prices). The % rank is the percentile rank of the volatility 

ratio over the past 60 days. 

This information is for educational purposes only. Currency Trader provides this data in good faith, but cannot guarantee its accuracy or timeliness. Currency Trader assumes 

no responsibility for the use of this information. Currency Trader does not recommend buying or selling any market, nor does it solicit orders to buy or sell any market. There is 

a high level of risk in trading, especially for traders who use leverage. The reader assumes all responsibility for his or her actions in the market. 


INTERNATIONAL MARKET SUMMARY 

FOREX (vs. U.S. DOLLAR) 

Current 

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

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

1 Canadian 0.8102 2.57% -1.39% -0.38% 0.8532 0.7243 9 

dollar 

2 Australian 0.7701 1.45% -0.21% 0.04% 0.7988 0.6852 10 

dollar 

3 Brazilian 0.4215 1.45% 13.31% 12.12% 0.4228 0.3189 1 

real 

4 British 1.8242 0.21% -2.55% -5.46% 1.955 1.7707 15 

pound 

5 Hong Kong 0.1287 0.16% 0.39% 0.16% 0.1288 0.128 4 

dollar 

6 Indian 0.02304 0.04% 0.56% 0.48% 0.02309 0.02145 2 

rupee 

7 Taiwanese 0.03192 -0.34% 0.38% 2.69% 0.03253 0.02801 3 

dollar 

8 New Zealand 0.7058 -0.52% -1.22% -1.71% 0.7464 0.6255 11 

dollar 

9 Singapore 0.5973 -0.85% -1.89% -2.09% 0.6186 0.5778 5 

dollar 

10 Japanese 0.009174 -1.05% -2.51% -5.16% 0.00983 0.00889 8 

yen 

11 South African 0.1495 -1.20% -8.09% -18.80% 0.1783 0.1427 16 

rand 

12 Russian 0.03492 -2.00% -3.41% -2.95% 0.03643 0.03414 6 

rouble 

13 Thai 0.02435 -2.01% -6.12% -5.50% 0.02621 0.0239 7 

baht 

14 Swiss 0.7843 -3.14% -6.27% -11.56% 0.8879 0.7775 14 

franc 

15 Euro 1.2086 -3.55% -7.22% -12.01% 1.3667 1.1967 12 

16 Swedish 0.1287 -5.67% -10.49% -16.78% 0.152 0.1276 13 

krona 

As of June 27, 2005 *based on one-month gain/loss 

INTEREST RATES 

Rank Country Rate June 27 1-month 3-month 6-month Previous 

1 Germany BUND 123.59 1.42% 4.73% 4.44% 2 

2 U.S. 10-year T-note 113.3 0.97% 4.55% 1.89% 1 

3 Japan Government bond 141 0.26% 1.49% 2.12% 3 

4 Australia 3-year bonds 94.945 0.17% 0.72% N/A 5 

5 U.K. Short sterling 95.39 0.14% 0.46% 0.15% 4 


NON-U.S. DOLLAR FOREX CROSS RATES 

Currency 1-month 3-month 6-month 52-week 52-week 

Rank pair Symbol June 27 gain/loss gain/loss gain/loss high low Previous 

1 Canadian $ / Euro CAD/EUR 0.6706 5.91% 5.44% 10.38% 0.6743 0.5962 7 

2 Aussie $ / Euro AUD/EUR 0.6373 4.82% 6.54% 10.75% 0.6424 0.5643 10 

3 Real / Euro BRL/EUR 0.3488 4.79% 19.12% 21.53% 0.3488 0.2625 2 

4 Aussie $ / Franc AUD/CHF 0.9823 4.47% 5.72% 10.39% 0.9908 0.8635 9 

5 Pound / Euro GBP/EUR 1.5091 3.58% 4.38% 5.98% 1.52 1.4057 14 

6 Canadian $ / Yen CAD/JPY 88.3406 3.56% 1.09% 4.53% 89.7805 78.0564 12 

7 Aussie $ / Yen AUD/JPY 84.004 2.53% 2.26% 5.01% 85.01 74.49 16 

8 Real / Yen BRL/JPY 45.9557 2.44% 15.42% 16.43% 42.0039 34.3301 5 

9 Canadian $ / Pound CAD/GBP 0.4442 2.36% 1.13% 4.80% 0.454 0.397 6 

10 Pound / Yen GBP/JPY 199.15 1.37% 0.13% 0.05% 205.94 189.5 20 

11 Real / Pound BRL/GBP 0.2311 1.25% 15.45% 16.66% 0.2317 0.1748 1 

12 Aussie $ / Pound AUD/GBP 0.4222 1.23% 2.27% 5.19% 0.4275 0.382 8 

13 Franc / Euro CHF/EUR 0.6489 0.37% 0.77% 0.42% 0.6632 0.6394 13 

14 Real / Aussie $ BRL/AUD 0.5476 -0.02% 13.50% 12.09% 0.5555 0.4532 3 

15 Aussie $ / Canadian $ AUD/CAD 0.9512 -1.10% 1.18% 0.44% 0.9837 0.8863 15 

16 Real / Canadian $ BRL/CAD 0.5206 -1.11% 14.50% 12.49% 0.5306 0.4212 4 

17 Franc / Yen CHF/JPY 85.5137 -2.10% -3.68% -6.09% 91.6645 85.1568 19 

18 Euro / Yen EUR/JPY 132.02 -2.27% -4.38% -6.31% 141.59 130.6 17 

19 Franc / Pound CHF/GBP 0.4304 -3.28% -3.55% -5.69% 0.4647 0.4274 11 

20 Franc / Canadian $ CHF/CAD 0.9687 -5.83% -4.81% -11.12% 1.1054 0.9636 18 

1-month 3-month 6-month 52-week 52-week 

Rank Country Index June 27 gain/loss gain/loss gain/loss high low Previous 

1 Egypt CMA 1794.79 9.47% 10.72% 32.63% 1801.98 898.55 3 

2 India BSE 30 7151.08 6.20% 9.90% 8.92% 7228.21 4723.04 5 

3 Canada S&P/TSX composite 9998.09 3.79% 4.65% 7.11% 10075.01 8116.15 10 

4 Hong Kong Hang Seng 14176.04 3.25% 4.17% -0.13% 14339.06 11862.68 14 

5 Australia All ordinaries 4191.2 2.80% 1.42% 3.39% 4275.6 3479.3 11 

6 Mexico IPC 13454.73 2.40% 4.47% 4.72% 13931.32 9789.42 1 

7 Singapore Straits Times 2206.71 2.36% 2.50% 7.06% 2230.56 1839.33 9 

8 Japan Nikkei 225 11414.28 1.94% -3.04% 0.45% 11988.12 10545.89 13 

9 Germany Xetra Dax 4523.82 1.75% 3.98% 6.38% 4637.34 3618.58 2 

10 U.K. FTSE 100 5043.5 1.13% 2.40% 4.87% 5121.9 4283 8 

11 France CAC 40 4157.68 0.62% 1.91% 6.40% 4246.43 3452.41 6 

12 Switzerland Swiss Market 6191.1 0.49% 4.13% 8.17% 6307.7 5264.5 7 

13 Italy MIBTel 24280 0.19% -0.92% 3.37% 25155 19733 12 

14 Brazil Bovespa 25226 -0.11% -5.85% -2.82% 29584 20351 15 

15 U.S. S&P 500 1190.69 -0.68% 1.62% -1.20% 1229.1 1060.72 4 

Rank Country 2004 Ratio* 2003 2005 + 

1 Hong Kong 15.872 9.6 16.182 16.254 

2 Taiwan 19.013 6.2 29.266 22.619 

3 Japan 3.7 3.7 136.238 157.223 

4 Germany 96.411 3.6 51.755 110.467 

5 Canada 26.044 2.6 17.048 28.299 

6 Denmark 3.459 1.4 6.337 5.043 

7 France -5.41 -0.3 4.987 -9.854 

8 Italy -24.818 -1.5 -21.942 -23.906 

GLOBAL STOCK INDICES 

ACCOUNT BALANCE 

Rank Country 2004 Ratio* 2003 2005 + 

9 U.K. -47.044 -2.2 -30.627 0.53 

10 Spain -49.159 -5.0 -23.553 -54.304 

11 U.S. -665.938 -5.7 -530.669 -724.49 

12 New Zealand -6.042 -6.2 -3.284 -6.919 

13 Australia -39.389 -6.4 -30.242 -38.934 

Totals in billions of U.S. dollars 

*Account balance in percent of GDP; + Estimate 

Source: International Monetary Fund, World Economic Outlook 

Database, April 2005 


EUROPE 

GLOBAL NEWS BRIEFS 

Preliminary data on the United Kingdom’s Q1 2005 

economy showed 0.6-percent growth over the previous 

quarter and 2.8 percent from the first quarter of 2004. The 

nation’s jobless rate fell 0.1 percent between February and 

April to 4.7 percent, a rate that matched the same period in 

2004. 

France’s April unemployment rate remained at 10.2 percent, 

a 0.2-percent increase over the same month a year earlier. 

According to France’s National Institute for Statistics and 

Economic Studies (INSEE), France has entered “a less 

robust growth phase,” as indicated by low GDP growth in 

Q1 and punctuated by a softening of French exports. Even 

though France is experiencing “dynamic domestic demand 

in the form of household consumption, house purchases, 

and corporate investment,” an economic upturn is unlikely 

to happen until after Q2. 

“Inflation is expected to stabilize at around 1.5 percent 

Q2, permitting a rise in purchasing power in 2005 similar to 

that of 2004 and growth in consumption of a little more than 

2 percent,” says the INSEE. “The principal uncertainty 

hanging over this outlook is a failure of France’s continental 

neighbors to spur growth in domestic demand. The probability 

of such a failure would be increased if oil prices rise.” 

Germany’s April jobless rate fell 0.4 percent to 11.6 percent 

from the month before, but was 1.3 percent above the 

rate of April 2004. 

In a surprise move, Sweden’s central bank cut the country’s 

benchmark index rate by 50 basis points to an all-time 

low of 1.5 percent. The Riksbank said falling GDP growth, 

both in Sweden and in the Eurozone, contributed to its decision. 

The European Central Bank is being pressured to cut 

overall rates in the eurozone. 

ASIA & THE SOUTH PACIFIC 

Japan’s April unemployment rate dropped 0.1 percent 

compared to the previous month and fell 0.2 percent compared 

to April 2004. 

For the first time, China will allow certain foreign 

institutional investors to participate in its futures market. 

“China’s futures market is short of big institutional players,” 

said China’s Securities Regulatory Commission (SRC) 

director of futures supervision Yang Maijun. “Development 

of the market hasn’t caught up with investors’ demand.” 

China is also considering introducing market makers in 

trading between the renminbi and the U.S. dollar. The 

move is considered one of the first steps in China moving 

toward a more flexible renminbi. 

Between March and May, Hong Kong’s preliminary 

jobless rate decreased 0.2 percent from the December- 

February period and fell 1.3 percent compared to the same 

period last year. 

Australia’s Q1 economy rose 0.7 percent compared to 

Q4 and 1.9 percent in year-to-year comparisons, boosted by 

growing inventories and increases in household final consumption 

expenditure. The country’s jobless rate for May 

stabilized at 5.10 percent, which was 0.4 percent lower than 

in May 2004. 

AMERICAS 

Argentina’s economy grew 7.0 percent from the previous 

year, while the country’s May unemployment rate increased 

0.9 percent from the previous month. However, the jobless 

rate was down 1.4 percent compared to May 2004. 

Brazil’s May GDP increased 0.3 percent over the previous 

month and rose 2.9 percent compared to the same 

month in 2004. The country adjusted its accumulated GDP 

for 2004 to 4.9 percent, representing growth of 4.6 percent. 

The nation’s April jobless rate remained constant at 10.8 

percent, 2.3 percent lower than April 2004. 

Canada’s economy for the first quarter of 2005 grew 1 

percent compared to the previous quarter and increased 6.3 

percent compared to Q1 2004. The country’s jobless rate 

stayed stable at 7 percent, a 0.4-percent decrease from May 

2004. 

AFRICA 

Africa’s first-quarter 2005 GDP rose 3.5 percent compared 

to the previous quarter and increased 3.7 percent 

year-on-year. The growth is attributed mostly to gains in 

finance, real estate, and business services. 


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FOREX DIARY 

Short-term short trade sets up 

within longer-term uptrend. 

TRADE 

Date: Wednesday, June 29, 2005. 

Entry: Short the U.S. dollar/Swiss franc 

(USD/CHF) at 1.2825. 

Reason(s) for trade/setup: On June 

24, the USD/CHF rate marked its eight consecutive 

week of higher highs — a period 

during which it gained more than 600 

points. Similar patterns in the past have 

been followed by down moves over the next couple of 

weeks, although testing showed the distinct potential for 

future gains on a longer-term basis. 

As described in this month’s Spot Check, virtually every 

off-the-shelf momentum oscillator — e.g., the stochastic 

and RSI on the daily chart — has been showing the market 

as overbought, although the chart also reveals how long 

these signals can persist without the expected price correction 

occurring. 

Nonetheless, these conditions suggest technical traders 

who are already long will be looking to take profits on any 

sign of weakness, while others will go short — especially 

since the currency pair has approached the notable resistance 

level implied by the July and August 2004 highs. 

These factors should support the probabilities of the historical 

pattern testing. As noted, though, we will prepare to 

reverse and go long in anticipation of a resumption of the 

uptrend after this correction. Virtually every long-term 

trend-following system is long this currency pair, and it will 

take a larger correction than the one anticipated by this 

trade for them to reverse. However, if that happens, we are 

prepared to ride the market lower with a trailing stop. 

TRADE SUMMARY 

U.S. dollar/Swiss franc (USD/CHF), daily 

Resistance level from August to September 2004 highs 

Stochastic slow 

RSI 

Initial stop: If the currency pair breaks above the resistance 

level, it’s likely to make a run at the “round number” 

of 1.3000, so we’ll place the initial stop at 1.3045. 

Initial target: 1.2575, which is 10 pips above the June 17 

low; secondary target is 1.2420, 10 pips above June 8 low. 

RESULT 

Exit: Position still open. 

Profit/loss: -.0051. 

Short at 1.2825 

Initial target 

Secondary target 

May June July 

Trade executed according to plan? So far. 

Lesson(s): The market, not surprisingly, pushed above 

the resistance level not long after we entered the position. 

Although this is likely to trigger a fair amount of immediate 

technical buying, it does not negate the analysis that initiated 

the trade. 

Date Rate Entry Initial Initial IRR Exit Date P/L LOP LOL Trade 

stop target length 

6/29/05 USD/CHF 1.2825 1.3045 1.2575 1.14 1.2876 6/29/05 -.0051 .0012 -.0051 — 

(MTM) (0.4%) 

Legend: IRR — initial reward/risk ratio (initial target amount/initial stop amount); LOP — largest open profit (maximum available profit 

during lifetime of trade); LOL — largest open loss (maximum potential loss during life of trade); MTM — marked to market price. 


1.31 

1.30 

1.29 

1.28 

1.27 

1.26 

1.25 

1.24 

1.23 

1.22 

1.21 

1.20 

1.19 

100 

80 

60 

40 

20 

100 

80 

60 

40 

20 

Source: TradeStation

KEY CONCEPTS AND DEFINITIONS 

Moving average convergence-divergence (MACD) 

Although it is often grouped in with oscillators, 

the MACD is more of an intermediate-term 

trend indicator (although it can reflect overbought 

and oversold conditions). 

The default MACD line (which can also be plotted as a 

histogram, as is the case in the accompanying article) is created 

by subtracting a 26-period exponential moving average 

(EMA) of closing prices from a 12-period EMA of closing 

prices; a nine-period EMA is then applied to the MACD 

The Fibonacci series 

The Fibonacci series is a number progression in 

which each successive number is the sum of the 

two immediately preceding it: 1, 2, 3, 5, 8, 13, 21, 

34, 55, and so on. 

As the series progresses, the ratio of a number in the 

series divided by the immediately preceding number 

approaches 1.618, a number that is attributed significance 

by many traders because of it appearance in natural phenomena 

(the progression a shell’s spiral, for example), as 

well as in art and architecture (including the dimensions of 

the Parthenon and the Great Pyramid). The inverse, .618 

(.62), has a similar significance. 

Some traders use fairly complex variations of Fibonacci 

numbers to generate price forecasts, but a basic approach is 

to use ratios derived from the series to calculate likely price 

Bob Dorman 

Ad sales East Coast and Midwest 

bdorman@activetradermag.com 

(312) 775-5421 

line to create a “signal line.” 

Allison Ellis 

Ad sales West Coast and Southwest 

aellis@activetradermag.com 

(626) 497-9195 

MACD = EMA(C,12)-EMA(C,26) 

Signal line = EMA(MACD,9) 

Standard buy signals are given when the MACD crosses 

above its signal line (preferably when the indicator is at a 

relatively high level, reflecting an overbought condition); 

the opposite is true for sell signals. 

targets. 

For example, if a stock broke out of a trading range and 

rallied from 25 to 55, potential retracement levels could be 

calculated by multiplying the distance of the move (30 

points) by Fibonacci ratios –– say, .382, .50, and .618 –– and 

then subtracting the results from the high of the price move. 

In this case, retracement levels of 43.60 [55 - (30*.38)], 40 [55 

- (30*.50)] and 36.40 [55 - (30*.62)] would result. 

Similarly, after a trading range breakout and an up move 

of 10 points, a Fibonacci follower might project the size of 

the next leg up in terms of a Fibonacci ratio –– e.g., 1.382 

times the first move, or 13.82 points in this case. 

The most commonly used ratios are .382, .50, .618, .786, 

1.00, 1.382, and 1.618. Depending on circumstances, other 

ratios, such as .236 and 2.618, are used. 

Three good tools for targeting customers . . . 

— CONTACT — 

Mark Seger 

Account Executive 

mseger@activetradermag.com 

(312) 377-9435 

July 2005 • CURRENCY TRADER 43

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