Monthly Archives: December 2010

In a blog post from Sunday, Adam Kritzer suggests that volatility in the Forex market continues to run high. This is based on a look back over the last five years (though the chart he shows only goes back four). I decided to take a longer look and instead of using options implied volatility, I went with actual range-based volatility.

The chart below shows the USD Index (cash version) going back to 2001. The sub-plot is of the Normalized Average True Range (N-ATR) indicator. Basically, the N-ATR takes the 14-period average High-Low range and divides it by the 14-period average closing price to get the range expressed as a % of the average. That allows for easier comparison across markets and timeframes.

As we can see on the chart, weekly ranges averaged between about 1.5% and 2.5% from 2001 to 2006. It dropped sharply into mid-2007, then took off to above 3% during the height of the financial crisis. The green line on the chart is the 5-year moving average of the N-ATR, which currently comes in below 2%. Since the current N-ATR is above that, we have agreement with Adam's comments about volatility. Interestingly, though, N-ATR has recently dipped back below the mid-point (50% retracement level) of the wide range of N-ATR valued between the 2007 low and the 2009 high.

It must be noted, though, that volatility varies among the pairs. The USD Index is very heavily weighted toward the EUR (57.6%). That means the volatility for the index is generally going to be very close to that of EUR/USD. As we can see from the weekly USD/JPY chart below, however, in some places the volatility is below average.

Notice how N-ATR for USD/JPY has fallen below the 5 year moving average. Interestingly, though, in this case N-ATR never got as low (about 1.5% vs. about 1.0% for the index) and got much higher at the peak. It currently is about the same level.

It's a similar case for GBP/USD.

Again, here was saw a higher low and a higher high, and now we've see N-ATR move below the 5-year average and into the lower 30% or so of the high-low range. We're also looking at N-ATR getting close to where it is for the USD Index.

The takeaways from all this are:

  1. Volatility in the Forex market can vary significantly between pairs
  2. Volatility is falling in some pairs, but not in others. That has implications for the way different pairs trading heading into the new year.
  3. N-ATR can be used to compare volatility across pairs to help identify good trading opportunities and/or helping you allocated funds to different Trade Leaders.

Hope your holidays have treated you well. Best of luck with your trading and trader development in 2011.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

1 Comment

The Bank for International Settlements (BIS) does a survey every three years to gauge flows in the forex market. The 2010 version of the report estimates average daily forex volume at $4 trillion. You can see the full report (PDF) here. I'd like to take a look at one particular element of it, though. Specifically, I want to focus on what the BIS said about the fastest growing area, namely the "Other Financial Institutions", which basically means those who fall outside the inter-bank dealers who are part of the survey underlying the report. That, by the way, is the area where retail forex comes into play.

Here's the chart included in the BIS report showing how the "Other" group now represents the largest share of the market. This is thanks to 42% growth from the 2007 survey.

It's worth noting that the Other group has been climbing at the expense of the Reporting group for some time now. As the BIS noted in the report, this can be attributed to the rapid structural change in the forex market toward more electronic trading. As anyone who was trading forex circa 2000 can attest, trades were mainly executed manually back then – the "dealing desk" model. The first broker I ever used was basically a voice broker. I could put orders in over the website, but the trades were executed by people. These days it's almost completely electronic, with little human intervention. This rapid evolution is part of what pulled so many traders into forex in the 2000s, that and the issues with the stock market following the burst of the Tech Bubble.

Naturally, the often talked about High Frequency Trading (HFT) also plays a part. Algo-based trading systems of all kinds have been developed to take advantage of the electronic market. Some of them are dealing systems like EBS. Many are run by hedge funds and the like. But it's not just the big players who are involved in algo trading. Retail traders can do the same thing with so called Expert Advisors (EAs) which trade automatically based on a programmed system. Heck, even the Currensee Trade Leaders program could be considered an algo strategy since the individual account-holder doesn't do anything to execute trades.

There are many other interesting observations in the report. They include discussions of how the forex market is consolidating at the top, the impact of the financial crisis on forex volume, and all kinds of other slicing and dicing of the figures for those with an interest in the structure of the market. I definitely recommend giving it a look.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

At some point early in a new trader's development there comes the question "Which currency pair should I trade?" There are a few considerations involved. Let's walk through them.

Trading time frame

Generally speaking, the longer the trading time frame a trader is looking to operate in, the more pairs should be included in their trading plan. There's two main parts to this factor. One is the fact that the more short-term you trade the more specific attention you are likely to need to give to each pair you trade. High frequency intraday traders (scalpers, etc.) generally can only focus on one or two pairs. Longer term traders have the time to look at many of them.

The other factor is trading opportunities. Short-term traders can usually get plenty of trading opportunities out of a small number of pairs, but longer-term traders need a larger number to ensure they get enough quality chances. Think about a position time frame trader who is looking for trend following options. In any given pair there may only be a couple of trades a year, which is going to make performance very choppy. Tracking a larger number of pairs will tend to mean more trades and more consistent trading.

Trading style

Some pairs are more suitable for certain types of trading than others. For many years the JPY pairs were excellent for trend trading, while GBP/USD has long been a notorious counter-trend mover. The variations in these sorts of patterns will tend to mean some pairs have characteristics more suited for how a trader wants to trade than others. Matching the two up will take some experimentation on the trader's part.

Be aware, though, that markets do change. A pair that exhibited one set of characteristics for a long time can change. Sometimes it happens fairly suddenly, and sometimes the change is only temporary. Usually, though, changes in the trading characteristics of a pair are caused by some kind of shift in the bigger macroeconomic picture. For example, many pairs went from relatively low volatility, range-oriented patterns in the middle 2000s to more volatile and trendy in the latter part of the decade thanks to the financial crisis and related developments. This is something to always be monitored.

Volume, Volatility, and Liquidity

For the most part, the forex market has more than sufficient liquidity to allow ready trading in all the major pairs and crosses. Once you venture into the realm of more regional and emerging market currencies, however, things get trickier. Spreads can be very wide and the markets can be very choppy because of the low volume in those pairs. The vast majority of new traders would do well to keep away.

Minor pairs aside, there are considerations in terms of deciding on what pair or pairs to trade based on the time of day being trading for those looking to intraday or short-term trade. Pairs are always going to be more active during the primary trading day of the currencies involved. For example, the AUD and NZD will be most volatile and active during the Asian session. AUD/USD and NZD/USD will certainly move at other times of day based on the influencing factors on the USD, but when Sydney and Wellington are active, with data and news items being released, things are going to be that much more exciting in terms of short-term volatility.

The USD, of course, is a special case. It can and will react to all kinds of developments through the whole of the trading day. As a result, trading USD pairs will be suitable for just about all traders.

Trading account denomination

One of the harder things for new traders to wrap their heads around is often the accounting where trading a pair that doesn't involve the currency their account is denominated in. For example, EUR/GBP is complex for a US-based trader because of the requirement to translate profits and losses from EUR or GBP back into USD. To keep things simple from that perspective, it's probably best to start off focused only on pairs which have at the account currency as part of the pair.

Bringing it all together

Generally speaking, new forex traders are going to want to stick to the major pairs to avoid thin markets and high spreads. They will want to focus on pairs where one of the currencies is the same as their account currency. If day trading is the intended path, then picking pairs which tend to move during the time of day traded will be important. Similarly, short-term traders will want to narrow their focus down to a small number of pairs, but longer-term traders can look at many. Then it comes down to finding a pair or pairs which suit the style of trading the trader intends on using, which is going to require some testing and experimentation.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

Our friends at FXstreet, who is by far the leading portal for unique information regarding Forex has launched this week a new website which is a lot cleaner and faster to use.

I have to say that I've been using the site daily and moving the navigation to the top does make the overall site much more readable and the improvement in the loading speed is definitely noticeable - great work!

The thing I like most about FXStreet is the fact that they bring unique and well thought out content and they have done it daily for more than 10 years. This is impressive given most of their competitors are just aggregating data and are merely SEO maniacs.

Keep up the good work.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

This video is too funny to watch. And apparently catching Bernanke lie on National TV is a new national sport.

Apparently, for those of you who thought otherwise, the Quantitative Easing II which is the sequel to Quantitative Easing I is simply a computer adjustment. It shows companies having less debt than they actually do - sounds like money printing to me.

The Daily Show With Jon Stewart Mon - Thurs 11p / 10c
The Big Bank Theory
www.thedailyshow.com
Daily Show Full Episodes Political Humor The Daily Show on Facebook

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Senator Bernie Sanders from Vermont gave a very passionate speech regarding the US economy comparing the US to a banana republic where the majority of the money and the power is concentrated with a very small percentage of the population who also control the government. This is a must see speech if you are interested in the economy, in the US, or if you have the slightest perception that things in the US are getting better.

Main takeaways from the speech.

  • Top 1% of the population earn 23.5% of all income which is more than the bottom 50%
  • 80% of all new income created between the 1980's and today went to the top 1%
  • CEOs on Wall Street are earning more money today than they've earned before the bailout
  • $700B in tax break was given to the top 2%

When Bernanke was asked by CBS's 60 minutes about the growing gap between the rich and the poor this was his answer:

Q: The gap between rich and poor in this country has never been greater. In fact, we have the biggest income disparity gap of any industrialized country in the world. And I wonder where you think that’s taking America.

A: Well, it’s a very bad development. It’s creating two societies. And it’s based very much, I think, on– on educational differences The unemployment rate we’ve been talking about. If you’re a college graduate, unemployment is five percent. If you’re a high school graduate, it’s ten percent or more. It’s a very big difference. It leads to an unequal society and a society– which doesn’t have the cohesion that– that we’d like to see.

I have to say that in my view, greed and the accumulation of wealth is a predatory phase and though a lot of people in the US make a lot of money the country as a whole is losing. The reduction in social services like health education and social security for elderly are only increasing the gap between the rich and the poor and are assuring that even college graduates will have a hard time affording the cost of living if they try to give their children the same quality of life they have.

If anyone is looking at the public companies filing or Wall Street as any indication that the US is stepping out of the crisis, they should take a closer look. Not only are things not getting better but they are getting worse every day.

Latest unemployment report that was released Friday indicates that unemployment continues to grow. As a country that manufactures everything in China and relies so much on consumer spending in the GDP, high unemployment is a very bad thing.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

2 Comments

Asaf did a bit of a ranting in his recent Are you listening to the "Experts" post. That's encouraged me to get something off my own chest as well, something along the same lines.

You see, I spend my day watching the markets and listening to the folks on CNBC trying to explain what's driving the markets. I use the term "trying" intentionally because they certainly aren't getting it right in many cases. The one I keep hearing is that the movement in the dollar is driving the action in the stock market. Stocks rally on a weak dollar. Stocks fall on a strong dollar. Give me a break!

Stocks/Dollar Linkage

Let's first take a look at the rolling 1 month correlation between the stock market and the dollar. The chart below compares the performance of the S&P 500 to that of EUR/USD over the last year.

First thing to notice is that the two markets have swung back and forth between being highly positively correlated (stocks and dollar moving in opposite directions) and pretty negatively correlated (stocks and dollar moving in the same direction) several times. Moreover, in 2010 they haven't held correlations on either side of the range for very long before swinging back in the other direction.

More importantly, though, correlation does not mean causation. Just because US stocks and the dollar are going in opposite direction, as has been harped on so many times in the media, it doesn't mean one is causing the other. It more likely means they are both reacting to the same underlying factors.

The Same Driver, Different Actions

Think about the stock/dollar relationship. What would cause stocks and the dollar to move at the same time? That would be money moving into the dollar from abroad and being invested in the stock market, or the reversal of that process. In either case stocks and the dollar move in the same direction.

Now why would stocks and the dollar move independently? Stocks could move because of action involving money already in dollars – US data, earnings releases, interest rate expectations, etc. The dollar could move because of money being exchanged for trade purposes or investment activity outside stocks (Treasuries, real estate, etc.).

So what have we been seeing in the markets over the last year or so? We've seen risk aversion trading in some cases. That's when money piles into the USD as a safe haven. It doesn't go in to stocks. It goes into Treasuries. At the same time, nervous investors already in dollars are taking money out of stocks and putting them in to safer investments. So what we have is one motivating factor (risk aversion) causing stocks to fall and the dollar to rise basically independent of each other, but in a correlated fashion.

We've also seen the QE trade in the dollar. That's where folks move money out of the dollar for fear that increased money supply via the Fed printing money to purchase securities will lower the greenback's value and lead to inflation. It's simple supply/demand analysis. When you increase the supply of something you decrease its value. QE is seen as increasing the supply of dollars, so the USD's value drops. The QE trade causes money to flow out of the dollar, which means foreign flows (on net) cannot be moving into stocks, so we have no dollar-related reason for stocks to rise. They are moving for their own reasons (better earnings prospects, lower interest rates, etc.), but again, linked to a similar underlying driver.

Follow the Money

My point is this: think these things through. If you are looking at the markets from a fundamental point of view you need to think in terms of the flow of money. Investment flows are a big driver, so you have to understand the implications of different events and development in those terms to really understand what's underpinning the market's action. Follow the money. It's a simple thing folks on CNBC don't seem to be able to do.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

1 Comment

Goldman Sachs published last week that their 2010 Top Currency Trades Were 'Unsatisfactory'. Thomas Stolper, a London based economist for GS recommended to buy the zloty against the Japanese yen which lost 15.6 percent, and also recommended to buy the pound against the New Zealand dollar which lost 12.5 percent. Nice one Thomas - please update us all on the 2011 recommendations.

The main thing I take away from this is that the so called "professional" analysts do not have any advantage in the Currencies market, they can't get exclusive access to decision makers like they do in the equities world and they are basically consuming the same information everyone with an internet connection can get at exactly the same time.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

While the Currensee Trade Leaders™ Investment Program may be the right investment choice for you, not every Trade Leader is right for each investor. I’ve put together some tips to help you get the most out of the Trade Leaders program:

  • Assess each Trade Leader. Look closely at each Trade Leaders’ performance and risk to help ensure you’re choosing Leaders who most closely match your investment style and needs.
  • Zoom in on performance. When viewing the Profile Performance graphs for each Trade Leader, you’ll notice that, above the graph, you can view the actual change in equity over the time period being shown. The number is above the graph next to the ticker being tracked.
  • View trade frequency. To see how often a Trade Leader typically trades, view their profile and change the view. The default view is 3 months, but zoom in to view ten days, thirty days or specify a custom time period.
  • Diversify, diversify, diversify! Take steps to build a well-balanced, diverse portfolio of Trade Leaders including a variety of strategies, risk and trading styles.
  • Think longer-term. Try not to think in terms of buying high and selling low. Plan to follow a Trade Leader for some time before making changes. Remember, on average even the most successful Trade Leaders lose some of the time.
  • Allocation is key. Lastly, make sure you’re making the most of your money – as your account grows be sure to re-allocate your funds. Funds that are not allocated are a missed opportunity as when your funds are not invested in a Trade Leader, you miss the chance to see returns.

Remember, the team and I are here to help you, so if you have questions, feel free to reach out to us at team@currensee.com and we’ll do our best to answer any specific questions you have about the Currensee Trade Leaders™ Investment Program.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

1 Comment

In our latest newsletter we spoke about some of our new Trade Leaders. In case you missed the article here is a summary of some of our newest Trade Leaders, welcome aboard!

Currensee is excited to welcome Ajay Atwaney (AJACO.A), ICTC Inc. (ICIXK.A), and DJ McCrosky (DJMRS.A) as the newest additions to the Currensee Trade Leaders™ Investment Program. These three Trade Leaders signify the ongoing Currensee effort to recruit high quality global professional traders, while at the same time expanding diverse allocation options for our investors. These traders join the program after, in some cases, months of evaluation and assessment.

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Ajay Atwaney is a professional trader based in the United Arab Emirates who utilizes technical indicators such as Elliot Wave Theory, Fibonacci, and Gann. Historically, Ajay’s results have been nothing short of spectacular. He has been able to amass a 72% cumulative return over the life of the Trade Leaders program, while maintaining relatively low volatility of 2%. As you can see, his TAI score ranks 2nd on the Trade Leaders Leaderboard and his risk score ranks 7th. Ajay offers a great a combination of risk versus reward, while maintaining a low minimum capital requirement of $2,000.

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ICTC Inc. is a professional trading group from Minnesota (USA) that has been in operation since 2008, and their overall experience dates back to the late 1990’s. ICTC Inc. focuses on various technical indicators in many of the major currencies with a distinct edge in the EUR/USD. ICTC Inc. seeks scalping opportunities raging from 8-50 pips. As for returns, ICTC has generated a cumulative return of 22% with 0.95% volatility and an amazing 79% win rate since the launch of the Trade Leaders program. ICTC's philosophy is to never take a trade they don’t believe in just for the sake of trading. ICTC Inc. is available to all investors with a $1,000 minimum capital requirement.

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DJ McCrosky, residing in the United States, DJ has been trading for a decade and focuses on initiating positions in AUD/USD and GBP/USD. DJ employs technical analysis for his trading decisions and primarily targets 45-90 pips per position. DJ is a highly disciplined trader who manages risk closely, focusing on 1-3 trades per week. This strategy has been highly successful historically, returning 81% with a 2.9% volatility since the program launched. DJ is accessible to all investors with a $1,000 minimum capital requirement.

I am extremely excited about the additions of Ajay, ICTC Inc., and DJ to the TLIP as they offer a range of trading strategies and minimum capital requirements that empower investors with new choices in investment opportunities.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.