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FOREIGN EXCHANGE NEWS, ANALYSIS AND EDUCATION FOR CURRENCY TRADERS

OPTIONS P r i m e r

P s yc h o l o g y o f
Quantum markets

FOREX leverage
TRADER MAGAZINE Friend or foes ?

PPP
return to
va luat i o n

O s c i l l ato r s a s
Trend indicators

unconventional
monetary
policies
APRIL - MAY 2009
 CONTENTs FX

12
Unconventional Monetary Policies:
how policy makers are shaping the currency markets through confusing
sometimes frantic decisions

Grammatical
evolution:
09
implementing a Fundamentals
trading model of trading
through a promising psychology:
evolutionary

38
Part 1:
computing approach getting prepared to cope with the
laws of Quantum mechanics

05 Editor’s note MARKET WATCH FOCUS

21 If...: when managers of 47 Bonds: why are bonds
MACROECONOMICS traditional UK financial institutions attracting retail and hign net-worth
06 Return to Valuation: how CPI- start looking at the FX market investors?
based Purchasing Parity Power can
make it easy to derive longterm OPTIONS
TECHNICAL ANALYSIS
valuations in FX markets 25 FX Options Primer: using
options as a safer means of hedging or 49 The Magic of Elliot Wave
STRATEGY speculating. Part 1. 23 Majors report
18 Forex Leverage: Friend or Foe? 54 Technical Outlook
The risks of using a high INTERVIEW
degree of leverage on the Forex 38 Robert Marcellus FX Manager INTERNATIONAL DATA
markets explains how he reached a +18,48% 57 FX Spot Monitor
performance in 2008 58 Central Bank Rates
30 Using Oscillators as trend 59 Economica Data - FX Poll
following indicators: an example TRADING SYSTEMS 60 Markets View
of how the Stochastic can be 33 Building Robust FX Trading
used to identify trends on various Systems, by identifying and exploiting
37 glossary
timeframes a small edge, as many times as possible

FX TRADER MAGAZINE April-May 2009 03

 FX CONTRIBUTORS
Alessandro Balsotti, is head of FX trading
in Abax Bank and covered the same role
previously in Banca Caboto. For several
years he has been the FX market-maker
of Italian Lira, Greek Dracma and Czech
Crown in JP Morgan.
Ben Brown, has worked in the FX and
Money Markets for 15 years with some
major Interbank brokers and at one the
UK’s largest independent Broker Dealers,.
With a knowledge of the market from
tier 1 to tier 3 Ben has a fundamental and
somewhat lighter approach to the FX
market.
Grace Cheng is a seasoned forex
trader, and founder and editor of www.
DailyMarkets.com, a leading New York-
based financial blog. She is also author of
“7 Winning Strategies For Trading Forex”
(2007, Harriman House, UK), and the
creator of the online PowerFX Course.
Rodolfo Festa Bianchet is trainer and
traders coach. He is CEO of Riflexo Ltd and
founder of TrendRisk expert system. His
analysis on Forex have been published on
Down Jones Markets private network for
over 10 years. He is regularly invited to run
seminars on Trading Psycholoy at various
financial and trading conferences.
D. Roy Fraser, is the Managing Director of
Incapital Europe Limited, the investment
bank that runs a platform providing
regulated financial intermediaries with
investment-grade bonds, which can be
further explored at incapital.com, internotes.
com and structuredinvestments.com
John Hydeskov, is senior FX strategist at
Danske Bank FX research team. John joined
Danske bank in 2007 and has worked with
G10 FX strategies. He previously worked for
Bank of England Exchange Rate team and
Danis National Bank FX liquidity team.
Steve Jarvis, from TraderMade International
has over 20 years’ experience of providing
technical analysis to FX professionals.
Formerly Chief Technical Analyst at
MCM Currencywatch and Informa Global
Markets, Steve now heads the technical
04 FX TRADER MAGAZINE April-May 2009
analysis at InterpreTA, Tradermade’s newly
launched technical analysis service.
Ashif F. Jiwani, is Head of Derivatives
Trading at Saxo Bank Capital Markets
(Asia). He was previously global head of FX
Options business at CIBC and has spent
8 years at Scotia Bank and CIBC trading
currency derivatives in a market making
capacity.
Editor :
JW Partners is an independent FX solution Emmanuelle Girodet
provider, based in Milan, with a strong editor@fxtradermagazine.com
FX specific know-how. JW supports
institutional investors and HNWI
in building quality FX multimanager Advertising manager:
portfolios, and FX underlying structures. Monique Atlan
ad@fxtradermagazine.com
Caspar Marney, started his trading career,
as a spot currency trader and technical
analyst with HSBC in London. He then Webmaster:
moved to SBC Warburg (later UBS) as Hristo Katzarski
a proprietary trader and global head of webmaster@fxtradermagazine.com
technical analysis for FX and precious
metals, where he became one of the bank’s Graphic design:
most successful traders and a regular
commentator on financial television. Preslav Dobrev
Maurizio Milano, began his career as Editorial support:
forex dealer in 1995. He started the Lorenzo Lorenzi
technical analysis department at Banca Luca Di Bari
Sella Group. He teaches technical analysis
at the University of Turin, Italy. His
contributions can be found in the most
renowned Italian financial newspapers and
televisions: Borsa&Finanza, Il Sole24Ore,
Il Corriere della Sera, Class-CNBC, Trading carries a high level of risk, and may not be
RadioRai1. He is member of SIAT suitable for all investors. The objective of FX Trader
Magazine is to give readers the tools, training and
(the association of the Italian technical information which will help them be better prepared
analysts) and IFTA (the International to trade on the foreign exchange. However, any analysis,
Federation of Technical Analysis). news, research, strategy, or other information contained
on this magazine is provided as general market
information and does not constitute investment advice.
N.Ramakrishnan, better known as
Ramki, is a professional banker and has FX Trader Magazine, will not accept liability for any
been in the treasury business since 1984. loss or damage, including without limitation to, any loss
He has been extensively quoted in Telerate of profit, which may arise directly or indirectly from use
of or reliance on such information.
and Reuters as well as finance journals and
newspapers of repute. Ramki writes a web
blog www.tradewithramki.com and has a
website www.wavetimes.com
Luca Taroni, is a quantitative trading Subscriptions:
system developer. Luca is head of Research www.fxtradermagazine.com
& Development at Luxorlab.
 TECHNICAL ANALYSIS FX

The Magic of Elliott Wave Analysis

“Can anyone parlay a $10,000 capital into $1,000,000 in a year? In five years?
If so, how do you do it and what are the risks involved?” – Robert Balan

I have been practicing Elliott Wave Analysis for over 25 (We have already reached 1.3498) but the daily chart points
years, and have made some astounding calls that came true. to a significant recovery, perhaps reaching as high at 1.6170
But I cannot honestly say that I was able to turn a mere before down. Of course, there are several risk levels on the
$10,000 into a million dollars. Yet, I can confidently say way, for example, it might run into considerable selling
that there are very few technical approaches to dealing with pressure near 1.4900.
the uncertainties of the market place as efficiently as does But let us first look at the monthly chart and see how the
the Elliot Wave Principle. waves unfolded. Let us suppose that we are now in the early
I am not going to give you 1990s and have already
the rules and guidelines seen the first big move from
governing the practice of 1.0520 to 2.0045 (Point A).
Elliot Wave Theory. There When the second attempt
are ample resources in the failed to sustain above
web that you can access at that level, we should have
the click of your mouse. anticipated a swift move
What I will do, instead, is down. Remember that the
to give you one example third step of any progression
now, and show you how is always a powerful move.
the magic of Elliot Wave We could have easily
Principle works in the calculated that a 61.8%
Forex market. retracement of the Wave
You see here two charts “A” would lie at 1.4158. The
of Sterling Pound (GBP/ move actually finished at
USD). The first is a 1.4063. Next consider the
monthly chart going back “c” wave that went from
to the early 1980s. The 1.7366 to 1.3677. Believe
second is a daily chart going to Oct 2007. The beauty of it or not, but that move was just 7 pips short of the 61.8%
Wave Principle is that it works equally well in the monthly measure of the “a” wave. But the wonder doesn’t stop there.
chart as it does in the 5-minute chart! Having said that, I Wave “B” that went from 1.3677 to 2.1161 was only 2 pips
must also add that you should not try to day-trade using the short of 78.6% of wave “A”. The Elliot Wave Principle asks
monthly chart! For example, the monthly chart suggests us to always be on the look out for Fibonacci relationships
that our long-term target for the Pound is around 1.3300 between alternating waves.

FX TRADER MAGAZINE April-May 2009 49

 FX TECHNICAL ANALYSIS
Now let us turn to the daily chart. This is a lot more
interesting. As you can see from the comments on the
chart, one could have placed a low-risk “buy” trade near
1.7450 as it marked a 161.8% projection of the first wave
down. One of the problems that many beginning-analysts
face is how to pick a level and call it the end of a certain
wave? For example, how did I label the 1.7450 level as a
mini wave 3? With
hind sight it all looks
so good, but how on
earth can one figure
out that we will not
break directly down?
(See for example how
the 261.8% level at
1.5628 did not hold).
Welcome to the
real world of Elliott
Waves! The key to
lasting success in the
business of trading is
to be honest to your
paradigm. Follow
your rules (whatever
they may be) to the
letter. The biggest sin that a trader can commit (second only
to not having a stop loss) is to keep changing his rules.
Take a look at the chart again. When you get a fast sell
off, you should calculate various projections and keep them
by your desk. I would have known that 1.7450 was a likely
(but not certain) support. I would not buy there the first
time. Typically in a fast moving market, we will always get a
retest of the lows. If the market stabilized near a Fibonacci
projection at the first try, I would place a small ‘buy’ order
near the prior low with a stop just a few pips below that low.
As you can see, we got a second test of 1.7450 two or three
days after the first try. Since the buying interest was strong
at that level, the trade paid off handsomely. (Another tip:
Depend on daily charts more than hourly charts to figure
out supports and resistances).
Let us look to the future now. Why do I think we could go
higher to around 1.6170? First of all you should understand
that in order to make money, it is not so important to
know the medium term targets as it is to know the general
50 FX TRADER MAGAZINE April-May 2009
direction! So what if we don’t get as far as 1.6170. Most
traders would be just as happy to catch a move to 1.4900.!
Anyway, back to the question. We saw that Wave (2) at
2.097 was a ‘simple’ correction. This means there is a high
probability for wave (4) to be a complex one. We have
already seen that the “B” wave (as labeled by me) is an
irregular one, with the low coming well below the end of
the Wave (3). If you
accept this count as
valid (and remain
truthful to that
count until proved
wrong) then you
should look for the
Wave “C” within the
Wave (4) to go well
above the top of the
wave “A.” Besides,
the second test of
the low seen AFTER
posting the “B” wave
bottom was unable
to break the prior
low. And finally, we
not only saw a strong
move higher, but it has managed to break above a declining
(green colored) downtrend line. These are just some of the
reasons why I am looking for Sterling to continue moving
higher.
It is vitally important to have an open mind about
these things. Consider this. I have a market reputation
and will look silly if the Pound stops climbing and goes
down directly. Should I allow that to bother me? If one
only worries about being ‘correct’ in making market calls,
one will never be a good trader. A trader has to study his
charts and make the most educated prediction about
what will happen next. He should then execute his plan of
action without wavering one bit. This includes having an
affordable stop-loss, as well as plans to take profits along
the way. There is no other way to riches.
Ramki (N.Ramakrishnan)