The Mundo is a pragmatic concoction of co-author Jim Bickford and represents a syn-
thetic global spot currency. In some ways it is analogous to the U.S. Dollar Index
(ticker symbol DX), which is an openly traded futures contract offered by the New
York Board of Trade since 1973. The U.S. Dollar Index is computed using a trade-
weighted geometric average of the forward futures contracts of the six currencies
listed in Table 23.1.
IMM currency futures traders monitor the U.S. Dollar Index to gauge the dollar’s
overall performance in world currency markets. If the U.S. Dollar Index is trading
lower, then it is very likely that a major currency that is a component of the Index is trading higher.
INTERNATIONAL CURRENCY UNIT
Stock and commodity traders have numerous composite indices which can be used as
barometers in the selection of which securities to trade. Outside of the U.S. Dollar Index, spot currency traders have none. For that purpose, we created the hypothetical
currency, the International Currency Unit, and nicknamed it the Mundo for short. We
will give it a fictitious ISO (International Standards Organization) designation of
“ICU.” The Mundo will be used to define the arithmetic average of a selection of spot
currency pairs.
MUNDO CALCULATION
In this study of U.S. major currency pairs, we will restrict our selection of Mundo components to EURUSD, GBPUSD, USDCHF, and USDJPY.
The first step is to ensure that the USD is the quote currency in each pair, which
means the arithmetic reciprocal must be substituted for the USDCHF and USDJPY
pairs.
The second step is to convert all exchange rates to integral pip amounts. This
means multiplying 10,000 times the exchange rates for the EURUSD, GBPUSD, and
CHFUSD pairs. Multiply the JPYUSD by 100,000.
The final step is to sum the four pairs and divide by four. To convert the pips back toan exchange rate, divide by 10,000.
Because the Mundo is an aggregate currency, it is natural to think that anomalies
in the individual component currency pairs would be smoothed over for the most
part. Yet a closer examination of the Mundo chart shows that anomalies appear to be
accentuated.
MUNDO DIFFERENTIAL CHART
The Mundo Differential Chart is a new addition to the technical analysis of spot cur-
rency pairs. Its purpose is to determine the degree of divergence that one USD major
currency pair deviates from the Mundo currency comprised of the EURUSD, GBPUSD,
CHFUSD, and JPYUSD pairs. (See Figures 23.2 through 23.5.)
In the upper portion of Figure 23.2 are two curves, one solid and one dotted. The
solid line represents the daily closes in the EURUSD currency pair after the first
close in the time series has been subtracted from all the subsequent closes. The same
is true for the dotted line except that it represents the Mundo currency. This scalingoperation coerces both time series to start at the same point on the left side of thechart.
USAGE
The differential chart is experimental and still requires thorough testing. One observation is that when the scaled major currency pair exceeds an arbitrary number of pipsabove the scaled Mundo currency, an upward trend is indicated. The converse appears true for a downward trend also.
Leader/lagger relationships (also called dominance and dependence) may also be
detected by the use of the Mundo differential chart. (See Figure 23.6.)
The authors are currently involved in writing online software that will test the deviation of a single currency pair from the Mundo as a potential market entry indicator.
The difficulty is that, while arbitrage opportunities are frequently present, they are usually very short-lived.
Lastly, the authors wish to state that the readers should not restrict themselves to
trades that involve only the major currencies. There are numerous trading opportunities with the minor currency pairs also (such as the Canadian Dollar, the Australian Dollar, the New Zealand Dollar, the Swedish Krona, the Hong Kong Dollar, the Singapore Dollar, and several others). In fact, many of these exhibit greater volatility than the major currency pairs. The disadvantage, though, is their diminished liquidity. So it is expedient to schedule trading sessions during periods of peak activity when dealing with the minor currency pairs.
Monday, November 5, 2007
Forex Trading system and precious metals
Universal fascination with gold is an obvious understatement. All Forex and futures
traders are very intrigued about the correlation between precious metal prices and currency prices.
The ISO (International Standards Organization) designation for gold is XAU, where
“X” is the identifier for financial vehicles other than currencies and “AU” is short for aurum, Latin for gold. Spot gold prices are represented in the same manner as Forex currency pairs: base currency on the left and quote currency on the right. XAU is always the base currency in the pair when quoting gold prices. Examples are XAUUSD,XAUEUR, XAUGBP, and XAUCHF.
The streaming spot prices represent what gold customers are willing to pay at the
current moment in time for gold coins, bullion, ingots, bars, wafers, and so on.
Historical data on compact disks for spot gold prices is available through Disk
Trading, Ltd., and the quotes are supplied in the identical format as currency pairs.
Thus upticks and downticks are supplied with time intervals of one minute and
higher.
Major U.S. and British Spot Gold Dealers
Gold Information Network
www.goldinfo.net
Kitco
www.kitco.com
American Precious Metals Exchange
www.ampex.com
Gold Masters
www.goldmasters.com
Gold Prices
www.goldprices.com
London Metal Exchange
www.metalprices.com
Bullion Direct
www.bulliondirect.com
SILVER STATISTICS
Analogous to the gold study above, we will again use the coefficient of variation as an indicator to determine how closely major currencies follow the prevailing price of silver.
It is interesting to note that after the coefficients of variation for both gold and silver were sorted with the highest correlation at the top, the major currencies are in the same order. However, none of the coefficients exhibited enough deviation or uniqueness to devise any hard and fast rules that traders can employ presently. We intend to probe this side venue of currency trading in more detail.
CAVEAT
Both trading in spot precious metals and currency trading have their intrinsic risk/reward factors. Readers should be aware of one interesting historical note on the volatility of silver prices.
In 1973 the Hunt family of Texas began taking delivery on silver futures contracts as
a hedge against inflation when silver was in the $1.95 per ounce range. By 1979, the Hunt brothers (Nelson Bunker and William Herbert), with the assistance of some wealthy Arabs, amassed over 200 million ounces of silver, accounting for nearly half of the world’s deliverable supply.
In early 1980, silver peaked at $54 per ounce, then plummeted on March 17 from
$21.62 to $10.80 in a single day. A combination of changed trading rules on the New
York Metals Market (COMEX) and the intervention of the Federal Reserve brought the
entire fiasco to a close and in 1988 the Hunt brothers were convicted of conspiring to
manipulate the market when their liabilities had grown to $2.5 billion against assets of $1.5 billion.
Amazingly, there is an upside to this rather scary tale. Numerous economists pro-
claim that market prices are merely the result of random walk theory and that technical analysis is simply human folly.
Given the history of silver prices from 1789 to 1973 as a mathematical
database, the likelihood of hitting a price of $54 in the subsequent seven years is not impossible using random walk theory, merely astronomically small. The moral is simple: Never initiate a currency trade without a stop loss limit order. Also, it is not wise to trade securities under SEC investigation regardless of how lucrative they may appear to be.
traders are very intrigued about the correlation between precious metal prices and currency prices.
The ISO (International Standards Organization) designation for gold is XAU, where
“X” is the identifier for financial vehicles other than currencies and “AU” is short for aurum, Latin for gold. Spot gold prices are represented in the same manner as Forex currency pairs: base currency on the left and quote currency on the right. XAU is always the base currency in the pair when quoting gold prices. Examples are XAUUSD,XAUEUR, XAUGBP, and XAUCHF.
The streaming spot prices represent what gold customers are willing to pay at the
current moment in time for gold coins, bullion, ingots, bars, wafers, and so on.
Historical data on compact disks for spot gold prices is available through Disk
Trading, Ltd., and the quotes are supplied in the identical format as currency pairs.
Thus upticks and downticks are supplied with time intervals of one minute and
higher.
Major U.S. and British Spot Gold Dealers
Gold Information Network
www.goldinfo.net
Kitco
www.kitco.com
American Precious Metals Exchange
www.ampex.com
Gold Masters
www.goldmasters.com
Gold Prices
www.goldprices.com
London Metal Exchange
www.metalprices.com
Bullion Direct
www.bulliondirect.com
SILVER STATISTICS
Analogous to the gold study above, we will again use the coefficient of variation as an indicator to determine how closely major currencies follow the prevailing price of silver.
It is interesting to note that after the coefficients of variation for both gold and silver were sorted with the highest correlation at the top, the major currencies are in the same order. However, none of the coefficients exhibited enough deviation or uniqueness to devise any hard and fast rules that traders can employ presently. We intend to probe this side venue of currency trading in more detail.
CAVEAT
Both trading in spot precious metals and currency trading have their intrinsic risk/reward factors. Readers should be aware of one interesting historical note on the volatility of silver prices.
In 1973 the Hunt family of Texas began taking delivery on silver futures contracts as
a hedge against inflation when silver was in the $1.95 per ounce range. By 1979, the Hunt brothers (Nelson Bunker and William Herbert), with the assistance of some wealthy Arabs, amassed over 200 million ounces of silver, accounting for nearly half of the world’s deliverable supply.
In early 1980, silver peaked at $54 per ounce, then plummeted on March 17 from
$21.62 to $10.80 in a single day. A combination of changed trading rules on the New
York Metals Market (COMEX) and the intervention of the Federal Reserve brought the
entire fiasco to a close and in 1988 the Hunt brothers were convicted of conspiring to
manipulate the market when their liabilities had grown to $2.5 billion against assets of $1.5 billion.
Amazingly, there is an upside to this rather scary tale. Numerous economists pro-
claim that market prices are merely the result of random walk theory and that technical analysis is simply human folly.
Given the history of silver prices from 1789 to 1973 as a mathematical
database, the likelihood of hitting a price of $54 in the subsequent seven years is not impossible using random walk theory, merely astronomically small. The moral is simple: Never initiate a currency trade without a stop loss limit order. Also, it is not wise to trade securities under SEC investigation regardless of how lucrative they may appear to be.
Forex Trading System for major currencies and futures
A futures contract is an agreement between two parties: A short position is taken by the party who agrees to deliver a commodity, and a long position is taken by the party who agrees to receive a commodity on a pre-arranged date. For example, a grain farmer would be the holder of the short position (agreeing to sell the grain), while the bakery would be the holder of the long position (agreeing to buy the grain).
In every futures contract, everything is precisely specified: the quantity and quality
(or grade) of the underlying commodity, the specific price per unit, and the date and
method of delivery. The price of a futures contract is represented by the agreed-upon
price of the underlying commodity or financial instrument that will be delivered in the future. For example, in the above scenario, the size of the contract is 5,000 bushels of soft red #2 wheat at a price of 317 cents per bushel, and the delivery date may be the third Wednesday in September of the current year.
The Forex market is essentially a cash or spot market in which over 90 percent of
the trades are liquidated within 48 hours. Currency trades held longer than this are normally routed through an authorized commodity futures exchange such as the Interna-
tional Monetary Market (IMM). It was founded in 1972 and is a division of the Chicago
Mercantile Exchange (CME) that specializes in currency futures, interest-rate futures,and stock index futures, as well as options on futures. Clearing houses (the futures exchange) and introducing brokers are subject to more stringent regulations from the SEC, CFTC, and NFA agencies than the Forex spot market (see www.cme.com and
www.cbot.com for more details).
FUTURES VOLUME AND OPEN INTEREST
Volume is the number of futures contracts traded within a given time period. Open in-
terest is the number of open futures contracts at any given time. Even though the volume and open interest of Forex spot currencies are presently not accessible, it is still possible to compare them with currency futures just as a point of perspective. Table 21.1 summarizes the trading activity of selected futures contracts in currencies, precious metals, and some financial instruments. The volume and open interest readings are intended only to provide a brief synopsis of each market’s liquidity and volatility based on the average of 30 trading days.
Table 21.2 lists the identical contracts but for the date June 4, 2004.
Note that all currency contracts (except the Canadian Dollar) exhibited a signifi-
cant increase in volume and most showed an increase in open interest over the five-
month time frame.
In every futures contract, everything is precisely specified: the quantity and quality
(or grade) of the underlying commodity, the specific price per unit, and the date and
method of delivery. The price of a futures contract is represented by the agreed-upon
price of the underlying commodity or financial instrument that will be delivered in the future. For example, in the above scenario, the size of the contract is 5,000 bushels of soft red #2 wheat at a price of 317 cents per bushel, and the delivery date may be the third Wednesday in September of the current year.
The Forex market is essentially a cash or spot market in which over 90 percent of
the trades are liquidated within 48 hours. Currency trades held longer than this are normally routed through an authorized commodity futures exchange such as the Interna-
tional Monetary Market (IMM). It was founded in 1972 and is a division of the Chicago
Mercantile Exchange (CME) that specializes in currency futures, interest-rate futures,and stock index futures, as well as options on futures. Clearing houses (the futures exchange) and introducing brokers are subject to more stringent regulations from the SEC, CFTC, and NFA agencies than the Forex spot market (see www.cme.com and
www.cbot.com for more details).
FUTURES VOLUME AND OPEN INTEREST
Volume is the number of futures contracts traded within a given time period. Open in-
terest is the number of open futures contracts at any given time. Even though the volume and open interest of Forex spot currencies are presently not accessible, it is still possible to compare them with currency futures just as a point of perspective. Table 21.1 summarizes the trading activity of selected futures contracts in currencies, precious metals, and some financial instruments. The volume and open interest readings are intended only to provide a brief synopsis of each market’s liquidity and volatility based on the average of 30 trading days.
Table 21.2 lists the identical contracts but for the date June 4, 2004.
Note that all currency contracts (except the Canadian Dollar) exhibited a signifi-
cant increase in volume and most showed an increase in open interest over the five-
month time frame.
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