Forex Trading system and the mundo currency

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.