OHLC AND ACTIVITY CHARTS
In this chapter, we examine historical charts for the years 2000 through 2005 using daily interval data. In the lower portion of each chart, activity is expressed in terms of ticks of the currency pair.
Saturday, November 3, 2007
Forex Trading System- Annual Charts
OHLC AND ACTIVITY CHARTS
In this chapter, we examine historical charts for the years 2000 through 2005 using daily interval data. In the lower portion of each chart, activity is expressed in terms of ticks of the currency pair.
Forex Trading system- History of the Euro Currency
WHY TRADE THE EURO CURRENCY?
The EURUSD is the most actively traded of all pairs available on the Foreign Exchange
markets globally. This fact alone ensures both volatility (that is, prices will fluctuate with sufficient standard deviation to make trading profitable) and liquidity (the ability to enter and exit the market quickly at a specified price).
HISTORICAL PERSPECTIVE
On January 1, 1999, 11 of the countries in the European Economic and Monetary Union
(EMU) decided to give up their own currencies and adopt the new Euro (EUR) cur-
rency: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the
Netherlands, Portugal, and Spain. Greece followed on January 1, 2001. The Vatican City also participated in the changeover. This changeover is now complete.
It is worth noting that any place that previously used one or more of the currencies
listed below has now also adopted the Euro. This applies to the Principality of Andorra, the Principality of Monaco, and the Republic of San Marino. This of course applies automatically to any territories, departments, possessions, or collectivities of Euro-zone countries, such as the Azores, Balearic Islands, the Canary Islands, Europa Island, French Guiana, Guadeloupe, Juan de Nova, the Madeira Islands, Martinique, Mayotte, Reunion, Saint-Martin, Saint Pierre, and Miquelon, to name just a few.
Euro bank notes and coins began circulating in the above countries on January 1,
2002. At that time, all transactions in those countries were valued in Euro, and the “old” notes and coins of these countries were gradually withdrawn from circulation.
ISO stands for the International Standards Organization. Most outgoing pre-Euro
currencies will still be physically convertible at special locations for a period of several years. For details, refer to the official Euro site (www.euro.gov.uk).
Also note that the Euro is not just the same thing as the former European Currency
Unit (or ECU), which used to be listed as XEU. The ECU was a theoretical basket of
currencies rather than a currency in and of itself, and no ECU bank notes or coins ever existed. At any rate, the ECU has been replaced by the Euro, which is a bona fidecurrency.
A note about spelling and capitalization: the official spelling of the EUR currency
unit in the English language is “euro,” with a lower case “e.” However, the overwhelmingly prevailing industry practice is to spell it “Euro,” with a capital “E.” Since other currency names are capitalized in general use, doing so helps differentiate the noun “Euro,” meaning EUR currency, from the more general adjective “euro,” meaning anything even remotely having to do with Europe.
BANKNOTES AND COINS
On January 1, 2002, the euro coins came into circulation. The eight denominations of
coins vary in size, color, and thickness according to their values, which are 1, 2, 5, 10, 20, and 50 cent, or EUR 1 and EUR 2. One euro is divided into 100 cents.
One side of each coin features one of three designs common to all 12 euro area
countries; these designs show different maps of Europe surrounded by the 12 stars of
the European Union.
Sophisticated bi-metal technology has been incorporated into the EUR 1 and EUR 2 coins which, together with lettering around the edge of the EUR 2 coin,
prevents counterfeiting.
Also on January 1, 2002, the euro banknotes were put into circulation with the fol-
lowing stipulations: There are seven new banknotes; they have the same design
throughout Europe; each banknote has a different color and different size; the EUR 5 is the smallest banknote and the EUR 500 the biggest. The banknotes that circulate in denominations of EUR 5, 10, 20, 50, 100, 200, and 500 have pictures of windows, arches, gateways, and bridges on them as well as a map of Europe and the European flag.
14.89 billion euro banknotes have been produced; 10 billion were needed to replace
the national banknotes in circulation and nearly 5 billion are to be held in reserve.
EURO CURRENCY VERSUS EURO DOLLAR
The Euro currency contract is a futures contract of the Euro, the currency in circulation in EMU member nations. The contract size is 125,000 Euros, the minimum fluctuation is $ 0.0001, one point equals $12.50, and contract duration is six months with delivery months in March, June, September, and December.
The Euro dollar futures contract is a time deposit having a principal value of
$1,000,000 with a 3-month maturity and is categorized at the exchange as an interest
rate rather than a currency. It is based upon the number of U.S. dollars deposited in European banks. Trading contracts occur in each calendar month and each point equals $25.00.
Forex Trading System- Tools of forex trading
OVERVIEW
In The Forex Chartist Companion(Wiley, 2006), we introduced several innovative
charting techniques and some new technical analysis tools. In this chapter we review
the ones used in this analysis of the major currency pairs.
It is because of the highly chart-intensive nature of the book that we are com-
pelled to provide very precise definitions of our chart time components to avoid any
confusion.
The time frameof a chart is the overall duration that the chart spans. On the left
side of the chart is the starting date and time and on the right side is the ending date and time. Date and time are represented in the conventional MM/DD/YY HH:MM format. The 24-hour (military) time format is used throughout.
The time intervalof a chart is the equally spaced time unit into which the time
frame is divided. In the case of a vertical OHLC bar chart, the time interval is the width along the x-axis of a single OHLC bar, that is, the amount of time elapsed between the opening quote of the OHLC bar and the closing quote of the same vertical OHLC bar.
ACTIVITY
The concept of activity is employed as a means to evaluate the intrinsic characteristics of a specific currency pair and acts as a surrogate tool for trading volume, a statistic not readily available for spot currencies due to the decentralized nature of Forex markets.
Theoretically, activity represents the number of price changes within a given inter-
val of time. Unfortunately, the activity number does not show the size of each order.
MIDRANGE
Another classical statistic based on the highest high and the lowest low is called the midrange and is the midpoint between the two extremes.
RELATIVE RANGE
Whereas the absolute range described earlier is an excellent tool for use in the analysis
of the internal characteristics within a single individual security, relative range is used to compare the characteristics of two or more similar securities.
The denominator is a critical central point (the midrange in this instance) that con-
verts an individualized statistic into a generalized statistic that is ideal for comparing different sets of similar data. Where absolute range is expressed in terms of pips of the quote currency in the currency pair, relative range is expressed as a percentage and acts as a dimensionless index number. It is this characteristic that permits comparisons between different currency pairs.
A relative range chart differs only slightly from the absolute range chart described
earlier in this chapter: The vertical bars in the lower half of the chart are slightly smoothed, and the lower right scale is expressed in percents instead of pips.
Relative range is a measure of relative volatility and can be used to assist the trader in determining which currency pairs to monitor based on the trader’s predilection for the ubiquitous risk/reward factor. Trading pairs with high relative ranges increases the risk factor while also increasing the likelihood of greater profits.
A high relative range does not mean that a currency pair is more actively traded
than other pairs. Instead, it implies that over time the underlying security prices will travel greater distances from a critical statistical point (in this case, the midrange point).
ABSOLUTE MOMENTUM
Standard momentum (one close minus a previous close separated by lagtime units)
generates a stream of data consisting of both positive and negative numbers whose
mean approaches zero in large samples. To rectify this intrinsic mathematical property, it was necessary to use the absolute value of the momentum data streams. That is, all negative numbers are converted to positive numbers.
Thus, when using absolute momentum, we are not concerned about the direction
of the processed data since all absolute momentum values are positive. We are, how-
ever, very interested in the magnitude of the processed data. Extreme values in an
absolute momentum oscillator inform us at what time of day breakouts are most
likely to occur, although we do not know which direction they will take. This is,
nonetheless, valuable information to traders, particularly for those who subscribe to
trend-following techniques.
STANDARD DEVIATION
Of the several methods of calculating the dispersion of a data set from a central point, we prefer to employ the moving standard deviation as the measurement of volatility.
Statistically, standard deviation is defined
where
x = the sample elements (prices)
n = the sample size (number of prices)
Variance= the sample variance (sum of the deviations squared)
Generally the standard deviation increases as a clear price trend begins emerging in
either direction and decreases when lateral congestion originates. A sharp decline in the standard deviation indicates that a price reversal has begun, after which the standard deviation will again increase regardless of the direction of the trend.
COEFFICIENT OF VARIATION
Just as the standard deviation is a measure of absolute dispersion within a single currency pair, the coefficient of variation is a measure of relative dispersion. The standard deviation is always expressed in terms of pips in the quote currency,
such as dollars, francs, pounds, yen, and so on. The coefficient of variation is expressed as a percentage (or dimensionless index number), which makes it an ideal tool for comparing two or more similar data sets.
Traders should not confuse the coefficient of variation with another statistic called
the coefficient of correlation, which measures how closely the estimated values match
the raw data in a specified regression model, such as a linear, parabolic, sinusoidal, or logistic regression. The coefficient of variation is analogous to relative range, described earlier.
COMPOSITE CHARTS
Another important analytic tool that we introduced in The Forex Chartist Companion
is the composite chart, of which we presented two general types: the Time of Day Chart and the Day of Week Chart (defined by their time span, one day or one week respectively).
Composite charts are constructed by averaging one specific statistical category (ac-
tivity, range, or momentum) over a selected time frame. For example, the daily composite chart in Figure 2.9 illustrates the average range on all Wednesdays between 1/1/2005 and 4/14/2006.
In a similar manner, the weekly composite chart can be constructed by concatenat-
ing the daily charts. In Figure 2.10, the average weekly activity between 1/1/2005 and 4/14/2006 is examined.
Composite charts are designed to assist traders in scheduling their primary trading
sessions. In accordance with our time definitions described at the beginning of this
chapter, the time frame in this chart is Sunday 00:00 through Friday 23:59, or six days. The time interval is measured in one- and two-hour increments.
In The Forex Chartist Companion(Wiley, 2006), we introduced several innovative
charting techniques and some new technical analysis tools. In this chapter we review
the ones used in this analysis of the major currency pairs.
It is because of the highly chart-intensive nature of the book that we are com-
pelled to provide very precise definitions of our chart time components to avoid any
confusion.
The time frameof a chart is the overall duration that the chart spans. On the left
side of the chart is the starting date and time and on the right side is the ending date and time. Date and time are represented in the conventional MM/DD/YY HH:MM format. The 24-hour (military) time format is used throughout.
The time intervalof a chart is the equally spaced time unit into which the time
frame is divided. In the case of a vertical OHLC bar chart, the time interval is the width along the x-axis of a single OHLC bar, that is, the amount of time elapsed between the opening quote of the OHLC bar and the closing quote of the same vertical OHLC bar.
ACTIVITY
The concept of activity is employed as a means to evaluate the intrinsic characteristics of a specific currency pair and acts as a surrogate tool for trading volume, a statistic not readily available for spot currencies due to the decentralized nature of Forex markets.
Theoretically, activity represents the number of price changes within a given inter-
val of time. Unfortunately, the activity number does not show the size of each order.
MIDRANGE
Another classical statistic based on the highest high and the lowest low is called the midrange and is the midpoint between the two extremes.
RELATIVE RANGE
Whereas the absolute range described earlier is an excellent tool for use in the analysis
of the internal characteristics within a single individual security, relative range is used to compare the characteristics of two or more similar securities.
The denominator is a critical central point (the midrange in this instance) that con-
verts an individualized statistic into a generalized statistic that is ideal for comparing different sets of similar data. Where absolute range is expressed in terms of pips of the quote currency in the currency pair, relative range is expressed as a percentage and acts as a dimensionless index number. It is this characteristic that permits comparisons between different currency pairs.
A relative range chart differs only slightly from the absolute range chart described
earlier in this chapter: The vertical bars in the lower half of the chart are slightly smoothed, and the lower right scale is expressed in percents instead of pips.
Relative range is a measure of relative volatility and can be used to assist the trader in determining which currency pairs to monitor based on the trader’s predilection for the ubiquitous risk/reward factor. Trading pairs with high relative ranges increases the risk factor while also increasing the likelihood of greater profits.
A high relative range does not mean that a currency pair is more actively traded
than other pairs. Instead, it implies that over time the underlying security prices will travel greater distances from a critical statistical point (in this case, the midrange point).
ABSOLUTE MOMENTUM
Standard momentum (one close minus a previous close separated by lagtime units)
generates a stream of data consisting of both positive and negative numbers whose
mean approaches zero in large samples. To rectify this intrinsic mathematical property, it was necessary to use the absolute value of the momentum data streams. That is, all negative numbers are converted to positive numbers.
Thus, when using absolute momentum, we are not concerned about the direction
of the processed data since all absolute momentum values are positive. We are, how-
ever, very interested in the magnitude of the processed data. Extreme values in an
absolute momentum oscillator inform us at what time of day breakouts are most
likely to occur, although we do not know which direction they will take. This is,
nonetheless, valuable information to traders, particularly for those who subscribe to
trend-following techniques.
STANDARD DEVIATION
Of the several methods of calculating the dispersion of a data set from a central point, we prefer to employ the moving standard deviation as the measurement of volatility.
Statistically, standard deviation is defined
where
x = the sample elements (prices)
n = the sample size (number of prices)
Variance= the sample variance (sum of the deviations squared)
Generally the standard deviation increases as a clear price trend begins emerging in
either direction and decreases when lateral congestion originates. A sharp decline in the standard deviation indicates that a price reversal has begun, after which the standard deviation will again increase regardless of the direction of the trend.
COEFFICIENT OF VARIATION
Just as the standard deviation is a measure of absolute dispersion within a single currency pair, the coefficient of variation is a measure of relative dispersion. The standard deviation is always expressed in terms of pips in the quote currency,
such as dollars, francs, pounds, yen, and so on. The coefficient of variation is expressed as a percentage (or dimensionless index number), which makes it an ideal tool for comparing two or more similar data sets.
Traders should not confuse the coefficient of variation with another statistic called
the coefficient of correlation, which measures how closely the estimated values match
the raw data in a specified regression model, such as a linear, parabolic, sinusoidal, or logistic regression. The coefficient of variation is analogous to relative range, described earlier.
COMPOSITE CHARTS
Another important analytic tool that we introduced in The Forex Chartist Companion
is the composite chart, of which we presented two general types: the Time of Day Chart and the Day of Week Chart (defined by their time span, one day or one week respectively).
Composite charts are constructed by averaging one specific statistical category (ac-
tivity, range, or momentum) over a selected time frame. For example, the daily composite chart in Figure 2.9 illustrates the average range on all Wednesdays between 1/1/2005 and 4/14/2006.
In a similar manner, the weekly composite chart can be constructed by concatenat-
ing the daily charts. In Figure 2.10, the average weekly activity between 1/1/2005 and 4/14/2006 is examined.
Composite charts are designed to assist traders in scheduling their primary trading
sessions. In accordance with our time definitions described at the beginning of this
chapter, the time frame in this chart is Sunday 00:00 through Friday 23:59, or six days. The time interval is measured in one- and two-hour increments.
Friday, November 2, 2007
Forex Trading System- Understanding Forex Data
OVERVIEW
Every Forex trade involves the simultaneous buying of one currency and the selling of
another currency. These two currencies are always referred to as the currency pair.
The base currency is the first currency in the pair and the second currency in the pair is called the quote currency. The exchange ratedefines how much the base currency is worth in terms of the quote currency.
A common practice in the trade is to describe currency pairs as major currencies,
minor currencies or cross rates. Cross rates are those currency pairs in which neither currency is the U.S. Dollar (USD). In major and minor currencies either the base currency or the quote currency is the USD.
Minor currencies are defined as those currency pairs with low trading activity, while
the major currencies are those currency pairs with the highest trading volume. Different currency brokers list different pairs as being major or minor. On the average, major currencies carry a slightly lower transaction cost due to their high liquidity. We arbitrarily define the major pairs as the U.S. Dollar versus the Euro currency, the British Pound, the Swiss Franc, and the Japanese Yen.
A pip is the smallest unit of price that any currency pair can fluctuate. Nearly all
currency pairs consist of five significant digits, and most pairs have the decimal point immediately after the leftmost digit; for example, EURUSD is displayed as 1.2329. In this instance, a single pip equals the smallest change in the fourth digit to the right of the decimal point, that is, 0.0001. Therefore, if the quote currency in any pair is the USD, then one pip equals 1/100 of a U.S. cent.
Just as a pip is the smallest price movement along the y-axis, a tick is the smallest
unit of time (x-axis) that occurs between two trades. When trading the most active currency pairs during peak trading periods, multiple ticks may and will occur within the span of a single second. In fact, over 300 ticks per second are not unusual in the EURUSD during high-activity periods. When trading minor currencies during low-
volatility periods, the trader should be aware that a single tick may not occur but
every two or three hours.
STREAMING DATA
In order to compile an analytical study of this depth, it was necessary to acquire
massive amounts of raw historical quotes. To this extent, we wish to express our ap-
preciation to Disk Trading, Ltd. (www.disktrading.com) for its extensive and well-
organized archive of historical currency prices (both spot and futures) dating back to the early 1970s.
Forex data can be packaged either as streaming data or as interval data. Streaming
data consists of every single price change as it occurs regardless of the time elapsed between ticks. This creates voluminous amounts of data. For example, all the tick quotes for the EURUSD currency pair from January 1, 2005, to December 31, 2005, provide the statistical sample for numerous analyses in this book with a sample size of 7,974,098 prices.
Streaming data uses the following comma-delimited field conventions for tick data:
Date,Time,Close
01/01/2002,0116,0.8896
01/01/2002,0116,0.8895
01/01/2002,0116,0.8897
01/01/2002,0116,0.8893
01/01/2002,0126,0.8902
GETTING STARTED
FIGURE 1.1Pip-Tick Relationship
Data is shipped on compact disks and DVDs since the sheer volume of data is too
large to download at current modem speeds. CSV (Comma separated values) files must
be unzipped and then read as flat ASCII files.
INTERVAL DATA
Interval data, in contrast, is compiled from the streaming data by coercing the data into the standard open, high, low, and close (OHLC) format for equal-interval time periods.
Disk Trading, Ltd., packages this type of data as 1-minute, 5-minute, 10-minute, 30-
minute, hourly, and daily data.
Interval data is stored in the following convention (5-minute interval example):
Date,Time,O,H,L,C,U,D
4/20/1998,0920,1.0982,1.0982,1.0982,1.0982,2,0
4/20/1998,0925,1.0980,1.0983,1.0980,1.0983,3,1
4/20/1998,0930,1.0985,1.0990,1.0982,1.0989,8,3
4/20/1998,0935,1.0987,1.0993,1.0987,1.0988,2,3
4/20/1998,0940,1.0987,1.0989,1.0983,1.0985,4,3
Dates are always expressed using the standard convention MM/DD/YYYY, while
the time field uses a four-digit integer to represent the 24-hour convention (i.e., 2030 =
8:30 P.M.).
Due to the lack of centralization, Forex currency data does not have volume and
open interest fields as in commodity futures quotes. The last two fields above (“U” and
“D”) are upticks and downticks. These two fields will be used to calculate two indica-
tors specific to currency trading, the Activity Oscillator and the Direction Oscillator.
Activity is calculated as the sum of the upticks and downticks over a specified period.
Direction is the difference between upticks and downticks over a specified period.
List of books on forex trading system
BOOKS
Aby, Carroll D., Jr. Point and Figure Charting. Greenville, SC:Traders Press, 1996.
Archer, Michael, and James Bickford. Getting Started in Currency Trading. Hoboken,
NJ: John Wiley & Sons, 2005.
Arms, Richard W., Jr. Volume Cycles in the Stock Market.Revised Edition, Salt Lake
City, UT: Equis International, Inc., 1994.
Bickford, James. Chart Plotting Techniques For Technical Analysts. Boulder, CO:
Syzygy, 2002.
Bigalow, Stephen. Profitable Candlestick Trading. New York: John Wiley & Sons,
2002.
Bulkowski, Thomas. Encyclopedia of Chart Patterns. Hoboken, NJ: John Wiley & Sons,
2005.
De Villiers, Victor and Owen Taylor. Point and Figure Method of Anticipating Stock
Market Price Movements. New York, NY: Traders Library, 1934.
Dobson, Edward L. The Trading Rule That Can Make You Rich.Greenville, SC: Traders
Press, 1978.
Dorsey, Thomas. Point & Figure Charting. New York: John Wiley & Sons, 1995.
DraKoln, Noble. Forex for Small Speculators. Long Beach, CA: Enlightened Financial
Press, 2004.
Henderson, Callum. Currency Strategy. New York: John Wiley & Sons, 2002.
Horner, Raghee. Forex Trading for Maximum Profit. Hoboken, NJ: John Wiley & Sons,
2005.
Klopfenstein, Gary. Trading Currency Cross Rates. New York: John Wiley & Sons, 1993.
Lien, Kathy. Day Trading the Currency Market. Hoboken, NJ: John Wiley & Sons, 2004.
Louw, G. N. Begin Forex. FXTrader, 2003.
Luca, Cornelius. Technical Analysis Applications in the Global Currency Markets. Up-
per Saddle River, NJ: Prentice Hall, 2000.
Luca, Cornelius. Trading in the Global Currency Markets.Upper Saddle River, NJ:
Prentice Hall, 2000.
Murphy, John. Intermarket Financial Analysis. New York: John Wiley & Sons, 2000.
Murphy, John. Technical Analysis of the Financial Markets.Upper Saddle River, NJ:
Prentice Hall, 1999.
Reuters Limited. An Introduction to Foreign Exchange & Money Markets.London:
Reuters Financial Training, 1999.
Rosenstreich, Peter. Forex Revolution. Upper Saddle River, NJ: Prentice Hall, 2004.
Schlossberg, Boris. Technical Analysis of the Currency Market. Hoboken, NJ: John
Wiley & Sons, 2006.
Shamah, Shani. A Foreign Exchange Primer. Hoboken, NJ: John Wiley & Sons, 2003.
Thousands of books have been written on the subject of technical analysis. Here are a
few with possible topical interest to this volume:
Lindsay, Charles. Trident: A Trading Strategy. Thousand Oaks, CA: Trident, 1976.
McGee, John. Technical Analysis of Stock Trends. New York, NY: American Manage-
ment Association, 2001.
Nison, Steven. Beyond Candlesticks: More Japanese Charting Techniques Revealed.
New York: John Wiley & Sons, 1994.
Nison, Steven. Japanese Candlestick Charting Techniques. Upper Saddle River, NJ:
Prentice Hall, 1991; rev. ed. 2001.
Nofri, Eugene, and Jeanette Nofri-Steinberg. Success in Commodities: The Congestion
Phase System. Elizabeth, NJ: Pageant-Poseidon Press, 1975.
Pugh, Burton. The Great Wheat Secret.Miami, FL: Lambert-Gann, 1933.
Ross, Joe. Trading by the Minute. Cedar Park, TX: Ross Trading, 1991.
Zieg, Kermit C., Jr. Point and Figure: Commodity and Stock Trading Techniques.
Greenville, SC: Traders Press, 1997.
The world’s largest supplier for mail-order trading books is Traders Press at www.traders
press.com.
Aby, Carroll D., Jr. Point and Figure Charting. Greenville, SC:Traders Press, 1996.
Archer, Michael, and James Bickford. Getting Started in Currency Trading. Hoboken,
NJ: John Wiley & Sons, 2005.
Arms, Richard W., Jr. Volume Cycles in the Stock Market.Revised Edition, Salt Lake
City, UT: Equis International, Inc., 1994.
Bickford, James. Chart Plotting Techniques For Technical Analysts. Boulder, CO:
Syzygy, 2002.
Bigalow, Stephen. Profitable Candlestick Trading. New York: John Wiley & Sons,
2002.
Bulkowski, Thomas. Encyclopedia of Chart Patterns. Hoboken, NJ: John Wiley & Sons,
2005.
De Villiers, Victor and Owen Taylor. Point and Figure Method of Anticipating Stock
Market Price Movements. New York, NY: Traders Library, 1934.
Dobson, Edward L. The Trading Rule That Can Make You Rich.Greenville, SC: Traders
Press, 1978.
Dorsey, Thomas. Point & Figure Charting. New York: John Wiley & Sons, 1995.
DraKoln, Noble. Forex for Small Speculators. Long Beach, CA: Enlightened Financial
Press, 2004.
Henderson, Callum. Currency Strategy. New York: John Wiley & Sons, 2002.
Horner, Raghee. Forex Trading for Maximum Profit. Hoboken, NJ: John Wiley & Sons,
2005.
Klopfenstein, Gary. Trading Currency Cross Rates. New York: John Wiley & Sons, 1993.
Lien, Kathy. Day Trading the Currency Market. Hoboken, NJ: John Wiley & Sons, 2004.
Louw, G. N. Begin Forex. FXTrader, 2003.
Luca, Cornelius. Technical Analysis Applications in the Global Currency Markets. Up-
per Saddle River, NJ: Prentice Hall, 2000.
Luca, Cornelius. Trading in the Global Currency Markets.Upper Saddle River, NJ:
Prentice Hall, 2000.
Murphy, John. Intermarket Financial Analysis. New York: John Wiley & Sons, 2000.
Murphy, John. Technical Analysis of the Financial Markets.Upper Saddle River, NJ:
Prentice Hall, 1999.
Reuters Limited. An Introduction to Foreign Exchange & Money Markets.London:
Reuters Financial Training, 1999.
Rosenstreich, Peter. Forex Revolution. Upper Saddle River, NJ: Prentice Hall, 2004.
Schlossberg, Boris. Technical Analysis of the Currency Market. Hoboken, NJ: John
Wiley & Sons, 2006.
Shamah, Shani. A Foreign Exchange Primer. Hoboken, NJ: John Wiley & Sons, 2003.
Thousands of books have been written on the subject of technical analysis. Here are a
few with possible topical interest to this volume:
Lindsay, Charles. Trident: A Trading Strategy. Thousand Oaks, CA: Trident, 1976.
McGee, John. Technical Analysis of Stock Trends. New York, NY: American Manage-
ment Association, 2001.
Nison, Steven. Beyond Candlesticks: More Japanese Charting Techniques Revealed.
New York: John Wiley & Sons, 1994.
Nison, Steven. Japanese Candlestick Charting Techniques. Upper Saddle River, NJ:
Prentice Hall, 1991; rev. ed. 2001.
Nofri, Eugene, and Jeanette Nofri-Steinberg. Success in Commodities: The Congestion
Phase System. Elizabeth, NJ: Pageant-Poseidon Press, 1975.
Pugh, Burton. The Great Wheat Secret.Miami, FL: Lambert-Gann, 1933.
Ross, Joe. Trading by the Minute. Cedar Park, TX: Ross Trading, 1991.
Zieg, Kermit C., Jr. Point and Figure: Commodity and Stock Trading Techniques.
Greenville, SC: Traders Press, 1997.
The world’s largest supplier for mail-order trading books is Traders Press at www.traders
press.com.
Forex Trading System- Visual basic source code for forex market swing
FILE: modSwing.bas
The module uses the global variables:
Q() As QUOTE_TYPE
S() As SWING_TYPE
NumQuotes As Long
NumSwings As Long
The calling format is:
NumQuotes = GetData()
NumSwings = CalculateSwingData(3)
Option Explicit
Public Function CalculateSwingData(RevAmt%) As Long
Dim i&, j&, Direction&
On Error GoTo Err_CalculateSwingData
' Initiatialize first swing pair
S(1).Price = Q(1).C
S(1).ArIdx = 1
' Initialize first direction
For i = 2 To NumQuotes
If Q(i).H >= Q(1).H Then
Direction = UP
S(2).Price = Q(i).H
S(2).ArIdx = i
Exit For
ElseIf Q(i).L < Q(1).L Then
Direction = DOWN
S(2).Price = Q(i).L
S(2).ArIdx = i
Exit For
End If
Next i
j = i
' Calculate remaining swing pairs iteratively
For i = j + 1 To NumQuotes
If Direction = UP Then
If Q(i).H > S(j).Price Then
S(j).Price = Q(i).H
S(j).ArIdx = i
ElseIf S(j).Price - Q(i).L >= RevAmt Then
Direction = DOWN
j = j + 1
S(j).Price = Q(i).L
S(j).ArIdx = i
End If
ElseIf Direction = DOWN Then
If Q(i).L < S(j).Price Then
S(j).Price = Q(i).L
S(j).ArIdx = i
ElseIf Q(i).H - S(j).Price >= RevAmt Then
Direction = UP
j = j + 1
S(j).Price = Q(i).H
S(j).ArIdx = i
End If
End If
Plotin giola dFtuar eFCr hdslRTm
339
If j = MAX_SWINGS Then
Exit For
End If
Next i
If S(j).ArIdx < NumQuotes Then
j = j + 1
S(j).Price = Q(NumQuotes).C
S(j).ArIdx = NumQuotes
End If
CalculateSwingData = j
Exit Function
Err_CalculateSwingData:
MsgBox Err.Description
End Function
The module uses the global variables:
Q() As QUOTE_TYPE
S() As SWING_TYPE
NumQuotes As Long
NumSwings As Long
The calling format is:
NumQuotes = GetData()
NumSwings = CalculateSwingData(3)
Option Explicit
Public Function CalculateSwingData(RevAmt%) As Long
Dim i&, j&, Direction&
On Error GoTo Err_CalculateSwingData
' Initiatialize first swing pair
S(1).Price = Q(1).C
S(1).ArIdx = 1
' Initialize first direction
For i = 2 To NumQuotes
If Q(i).H >= Q(1).H Then
Direction = UP
S(2).Price = Q(i).H
S(2).ArIdx = i
Exit For
ElseIf Q(i).L < Q(1).L Then
Direction = DOWN
S(2).Price = Q(i).L
S(2).ArIdx = i
Exit For
End If
Next i
j = i
' Calculate remaining swing pairs iteratively
For i = j + 1 To NumQuotes
If Direction = UP Then
If Q(i).H > S(j).Price Then
S(j).Price = Q(i).H
S(j).ArIdx = i
ElseIf S(j).Price - Q(i).L >= RevAmt Then
Direction = DOWN
j = j + 1
S(j).Price = Q(i).L
S(j).ArIdx = i
End If
ElseIf Direction = DOWN Then
If Q(i).L < S(j).Price Then
S(j).Price = Q(i).L
S(j).ArIdx = i
ElseIf Q(i).H - S(j).Price >= RevAmt Then
Direction = UP
j = j + 1
S(j).Price = Q(i).H
S(j).ArIdx = i
End If
End If
Plotin giola dFtuar eFCr hdslRTm
339
If j = MAX_SWINGS Then
Exit For
End If
Next i
If S(j).ArIdx < NumQuotes Then
j = j + 1
S(j).Price = Q(NumQuotes).C
S(j).ArIdx = NumQuotes
End If
CalculateSwingData = j
Exit Function
Err_CalculateSwingData:
MsgBox Err.Description
End Function
Forex Trading System- Visual Basic source code for forex traders
Option Explicit
Global Const MAX_QUOTES = 8000
Global Const MAX_CLOSES = MAX_QUOTES * 4
Global Const UP = 1
Global Const DOWN = -1
Global Const vbLightGray = &HC0C0C0
Global Const vbGray = &H808080
Global Const vbLightYellow = &HC0FFFF
Type QUOTE_TYPE
Date As String
Time As String
O As Double
H As Double
L As Double
C As Double
U As Double
D As Double
End Type
331
Global NumQuotes As Long
Global NumCloses As Long
Global NumColumns As Long
Global Pair$, StartDate$, EndDate$
Global BoxSize As Double, RevAmt As Double
Global Q(MAX_QUOTES) As QUOTE_TYPE
Global C(MAX_QUOTES) As Double
Global Column(MAX_CLOSES) As Integer
Public Function CalculateColumns(C#(), NumCloses&, BoxSize#, RevAmt#) As Integer
Dim i&, col&, start#, last#, direction%
On Error GoTo Err_CalculateColumns
' initialize the global column array
For i = 1 To NumCloses
Column(i) = 0
Next i
last = C(1)
' calculate first value of column array
For i = 2 To NumCloses
If C(i) - last >= RevAmt * BoxSize Then
Do
If last + BoxSize > C(i) Then
Exit Do
End If
last = last + BoxSize
Column(1) = Column(1) + 1
Loop
direction = UP
start = i + 1
Exit For
ElseIf last - C(i) >= RevAmt * BoxSize Then
Do
If last - BoxSize < C(i) Then
Exit Do
End If
last = last - BoxSize
Column(1) = Column(1) - 1
Loop
332
INNTRODU C
direction = DOWN
start = i + 1
Exit For
Else
' Do nothing if Q(i).C = Q(1).C
End If
Next i
' loop through remainder of closes filling the column array
col = 1
For i = start To NumCloses
If direction = UP Then
If C(i) - last >= BoxSize Then
Do
If last + BoxSize > C(i) Then
Exit Do
End If
last = last + BoxSize
Column(col) = Column(col) + 1
Loop
ElseIf last - C(i) >= RevAmt * BoxSize Then
col = col + 1
Do
If last - BoxSize < C(i) Then
Exit Do
End If
last = last - BoxSize
Column(col) = Column(col) - 1
Loop
direction = DOWN
End If
ElseIf direction = DOWN Then
If last - C(i) >= BoxSize Then
Do
If last - BoxSize < C(i) Then
Exit Do
End If
last = last - BoxSize
Column(col) = Column(col) - 1
Loop
ElseIf C(i) - last >= RevAmt * BoxSize Then
col = col + 1
Visual Basic Source Code (Point and Figure)
333
Do
If last + BoxSize > C(i) Then
Exit Do
End If
last = last + BoxSize
Column(col) = Column(col) + 1
Loop
direction = UP
End If
End If
Next i
CalculateColumns = col
Exit Function
Err_CalculateColumns:
MsgBox Err.Description
End Function
Public Sub PlotPafChart(obj As Object)
Dim Xinc# ' width of each graph paper square in twips
Dim Yinc# ' height of each graph paper square in twips
Dim Xmrg# ' left margin of plotting zone
Dim Ymrg# ' top margin of plotting zone
Dim PipFactor# ' converts prices to integers, ie, 10000 for EURUSD
Dim Fmt$ ' format string for PipFactor
Dim dnum# ' floating point loop index
Dim st$ ' local discard string
Dim i&, j& ' integer loop indexes
Dim max# ' maximum high
Dim start# ' first close in raw data
Dim last# ' last plotted X or Y
Dim x1#, x2# ' x-axis coordinates
Dim y1#, y2# ' y-axis coordinates
Dim HdrMrg# ' header margin
On Error GoTo Err_PlotPafChart
' Initialize variables ===============================
Xinc = 150
Yinc = Xinc
Xmrg = 5.5 * Xinc
Ymrg = 10 * Yinc
PipFactor = 100 '10000
334
INNTRODU C
' Plot background graph paper ========================
obj.Cls
For dnum = 0 To obj.Height Step Xinc
obj.Line (0, dnum)-(obj.Width, dnum), vbGray
Next dnum
For dnum = 0 To obj.Width Step Yinc
obj.Line (dnum, 0)-(dnum, obj.Height), vbGray
Next dnum
' Print two-line header ==============================
HdrMrg = 0.21
obj.Line (HdrMrg * obj.Width, 80)-((1# - HdrMrg) * obj.Width, 650), vbLightYellow, BF
For i = 0 To 12
obj.Line (0.21 * obj.Width + i, 100 - i)-(0.79 * obj.Width - i, 650 + i), vbBlack, B
Next i
obj.FontName = ''Times New Roman''
obj.ForeColor = vbBlack
obj.FontSize = 10
obj.FontBold = True
st = ''USDJPY December 2004''
obj.CurrentX = (obj.Width - obj.TextWidth(st)) / 2
obj.CurrentY = 150
obj.Print st
obj.FontSize = 9
st = ''P&F Chart Box Size = '' + CStr(BoxSize) + '' Rev Amt = ''
st = st + CStr(RevAmt) + '' Boxes''
obj.CurrentX = (obj.Width - obj.TextWidth(st)) / 2
obj.Print st
' Find maximum close ====================================
max = 0
For i = 1 To NumCloses
If C(i) > max Then max = C(i)
Next i
' Adjust max to be a multiple of boxsize units from C(1)
' This ensures Xs and Os land in center of squares
last = C(1)
Do
Visual Basic Source Code (Point and Figure)
335
last = last + BoxSize
Loop While last < max
max = last
Debug.Print max
' Print vertical scale ================
x1 = 1
y1 = Yinc * (Ymrg / Yinc - 3)
x2 = Xmrg
y2 = obj.Height - 2 * Yinc
obj.Line (x1, y1)-(x2, y2), vbWhite, BF
obj.FontSize = 8
obj.FontBold = True
i = -1
Do
i = i + 1
dnum = max - i * BoxSize
st = Format(dnum - 0.0001, ''##0.00'')
obj.CurrentX = (Xmrg - obj.TextWidth(st)) / 2
obj.CurrentY = Ymrg + (i - 3) * Yinc + 10
If obj.CurrentY > obj.Height - 3 * Yinc Then Exit Do
obj.Print st
Loop While obj.CurrentY <= 0.98 * obj.Height
' Plot Xs and Os columns =================
last = -4 + (max - C(1)) / BoxSize
For i = 1 To NumColumns
x1 = Xmrg + (i * Xinc)
If Column(i) > 0 Then
For j = 1 To Column(i)
y1 = Ymrg + (last - j + 0.45) * Yinc
PrintX obj, x1, y1, 0.3 * Xinc
Next j
Else
For j = -1 To Column(i) Step -1
y1 = Ymrg + (last - j + 0.45) * Yinc
PrintO obj, x1, y1, 0.3 * Xinc
Next j
End If
last = last - Column(i)
Next i
336
INNTRODU C
Exit Sub
Err_PlotPafChart:
MsgBox Err.Description
Resume
End Sub
Public Sub PrintX(obj As Object, cx#, cy#, side#)
Dim i%
cy = cy + 5
For i = 0 To 15
obj.Line (cx - 0.7 * side + i, cy - side)-(cx + 0.7 * side + i, cy + side), vbBlack
obj.Line (cx + 0.7 * side - i, cy - side)-(cx - 0.7 * side - i, cy + side), vbBlack
Next i
End Sub
Public Sub PrintO(obj As Object, cx#, cy#, radius#)
Dim i%
cy = cy + 5
For i = 0 To 15
obj.Circle (cx + i, cy), radius, vbBlack, , , 1.85
Next i
End Sub
Global Const MAX_QUOTES = 8000
Global Const MAX_CLOSES = MAX_QUOTES * 4
Global Const UP = 1
Global Const DOWN = -1
Global Const vbLightGray = &HC0C0C0
Global Const vbGray = &H808080
Global Const vbLightYellow = &HC0FFFF
Type QUOTE_TYPE
Date As String
Time As String
O As Double
H As Double
L As Double
C As Double
U As Double
D As Double
End Type
331
Global NumQuotes As Long
Global NumCloses As Long
Global NumColumns As Long
Global Pair$, StartDate$, EndDate$
Global BoxSize As Double, RevAmt As Double
Global Q(MAX_QUOTES) As QUOTE_TYPE
Global C(MAX_QUOTES) As Double
Global Column(MAX_CLOSES) As Integer
Public Function CalculateColumns(C#(), NumCloses&, BoxSize#, RevAmt#) As Integer
Dim i&, col&, start#, last#, direction%
On Error GoTo Err_CalculateColumns
' initialize the global column array
For i = 1 To NumCloses
Column(i) = 0
Next i
last = C(1)
' calculate first value of column array
For i = 2 To NumCloses
If C(i) - last >= RevAmt * BoxSize Then
Do
If last + BoxSize > C(i) Then
Exit Do
End If
last = last + BoxSize
Column(1) = Column(1) + 1
Loop
direction = UP
start = i + 1
Exit For
ElseIf last - C(i) >= RevAmt * BoxSize Then
Do
If last - BoxSize < C(i) Then
Exit Do
End If
last = last - BoxSize
Column(1) = Column(1) - 1
Loop
332
INNTRODU C
direction = DOWN
start = i + 1
Exit For
Else
' Do nothing if Q(i).C = Q(1).C
End If
Next i
' loop through remainder of closes filling the column array
col = 1
For i = start To NumCloses
If direction = UP Then
If C(i) - last >= BoxSize Then
Do
If last + BoxSize > C(i) Then
Exit Do
End If
last = last + BoxSize
Column(col) = Column(col) + 1
Loop
ElseIf last - C(i) >= RevAmt * BoxSize Then
col = col + 1
Do
If last - BoxSize < C(i) Then
Exit Do
End If
last = last - BoxSize
Column(col) = Column(col) - 1
Loop
direction = DOWN
End If
ElseIf direction = DOWN Then
If last - C(i) >= BoxSize Then
Do
If last - BoxSize < C(i) Then
Exit Do
End If
last = last - BoxSize
Column(col) = Column(col) - 1
Loop
ElseIf C(i) - last >= RevAmt * BoxSize Then
col = col + 1
Visual Basic Source Code (Point and Figure)
333
Do
If last + BoxSize > C(i) Then
Exit Do
End If
last = last + BoxSize
Column(col) = Column(col) + 1
Loop
direction = UP
End If
End If
Next i
CalculateColumns = col
Exit Function
Err_CalculateColumns:
MsgBox Err.Description
End Function
Public Sub PlotPafChart(obj As Object)
Dim Xinc# ' width of each graph paper square in twips
Dim Yinc# ' height of each graph paper square in twips
Dim Xmrg# ' left margin of plotting zone
Dim Ymrg# ' top margin of plotting zone
Dim PipFactor# ' converts prices to integers, ie, 10000 for EURUSD
Dim Fmt$ ' format string for PipFactor
Dim dnum# ' floating point loop index
Dim st$ ' local discard string
Dim i&, j& ' integer loop indexes
Dim max# ' maximum high
Dim start# ' first close in raw data
Dim last# ' last plotted X or Y
Dim x1#, x2# ' x-axis coordinates
Dim y1#, y2# ' y-axis coordinates
Dim HdrMrg# ' header margin
On Error GoTo Err_PlotPafChart
' Initialize variables ===============================
Xinc = 150
Yinc = Xinc
Xmrg = 5.5 * Xinc
Ymrg = 10 * Yinc
PipFactor = 100 '10000
334
INNTRODU C
' Plot background graph paper ========================
obj.Cls
For dnum = 0 To obj.Height Step Xinc
obj.Line (0, dnum)-(obj.Width, dnum), vbGray
Next dnum
For dnum = 0 To obj.Width Step Yinc
obj.Line (dnum, 0)-(dnum, obj.Height), vbGray
Next dnum
' Print two-line header ==============================
HdrMrg = 0.21
obj.Line (HdrMrg * obj.Width, 80)-((1# - HdrMrg) * obj.Width, 650), vbLightYellow, BF
For i = 0 To 12
obj.Line (0.21 * obj.Width + i, 100 - i)-(0.79 * obj.Width - i, 650 + i), vbBlack, B
Next i
obj.FontName = ''Times New Roman''
obj.ForeColor = vbBlack
obj.FontSize = 10
obj.FontBold = True
st = ''USDJPY December 2004''
obj.CurrentX = (obj.Width - obj.TextWidth(st)) / 2
obj.CurrentY = 150
obj.Print st
obj.FontSize = 9
st = ''P&F Chart Box Size = '' + CStr(BoxSize) + '' Rev Amt = ''
st = st + CStr(RevAmt) + '' Boxes''
obj.CurrentX = (obj.Width - obj.TextWidth(st)) / 2
obj.Print st
' Find maximum close ====================================
max = 0
For i = 1 To NumCloses
If C(i) > max Then max = C(i)
Next i
' Adjust max to be a multiple of boxsize units from C(1)
' This ensures Xs and Os land in center of squares
last = C(1)
Do
Visual Basic Source Code (Point and Figure)
335
last = last + BoxSize
Loop While last < max
max = last
Debug.Print max
' Print vertical scale ================
x1 = 1
y1 = Yinc * (Ymrg / Yinc - 3)
x2 = Xmrg
y2 = obj.Height - 2 * Yinc
obj.Line (x1, y1)-(x2, y2), vbWhite, BF
obj.FontSize = 8
obj.FontBold = True
i = -1
Do
i = i + 1
dnum = max - i * BoxSize
st = Format(dnum - 0.0001, ''##0.00'')
obj.CurrentX = (Xmrg - obj.TextWidth(st)) / 2
obj.CurrentY = Ymrg + (i - 3) * Yinc + 10
If obj.CurrentY > obj.Height - 3 * Yinc Then Exit Do
obj.Print st
Loop While obj.CurrentY <= 0.98 * obj.Height
' Plot Xs and Os columns =================
last = -4 + (max - C(1)) / BoxSize
For i = 1 To NumColumns
x1 = Xmrg + (i * Xinc)
If Column(i) > 0 Then
For j = 1 To Column(i)
y1 = Ymrg + (last - j + 0.45) * Yinc
PrintX obj, x1, y1, 0.3 * Xinc
Next j
Else
For j = -1 To Column(i) Step -1
y1 = Ymrg + (last - j + 0.45) * Yinc
PrintO obj, x1, y1, 0.3 * Xinc
Next j
End If
last = last - Column(i)
Next i
336
INNTRODU C
Exit Sub
Err_PlotPafChart:
MsgBox Err.Description
Resume
End Sub
Public Sub PrintX(obj As Object, cx#, cy#, side#)
Dim i%
cy = cy + 5
For i = 0 To 15
obj.Line (cx - 0.7 * side + i, cy - side)-(cx + 0.7 * side + i, cy + side), vbBlack
obj.Line (cx + 0.7 * side - i, cy - side)-(cx - 0.7 * side - i, cy + side), vbBlack
Next i
End Sub
Public Sub PrintO(obj As Object, cx#, cy#, radius#)
Dim i%
cy = cy + 5
For i = 0 To 15
obj.Circle (cx + i, cy), radius, vbBlack, , , 1.85
Next i
End Sub
Forex Trading System- Global Banking Hours
Despite all the fundamental and technical influences on the foreign exchange mar-
ket, one major constant in determining periods of high volatility is the hours of opera-
tion for the central banks of each major currency country.
Figure D.1 emphasizes the importance of the effect of time of day on forex mar-
ket activity and volatility based on hours of operation around the globe. Because
banking hours vary from country to country, we have arbitrarily set hours of opera-
tion from 9:00 A.M.to 5:00 P.M.for consistency. The top row is expressed as central
european time (Greenwich mean time + 1 hour), which aligns with the Central Bank
of Europe in Frankfurt, the most prestigious central bank in the European Monetary
Union.
The table allows traders to view overlapping time periods when central banks
for different currencies are operating and thus guarantee a certain degree of mutual
activity.
For example, when banks open in New York City at 9:00 A.M.EST, the Frankfurt
bank has already been operating for six hours. So there is a two-hour overlap of trading
in the EURUSD currency pair on both sides of the Atlantic Ocean (9:00 A.M. to 11:00 A.M.
EST). This can be readily recognized in the time of day activity chart for the EURUSD
pair (Figure 2.4 in Chapter 2).
Dedicated currency traders may have to adjust their sleeping schedules to take
advantage of increased activity and volatility when trading non-USD cross-rate cur-
rency pairs.
ket, one major constant in determining periods of high volatility is the hours of opera-
tion for the central banks of each major currency country.
Figure D.1 emphasizes the importance of the effect of time of day on forex mar-
ket activity and volatility based on hours of operation around the globe. Because
banking hours vary from country to country, we have arbitrarily set hours of opera-
tion from 9:00 A.M.to 5:00 P.M.for consistency. The top row is expressed as central
european time (Greenwich mean time + 1 hour), which aligns with the Central Bank
of Europe in Frankfurt, the most prestigious central bank in the European Monetary
Union.
The table allows traders to view overlapping time periods when central banks
for different currencies are operating and thus guarantee a certain degree of mutual
activity.
For example, when banks open in New York City at 9:00 A.M.EST, the Frankfurt
bank has already been operating for six hours. So there is a two-hour overlap of trading
in the EURUSD currency pair on both sides of the Atlantic Ocean (9:00 A.M. to 11:00 A.M.
EST). This can be readily recognized in the time of day activity chart for the EURUSD
pair (Figure 2.4 in Chapter 2).
Dedicated currency traders may have to adjust their sleeping schedules to take
advantage of increased activity and volatility when trading non-USD cross-rate cur-
rency pairs.
Forex Trading System- World Currencies
This is a list of global currencies and the three-character currency codes that we
have found are generally used to represent them. Often, but not always, this code
is the same as the ISO 4217 standard. (The ISO, or International Organization for
Standardization, is a worldwide federation of national standards.)
In most cases, the currency code is composed of the country’s two-character Inter-
net country code plus an extra character to denote the currency unit. For example, the
code for Canadian dollars is simply Canada’s two-character Internet country code (CA)
plus a one-character currency designator (D).
We have endeavored to list the codes that, in our experience, are actually in general
industry use to represent the currencies. Currency names are given in the plural form.
This list does not contain obsolete euro-zone currencies.
WORLD CURRENCIES
Symbol
Region
Currency Name
AED
United Arab Emirates
Dirhams
AFA
Afghanistan
Afghanis
ALL
Albania
Leke
AMD
Armenia
Drams
ANG
Netherlands Antilles
Guilders
AOA
Angola
Kwanza
ARS
Argentina
Pesos
AUD
Australia
Dollars
AWG
Aruba
Guilders
(continues)
259
Symbol
Region
Currency Name
AZM
Azerbaijan
Manats
BAM
Bosnia and Herzegovina
Convertible marka
BBD
Barbados
Dollars
BDT
Bangladesh
Taka
BGN
Bulgaria
Leva
BHD
Bahrain
Dinars
BIF
Burundi
Francs
BMD
Bermuda
Dollars
BND
Brunei Darussalam
Dollars
BOB
Bolivia
Bolivianos
BRL
Brazil
Brazil real
BSD
Bahamas
Dollars
BTN
Bhutan
Ngultrum
BWP
Botswana
Pulas
BYR
Belarus
Rubles
BZD
Belize
Dollars
CAD
Canada
Dollars
CDF
Congo/Kinshasa
Congolese francs
CHF
Switzerland
Francs
CLP
Chile
Pesos
CNY
China
Renminbi
COP
Colombia
Pesos
CRC
Costa Rica
Colones
CUP
Cuba
Pesos
CVE
Cape Verde
Escudos
CYP
Cyprus
Pounds
CZK
Czech Republic
Koruny
DJF
Djibouti
Francs
DKK
Denmark
Kroner
DOP
Dominican Republic
Pesos
DZD
Algeria
Algeria dinars
EEK
Estonia
Krooni
EGP
Egypt
Pounds
ERN
Eritrea
Nakfa
ETB
Ethiopia
Birr
EUR
Euro member countries
Euro
FJD
Fiji
Dollars
FKP
Falkland Islands
Pounds
GBP
United Kingdom
Pounds
GEL
Georgia
Lari
GGP
Guernsey
Pounds
260
APPENDIX A
GHC
Ghana
Cedis
GIP
Gibraltar
Pounds
GMD
Gambia
Dalasi
GNF
Guinea
Francs
GTQ
Guatemala
Quetzales
GYD
Guyana
Dollars
HKD
Hong Kong
Dollars
HNL
Honduras
Lempiras
HRK
Croatia
Kuna
HTG
Haiti
Gourdes
HUF
Hungary
Forint
IDR
Indonesia
Rupiahs
ILS
Israel
New shekels
IMP
Isle of Man
Pounds
INR
India
Rupees
IQD
Iraq
Dinars
IRR
Iran
Rials
ISK
Iceland
Kronur
JEP
Jersey
Pounds
JMD
Jamaica
Dollars
JOD
Jordan
Dinars
JPY
Japan
Yen
KES
Kenya
Shillings
KGS
Kyrgyzstan
Soms
KHR
Cambodia
Riels
KMF
Comoros
Francs
KPW
Korea (North)
Won
KRW
Korea (South)
Won
KWD
Kuwait
Dinars
KYD
Cayman Islands
Dollars
KZT
Kazakstan
Tenge
LAK
Laos
Kips
LBP
Lebanon
Pounds
LKR
Sri Lanka
Rupees
LRD
Liberia
Dollars
LSL
Lesotho
Maloti
LTL
Lithuania
Litai
LVL
Latvia
Lati
LYD
Libya
Dinars
MAD
Morocco
Dirhams
MDL
Moldova
Lei
MGA
Madagascar
Ariary
(continues)
Pater nFttquciqs
261
Symbol
Region
Currency Name
MKD
Macedonia
Denars
MMK
Myanmar (Burma)
Kyats
MNT
Mongolia
Tugriks
MOP
Macau
Patacas
MRO
Mauritania
Ouguiyas
MTL
Malta
Liri
MUR
Mauritius
Rupees
MVR
Maldives
Rufiyaa
MWK
Malawi
Kwachas
MXN
Mexico
Pesos
MYR
Malaysia
Ringgits
MZM
Mozambique
Meticais
NAD
Namibia
Dollars
NGN
Nigeria
Nairas
NIO
Nicaragua
Gold cordobas
NOK
Norway
Krone
NPR
Nepal
Nepal rupees
NZD
New Zealand
Dollars
OMR
Oman
Rials
PAB
Panama
Balboa
PEN
Peru
Nuevos soles
PGK
Papua New Guinea
Kina
PHP
Philippines
Pesos
PKR
Pakistan
Rupees
PLN
Poland
Zlotych
PYG
Paraguay
Guarani
QAR
Qatar
Rials
ROL
Romania
Lei
RUR
Russia
Rubles
RWF
Rwanda
Rwanda francs
SAR
Saudi Arabia
Riyals
SBD
Solomon Islands
Dollars
SCR
Seychelles
Rupees
SDD
Sudan
Dinars
SEK
Sweden
Kronor
SGD
Singapore
Dollars
SHP
Saint Helena
Pounds
SIT
Slovenia
Tolars
SKK
Slovakia
Koruny
SLL
Sierra Leone
Leones
SOS
Somalia
Shillings
262
APPENDIX A
SPL
Seborga
Luigini
SRG
Suriname
Guilders
STD
São Tomé, Principe
Dobras
SVC
El Salvador
Colones
SYP
Syria
Pounds
SZL
Swaziland
Emalangeni
THB
Thailand
Baht
TJS
Tajikistan
Somoni
TMM
Turkmenistan
Manats
TND
Tunisia
Dinars
TOP
Tonga
Pa’anga
TRL
Turkey
Liras
TTD
Trinidad, Tobago
Dollars
TVD
Tuvalu
Tuvalu dollars
TWD
Taiwan
New dollars
TZS
Tanzania
Shillings
UAH
Ukraine
Hryvnia
UGX
Uganda
Shillings
USD
United States of America
Dollars
UYU
Uruguay
Pesos
UZS
Uzbekistan
Sums
VEB
Venezuela
Bolivares
VND
Vietnam
Dong
VUV
Vanuatu
Vatu
WST
Samoa
Tala
YER
Yemen
Rials
YUM
Yugoslavia
New dinars
ZAR
South Africa
Rand
ZMK
Zambia
Kwacha
ZWD
Zimbabwe
Zimbabwe dollars
have found are generally used to represent them. Often, but not always, this code
is the same as the ISO 4217 standard. (The ISO, or International Organization for
Standardization, is a worldwide federation of national standards.)
In most cases, the currency code is composed of the country’s two-character Inter-
net country code plus an extra character to denote the currency unit. For example, the
code for Canadian dollars is simply Canada’s two-character Internet country code (CA)
plus a one-character currency designator (D).
We have endeavored to list the codes that, in our experience, are actually in general
industry use to represent the currencies. Currency names are given in the plural form.
This list does not contain obsolete euro-zone currencies.
WORLD CURRENCIES
Symbol
Region
Currency Name
AED
United Arab Emirates
Dirhams
AFA
Afghanistan
Afghanis
ALL
Albania
Leke
AMD
Armenia
Drams
ANG
Netherlands Antilles
Guilders
AOA
Angola
Kwanza
ARS
Argentina
Pesos
AUD
Australia
Dollars
AWG
Aruba
Guilders
(continues)
259
Symbol
Region
Currency Name
AZM
Azerbaijan
Manats
BAM
Bosnia and Herzegovina
Convertible marka
BBD
Barbados
Dollars
BDT
Bangladesh
Taka
BGN
Bulgaria
Leva
BHD
Bahrain
Dinars
BIF
Burundi
Francs
BMD
Bermuda
Dollars
BND
Brunei Darussalam
Dollars
BOB
Bolivia
Bolivianos
BRL
Brazil
Brazil real
BSD
Bahamas
Dollars
BTN
Bhutan
Ngultrum
BWP
Botswana
Pulas
BYR
Belarus
Rubles
BZD
Belize
Dollars
CAD
Canada
Dollars
CDF
Congo/Kinshasa
Congolese francs
CHF
Switzerland
Francs
CLP
Chile
Pesos
CNY
China
Renminbi
COP
Colombia
Pesos
CRC
Costa Rica
Colones
CUP
Cuba
Pesos
CVE
Cape Verde
Escudos
CYP
Cyprus
Pounds
CZK
Czech Republic
Koruny
DJF
Djibouti
Francs
DKK
Denmark
Kroner
DOP
Dominican Republic
Pesos
DZD
Algeria
Algeria dinars
EEK
Estonia
Krooni
EGP
Egypt
Pounds
ERN
Eritrea
Nakfa
ETB
Ethiopia
Birr
EUR
Euro member countries
Euro
FJD
Fiji
Dollars
FKP
Falkland Islands
Pounds
GBP
United Kingdom
Pounds
GEL
Georgia
Lari
GGP
Guernsey
Pounds
260
APPENDIX A
GHC
Ghana
Cedis
GIP
Gibraltar
Pounds
GMD
Gambia
Dalasi
GNF
Guinea
Francs
GTQ
Guatemala
Quetzales
GYD
Guyana
Dollars
HKD
Hong Kong
Dollars
HNL
Honduras
Lempiras
HRK
Croatia
Kuna
HTG
Haiti
Gourdes
HUF
Hungary
Forint
IDR
Indonesia
Rupiahs
ILS
Israel
New shekels
IMP
Isle of Man
Pounds
INR
India
Rupees
IQD
Iraq
Dinars
IRR
Iran
Rials
ISK
Iceland
Kronur
JEP
Jersey
Pounds
JMD
Jamaica
Dollars
JOD
Jordan
Dinars
JPY
Japan
Yen
KES
Kenya
Shillings
KGS
Kyrgyzstan
Soms
KHR
Cambodia
Riels
KMF
Comoros
Francs
KPW
Korea (North)
Won
KRW
Korea (South)
Won
KWD
Kuwait
Dinars
KYD
Cayman Islands
Dollars
KZT
Kazakstan
Tenge
LAK
Laos
Kips
LBP
Lebanon
Pounds
LKR
Sri Lanka
Rupees
LRD
Liberia
Dollars
LSL
Lesotho
Maloti
LTL
Lithuania
Litai
LVL
Latvia
Lati
LYD
Libya
Dinars
MAD
Morocco
Dirhams
MDL
Moldova
Lei
MGA
Madagascar
Ariary
(continues)
Pater nFttquciqs
261
Symbol
Region
Currency Name
MKD
Macedonia
Denars
MMK
Myanmar (Burma)
Kyats
MNT
Mongolia
Tugriks
MOP
Macau
Patacas
MRO
Mauritania
Ouguiyas
MTL
Malta
Liri
MUR
Mauritius
Rupees
MVR
Maldives
Rufiyaa
MWK
Malawi
Kwachas
MXN
Mexico
Pesos
MYR
Malaysia
Ringgits
MZM
Mozambique
Meticais
NAD
Namibia
Dollars
NGN
Nigeria
Nairas
NIO
Nicaragua
Gold cordobas
NOK
Norway
Krone
NPR
Nepal
Nepal rupees
NZD
New Zealand
Dollars
OMR
Oman
Rials
PAB
Panama
Balboa
PEN
Peru
Nuevos soles
PGK
Papua New Guinea
Kina
PHP
Philippines
Pesos
PKR
Pakistan
Rupees
PLN
Poland
Zlotych
PYG
Paraguay
Guarani
QAR
Qatar
Rials
ROL
Romania
Lei
RUR
Russia
Rubles
RWF
Rwanda
Rwanda francs
SAR
Saudi Arabia
Riyals
SBD
Solomon Islands
Dollars
SCR
Seychelles
Rupees
SDD
Sudan
Dinars
SEK
Sweden
Kronor
SGD
Singapore
Dollars
SHP
Saint Helena
Pounds
SIT
Slovenia
Tolars
SKK
Slovakia
Koruny
SLL
Sierra Leone
Leones
SOS
Somalia
Shillings
262
APPENDIX A
SPL
Seborga
Luigini
SRG
Suriname
Guilders
STD
São Tomé, Principe
Dobras
SVC
El Salvador
Colones
SYP
Syria
Pounds
SZL
Swaziland
Emalangeni
THB
Thailand
Baht
TJS
Tajikistan
Somoni
TMM
Turkmenistan
Manats
TND
Tunisia
Dinars
TOP
Tonga
Pa’anga
TRL
Turkey
Liras
TTD
Trinidad, Tobago
Dollars
TVD
Tuvalu
Tuvalu dollars
TWD
Taiwan
New dollars
TZS
Tanzania
Shillings
UAH
Ukraine
Hryvnia
UGX
Uganda
Shillings
USD
United States of America
Dollars
UYU
Uruguay
Pesos
UZS
Uzbekistan
Sums
VEB
Venezuela
Bolivares
VND
Vietnam
Dong
VUV
Vanuatu
Vatu
WST
Samoa
Tala
YER
Yemen
Rials
YUM
Yugoslavia
New dinars
ZAR
South Africa
Rand
ZMK
Zambia
Kwacha
ZWD
Zimbabwe
Zimbabwe dollars
Forex Trading System- Charting Study
OVERVIEW
The textbook Goodman wave from recent EUR/USD trading shown in Figure 38.1 gives
us an opportunity to introduce a number of Goodman topics and ideas via a brief tour of
the entire system.
NOTATION
The end points of a matrix (“M”) are denoted by 1-2-3-4; going in to smaller matrices,
i-ii-iii-iv; going out to a larger matrix, A-B-C-D. All matrix notation uses parentheses:
M(1-2-3-4).
A wave is denoted by 1-2-3-4-5-6 (points of the wave); going in to smaller waves, i-ii-
iii-iv-v-vi; going out to larger matrices, A-B-C-D-E-F-G. All waves are denoted as “G.” The
notation uses brackets G[1-2-3-4-5-6].
A matrix always has three components; of course, a component may also itself be a
matrix. A Goodman wave has five components at least for the purposes of notation.
A matrix or wave segment or component is thus M(1-2) or G[3-4-5-6].
MATRIX
A matrix is a simple 1-2-3 swing (three components or segments). It may or may not
have smaller matrices as some of its components. A matrix is either simple (no compo-
nents) or complex (if it has components): M(1-2-3-4). (See Figure 38.2.)
A Goodman wave is the propagation or generation of a complex matrix in a specific
manner and of a specific form: G[1-2-3-4-5-6].
Charlie’s concept of how matrices propagate is different from Elliott’s. Once you
start looking for them, finding them, and analyzing them you will quickly realize how
much more they conform to the real structure of the markets and—more importantly—
how much more easily they may be traded. The propagation concept more accurately
reflects the dynamic of markets than does a static wave concept.
Goodman waves are relatively easy to spot after they are built, or as part of a larger
wave. But what we are most interested in—from the point of view of trading—is the
propagation of a Goodman wave.
PROPAGATION
Any Goodman wave obviously begins with a segment S(1-2). The question becomes—
and this is why the concept of propagation is important: Does the wave develop as a flat
segment followed by a complex matrix—or vice versa?
According to GSCS theory, this segment or matrix now becomes the first compo-
nent of a Goodman wave and is thereafter treated as a single segment or component for
purposes of analysis.
We now look for a 50 percent secondary component retracement of the entire com-
plex matrix or segment. On this chart study this is segment S(4-5). This component
could easily be mistaken for a simple wave in a five-wave Elliott wave pattern, but it is
not. In Goodman it is the key return or propagation segment.
Finally, we look for a component or matrix in the primary direction with a magni-
tude equal to the first component.
In Figure 38.3, note the return or propagation wave (the lighter wave).
The four primary Goodman waves occur every day, over and over again, in all mar-
kets—forex, futures, and securities—and at all price levels. The wave is the foundation
and basis of trading GSCS. The opportunities to trade it are only limited by your time to
seek them out in the markets that most interest you.
Forget trading stations with five monitors; forget specialist short sales; forget complex
volume and open interest calculations; forget Gann charts with 50 lines on them all leading
to nowhere and Fibonacci charts with numbers carried out to 14 significant places.
Elliott mistakenly identified this as a five-component wave. This is not accurate or
precise. What is occurring is that a three-component matrix is propagating in accor-
dance with the 50 percent rule. It is not strictly a five-component wave but rather a ma-
trix in generation or propagation. This propagation is critical and fundamental to GSCS.
SIMPLE/COMPLEX
Note: From a matrix point of view, two of the four Goodman waves appear to be a sim-
ple/complex matrix followed by a complex/simple matrix. It is important to think only
in terms of the four Goodman wave types shown in Figure 38.3. By thinking in terms of
propagation you will better anticipate the unfolding of the market through time.
For now just drill into memory the four Goodman wave types.
Keep in mind that—at least theoretically—Goodman waves propagate inward and
outward, meaning that every wave is composed of smaller waves and every wave is a
component of a larger wave. The same is true of matrices.
FAT/THIN
Note in the complex matrix of Figure 38.4 the first matrix is fat and the second is thin;
this is another important alternating structure that assists in templating and trading.
By fat I mean there is a lot of back-and-fro motion (volatility) as prices move up or
down (directional movement). By thin I mean there is little such motion.
The rhythm of the market is much determined by the fatness and thinness of price
action. Rhythm can also give us important clues to templating. In GSCS templating is
the nexus of theory and practice. Templating is the process of laying out the possible
propagations of a wave and narrowing them down as events and prices unfold.
Fatness may simply represent price noise that may be filtered out of analysis. But it
may occasionally represent significant internal matrices and demand deeper analysis.
GOODMAN AND COMPUTERS
The question arises: Is GSCS programmable? The answer is: probably. Software has
been written to capture the basic elements of Goodman. A complete program would be
a substantial undertaking and at least for me would go very much against the grain of
what Charlie had in mind.
A small program to spot intersections, perhaps in TradeStation or StrategyBuilder
format, would not be too difficult.
For further information about GSCS, contact Michael Duane Archer at Duane@
FxPraxis.com.
The textbook Goodman wave from recent EUR/USD trading shown in Figure 38.1 gives
us an opportunity to introduce a number of Goodman topics and ideas via a brief tour of
the entire system.
NOTATION
The end points of a matrix (“M”) are denoted by 1-2-3-4; going in to smaller matrices,
i-ii-iii-iv; going out to a larger matrix, A-B-C-D. All matrix notation uses parentheses:
M(1-2-3-4).
A wave is denoted by 1-2-3-4-5-6 (points of the wave); going in to smaller waves, i-ii-
iii-iv-v-vi; going out to larger matrices, A-B-C-D-E-F-G. All waves are denoted as “G.” The
notation uses brackets G[1-2-3-4-5-6].
A matrix always has three components; of course, a component may also itself be a
matrix. A Goodman wave has five components at least for the purposes of notation.
A matrix or wave segment or component is thus M(1-2) or G[3-4-5-6].
MATRIX
A matrix is a simple 1-2-3 swing (three components or segments). It may or may not
have smaller matrices as some of its components. A matrix is either simple (no compo-
nents) or complex (if it has components): M(1-2-3-4). (See Figure 38.2.)
A Goodman wave is the propagation or generation of a complex matrix in a specific
manner and of a specific form: G[1-2-3-4-5-6].
Charlie’s concept of how matrices propagate is different from Elliott’s. Once you
start looking for them, finding them, and analyzing them you will quickly realize how
much more they conform to the real structure of the markets and—more importantly—
how much more easily they may be traded. The propagation concept more accurately
reflects the dynamic of markets than does a static wave concept.
Goodman waves are relatively easy to spot after they are built, or as part of a larger
wave. But what we are most interested in—from the point of view of trading—is the
propagation of a Goodman wave.
PROPAGATION
Any Goodman wave obviously begins with a segment S(1-2). The question becomes—
and this is why the concept of propagation is important: Does the wave develop as a flat
segment followed by a complex matrix—or vice versa?
According to GSCS theory, this segment or matrix now becomes the first compo-
nent of a Goodman wave and is thereafter treated as a single segment or component for
purposes of analysis.
We now look for a 50 percent secondary component retracement of the entire com-
plex matrix or segment. On this chart study this is segment S(4-5). This component
could easily be mistaken for a simple wave in a five-wave Elliott wave pattern, but it is
not. In Goodman it is the key return or propagation segment.
Finally, we look for a component or matrix in the primary direction with a magni-
tude equal to the first component.
In Figure 38.3, note the return or propagation wave (the lighter wave).
The four primary Goodman waves occur every day, over and over again, in all mar-
kets—forex, futures, and securities—and at all price levels. The wave is the foundation
and basis of trading GSCS. The opportunities to trade it are only limited by your time to
seek them out in the markets that most interest you.
Forget trading stations with five monitors; forget specialist short sales; forget complex
volume and open interest calculations; forget Gann charts with 50 lines on them all leading
to nowhere and Fibonacci charts with numbers carried out to 14 significant places.
Elliott mistakenly identified this as a five-component wave. This is not accurate or
precise. What is occurring is that a three-component matrix is propagating in accor-
dance with the 50 percent rule. It is not strictly a five-component wave but rather a ma-
trix in generation or propagation. This propagation is critical and fundamental to GSCS.
SIMPLE/COMPLEX
Note: From a matrix point of view, two of the four Goodman waves appear to be a sim-
ple/complex matrix followed by a complex/simple matrix. It is important to think only
in terms of the four Goodman wave types shown in Figure 38.3. By thinking in terms of
propagation you will better anticipate the unfolding of the market through time.
For now just drill into memory the four Goodman wave types.
Keep in mind that—at least theoretically—Goodman waves propagate inward and
outward, meaning that every wave is composed of smaller waves and every wave is a
component of a larger wave. The same is true of matrices.
FAT/THIN
Note in the complex matrix of Figure 38.4 the first matrix is fat and the second is thin;
this is another important alternating structure that assists in templating and trading.
By fat I mean there is a lot of back-and-fro motion (volatility) as prices move up or
down (directional movement). By thin I mean there is little such motion.
The rhythm of the market is much determined by the fatness and thinness of price
action. Rhythm can also give us important clues to templating. In GSCS templating is
the nexus of theory and practice. Templating is the process of laying out the possible
propagations of a wave and narrowing them down as events and prices unfold.
Fatness may simply represent price noise that may be filtered out of analysis. But it
may occasionally represent significant internal matrices and demand deeper analysis.
GOODMAN AND COMPUTERS
The question arises: Is GSCS programmable? The answer is: probably. Software has
been written to capture the basic elements of Goodman. A complete program would be
a substantial undertaking and at least for me would go very much against the grain of
what Charlie had in mind.
A small program to spot intersections, perhaps in TradeStation or StrategyBuilder
format, would not be too difficult.
For further information about GSCS, contact Michael Duane Archer at Duane@
FxPraxis.com.
Forex Trading System- Goodman versus Elliot
OVERVIEW
When I tutor traders on Goodman, I break up the study into ordinal and cardinal.
We study Goodman wave theory (GWT) without respect to measurements first, and
only then overlay a study of the Goodman measurement theory (GMT). These both in-
volve Goodman ordinal rules and Goodman cardinal rules.
Here is a nice formation to look for in GWT. It has some high probabilities, espe-
cially with the use of filters and GMT (the latter beyond the scope of this short primer).
Charlie called it the “Return.”
Elliott identified the basic market wave as having five components (See Figure 37.1.)
This is incorrect. The basic market wave has three components. (See Figure 37.2.)
This propagation rule can be extremely useful in and of itself in anticipating the or-
dinal template of the market as it unfolds, but further details are beyond the scope of
this short overview. There are 16 basic propagation schemes or templates.
THE RETURN
Charlie identified what he called a “return”—defined here as the price location (+/–) in a
wave propagation where the secondary wave of the primary wave approaches the sec-
ondary wave of the complex component. (See Figure 37.4.)
This feature has some interesting ramifications for anticipating the basic market
template. But for the purposes of this overview, I want to draw your attention to a single
idea as a possible short-term trading tactic.
To use this in isolation as a short-term trading tool you will need a timing method—
I recommend a three-box reversal point and figure chart. Also helpful would be moni-
toring the Goodman templates at one higher and one lower matrix. The return can also
be useful in identifying the market template itself.
Typically (but not always) if the return falls short of the point of the BC wave, the
market will build a bit before reversing. If the return is past the point of the BC wave,
the market will often spike through the return point and then reverse.
When this is overlaid with the Goodman cardinal rules, it becomes a very powerful
tool in the broader scope of Goodman studies.
When I tutor traders on Goodman, I break up the study into ordinal and cardinal.
We study Goodman wave theory (GWT) without respect to measurements first, and
only then overlay a study of the Goodman measurement theory (GMT). These both in-
volve Goodman ordinal rules and Goodman cardinal rules.
Here is a nice formation to look for in GWT. It has some high probabilities, espe-
cially with the use of filters and GMT (the latter beyond the scope of this short primer).
Charlie called it the “Return.”
Elliott identified the basic market wave as having five components (See Figure 37.1.)
This is incorrect. The basic market wave has three components. (See Figure 37.2.)
This propagation rule can be extremely useful in and of itself in anticipating the or-
dinal template of the market as it unfolds, but further details are beyond the scope of
this short overview. There are 16 basic propagation schemes or templates.
THE RETURN
Charlie identified what he called a “return”—defined here as the price location (+/–) in a
wave propagation where the secondary wave of the primary wave approaches the sec-
ondary wave of the complex component. (See Figure 37.4.)
This feature has some interesting ramifications for anticipating the basic market
template. But for the purposes of this overview, I want to draw your attention to a single
idea as a possible short-term trading tactic.
To use this in isolation as a short-term trading tool you will need a timing method—
I recommend a three-box reversal point and figure chart. Also helpful would be moni-
toring the Goodman templates at one higher and one lower matrix. The return can also
be useful in identifying the market template itself.
Typically (but not always) if the return falls short of the point of the BC wave, the
market will build a bit before reversing. If the return is past the point of the BC wave,
the market will often spike through the return point and then reverse.
When this is overlaid with the Goodman cardinal rules, it becomes a very powerful
tool in the broader scope of Goodman studies.
Forex Trading System- Cardinal Principles
OVERVIEW
Now we can begin to informally define six of the seven concepts in The Rule that
Mr. Goodman used to construct the Goodman Swing Count System (GCSC). What
had been neglected by previous theorists, users, writers, and purveyors of the rule
was this:
The 50 percent point is indeed an equilibrium point. As such, the equilibrium must
give way, but either side (buyers or sellers) in either a downtrend or an uptrend may
prevail at any given matrix or price level.
PRICE SURGE
Goodman realized both the possibilities for a reversal (as in the case of the completed
measured move) and a price surge. A price surge would be equivalent to the sellers (in
an uptrend) and the buyers (in a downtrend) winning the tug-of-war within a matrix. In
price action this means prices would fall or rise to at least the beginning point of the ini-
tial swing.
In other words, the measured move is not a done deal—the 50 percent retrace-
ment in Figure 36.1 could also become a V or an inverted V. The 50 percent retrace-
ment is not necessarily a reversal point but should be considered as a point of
interest where prices may be more likely than randomlyto decide whether to con-
tinue or reverse.
It may not sound like much, but it is a major discovery.
Clearly price surges are implicit in The Rule. But they are not visible on a chart un-
less you are looking for them and unless you are considering the 50 percent retracement
as a point of interest and not necessarily a reversal. In fact, most practitioners perceive
a price surge as a failure of The Rule!
MULTILEVEL MATRICES
What was even more important, Goodman discovered the implications of The
Rule occurring simultaneously at all price levels. I remember exactly the day and
place when Charlie showed me this one—it hit me as truly a grand revelation on the
markets!
Here you are: The initial (primary) trend and secondary (reaction trend) as well as
reversals (measured moves) and surges are relative to price matrix context. What is one
thing in one price matrix may well be its opposite in a higher (or lower) matrix. (See
Figure 36.2.)
It is true that Elliott wave theory contains the same concept. But with GCSC you
can tell before (in many instances) which it is. In Elliott you can tell only after. GCSC is
a predictive system, whereas Elliott wave theory, grand and elegant as it is, is primarily
a descriptive system.
All price matrices are in theory part of a larger price matrix.
All price matrices are composed of smaller price matrices.
Of course there is the practical limitation of the smallest possible fluctuation.
Besides reversals and surges, GCSC matrix concepts include domination and
generation.
Clearly, prices do not always seem to find any kind of equilibrium at the 50
percent retracement price area. Or so it may seem. This leads to the third grand
discovery:
To the extent a price swing overshoots or undershoots its ideal 50 percent
retracement, that price value will be made up on the next price swing within the
matrix.
Now this is the trading rule that can make you rich!
COMPENSATION
For example, if prices fall only 40 percent of the initial trend and reverse, the mea-
sured move will actually be either 90 percent or 110 percent of the measured move
point and value of the primary (initial) swing in the matrix. The 10 percent differ-
ence—GCSC holds—must be made up eventually. This is the concept of compensa-
tion. See Figure 36.3.
CARRYOVER
Furthermore, if the difference is not fully made up in the final price swing of a matrix,
the cumulative “miss” value will carry over through each subsequent price matrix until
it does. This is the concept of carryover. (See Figure 36.4.) A carryover table is used to
add and subtract cumulative carryover values until they cancel.
CANCELLATION
When no carryover remains, the price matrix is said to have cleared or cancelled.
This is the GCSC concept of cancellation. Cancellation is critical to finding GCSC
support and resistance points. These price areas or points indicate a higher degree of
forecasting probability than would occur with a single matrix measurement. (See
Figure 36.5.)
The exact method for these important concepts is more fully described in the fol-
lowing chapter. We can now get an early glimpse of what the strange brackets in
Charlie’s charts were all about. (See Figure 36.6 for an example.) The brackets indi-
cate the measured area on a chart where prices have a higher degree of moving con-
clusively. The more bracketed areas surrounding a price, the higher the probability of
forecasting.
The five points are: the beginning of the swing, the 50 percent measurement of the
swing, the end of the swing, the measured move if the swing is a primary wave, and the
end of the measured move if the swing is a secondary wave.
INTERSECTIONS
Charlie had even more ideas:
The importance of a hot spot in relation to its likelihood of being an important point
of support or resistance, reversal, or continuation, increases when two or more price
matrices cancel at the same price or same price area. This is the key concept of inter-
section. There is no analogous concept in Elliott, the most common competitor to
GSCS. Intersection makes GSCS much more objective and testable than other swing
systems. (See Figure 36.7.)
This chapter has covered micro formations. Charlie also had compiled a dozen or so
extremely valuable macro formations—combinations of micros. I encourage the reader
to examine some charts and find simple areas of the intersection of two (or three) ma-
trices. You will see at once that these points are golden to the trader. If I had after 30
years of studying the markets only one idea to impart, it would be to show you an exam-
ple of a GSCS intersection in two or three matrices.
Remember, carryover is to the same or next larger price matrix. The above are ex-
amples of independent intersections. That is, each price level carryover calculation is
kept separate from the others and tallied at the end of each matrix. Charlie had also de-
FIVE POINTS OF A GOODMAN WAVE
Here is another perspective to help you analyze a chart and understand GSCS. Given
any component or matrix, there are five points worth watching. Remember, these points
are constantly changing as the market develops.
The five points are: the 50 percent return, the top/bottom, the bottom/top, the mea-
sured move assuming the matrix or component is in the primary direction, and the mea-
sured move assuming the matrix or component is in the secondary direction. (See
Figure 36.8.)
Sometimes it is easier to watch the points instead of totally focusing on the chart as
it develops.
DOUBLE AND TRIPLE INTERSECTIONS
The two key cardinal formations in GSCS are the double intersection and the triple in-
tersection. These represent (respectively) the intersection of two and three matrix
measurements.
The strong support and resistance at these areas may be used to enter the market in
the direction of the dominant wave. (See Figure 36.9.)
Now we can begin to informally define six of the seven concepts in The Rule that
Mr. Goodman used to construct the Goodman Swing Count System (GCSC). What
had been neglected by previous theorists, users, writers, and purveyors of the rule
was this:
The 50 percent point is indeed an equilibrium point. As such, the equilibrium must
give way, but either side (buyers or sellers) in either a downtrend or an uptrend may
prevail at any given matrix or price level.
PRICE SURGE
Goodman realized both the possibilities for a reversal (as in the case of the completed
measured move) and a price surge. A price surge would be equivalent to the sellers (in
an uptrend) and the buyers (in a downtrend) winning the tug-of-war within a matrix. In
price action this means prices would fall or rise to at least the beginning point of the ini-
tial swing.
In other words, the measured move is not a done deal—the 50 percent retrace-
ment in Figure 36.1 could also become a V or an inverted V. The 50 percent retrace-
ment is not necessarily a reversal point but should be considered as a point of
interest where prices may be more likely than randomlyto decide whether to con-
tinue or reverse.
It may not sound like much, but it is a major discovery.
Clearly price surges are implicit in The Rule. But they are not visible on a chart un-
less you are looking for them and unless you are considering the 50 percent retracement
as a point of interest and not necessarily a reversal. In fact, most practitioners perceive
a price surge as a failure of The Rule!
MULTILEVEL MATRICES
What was even more important, Goodman discovered the implications of The
Rule occurring simultaneously at all price levels. I remember exactly the day and
place when Charlie showed me this one—it hit me as truly a grand revelation on the
markets!
Here you are: The initial (primary) trend and secondary (reaction trend) as well as
reversals (measured moves) and surges are relative to price matrix context. What is one
thing in one price matrix may well be its opposite in a higher (or lower) matrix. (See
Figure 36.2.)
It is true that Elliott wave theory contains the same concept. But with GCSC you
can tell before (in many instances) which it is. In Elliott you can tell only after. GCSC is
a predictive system, whereas Elliott wave theory, grand and elegant as it is, is primarily
a descriptive system.
All price matrices are in theory part of a larger price matrix.
All price matrices are composed of smaller price matrices.
Of course there is the practical limitation of the smallest possible fluctuation.
Besides reversals and surges, GCSC matrix concepts include domination and
generation.
Clearly, prices do not always seem to find any kind of equilibrium at the 50
percent retracement price area. Or so it may seem. This leads to the third grand
discovery:
To the extent a price swing overshoots or undershoots its ideal 50 percent
retracement, that price value will be made up on the next price swing within the
matrix.
Now this is the trading rule that can make you rich!
COMPENSATION
For example, if prices fall only 40 percent of the initial trend and reverse, the mea-
sured move will actually be either 90 percent or 110 percent of the measured move
point and value of the primary (initial) swing in the matrix. The 10 percent differ-
ence—GCSC holds—must be made up eventually. This is the concept of compensa-
tion. See Figure 36.3.
CARRYOVER
Furthermore, if the difference is not fully made up in the final price swing of a matrix,
the cumulative “miss” value will carry over through each subsequent price matrix until
it does. This is the concept of carryover. (See Figure 36.4.) A carryover table is used to
add and subtract cumulative carryover values until they cancel.
CANCELLATION
When no carryover remains, the price matrix is said to have cleared or cancelled.
This is the GCSC concept of cancellation. Cancellation is critical to finding GCSC
support and resistance points. These price areas or points indicate a higher degree of
forecasting probability than would occur with a single matrix measurement. (See
Figure 36.5.)
The exact method for these important concepts is more fully described in the fol-
lowing chapter. We can now get an early glimpse of what the strange brackets in
Charlie’s charts were all about. (See Figure 36.6 for an example.) The brackets indi-
cate the measured area on a chart where prices have a higher degree of moving con-
clusively. The more bracketed areas surrounding a price, the higher the probability of
forecasting.
The five points are: the beginning of the swing, the 50 percent measurement of the
swing, the end of the swing, the measured move if the swing is a primary wave, and the
end of the measured move if the swing is a secondary wave.
INTERSECTIONS
Charlie had even more ideas:
The importance of a hot spot in relation to its likelihood of being an important point
of support or resistance, reversal, or continuation, increases when two or more price
matrices cancel at the same price or same price area. This is the key concept of inter-
section. There is no analogous concept in Elliott, the most common competitor to
GSCS. Intersection makes GSCS much more objective and testable than other swing
systems. (See Figure 36.7.)
This chapter has covered micro formations. Charlie also had compiled a dozen or so
extremely valuable macro formations—combinations of micros. I encourage the reader
to examine some charts and find simple areas of the intersection of two (or three) ma-
trices. You will see at once that these points are golden to the trader. If I had after 30
years of studying the markets only one idea to impart, it would be to show you an exam-
ple of a GSCS intersection in two or three matrices.
Remember, carryover is to the same or next larger price matrix. The above are ex-
amples of independent intersections. That is, each price level carryover calculation is
kept separate from the others and tallied at the end of each matrix. Charlie had also de-
FIVE POINTS OF A GOODMAN WAVE
Here is another perspective to help you analyze a chart and understand GSCS. Given
any component or matrix, there are five points worth watching. Remember, these points
are constantly changing as the market develops.
The five points are: the 50 percent return, the top/bottom, the bottom/top, the mea-
sured move assuming the matrix or component is in the primary direction, and the mea-
sured move assuming the matrix or component is in the secondary direction. (See
Figure 36.8.)
Sometimes it is easier to watch the points instead of totally focusing on the chart as
it develops.
DOUBLE AND TRIPLE INTERSECTIONS
The two key cardinal formations in GSCS are the double intersection and the triple in-
tersection. These represent (respectively) the intersection of two and three matrix
measurements.
The strong support and resistance at these areas may be used to enter the market in
the direction of the dominant wave. (See Figure 36.9.)
Forex Trading System- Ordinal Principles
ORDINAL VERSUS CARDINAL
Within the context of this book, ordinal refers to measurement without specific values;
cardinal refers to measurement with specific values.
THE MEASURED MOVE
The cornerstone of the Goodman Swing Count System (GSCS) is the old “50 Percent
Retracement and Measured Move” rule (“The Rule”). (See Figure 35.1.) This rule, fa-
miliar to most traders, is almost as old as the organized markets themselves. It has
been traced to the times when insiders manipulated railroad stocks in the nineteenth
century.
The first systematic description of The Rule was given in Burton Pugh’s The
Great Wheat Secret, originally published in 1933. In 1976, Charles L. Lindsay’s Tri-
dentwas published. This book did much—some say too much!—to quantify and
mathematically describe The Rule. Nevertheless, it is must reading for anyone inter-
ested in this area of market methodology. Edward L. Dobson wrote The Trading Rule
That Can Make You Rich in 1978. This is a good work with some nice examples. But
none of these, in my humble opinion, even scratches the surface relative to Goodman’s
work.
CONGESTION PHASE
In 1975 a well-known Chicago grain floor trader, Eugene Nofri, published Success in
Commodities: The Congestion Phase System. This small but power-packed volume
detailed a short-term trading method using simple but effective congestion phases.
(See Figure 35.2.) While not precisely a work on The Rule, it touched on some of
Charlie’s ideas from a different angle.
I mention Nofri’s work also because Charlie was especially taken by its simplic-
ity and because it can work well in conjunction with the GCSC. The idea of melding
the GCSC with a congestion phase approach ought to produce a method of finding
those high-percentage ducks that the Belgian dentist loves so much. Charlie also felt
that Earl Hadady’s work on contrary opinion was a natural fit, especially since the
GCSC support and resistance points seldom lie where anyone else thinks they
should.
Still, in the end, it was left for Charles B. Goodman, the great grain trader from
Eads, Colorado, to extract all the logical consequences from The Rule and transform it
into a robust, almost geometrically precise system.
EQUILIBRIUM OF BUYERS AND SELLERS
The logic of The Rule is quite simple. At a 50 percent retracement, both buyers and sell-
ers of the previous trend (up or down) are ceteris paribus in balance. Half of each holds
profits and half of each holds losses. (See Figure 35.3.)
The equilibrium is a tenuous one, indeed. The distribution of buyers and sellers over
the initial price trend or swing is obviously not perfectly even: Some buyers hold more
contracts than other buyers. They also have different propensities for taking profits or
losses. Nor does it account for the buyers and sellers who have entered the market be-
fore the initial swing or during the reaction swing. Not all of the buyers and sellers from
the original swing may be in the market any longer.
Remarkably, GCSC eventually takes all of this into account—especially the buyers
and sellers at other price swing levels, called matrices.
Nevertheless, the 50 percent retracement point isoften a powerful and very real
point of equilibrium and certainly a known and defined hot spot of which one should be
aware. Remember that both the futures markets and the currency markets are very
close to a zero-sum game. It is only commissions, pips, and slippage that keep them
from being zero-sum. At the 50 percent point it doesn’t take much to shift the balance of
power for that particular swing matrix.
The Rule also states that the final (third) swing of the move—again in the direction
of the initial swing—will equal the value of the initial swing. The logic of this idea, called
the measured move, is seen in Figure 35.4.
Examples of The Rule occur at allprice levels or matrices, and many are being
worked simultaneously in any given ongoing market. This is a critical point. In modern
terminology it would be said that price movements are recursive. Simply stated, this
means that without labeling you could not really tell the difference between a 10-minute
chart and a daily or weekly chart—they all exhibit the same behavior and operate under
the same principles of parameter and matrix. The bar graphs in Figure 35.5 were taken
from actual market data. It is functionally impossible to tell the time units apart with re-
spect to the chart action.
Within the context of this book, ordinal refers to measurement without specific values;
cardinal refers to measurement with specific values.
THE MEASURED MOVE
The cornerstone of the Goodman Swing Count System (GSCS) is the old “50 Percent
Retracement and Measured Move” rule (“The Rule”). (See Figure 35.1.) This rule, fa-
miliar to most traders, is almost as old as the organized markets themselves. It has
been traced to the times when insiders manipulated railroad stocks in the nineteenth
century.
The first systematic description of The Rule was given in Burton Pugh’s The
Great Wheat Secret, originally published in 1933. In 1976, Charles L. Lindsay’s Tri-
dentwas published. This book did much—some say too much!—to quantify and
mathematically describe The Rule. Nevertheless, it is must reading for anyone inter-
ested in this area of market methodology. Edward L. Dobson wrote The Trading Rule
That Can Make You Rich in 1978. This is a good work with some nice examples. But
none of these, in my humble opinion, even scratches the surface relative to Goodman’s
work.
CONGESTION PHASE
In 1975 a well-known Chicago grain floor trader, Eugene Nofri, published Success in
Commodities: The Congestion Phase System. This small but power-packed volume
detailed a short-term trading method using simple but effective congestion phases.
(See Figure 35.2.) While not precisely a work on The Rule, it touched on some of
Charlie’s ideas from a different angle.
I mention Nofri’s work also because Charlie was especially taken by its simplic-
ity and because it can work well in conjunction with the GCSC. The idea of melding
the GCSC with a congestion phase approach ought to produce a method of finding
those high-percentage ducks that the Belgian dentist loves so much. Charlie also felt
that Earl Hadady’s work on contrary opinion was a natural fit, especially since the
GCSC support and resistance points seldom lie where anyone else thinks they
should.
Still, in the end, it was left for Charles B. Goodman, the great grain trader from
Eads, Colorado, to extract all the logical consequences from The Rule and transform it
into a robust, almost geometrically precise system.
EQUILIBRIUM OF BUYERS AND SELLERS
The logic of The Rule is quite simple. At a 50 percent retracement, both buyers and sell-
ers of the previous trend (up or down) are ceteris paribus in balance. Half of each holds
profits and half of each holds losses. (See Figure 35.3.)
The equilibrium is a tenuous one, indeed. The distribution of buyers and sellers over
the initial price trend or swing is obviously not perfectly even: Some buyers hold more
contracts than other buyers. They also have different propensities for taking profits or
losses. Nor does it account for the buyers and sellers who have entered the market be-
fore the initial swing or during the reaction swing. Not all of the buyers and sellers from
the original swing may be in the market any longer.
Remarkably, GCSC eventually takes all of this into account—especially the buyers
and sellers at other price swing levels, called matrices.
Nevertheless, the 50 percent retracement point isoften a powerful and very real
point of equilibrium and certainly a known and defined hot spot of which one should be
aware. Remember that both the futures markets and the currency markets are very
close to a zero-sum game. It is only commissions, pips, and slippage that keep them
from being zero-sum. At the 50 percent point it doesn’t take much to shift the balance of
power for that particular swing matrix.
The Rule also states that the final (third) swing of the move—again in the direction
of the initial swing—will equal the value of the initial swing. The logic of this idea, called
the measured move, is seen in Figure 35.4.
Examples of The Rule occur at allprice levels or matrices, and many are being
worked simultaneously in any given ongoing market. This is a critical point. In modern
terminology it would be said that price movements are recursive. Simply stated, this
means that without labeling you could not really tell the difference between a 10-minute
chart and a daily or weekly chart—they all exhibit the same behavior and operate under
the same principles of parameter and matrix. The bar graphs in Figure 35.5 were taken
from actual market data. It is functionally impossible to tell the time units apart with re-
spect to the chart action.
Forex Trading System- History
CHARLES B. GOODMAN
The principles of the Goodman Swing Count System (GSCS) were informally set forth
in a series of annotated commodity charts from the late 1940s to the early 1970s. These
trading studies, simply titled “My System,” were the work of Charles B. Goodman and
were never published.
I (Michael Archer) met Charles Goodman at the Denver, Colorado, offices of Peavey
and Company (later, Gelderman) in the fall of 1971. It was the occasion of my maiden
voyage in the great sea of commodity trading (later, futures). In 1971 silver prices were
finally forging ahead to the $2.00/ounce level. A 10-cent limit move in soybeans elicited a
full afternoon of postmortem analysis by traders and brokers alike.
The Peavey office, managed by the late and great Pete Rednor, employed eight
brokers (later, account representatives). The broker for both Mr. Goodman and me
was the colorful—and patient—Ken Malo. Brokers, resident professional traders—
including Mr. Goodman and the Feldman brothers, Stu and Reef—and a regular con-
tingent of retail customers drew inspiration from a Trans-Lux ticker that wormed its
way across a long, narrow library table in the back of the office. Most impressive was
a large clacker board quote system covering almost the entire front office wall. This
electromechanical quotation behemoth made loud clacking sounds (thus its name)
each time an individual price flipped over to reveal an updated quote. Green and red
lights flashed, denoting daily new highs and lows. Pete, apart from being an excellent
office manager, was also a fine showman who used the various stimuli to encourage
trading activity.
229
THE RIGHT BRACKETS
Almost everyone made frequent reference to Charlie’s hugebar charts posted on 21/2-
by-4-foot sheets of graph paper, mounted on heavy particle board and displayed on
large easels. No one ever really knew what the numerous right brackets (])of varying
lengths scattered throughout each chart meant. But there was always a great deal of
speculation! The present work finally reveals the meaning of those mysterious trading
hieroglyphics.
The quiet chatter of the tickertape, the loud clacking of the quote board, the con-
stant ringing of the telephones. The news ticker that buzzed oncefor standing reports,
twice for opinions, and three times for hot news. The squawk boxes and Pete Rednor’s
authoritative voice booming, “Merc! Merc!” What a spectacular scene it was! No wonder
that this author, then a 21-year-old trading newbie, would soon make commodity futures
and currency trading his life’s work.
But nothing made a greater impression on me than the work of Charles B. Good-
man. He instilled first some very simple ideas: “Avoid volatile markets when at all pos-
sible.” “Trade only high-percentage short-term ‘ducks.’” “Sit on your hands, Dad, sit
on your hands.” It didn’t take long for me to adopt the ultraconservative “Belgian den-
tist” style of trading, that is, “Avoiding losing trades is more important than finding
winning trades.”
The Belgian dentist approach carried with me when I developed my artificial intelli-
gence (AI) trading system in the 1980s—Jonathan’s Wave. Even though it generated 48
percent annual returns with a zero expectation of a 50 percent drawdown (according to
Managed Account Reports), it drove the brokers berserk because it could easily go a full
month without making a single trade!
I am certain that Charlie’s trading advice allowed me to survive the financial bap-
tism by fire that destroys most commodity and currency trading newbies in a matter of
months, if not weeks.
Mr. Goodman was to be my one and only trading mentor. Over the decade that fol-
lowed he entrusted to me many, if not most, of his trading secrets. To the best of my
knowledge he shared this information on his work with no one else in such detail.
LATER DEVELOPMENTS
Charlie and I spent hundreds of hours together analyzing the trade studies from My Sys-
tem. We also analyzed hundreds of other commodity, currency, and securities charts.
Charlie was happy with My System being organized in his mind. But as a new-generation
technical analyst, I was anxious to see it formalized on paper and eventually in source
code on a computer. To be honest, this created a small amount of friction between the
two of us—Charlie was dead set against formalized systems and believed strongly in the
psychological and money management elements of trading.
230
GOODMAN SWING COUNT SYSTEM
Notwithstanding, by 1979 I was finally ready and able to formally state the princi-
ples of My System. Because of its equal concern for price measurements (parameters)
and price levels interacting together (matrices), I originally renamed Charlie’s My Sys-
tem “ParaMatrix.” My first investment management company in the mid-1970s was Para-
Matrix Investment Management, and I acted as both an investment advisor registered
with the Securities and Exchange Commission (SEC) and a Commodity Trading Advisor
registered with the Commodity Futures Trading Commission (CFTC).
Contrary to ongoing speculation, only two copies of my original 1979 Principles of
ParaMatrixever existed. I possess both of them. Charlie’s original My System trade
studies were mistakenly destroyed shortly after his death in 1984. What remains of them
are fewer than 200 or so examples I had copied into Principles of ParaMatrix.
The present work (Part 5), “Goodman Swing Count System,” is a reorganized reis-
sue of Principles of ParaMatrixwith updated charts and a simplified nomenclature
that I am sure Charlie would have appreciated; “Keep it simple, Dad!” he would always
advise. In a later work I hope to expand on Charlie’s ideas by filling in some less formed
ideas such as his market notation, or calculus as he referred to it, and a method for
charting that I have dubbed Goodman charting. He also worked out a time-based, cycli-
cal count system.
My own direction in futures and currencies turned in the 1980s to artificial intelli-
gence (Jonathan’s Wave) and in the 1990s and today to artificial life and cellular au-
tomata (the Trend Machine). In spite of, or perhaps because of, these complicated
cutting-edge computer efforts, I continue to view the Goodman Swing Count System
(GSCS) in a very positive light. To this day, the first thing I do when I see any chart is a
quick Goodman analysis!
The GSCS is a natural system for pursuing the conservative Belgian dentist ap-
proach to trading, even without the aid of a computer. Part 5, in fact, could be used to
make Goodman analysis without a computer at all!
Goodman Swing Count System trade opportunities are as frequent today as (per-
haps more frequent than) they were 40 or 50 years ago. I believe that the system’s foun-
dations have stood the test of time well. Patterns today are no different than they were
decades ago, nor are the twin human emotions—fear and greed—that create them.
GSCS is an excellent method for finding support and resistance areas that no other
method spots, and for locating potentialturning points in any market. One of its best
suits is that it can easily integrate into other trading techniques and methodologies.
I would never recommend using or advise anyone to use a 100 percent mechanical
trading system, GSCS or any other!
Is it really a system? Depending upon your perspective, GSCS is between 70 per-
cent and 90 percent mechanical. The program available from CommTools, Inc.
(www.commtools.com) represents the kernel idea of mechanizing perhaps 80 percent
of the system. I now believe attempting to completely code Charlie’s work would be
inadvisable.
Mr. Goodman passed away in 1984. It was always his desire to share with others, al-
though as is usually the case with true genius—few wanted to listen. These days we are
History
231
ever more bombarded with ever more cryptic and computer-dependent software pro-
grams and black boxes. Perhaps now is the time for the simple yet theoretically well-
grounded ideas of GSCS to become popular.
The publication of this brief overview, I hope and pray, would meet with Charlie’s
wishes. His work in extracting an objective and almost geometrically precise (à la Bene-
dict de Spinoza) trading system out of a simple trading rule (the 50 percent rule) is most
remarkable. It has certainly earned him the right to be included in the elite group of
early scientific traders along with George D. Taylor, Ralph N. Elliott, William D. Gann,
and Burton Pugh.
Conforming to the spirit of the original My System, I have attempted to keep theo-
retical discussions and formulations to a necessary minimum. Trade studies at the end
of Part 5 of this book must still be considered the crux of GSCS, even though I am
pleased with the formalization of most relevant principles described in the following
sections. The trader weary of theoretical discussions and intrigue will find all the con-
cepts and principles delineated in the trade study examples. Nevertheless, those who in-
vest time in the theory of GSCS will undoubtedly discover an area for further
exploration where many new and fresh ideas are waiting to be mined.
In Mr. Goodman’s worldly absence, the responsibility for this work and its contents
is solely mine, for better or for worse.
The principles of the Goodman Swing Count System (GSCS) were informally set forth
in a series of annotated commodity charts from the late 1940s to the early 1970s. These
trading studies, simply titled “My System,” were the work of Charles B. Goodman and
were never published.
I (Michael Archer) met Charles Goodman at the Denver, Colorado, offices of Peavey
and Company (later, Gelderman) in the fall of 1971. It was the occasion of my maiden
voyage in the great sea of commodity trading (later, futures). In 1971 silver prices were
finally forging ahead to the $2.00/ounce level. A 10-cent limit move in soybeans elicited a
full afternoon of postmortem analysis by traders and brokers alike.
The Peavey office, managed by the late and great Pete Rednor, employed eight
brokers (later, account representatives). The broker for both Mr. Goodman and me
was the colorful—and patient—Ken Malo. Brokers, resident professional traders—
including Mr. Goodman and the Feldman brothers, Stu and Reef—and a regular con-
tingent of retail customers drew inspiration from a Trans-Lux ticker that wormed its
way across a long, narrow library table in the back of the office. Most impressive was
a large clacker board quote system covering almost the entire front office wall. This
electromechanical quotation behemoth made loud clacking sounds (thus its name)
each time an individual price flipped over to reveal an updated quote. Green and red
lights flashed, denoting daily new highs and lows. Pete, apart from being an excellent
office manager, was also a fine showman who used the various stimuli to encourage
trading activity.
229
THE RIGHT BRACKETS
Almost everyone made frequent reference to Charlie’s hugebar charts posted on 21/2-
by-4-foot sheets of graph paper, mounted on heavy particle board and displayed on
large easels. No one ever really knew what the numerous right brackets (])of varying
lengths scattered throughout each chart meant. But there was always a great deal of
speculation! The present work finally reveals the meaning of those mysterious trading
hieroglyphics.
The quiet chatter of the tickertape, the loud clacking of the quote board, the con-
stant ringing of the telephones. The news ticker that buzzed oncefor standing reports,
twice for opinions, and three times for hot news. The squawk boxes and Pete Rednor’s
authoritative voice booming, “Merc! Merc!” What a spectacular scene it was! No wonder
that this author, then a 21-year-old trading newbie, would soon make commodity futures
and currency trading his life’s work.
But nothing made a greater impression on me than the work of Charles B. Good-
man. He instilled first some very simple ideas: “Avoid volatile markets when at all pos-
sible.” “Trade only high-percentage short-term ‘ducks.’” “Sit on your hands, Dad, sit
on your hands.” It didn’t take long for me to adopt the ultraconservative “Belgian den-
tist” style of trading, that is, “Avoiding losing trades is more important than finding
winning trades.”
The Belgian dentist approach carried with me when I developed my artificial intelli-
gence (AI) trading system in the 1980s—Jonathan’s Wave. Even though it generated 48
percent annual returns with a zero expectation of a 50 percent drawdown (according to
Managed Account Reports), it drove the brokers berserk because it could easily go a full
month without making a single trade!
I am certain that Charlie’s trading advice allowed me to survive the financial bap-
tism by fire that destroys most commodity and currency trading newbies in a matter of
months, if not weeks.
Mr. Goodman was to be my one and only trading mentor. Over the decade that fol-
lowed he entrusted to me many, if not most, of his trading secrets. To the best of my
knowledge he shared this information on his work with no one else in such detail.
LATER DEVELOPMENTS
Charlie and I spent hundreds of hours together analyzing the trade studies from My Sys-
tem. We also analyzed hundreds of other commodity, currency, and securities charts.
Charlie was happy with My System being organized in his mind. But as a new-generation
technical analyst, I was anxious to see it formalized on paper and eventually in source
code on a computer. To be honest, this created a small amount of friction between the
two of us—Charlie was dead set against formalized systems and believed strongly in the
psychological and money management elements of trading.
230
GOODMAN SWING COUNT SYSTEM
Notwithstanding, by 1979 I was finally ready and able to formally state the princi-
ples of My System. Because of its equal concern for price measurements (parameters)
and price levels interacting together (matrices), I originally renamed Charlie’s My Sys-
tem “ParaMatrix.” My first investment management company in the mid-1970s was Para-
Matrix Investment Management, and I acted as both an investment advisor registered
with the Securities and Exchange Commission (SEC) and a Commodity Trading Advisor
registered with the Commodity Futures Trading Commission (CFTC).
Contrary to ongoing speculation, only two copies of my original 1979 Principles of
ParaMatrixever existed. I possess both of them. Charlie’s original My System trade
studies were mistakenly destroyed shortly after his death in 1984. What remains of them
are fewer than 200 or so examples I had copied into Principles of ParaMatrix.
The present work (Part 5), “Goodman Swing Count System,” is a reorganized reis-
sue of Principles of ParaMatrixwith updated charts and a simplified nomenclature
that I am sure Charlie would have appreciated; “Keep it simple, Dad!” he would always
advise. In a later work I hope to expand on Charlie’s ideas by filling in some less formed
ideas such as his market notation, or calculus as he referred to it, and a method for
charting that I have dubbed Goodman charting. He also worked out a time-based, cycli-
cal count system.
My own direction in futures and currencies turned in the 1980s to artificial intelli-
gence (Jonathan’s Wave) and in the 1990s and today to artificial life and cellular au-
tomata (the Trend Machine). In spite of, or perhaps because of, these complicated
cutting-edge computer efforts, I continue to view the Goodman Swing Count System
(GSCS) in a very positive light. To this day, the first thing I do when I see any chart is a
quick Goodman analysis!
The GSCS is a natural system for pursuing the conservative Belgian dentist ap-
proach to trading, even without the aid of a computer. Part 5, in fact, could be used to
make Goodman analysis without a computer at all!
Goodman Swing Count System trade opportunities are as frequent today as (per-
haps more frequent than) they were 40 or 50 years ago. I believe that the system’s foun-
dations have stood the test of time well. Patterns today are no different than they were
decades ago, nor are the twin human emotions—fear and greed—that create them.
GSCS is an excellent method for finding support and resistance areas that no other
method spots, and for locating potentialturning points in any market. One of its best
suits is that it can easily integrate into other trading techniques and methodologies.
I would never recommend using or advise anyone to use a 100 percent mechanical
trading system, GSCS or any other!
Is it really a system? Depending upon your perspective, GSCS is between 70 per-
cent and 90 percent mechanical. The program available from CommTools, Inc.
(www.commtools.com) represents the kernel idea of mechanizing perhaps 80 percent
of the system. I now believe attempting to completely code Charlie’s work would be
inadvisable.
Mr. Goodman passed away in 1984. It was always his desire to share with others, al-
though as is usually the case with true genius—few wanted to listen. These days we are
History
231
ever more bombarded with ever more cryptic and computer-dependent software pro-
grams and black boxes. Perhaps now is the time for the simple yet theoretically well-
grounded ideas of GSCS to become popular.
The publication of this brief overview, I hope and pray, would meet with Charlie’s
wishes. His work in extracting an objective and almost geometrically precise (à la Bene-
dict de Spinoza) trading system out of a simple trading rule (the 50 percent rule) is most
remarkable. It has certainly earned him the right to be included in the elite group of
early scientific traders along with George D. Taylor, Ralph N. Elliott, William D. Gann,
and Burton Pugh.
Conforming to the spirit of the original My System, I have attempted to keep theo-
retical discussions and formulations to a necessary minimum. Trade studies at the end
of Part 5 of this book must still be considered the crux of GSCS, even though I am
pleased with the formalization of most relevant principles described in the following
sections. The trader weary of theoretical discussions and intrigue will find all the con-
cepts and principles delineated in the trade study examples. Nevertheless, those who in-
vest time in the theory of GSCS will undoubtedly discover an area for further
exploration where many new and fresh ideas are waiting to be mined.
In Mr. Goodman’s worldly absence, the responsibility for this work and its contents
is solely mine, for better or for worse.
Forex Trading System- Introduction to forex
Little History
The purpose of this ebook is to introduce the forex market to you. As
with many markets there are many derivative of the central market
such as futures, options and forwards. In this book we will only be
discussing the main market sometime referred to as the Spot or Cash
market.
The word FOREX is derived from the words Foreign Exchange and is
the largest financial market in the world. Unlike many markets the FX
market is open 24 hours per day and has an estimated $1.2 Trillion in
turnover every day. This tremendous turnover is more than the
combined turnover of the main worlds' stock markets on any given
day. This tends to lead to a very liquid market and thus a desirable
market to trade.
Unlike many other securities (any financial instrument that can be
traded) the FX market does not have a fixed exchange. It is primarily
traded through banks, brokers, dealers, financial institutions and
private individuals.
Trades are executed through phone and increasingly through the
Internet. It is only in the last few years that the smaller investor has
been able to gain access to this market. Previously the large amounts
of deposits required precluded the smaller investors. With the advent
of the Internet and growing competition it is now easily within the
reach of most investors.
INTERBANK
You will often hear the term INTERBANK discussed in FX
terminology. This originally, as the name implies was simply banks
and large institutions exchanging information about the current rate at
which their clients or themselves were prepared to buy or sell a
currency.
3
INTER meaning between and Bank meaning deposit taking
institutions. The market has moved on to such a degree now that the
term interbank now means anybody who is prepared to buy or sell a
currency.
It could be two individuals or your local travel agent offering to
exchange Euros for US Dollars. You will however find that most of the
brokers and banks use centralized feeds to insure reliability of quote.
The quotes for Bid (buy) and Offer (sell) will all be from reliable
sources. These quotes are normally made up of the top 300 or so
large institutions. This insures that if they place an order on your
behalf that the institutions they have placed the order with is capable
of fulfilling the order.
Now although we have spoken about orders being fulfilled, it is
estimated that anywhere from 70%-90% of the FX market is
speculative. In other words the person or institution that bought or
sold the currency has no intention of actually taking delivery of the
currency. Instead they were solely speculating on the movement of
that particular currency.
Source: Bank For International Settlements http://www.bis.org
Extract From The Triennial Central Bank Survey of Foreign Exchange
and Derivatives Market Activity.
Currency 1989 1992 1995 1998 2001
US Dollar 90 82.0 83.3 87.3 90.4
Euro 37.6
Japanese Yen 27 23.4 24.1 20.2 22.7
Pound Sterling 15 13.6 9.4 11.0 13.2
Swiss Franc 10 8.4 7.3 7.1 6.1
As you can see from the above table over 90% of all currencies are
traded against the US Dollar. The four next most traded currencies
are the Euro (EUR), Japanese Yen (JPY), Pound Sterling (GBP) and
Swiss Franc (CHF).
4
As currencies are traded in pairs and exchanged one for the other
when traded, the rate at which they are exchanged is called the
exchange rate. These four currencies traded against the US Dollar
make up the majority of the market and are called major currencies or
the majors.
Market Mechanics
So now we know that the FX market is the largest in the world and
that your broker or institution that you are trading with is collecting
quotes from a centralized feed or individual quotes comprising of
interbank rates.
So how are these quotes made up? Well, as we previously
mentioned currencies are traded in pairs and are each assigned a
symbol. For the Japanese Yen it is JPY, for the Pounds Sterling it is
GBP, for Euro it is EUR and for the Swiss Frank it is CHF. So,
EUR/USD would be Euro-Dollar pair. GBP/USD would be pounds
Sterling-Dollar pair and USD/CHF would be Dollar-Swiss Franc pair
and so on.
You will always see the USD quoted first with few exceptions such as
Pounds Sterling, Euro Dollar, Australia Dollar and New Zealand
Dollar. The first currency quoted is called the base currency. Have a
look below for some example.
Currency Symbol Currency Pair
EUR/USD Euro / US Dollar
GBP/USD Pounds Sterling/ US Dollar
USD/JPY US Dollar / Japanese Yen
USD/CHF US Dollar / Swiss Franc
USD/CAD US Dollar / Canadian Dollar
AUD/USD Australian Dollar / US Dollar
NZD/USD New Zealand Dollar / US Dollar
5
When you see FX quotes you will actually see two numbers. The first
number is called the bid and the second number is called the offer
(sometimes called the ASK).
If we use the EUR/USD as an example you might see 0.9950/0.9955
the first number 0.9950 is the bid price and is the price traders are
prepared to buy Euros against the USD Dollar. The second number
0.9955 is the offer price and is the price traders are prepared to sell
the Euro against the US Dollar.
These quotes are sometimes abbreviated to the last two digits of the
currency such as 50/55. Each broker has its own convention and
some will quote the full number and others will show only the last two.
You will also notice that there is a difference between the bid and the
offer price and that is called the spread. For the four major currencies
the spread is normally 5 give or take a pip (will explain pips later)
To carry on from the symbol conventions and using our previous EUR
quote of 0.9950 bid, that means that 1 Euro = 0.9950 US Dollars. In
another example if we used the USD/CAD 1.4500 that would mean
that 1 US Dollar = 1.4500 Canadian Dollars.
The most common increment of currencies is the PIP. If the
EUR/USD moves from 0.9550 to 0.9551 that is one pip. A pip is the
last decimal place of a quotation. The pip or POINT as it is
sometimes referred to depending on context is how we will measure
our profit or loss.
As each currency has its own value, it is necessary to calculate the
value of a pip for that particular currency. We also want a constant so
we will assume that we want to convert everything to US Dollars. In
currencies where the US Dollar is quoted first the calculation would
be as follows.
6
Example JPY rate of 116.73 (notice the JPY only goes to two decimal
places, most of the other currencies have four decimal places)
In the case of the JPY 1 pip would be .01 therefore
USD/JPY:
(.01 divided by exchange rate = pip value) so .01/116.73=0.0000856.
It looks like a big number but later we will discuss lot (contract) size
later.
USD/CHF:
(.0001 divided by exchange rate = pip value) so .0001/1.4840 =
0.0000673
USD/CAD:
(.0001 divided by exchange rate = pip value) so .0001/1.5223 =
0.0001522
In the case where the US Dollar is not quoted first and we want to get
to the US Dollar value we have to add one more step.
EUR/USD:
(0.0001 divided by exchange rate = pip value) so .0001/0.9887 =
EUR 0.0001011 but we want to get back to US Dollars so we add
another little calculation which is EUR X Exchange rate so
0.0001011 X 0.9887 = 0.0000999 when rounded up it would be
0.0001.
GBP/USD:
(0.0001 divided by exchange rate = pip value) so 0.0001/1.5506 =
GBP 0.0000644 but we want to get back to US Dollars so we add
another little calculation which is GBP X Exchange rate so
0.0000644 X 1.5506 = 0.0000998 when rounded up it would be
0.0001.
By this time you might be rolling your eyes back and thinking do I
really need to work all this out, and the answer is no.
7
Nearly all the brokers you will deal with will work all this out for you.
They may have slightly different conventions, but it is all done
automatically. It is good however for you to know how they work it
out. In the next section we will be discussing how these seemingly
insignificant amounts can add up.
More On Market Mechanics
Spot Forex is traditionally traded in lots also referred to as contracts.
The standard size for a lot is $100,000. In the last few years a mini lot
size has been introduced of $10,000 and this again may change in
the years to come.
As we mentioned on the previous page currencies are measured in
pips, which is the smallest increment of that currency. To take
advantage of these tiny increments it is desirable to trade large
amounts of a particular currency in order to see any significant profit
or loss. We shall cover leverage later but for the time being let's
assume that we will be using $100,000 lot size. We will now
recalculate some examples to see how it effects the pip value.
USD/JPY at an exchange rate of 116.73
(.01/116.73) X $100,000 = $8.56 per pip
USD/CHF at an exchange rate of 1.4840
(0.0001/1.4840) X $100,000 = $6.73 per pip
In cases where the US Dollar is not quoted first the formula is slightly
different.
EUR/USD at an exchange rate of 0.9887
(0.0001/ 0.9887) X EUR 100,000 = EUR 10.11 to get back to US
Dollars we add a further step
EUR 10.11 X Exchange rate which looks like EUR 10.11 X 0.9887 =
$9.9957 rounded up will be $10 per pip.
8
GBP/USD at an exchange rate of 1.5506
(0.0001/1.5506) X GBP 100,000 = GBP 6.44 to get back to US
Dollars we add a further step
GBP 6.44 X Exchange rate which looks like GBP 6.44 X 1.5506 =
$9.9858864 rounded up will be $10 per pip.
As we said earlier your broker might have a different convention for
calculating pip value relative to lot size but however they do it they
will be able to tell you what the pip value for the currency you are
trading is at that particular time. Remember that as the market moves
so will the pip value depending on what currency you trade.
So now we know how to calculate pip value lets have a look at how
you work out your profit or loss. Let's assume you want to buy US
Dollars and Sell Japanese Yen. The rate you are quoted is
116.70/116.75 because you are buying the US you will be working on
the 116.75, the rate at which traders are prepared to sell.
So you buy 1 lot of $100,000 at 116.75. A few hours later the price
moves to 116.95 and you decide to close your trade. You ask for a
new quote and are quoted 116.95/117.00. As you are now closing
your trade and you initially bought to enter the trade you now sell in
order to close the trade and you take 116.95 the price traders are
prepared to buy at. The difference between 116.75 and 116.95 is .20
or 20 pips. Using our formula from before, we now have (.01/116.95)
X $100,000 = $8.55 per pip X 20 pips =$171
In the case of the EUR/USD you decide to sell the EUR and are
quoted 0.9885/0.9890 you take 0.9885. Now don't get confused here.
Remember you are now selling and you need a buyer. The buyer is
biding 0.9885 and that is what you take. A few hours later the EUR
moves to 0.9805 and you ask for a quote.
You are quoted 0.9805/0.9810 and you take 0.9810. You originally
sold EUR to open the trade and now to close the trade you must buy
back your position. In order to buy back your position you take the
price traders are prepared to sell at which is 0.9810.
9
The difference between 0.9810 and 0.9885 is 0.0075 or 75 pips.
Using the formula from before, we now have (.0001/0.9810) X EUR
100,000 = EUR10.19: EUR 10.19 X Exchange rate 0.9810
=$9.99($10) so 75 X $10 = $750.
To reiterate what has gone before, when you enter or exit a trade at
some point your are subject to the spread in the bid/offer quote. As a
rule of thumb when you buy a currency you will use the offer price
and when you sell you will use the bid price.
So when you buy a currency you pay the spread as you enter the
trade but not as you exit and when you sell a currency you pay no
spread when you enter but only when you exit.
Leverage
Leverage financed with credit, such as that purchased on a margin
account is very common in Forex. A margined account is a
leverageable account in which Forex can be purchased for a
combination of cash or collateral depending what your brokers will
accept.
The loan (leverage) in the margined account is collateralized by your
initial margin (deposit), if the value of the trade (position) drops
sufficiently, the broker will ask you to either put in more cash, or sell a
portion of your position or even close your position.
Margin rules may be regulated in some countries, but margin
requirements and interest vary among broker/dealers so always
check with the company you are dealing with to ensure you
understand their policy.
Up until this point you are probably wondering how a small investor
can trade such large amounts of money (positions). The amount of
leverage you use will depend on your broker and what you feel
comfortable with. There was a time when it was difficult to find
companies prepared to offer margined accounts but nowadays you
can get leverage from a high as 1% with some brokers. This means
you could control $100,000 with only $1,000.
10
Typically the broker will have a minimum account size also known as
account margin or initial margin e.g. $10,000. Once you have
deposited your money you will then be able to trade. The broker will
also stipulate how much they require per position (lot) traded.
In the example above for every $1,000 you have you can take a lot of
$100,000 so if you have $5,000 they may allow you to trade up to
$500,00 of forex.
The minimum security (Margin) for each lot will very from broker to
broker. In the example above the broker required a one percent
margin. This means that for every $100,000 traded the broker wanted
$1,000 as security on the position.
Margin call is also something that you will have to be aware of. If for
any reason the broker thinks that your position is in danger e.g. you
have a position of $100,000 with a margin of one percent ($1,000)
and your losses are approaching your margin ($1,000). He will call
you and either ask you to deposit more money, or close your position
to limit your risk and his risk.
If you are going to trade on a margin account it is imperative that you
talk with your broker first to find out what their polices are on this type
of accounts.
Variation Margin is also very important. Variation margin is the
amount of profit or loss your account is showing on open positions.
Let's say you have just deposited $10,000 with your broker. You take
5 lots of USD/JPY, which is $500,000. To secure this the broker
needs $5,000 (1%).
11
The trade goes bad and your losses equal $5001, your broker may
do a margin call. The reason he may do a margin call is that even
though you still have $4,999 in your account the broker needs that as
security and allowing you to use it could endanger yourself and him.
Another way to look at it is this, if you have an account of $10,000
and you have a 1 lot ($100,000) position. That's $1,000 assuming a
(1% margin) is no longer available for you to trade. The money still
belongs to you but for the time you are margined the broker needs
that as security.
Another point of note is that some brokers may require a higher
margin during the weekends. This may take the form of 1% margin
during the week and if you intend to hold the position over the
weekend it may rise to 2% or higher. Also in the example we have
used a 1% margin. This is by no means standard. I have seen as
high as 0.5% and many between 3%-5% margin. It all depends on
your broker.
There have been many discussions on the topic of margin and some
argue that too much margin is dangerous. This is a point for the
individual concerned. The important thing to remember as with all
trading is that you thoroughly understand your broker's policies on the
subject and you are comfortable with and understand your risk.
Rollovers
Even though the mighty US dominates many markets, most of Spot
Forex is still traded through London in Great Britain. So for our next
description we shall use London time. Most deals in Forex are done
as Spot deals. Spot deals are nearly always due for settlement two
business days later. This is referred to as the value date or delivery
date. On that date the counter parties theoretically take delivery of the
currency they have sold or bought.
In Spot FX the majority of the time the end of the business day is
21:59 (London time). Any positions still open at this time are
automatically rolled over to the next business day, which again
finishes at 21:59.
12
This is necessary to avoid the actual delivery of the currency. As Spot
FX is predominantly speculative most of the time the trades never
wish to actually take delivery of the currency. They will instruct the
brokerage to always rollover their position.
Many of the brokers nowadays do this automatically and it will be in
their polices and procedures. The act of rolling the currency pair over
is known as tom.next, which stands for tomorrow and the next day.
Just to go over this again, your broker will automatically rollover your
position unless you instruct him that you actually want delivery of the
currency. Another point noting is that most leveraged accounts are
unable to actual deliver of the currency as there is insufficient capital
there to cover the transaction.
Remember that if you are trading on margin, you have in effect got a
loan from your broker for the amount you are trading. If you had a 1
lot position you broker has advanced you the $100,000 even though
you did not actually have $100,000. The broker will normally charge
you the interest differential between the two currencies if you rollover
your position. This normally only happens if you have rolled over the
position and not if you open and close the position within the same
business day.
To calculate the broker's interest he will normally close your position
at the end of the business day and again reopen a new position
almost simultaneously. You open a 1 lot ($100,000) EUR/USD
position on Monday 15th at 11:00 at an exchange rate of 0.9950.
During the day the rate fluctuates and at 22:00 the rate is 0.9975. The
broker closes your position and reopens a new position with a
different value date. The new position was opened at 0.9976 - a 1 pip
difference. The 1 pip deference reflects the difference in interest rates
between the US Dollar and the Euro.
In our example your are long Euro and short US Dollar. As the US
Dollar in the example has a higher interest rate than the Euro you pay
the premium of 1 pip.
13
Now the good news. If you had the reverse position and you were
short Euros and long US Dollars you would gain the interest
differential of 1 pip. If the first named currency has an overnight
interest rate lower than the second currency then you will pay that
interest differential if you bought that currency. If the first named
currency has a higher interest rate than the second currency then you
will gain the interest differential.
To simplify the above. If you are long (bought) a particular currency
and that currency has a higher overnight interest rate you will gain. If
you are short (sold) the currency with a higher overnight interest rate
then you will lose the difference.
I would like to emphasis here that although we are going a little in-
depth to explain how all this works, your broker will calculate all this
for you. The purpose of this book is just to give you an overview of
how the forex market works.
Accounts
Although the movement today is towards all transaction eventually
finishing in a profit and loss in US Dollars it is important to realize that
your profit or loss may not actually be in US Dollars.
From my observation the trend is more pronounced in the US as you
would expect. Most US based traders assume they will see their
balance at the end of each day in US Dollars. I have even spoken
with some traders who are oblivious to the fact the their profit might
have actually been in Japanese Yen.
Let me explain a little more. You sell (go short) USD/JPY and as such
are short USD and Long (bought) JPY. You enter the trade at 116.10
and exit 116.90. You in fact made 80,000 Japanese Yen (1 lot traded)
not US Dollars.
If you traded all four major currencies against the US Dollar you
would in fact have made or lose in EUR, GPY, JPY and CHF. This
might give you a ledger balance at the end of the day or month with
four different currencies.
14
This is common in London. They will stay in that currency until you
instruct the broker to exchange the currencies into your own base
currency.
This actually happened to me. After dealing with mainly US based
brokers it had never occurred to me that my statement would be in
anything other than US Dollars.
This can work for you or against you depending on the rate of
exchange when you change back into your home currency. Once I
knew the convention I simply instructed the broker to change my
profit or loss into US Dollars when I closed my position. It is worth
checking how your broker approaches this and simply ask them how
they handle it. A small point, but worth noting.
Nowadays most countries have regulated forex, but it is still worth
checking that the broker who you are dealing with is regulated in the
country that it operates, insured or bonded and has some kind of
track recorded.
I cannot advise you on which broker you should use as there are just
to many variables to each person, but as a rule of thumb, nearly all
countries have some kind of regulatory authority who will be able to
advise you. Most of the regulatory authorities will have a list of
brokers that fall within their jurisdiction and will give you that list. They
probably wont tell whom to use but at least if the list came from them
you can have some confidence in those companies.
Once you have a list, give a few of them a call, see who you feel
comfortable with, ask for them to send you their polices and
procedures. If you live near where your broker is based, go spend the
day with him. I have been to many brokerages just to check them out.
It will give you a chance to see their operation and meet their team.
This brings up another interesting point. When you open an account
with a broker you will have to fill in some forms basically stating your
acceptance of their polices. This can range from a 1 page document
to something resembling a book. Take the time to read through these
documents and make a list of things you don't understand or want
explained.
15
Most reputable companies will be happy to spend some time with you
on this. Your involvement with your broker is largely up to you. As a
forex trader you will probably spend long hours staring at the screen
without talking to anyone. You may be the sort of person who likes
this or you may be the sort of person who likes to chat with the dealer
in the trading room. You will normally get a call once a week or once
a month from someone in the brokerage asking if everything is OK.
Statements
Before we move on to account statements I just want to touch on
segregation of funds. In times past there was a danger that traders
who deposited money with their broker who did not segregate their
clients money from their own companies money were at some risk.
The problem arose if the broker misused the deposited funds to either
reinvest or otherwise manipulated these deposits to enhance their
own standing. There were also instances were the broker became
insolvent and many complications ensued as to what was the clients
money and what was the broker's money.
With the advent of regulation most broker now segregate their clients
funds from the brokerage funds. Deposits are normally held with
banks or other large financial institution that are also regulated and
bonded or insured. This protects you money should anything happen
to your broker.
The deposit taking institution is normally aware that these deposits
are client's funds. Depending on regulation in the particular country
you live, each client may have their own segregated account or for
smaller depositors they may be pooled. The point is that segregation
of funds is a safeguard. Ask your broker if your funds are segregated
and who actually has your money.
Just as with a bank you are entitled to interest on the money you
have on deposit. Some broker may stipulate that interest is only
payable on accounts over a certain amount but the trend today is that
you will earn interest on any amount you have that is not being used
to cover your margin.
16
Your broker is probably not the most competitive place to earn
interest but that should not be the point of having your money with
him in the first place. Payment on your account that is not being used
and segregation of funds all go to show the reputability of the
company you are dealing with.
In this section I will discuss briefly the basic account statement. I
have to keep this basic, as there are as many flavors of account
statements as you can imagine.
Just about every broker has their own way of presenting this. The
most important thing is to know where you stand at the end of each
day or week. Just because your broker is Internet based and has all
the bells and whistles does not mean they are infallible.
Many of the actions taken before information is imputed are still done
by hand and if humans are involved there will be a mistake at some
point. The responsibility lies with you. It is your money so make sure
that all the transactions are correct.
FX Some Company
New York
Statement for: Mr. Joe Bloggs
Statement Date: 16th July 2002
Account No: 123456
Ticket No Time Trade Date Value Date B/S Symbol
Quantity Rate Debit Credit Balance
123458 09:05 15/07/2002 17/07/02 B EUR/USD100,000 0.9850 $10,000
123459 13:01 15/07/2002 17/07/02 S EUR/USD100,000 0.9870 $200.00 $10,200
123460 14:05 16/07/2002 18/07/02 S USD/JPY 100,000 116.85 $10,200
Total Equity
$10,200
Margin Available $9,200
Margin Requirements $1,000
Current Position Short USD/JPY
17
Normally there is a ticket or docket number to help identify the trade.
You will nearly always find the time and date of the trade. The value
date if the currency were to be delivered. You should always see the
direction of the trade, buy or sell (Long or Short). The amount and
rate you bought or sold. Balance to let you know if you made a profit
or a loss.
You should also see any open positions you may have and the
margin requirements for that position. A lot of the more modern
systems will show your open position as though it has been closed
just to give you an up to the minute balance.
The Main Players
Central Banks And Governments
Policies that are implemented by governments and central banks can
play a major roll in the FX market. Central banks can play an
important part in controlling the country's money supply to insure
financial stability.
Banks
A large part of FX turnover is from banks. Large banks can literally
trade billions of dollars daily. This can take the form of a service to
their customers or they themselves speculate on the FX market.
Hedge Funds
As we know the FX market can be extremely liquid which is why it
can be desirable to trade. Hedge Funds have increasingly allocated
portions of their portfolios to speculate on the FX market. Another
advantage Hedge Funds can utilize is a much higher degree of
leverage than would typically be found in the equity markets.
18
Corporate Businesses
The FX market mainstay is that of international trade. Many
companies have to import or exports goods to different countries all
around the world. Payment for these goods and services may be
made and received in different currencies. Many billions of dollars are
exchanges daily to facilitate trade. The timing of those transactions
can dramatically affect a company's balance sheet.
The Man In The Street
Although you may not think it, the man in the street also plays a part
in toady's FX world. Every time he goes on holiday overseas he
normally need to purchase that country's currency and again change
it back into his own currency once he returns. Unwittingly he is in fact
trading currencies.
He may also purchase goods and services whilst overseas and his
credit card company has to convert those sales back into his base
currency in order to charge him.
Speculators And Investors
We shall differentiate speculator from investors here with the
definition that an investor has a much longer time horizon in which he
expects his investment to yield a profit. Regardless of the difference
both speculators and investors will approach the FX market to exploit
the movement in currency pairs.
They both will have their reason for believing a particular currency will
perform better or worse as the case may be and will buy or sell
accordingly. They may decide that the Euro will appreciate against
the US Dollar and take what is called a long position in Euro. If the
Euro does in fact gain ground against the US Dollar they will have
made a profit.
19
Below you will find a list of Central Banks. Source http://www.bis.org
Albania: Bank of Albania
Algeria: Bank of Algeria
Argentina: Banco Central de la Republica Argentina
Armenia: Central Bank of Armenia
Aruba: Centrale Bank van Aruba
Australia: Reserve Bank of Australia
Austria: Oesterreichische Nationalbank
Azerbaijan: National Bank of Azerbaijan
Bahamas: Central Bank of The Bahamas
Bahrain: Bahrain Monetary Agency
Bangladesh: Bangladesh Bank
Barbados: Central Bank of Barbados
Nationale Bank van Belgie -Banque Nationale de
Belgium:
Belgique
Benin: Banque Centrale des Etats de l'Afrique de l'Ouest
Bolivia: Banco Central de Bolivia
Bosnia: Central Bank of Bosnia and Herzegovina
Botswana: Bank of Botswana
Brazil: Banco Central do Brasil
Bulgaria: Bulgarian National Bank
Burkina Faso: Banque Centrale des Etats de l'Afrique de l'Ouest
Canada: Bank of Canada - Banque du Canada
Cayman Islands: Cayman Islands Monetary Authority
Chile: Banco Central de Chile
China: The People's Bank of China
Colombia: Banco de la Republica
Costa Rica: Banco Central de Costa Rica
C te d'Ivoire: Banque Centrale des Etats de l'Afrique de l'Ouest
20
Croatia: Croatian National Bank
Cyprus: Central Bank of Cyprus
Czech Rep.: Ceska Narodni Banka
Denmark: Danmarks Nationalbank
Dominican Rep.: Banco Central de la Republica Dominicana
The East Caribbean Central Bank
area:
Ecuador: Banco Central del Ecuador
Egypt: Central Bank of Egypt
El Salvador: The Central Reserve Bank of El Salvador
Estonia: Eesti Pank
European Union: European Central Bank
Fiji: Reserve Bank of Fiji
Finland: Suomen Pankki
France: Banque de France
Georgia: National Bank of Georgia
Germany: Deutsche Bundesbank
Ghana: Bank of Ghana
Greece: Bank of Greece
Guatemala: Banco de Guatemala
Guinea Bissau: Banque Centrale des Etats de l'Afrique de l'Ouest
Honduras: Banco Central de Honduras
Hong Kong: Hong Kong Monetary Authority
Hungary: National Bank of Hungary
Iceland: Central Bank of Iceland
India: Reserve Bank of India
Indonesia: Bank of Indonesia
Ireland: Central Bank of Ireland
Israel: Bank of Israel
Italy: Banca d'Italia
Jamaica: Bank of Jamaica
21
Japan: Bank of Japan
Jordan: Central Bank of Jordan
Kazakhstan: National Bank of Kazakhstan
Kenya: Central Bank of Kenya
Korea: Bank of Korea
Kuwait: Central Bank of Kuwait
Kyrgyzstan: National Bank of the Kyrgyz Republic
Latvia: Bank of Latvia
Lebanon: Banque du Liban
Lithuania: Lietuvos Bankas
Luxembourg: Banque Centrale du Luxembourg
Macedonia: National Bank of the Republic of Macedonia
Malaysia: Bank Negara Malaysia
Malawi: Reserve Bank of Malawi
Mali: Banque Centrale des Etats de l'Afrique de l'Ouest
Malta: Central Bank of Malta
Mauritius: Bank of Mauritius
Mexico: Banco de Mexico
Moldova: The National Bank of Moldova
Mongolia: The Bank of Mongolia
Morocco: Bank Al-Maghrib
Mozambique: Bank of Mozambique
Namibia: Bank of Namibia
Nepal: Nepal Rastra Bank
Netherlands: De Nederlandsche Bank
Bank van de Nederlandse Antillen
Antilles:
New Zealand: Reserve Bank of New Zealand
Nicaragua: Banco Central de Nicaragua
Niger: Banque Centrale des Etats de l'Afrique de l'Ouest
Nigeria: Central Bank of Nigeria
22
Norway: Norges Bank
Oman: Central Bank of Oman
Pakistan: State Bank of Pakistan
Bank of Papua New Guinea
Guinea:
Paraguay: Banco Central del Paraguay
Peru: Banco Central de Reserva del Peru
Philippines: Bangko Sentral ng Pilipinas
Poland: National Bank of Poland
Portugal: Banco de Portugal
Qatar: Qatar Central Bank
Romania: National Bank of Romania
Russia: Central Bank of Russia
Rwanda: Banque Nationale du Rwanda
Saudi Arabia: Saudi Arabian Monetary Agency
Senegal: Banque Centrale des Etats de l'Afrique de l'Ouest
Sierra Leone: Bank of Sierra Leone
Singapore: Monetary Authority of Singapore
Slovakia: National Bank of Slovakia
Slovenia: Bank of Slovenia
South Africa: South African Reserve Bank
Spain: Banco de Espa a
Sri Lanka: Central Bank of Sri Lanka
Sudan: Bank of Sudan
Suriname: Centrale Bank van Suriname
Sweden: Sveriges Riksbank
Switzerland: Schweizerische Nationalbank
Tanzania: Bank of Tanzania
Thailand: Bank of Thailand
Togo: Banque Centrale des Etats de l'Afrique de l'Ouest
Trinidad and Central Bank of Trinidad and Tobago
23
Tobago:
Tunisia: Banque Centrale de Tunisie
Turkey: T rkiye Cumhuriyet Merkez Bankasi
Ukraine: National Bank of Ukraine
Central Bank of United Arab Emirates
Emirates:
United Kingdom: Bank of England
United States: Board of Governors of the Federal Reserve
System (Washington)
Federal Reserve Bank of New York
Venezuela: Banco Central de Venezuela
Yemen: Central Bank of Yemen
Yugoslavia: National Bank of Yugoslavia
Zambia: Bank of Zambia
Zimbabwe: Reserve bank of Zimbabwe
What Next
Well now we have a basic understanding of how the FX market works
and who the main players are, what next?
You are now going to have to decide the best way to trade the
market. The two most common approaches are that of fundamental
analysis and technical analysis.
Fundamental analysis concentrates on the forces of supply and
demand for a given security. This approach examines all the factors
that determine the price of a security and the real value of that
security. This is referred to as the intrinsic value. If the intrinsic value
is below the market price then there is an opportunity to buy and if the
market is above the intrinsic price then there is an opportunity to sell.
24
Technical analysis is the study of market action, mainly through the
use of charts and indicators to forecast the future price of a security.
There are three main points that a technical analyst applies.
A. Market action discounts everything. Regardless of what the
fundamentals are saying, the price you see is the price you get.
B. The price of a given security moves in trends.
C. The historical trend of a security will tend to repeat.
Of all of the above things the most important of them is point A. The
tools of the technical analyst are indicators, patterns and systems.
These tools are applied to charts. Moving averages, support and
resistance lines, envelopes, Bollinger bands and momentum are all
examples of indicators.
There are many ways to skin a cat, as the saying goes but
fundamental and technical analysis are the two most popular ways of
trading FX.
The purpose of this ebook is to introduce the forex market to you. As
with many markets there are many derivative of the central market
such as futures, options and forwards. In this book we will only be
discussing the main market sometime referred to as the Spot or Cash
market.
The word FOREX is derived from the words Foreign Exchange and is
the largest financial market in the world. Unlike many markets the FX
market is open 24 hours per day and has an estimated $1.2 Trillion in
turnover every day. This tremendous turnover is more than the
combined turnover of the main worlds' stock markets on any given
day. This tends to lead to a very liquid market and thus a desirable
market to trade.
Unlike many other securities (any financial instrument that can be
traded) the FX market does not have a fixed exchange. It is primarily
traded through banks, brokers, dealers, financial institutions and
private individuals.
Trades are executed through phone and increasingly through the
Internet. It is only in the last few years that the smaller investor has
been able to gain access to this market. Previously the large amounts
of deposits required precluded the smaller investors. With the advent
of the Internet and growing competition it is now easily within the
reach of most investors.
INTERBANK
You will often hear the term INTERBANK discussed in FX
terminology. This originally, as the name implies was simply banks
and large institutions exchanging information about the current rate at
which their clients or themselves were prepared to buy or sell a
currency.
3
INTER meaning between and Bank meaning deposit taking
institutions. The market has moved on to such a degree now that the
term interbank now means anybody who is prepared to buy or sell a
currency.
It could be two individuals or your local travel agent offering to
exchange Euros for US Dollars. You will however find that most of the
brokers and banks use centralized feeds to insure reliability of quote.
The quotes for Bid (buy) and Offer (sell) will all be from reliable
sources. These quotes are normally made up of the top 300 or so
large institutions. This insures that if they place an order on your
behalf that the institutions they have placed the order with is capable
of fulfilling the order.
Now although we have spoken about orders being fulfilled, it is
estimated that anywhere from 70%-90% of the FX market is
speculative. In other words the person or institution that bought or
sold the currency has no intention of actually taking delivery of the
currency. Instead they were solely speculating on the movement of
that particular currency.
Source: Bank For International Settlements http://www.bis.org
Extract From The Triennial Central Bank Survey of Foreign Exchange
and Derivatives Market Activity.
Currency 1989 1992 1995 1998 2001
US Dollar 90 82.0 83.3 87.3 90.4
Euro 37.6
Japanese Yen 27 23.4 24.1 20.2 22.7
Pound Sterling 15 13.6 9.4 11.0 13.2
Swiss Franc 10 8.4 7.3 7.1 6.1
As you can see from the above table over 90% of all currencies are
traded against the US Dollar. The four next most traded currencies
are the Euro (EUR), Japanese Yen (JPY), Pound Sterling (GBP) and
Swiss Franc (CHF).
4
As currencies are traded in pairs and exchanged one for the other
when traded, the rate at which they are exchanged is called the
exchange rate. These four currencies traded against the US Dollar
make up the majority of the market and are called major currencies or
the majors.
Market Mechanics
So now we know that the FX market is the largest in the world and
that your broker or institution that you are trading with is collecting
quotes from a centralized feed or individual quotes comprising of
interbank rates.
So how are these quotes made up? Well, as we previously
mentioned currencies are traded in pairs and are each assigned a
symbol. For the Japanese Yen it is JPY, for the Pounds Sterling it is
GBP, for Euro it is EUR and for the Swiss Frank it is CHF. So,
EUR/USD would be Euro-Dollar pair. GBP/USD would be pounds
Sterling-Dollar pair and USD/CHF would be Dollar-Swiss Franc pair
and so on.
You will always see the USD quoted first with few exceptions such as
Pounds Sterling, Euro Dollar, Australia Dollar and New Zealand
Dollar. The first currency quoted is called the base currency. Have a
look below for some example.
Currency Symbol Currency Pair
EUR/USD Euro / US Dollar
GBP/USD Pounds Sterling/ US Dollar
USD/JPY US Dollar / Japanese Yen
USD/CHF US Dollar / Swiss Franc
USD/CAD US Dollar / Canadian Dollar
AUD/USD Australian Dollar / US Dollar
NZD/USD New Zealand Dollar / US Dollar
5
When you see FX quotes you will actually see two numbers. The first
number is called the bid and the second number is called the offer
(sometimes called the ASK).
If we use the EUR/USD as an example you might see 0.9950/0.9955
the first number 0.9950 is the bid price and is the price traders are
prepared to buy Euros against the USD Dollar. The second number
0.9955 is the offer price and is the price traders are prepared to sell
the Euro against the US Dollar.
These quotes are sometimes abbreviated to the last two digits of the
currency such as 50/55. Each broker has its own convention and
some will quote the full number and others will show only the last two.
You will also notice that there is a difference between the bid and the
offer price and that is called the spread. For the four major currencies
the spread is normally 5 give or take a pip (will explain pips later)
To carry on from the symbol conventions and using our previous EUR
quote of 0.9950 bid, that means that 1 Euro = 0.9950 US Dollars. In
another example if we used the USD/CAD 1.4500 that would mean
that 1 US Dollar = 1.4500 Canadian Dollars.
The most common increment of currencies is the PIP. If the
EUR/USD moves from 0.9550 to 0.9551 that is one pip. A pip is the
last decimal place of a quotation. The pip or POINT as it is
sometimes referred to depending on context is how we will measure
our profit or loss.
As each currency has its own value, it is necessary to calculate the
value of a pip for that particular currency. We also want a constant so
we will assume that we want to convert everything to US Dollars. In
currencies where the US Dollar is quoted first the calculation would
be as follows.
6
Example JPY rate of 116.73 (notice the JPY only goes to two decimal
places, most of the other currencies have four decimal places)
In the case of the JPY 1 pip would be .01 therefore
USD/JPY:
(.01 divided by exchange rate = pip value) so .01/116.73=0.0000856.
It looks like a big number but later we will discuss lot (contract) size
later.
USD/CHF:
(.0001 divided by exchange rate = pip value) so .0001/1.4840 =
0.0000673
USD/CAD:
(.0001 divided by exchange rate = pip value) so .0001/1.5223 =
0.0001522
In the case where the US Dollar is not quoted first and we want to get
to the US Dollar value we have to add one more step.
EUR/USD:
(0.0001 divided by exchange rate = pip value) so .0001/0.9887 =
EUR 0.0001011 but we want to get back to US Dollars so we add
another little calculation which is EUR X Exchange rate so
0.0001011 X 0.9887 = 0.0000999 when rounded up it would be
0.0001.
GBP/USD:
(0.0001 divided by exchange rate = pip value) so 0.0001/1.5506 =
GBP 0.0000644 but we want to get back to US Dollars so we add
another little calculation which is GBP X Exchange rate so
0.0000644 X 1.5506 = 0.0000998 when rounded up it would be
0.0001.
By this time you might be rolling your eyes back and thinking do I
really need to work all this out, and the answer is no.
7
Nearly all the brokers you will deal with will work all this out for you.
They may have slightly different conventions, but it is all done
automatically. It is good however for you to know how they work it
out. In the next section we will be discussing how these seemingly
insignificant amounts can add up.
More On Market Mechanics
Spot Forex is traditionally traded in lots also referred to as contracts.
The standard size for a lot is $100,000. In the last few years a mini lot
size has been introduced of $10,000 and this again may change in
the years to come.
As we mentioned on the previous page currencies are measured in
pips, which is the smallest increment of that currency. To take
advantage of these tiny increments it is desirable to trade large
amounts of a particular currency in order to see any significant profit
or loss. We shall cover leverage later but for the time being let's
assume that we will be using $100,000 lot size. We will now
recalculate some examples to see how it effects the pip value.
USD/JPY at an exchange rate of 116.73
(.01/116.73) X $100,000 = $8.56 per pip
USD/CHF at an exchange rate of 1.4840
(0.0001/1.4840) X $100,000 = $6.73 per pip
In cases where the US Dollar is not quoted first the formula is slightly
different.
EUR/USD at an exchange rate of 0.9887
(0.0001/ 0.9887) X EUR 100,000 = EUR 10.11 to get back to US
Dollars we add a further step
EUR 10.11 X Exchange rate which looks like EUR 10.11 X 0.9887 =
$9.9957 rounded up will be $10 per pip.
8
GBP/USD at an exchange rate of 1.5506
(0.0001/1.5506) X GBP 100,000 = GBP 6.44 to get back to US
Dollars we add a further step
GBP 6.44 X Exchange rate which looks like GBP 6.44 X 1.5506 =
$9.9858864 rounded up will be $10 per pip.
As we said earlier your broker might have a different convention for
calculating pip value relative to lot size but however they do it they
will be able to tell you what the pip value for the currency you are
trading is at that particular time. Remember that as the market moves
so will the pip value depending on what currency you trade.
So now we know how to calculate pip value lets have a look at how
you work out your profit or loss. Let's assume you want to buy US
Dollars and Sell Japanese Yen. The rate you are quoted is
116.70/116.75 because you are buying the US you will be working on
the 116.75, the rate at which traders are prepared to sell.
So you buy 1 lot of $100,000 at 116.75. A few hours later the price
moves to 116.95 and you decide to close your trade. You ask for a
new quote and are quoted 116.95/117.00. As you are now closing
your trade and you initially bought to enter the trade you now sell in
order to close the trade and you take 116.95 the price traders are
prepared to buy at. The difference between 116.75 and 116.95 is .20
or 20 pips. Using our formula from before, we now have (.01/116.95)
X $100,000 = $8.55 per pip X 20 pips =$171
In the case of the EUR/USD you decide to sell the EUR and are
quoted 0.9885/0.9890 you take 0.9885. Now don't get confused here.
Remember you are now selling and you need a buyer. The buyer is
biding 0.9885 and that is what you take. A few hours later the EUR
moves to 0.9805 and you ask for a quote.
You are quoted 0.9805/0.9810 and you take 0.9810. You originally
sold EUR to open the trade and now to close the trade you must buy
back your position. In order to buy back your position you take the
price traders are prepared to sell at which is 0.9810.
9
The difference between 0.9810 and 0.9885 is 0.0075 or 75 pips.
Using the formula from before, we now have (.0001/0.9810) X EUR
100,000 = EUR10.19: EUR 10.19 X Exchange rate 0.9810
=$9.99($10) so 75 X $10 = $750.
To reiterate what has gone before, when you enter or exit a trade at
some point your are subject to the spread in the bid/offer quote. As a
rule of thumb when you buy a currency you will use the offer price
and when you sell you will use the bid price.
So when you buy a currency you pay the spread as you enter the
trade but not as you exit and when you sell a currency you pay no
spread when you enter but only when you exit.
Leverage
Leverage financed with credit, such as that purchased on a margin
account is very common in Forex. A margined account is a
leverageable account in which Forex can be purchased for a
combination of cash or collateral depending what your brokers will
accept.
The loan (leverage) in the margined account is collateralized by your
initial margin (deposit), if the value of the trade (position) drops
sufficiently, the broker will ask you to either put in more cash, or sell a
portion of your position or even close your position.
Margin rules may be regulated in some countries, but margin
requirements and interest vary among broker/dealers so always
check with the company you are dealing with to ensure you
understand their policy.
Up until this point you are probably wondering how a small investor
can trade such large amounts of money (positions). The amount of
leverage you use will depend on your broker and what you feel
comfortable with. There was a time when it was difficult to find
companies prepared to offer margined accounts but nowadays you
can get leverage from a high as 1% with some brokers. This means
you could control $100,000 with only $1,000.
10
Typically the broker will have a minimum account size also known as
account margin or initial margin e.g. $10,000. Once you have
deposited your money you will then be able to trade. The broker will
also stipulate how much they require per position (lot) traded.
In the example above for every $1,000 you have you can take a lot of
$100,000 so if you have $5,000 they may allow you to trade up to
$500,00 of forex.
The minimum security (Margin) for each lot will very from broker to
broker. In the example above the broker required a one percent
margin. This means that for every $100,000 traded the broker wanted
$1,000 as security on the position.
Margin call is also something that you will have to be aware of. If for
any reason the broker thinks that your position is in danger e.g. you
have a position of $100,000 with a margin of one percent ($1,000)
and your losses are approaching your margin ($1,000). He will call
you and either ask you to deposit more money, or close your position
to limit your risk and his risk.
If you are going to trade on a margin account it is imperative that you
talk with your broker first to find out what their polices are on this type
of accounts.
Variation Margin is also very important. Variation margin is the
amount of profit or loss your account is showing on open positions.
Let's say you have just deposited $10,000 with your broker. You take
5 lots of USD/JPY, which is $500,000. To secure this the broker
needs $5,000 (1%).
11
The trade goes bad and your losses equal $5001, your broker may
do a margin call. The reason he may do a margin call is that even
though you still have $4,999 in your account the broker needs that as
security and allowing you to use it could endanger yourself and him.
Another way to look at it is this, if you have an account of $10,000
and you have a 1 lot ($100,000) position. That's $1,000 assuming a
(1% margin) is no longer available for you to trade. The money still
belongs to you but for the time you are margined the broker needs
that as security.
Another point of note is that some brokers may require a higher
margin during the weekends. This may take the form of 1% margin
during the week and if you intend to hold the position over the
weekend it may rise to 2% or higher. Also in the example we have
used a 1% margin. This is by no means standard. I have seen as
high as 0.5% and many between 3%-5% margin. It all depends on
your broker.
There have been many discussions on the topic of margin and some
argue that too much margin is dangerous. This is a point for the
individual concerned. The important thing to remember as with all
trading is that you thoroughly understand your broker's policies on the
subject and you are comfortable with and understand your risk.
Rollovers
Even though the mighty US dominates many markets, most of Spot
Forex is still traded through London in Great Britain. So for our next
description we shall use London time. Most deals in Forex are done
as Spot deals. Spot deals are nearly always due for settlement two
business days later. This is referred to as the value date or delivery
date. On that date the counter parties theoretically take delivery of the
currency they have sold or bought.
In Spot FX the majority of the time the end of the business day is
21:59 (London time). Any positions still open at this time are
automatically rolled over to the next business day, which again
finishes at 21:59.
12
This is necessary to avoid the actual delivery of the currency. As Spot
FX is predominantly speculative most of the time the trades never
wish to actually take delivery of the currency. They will instruct the
brokerage to always rollover their position.
Many of the brokers nowadays do this automatically and it will be in
their polices and procedures. The act of rolling the currency pair over
is known as tom.next, which stands for tomorrow and the next day.
Just to go over this again, your broker will automatically rollover your
position unless you instruct him that you actually want delivery of the
currency. Another point noting is that most leveraged accounts are
unable to actual deliver of the currency as there is insufficient capital
there to cover the transaction.
Remember that if you are trading on margin, you have in effect got a
loan from your broker for the amount you are trading. If you had a 1
lot position you broker has advanced you the $100,000 even though
you did not actually have $100,000. The broker will normally charge
you the interest differential between the two currencies if you rollover
your position. This normally only happens if you have rolled over the
position and not if you open and close the position within the same
business day.
To calculate the broker's interest he will normally close your position
at the end of the business day and again reopen a new position
almost simultaneously. You open a 1 lot ($100,000) EUR/USD
position on Monday 15th at 11:00 at an exchange rate of 0.9950.
During the day the rate fluctuates and at 22:00 the rate is 0.9975. The
broker closes your position and reopens a new position with a
different value date. The new position was opened at 0.9976 - a 1 pip
difference. The 1 pip deference reflects the difference in interest rates
between the US Dollar and the Euro.
In our example your are long Euro and short US Dollar. As the US
Dollar in the example has a higher interest rate than the Euro you pay
the premium of 1 pip.
13
Now the good news. If you had the reverse position and you were
short Euros and long US Dollars you would gain the interest
differential of 1 pip. If the first named currency has an overnight
interest rate lower than the second currency then you will pay that
interest differential if you bought that currency. If the first named
currency has a higher interest rate than the second currency then you
will gain the interest differential.
To simplify the above. If you are long (bought) a particular currency
and that currency has a higher overnight interest rate you will gain. If
you are short (sold) the currency with a higher overnight interest rate
then you will lose the difference.
I would like to emphasis here that although we are going a little in-
depth to explain how all this works, your broker will calculate all this
for you. The purpose of this book is just to give you an overview of
how the forex market works.
Accounts
Although the movement today is towards all transaction eventually
finishing in a profit and loss in US Dollars it is important to realize that
your profit or loss may not actually be in US Dollars.
From my observation the trend is more pronounced in the US as you
would expect. Most US based traders assume they will see their
balance at the end of each day in US Dollars. I have even spoken
with some traders who are oblivious to the fact the their profit might
have actually been in Japanese Yen.
Let me explain a little more. You sell (go short) USD/JPY and as such
are short USD and Long (bought) JPY. You enter the trade at 116.10
and exit 116.90. You in fact made 80,000 Japanese Yen (1 lot traded)
not US Dollars.
If you traded all four major currencies against the US Dollar you
would in fact have made or lose in EUR, GPY, JPY and CHF. This
might give you a ledger balance at the end of the day or month with
four different currencies.
14
This is common in London. They will stay in that currency until you
instruct the broker to exchange the currencies into your own base
currency.
This actually happened to me. After dealing with mainly US based
brokers it had never occurred to me that my statement would be in
anything other than US Dollars.
This can work for you or against you depending on the rate of
exchange when you change back into your home currency. Once I
knew the convention I simply instructed the broker to change my
profit or loss into US Dollars when I closed my position. It is worth
checking how your broker approaches this and simply ask them how
they handle it. A small point, but worth noting.
Nowadays most countries have regulated forex, but it is still worth
checking that the broker who you are dealing with is regulated in the
country that it operates, insured or bonded and has some kind of
track recorded.
I cannot advise you on which broker you should use as there are just
to many variables to each person, but as a rule of thumb, nearly all
countries have some kind of regulatory authority who will be able to
advise you. Most of the regulatory authorities will have a list of
brokers that fall within their jurisdiction and will give you that list. They
probably wont tell whom to use but at least if the list came from them
you can have some confidence in those companies.
Once you have a list, give a few of them a call, see who you feel
comfortable with, ask for them to send you their polices and
procedures. If you live near where your broker is based, go spend the
day with him. I have been to many brokerages just to check them out.
It will give you a chance to see their operation and meet their team.
This brings up another interesting point. When you open an account
with a broker you will have to fill in some forms basically stating your
acceptance of their polices. This can range from a 1 page document
to something resembling a book. Take the time to read through these
documents and make a list of things you don't understand or want
explained.
15
Most reputable companies will be happy to spend some time with you
on this. Your involvement with your broker is largely up to you. As a
forex trader you will probably spend long hours staring at the screen
without talking to anyone. You may be the sort of person who likes
this or you may be the sort of person who likes to chat with the dealer
in the trading room. You will normally get a call once a week or once
a month from someone in the brokerage asking if everything is OK.
Statements
Before we move on to account statements I just want to touch on
segregation of funds. In times past there was a danger that traders
who deposited money with their broker who did not segregate their
clients money from their own companies money were at some risk.
The problem arose if the broker misused the deposited funds to either
reinvest or otherwise manipulated these deposits to enhance their
own standing. There were also instances were the broker became
insolvent and many complications ensued as to what was the clients
money and what was the broker's money.
With the advent of regulation most broker now segregate their clients
funds from the brokerage funds. Deposits are normally held with
banks or other large financial institution that are also regulated and
bonded or insured. This protects you money should anything happen
to your broker.
The deposit taking institution is normally aware that these deposits
are client's funds. Depending on regulation in the particular country
you live, each client may have their own segregated account or for
smaller depositors they may be pooled. The point is that segregation
of funds is a safeguard. Ask your broker if your funds are segregated
and who actually has your money.
Just as with a bank you are entitled to interest on the money you
have on deposit. Some broker may stipulate that interest is only
payable on accounts over a certain amount but the trend today is that
you will earn interest on any amount you have that is not being used
to cover your margin.
16
Your broker is probably not the most competitive place to earn
interest but that should not be the point of having your money with
him in the first place. Payment on your account that is not being used
and segregation of funds all go to show the reputability of the
company you are dealing with.
In this section I will discuss briefly the basic account statement. I
have to keep this basic, as there are as many flavors of account
statements as you can imagine.
Just about every broker has their own way of presenting this. The
most important thing is to know where you stand at the end of each
day or week. Just because your broker is Internet based and has all
the bells and whistles does not mean they are infallible.
Many of the actions taken before information is imputed are still done
by hand and if humans are involved there will be a mistake at some
point. The responsibility lies with you. It is your money so make sure
that all the transactions are correct.
FX Some Company
New York
Statement for: Mr. Joe Bloggs
Statement Date: 16th July 2002
Account No: 123456
Ticket No Time Trade Date Value Date B/S Symbol
Quantity Rate Debit Credit Balance
123458 09:05 15/07/2002 17/07/02 B EUR/USD100,000 0.9850 $10,000
123459 13:01 15/07/2002 17/07/02 S EUR/USD100,000 0.9870 $200.00 $10,200
123460 14:05 16/07/2002 18/07/02 S USD/JPY 100,000 116.85 $10,200
Total Equity
$10,200
Margin Available $9,200
Margin Requirements $1,000
Current Position Short USD/JPY
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Normally there is a ticket or docket number to help identify the trade.
You will nearly always find the time and date of the trade. The value
date if the currency were to be delivered. You should always see the
direction of the trade, buy or sell (Long or Short). The amount and
rate you bought or sold. Balance to let you know if you made a profit
or a loss.
You should also see any open positions you may have and the
margin requirements for that position. A lot of the more modern
systems will show your open position as though it has been closed
just to give you an up to the minute balance.
The Main Players
Central Banks And Governments
Policies that are implemented by governments and central banks can
play a major roll in the FX market. Central banks can play an
important part in controlling the country's money supply to insure
financial stability.
Banks
A large part of FX turnover is from banks. Large banks can literally
trade billions of dollars daily. This can take the form of a service to
their customers or they themselves speculate on the FX market.
Hedge Funds
As we know the FX market can be extremely liquid which is why it
can be desirable to trade. Hedge Funds have increasingly allocated
portions of their portfolios to speculate on the FX market. Another
advantage Hedge Funds can utilize is a much higher degree of
leverage than would typically be found in the equity markets.
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Corporate Businesses
The FX market mainstay is that of international trade. Many
companies have to import or exports goods to different countries all
around the world. Payment for these goods and services may be
made and received in different currencies. Many billions of dollars are
exchanges daily to facilitate trade. The timing of those transactions
can dramatically affect a company's balance sheet.
The Man In The Street
Although you may not think it, the man in the street also plays a part
in toady's FX world. Every time he goes on holiday overseas he
normally need to purchase that country's currency and again change
it back into his own currency once he returns. Unwittingly he is in fact
trading currencies.
He may also purchase goods and services whilst overseas and his
credit card company has to convert those sales back into his base
currency in order to charge him.
Speculators And Investors
We shall differentiate speculator from investors here with the
definition that an investor has a much longer time horizon in which he
expects his investment to yield a profit. Regardless of the difference
both speculators and investors will approach the FX market to exploit
the movement in currency pairs.
They both will have their reason for believing a particular currency will
perform better or worse as the case may be and will buy or sell
accordingly. They may decide that the Euro will appreciate against
the US Dollar and take what is called a long position in Euro. If the
Euro does in fact gain ground against the US Dollar they will have
made a profit.
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Below you will find a list of Central Banks. Source http://www.bis.org
Albania: Bank of Albania
Algeria: Bank of Algeria
Argentina: Banco Central de la Republica Argentina
Armenia: Central Bank of Armenia
Aruba: Centrale Bank van Aruba
Australia: Reserve Bank of Australia
Austria: Oesterreichische Nationalbank
Azerbaijan: National Bank of Azerbaijan
Bahamas: Central Bank of The Bahamas
Bahrain: Bahrain Monetary Agency
Bangladesh: Bangladesh Bank
Barbados: Central Bank of Barbados
Nationale Bank van Belgie -Banque Nationale de
Belgium:
Belgique
Benin: Banque Centrale des Etats de l'Afrique de l'Ouest
Bolivia: Banco Central de Bolivia
Bosnia: Central Bank of Bosnia and Herzegovina
Botswana: Bank of Botswana
Brazil: Banco Central do Brasil
Bulgaria: Bulgarian National Bank
Burkina Faso: Banque Centrale des Etats de l'Afrique de l'Ouest
Canada: Bank of Canada - Banque du Canada
Cayman Islands: Cayman Islands Monetary Authority
Chile: Banco Central de Chile
China: The People's Bank of China
Colombia: Banco de la Republica
Costa Rica: Banco Central de Costa Rica
C te d'Ivoire: Banque Centrale des Etats de l'Afrique de l'Ouest
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Croatia: Croatian National Bank
Cyprus: Central Bank of Cyprus
Czech Rep.: Ceska Narodni Banka
Denmark: Danmarks Nationalbank
Dominican Rep.: Banco Central de la Republica Dominicana
The East Caribbean Central Bank
area:
Ecuador: Banco Central del Ecuador
Egypt: Central Bank of Egypt
El Salvador: The Central Reserve Bank of El Salvador
Estonia: Eesti Pank
European Union: European Central Bank
Fiji: Reserve Bank of Fiji
Finland: Suomen Pankki
France: Banque de France
Georgia: National Bank of Georgia
Germany: Deutsche Bundesbank
Ghana: Bank of Ghana
Greece: Bank of Greece
Guatemala: Banco de Guatemala
Guinea Bissau: Banque Centrale des Etats de l'Afrique de l'Ouest
Honduras: Banco Central de Honduras
Hong Kong: Hong Kong Monetary Authority
Hungary: National Bank of Hungary
Iceland: Central Bank of Iceland
India: Reserve Bank of India
Indonesia: Bank of Indonesia
Ireland: Central Bank of Ireland
Israel: Bank of Israel
Italy: Banca d'Italia
Jamaica: Bank of Jamaica
21
Japan: Bank of Japan
Jordan: Central Bank of Jordan
Kazakhstan: National Bank of Kazakhstan
Kenya: Central Bank of Kenya
Korea: Bank of Korea
Kuwait: Central Bank of Kuwait
Kyrgyzstan: National Bank of the Kyrgyz Republic
Latvia: Bank of Latvia
Lebanon: Banque du Liban
Lithuania: Lietuvos Bankas
Luxembourg: Banque Centrale du Luxembourg
Macedonia: National Bank of the Republic of Macedonia
Malaysia: Bank Negara Malaysia
Malawi: Reserve Bank of Malawi
Mali: Banque Centrale des Etats de l'Afrique de l'Ouest
Malta: Central Bank of Malta
Mauritius: Bank of Mauritius
Mexico: Banco de Mexico
Moldova: The National Bank of Moldova
Mongolia: The Bank of Mongolia
Morocco: Bank Al-Maghrib
Mozambique: Bank of Mozambique
Namibia: Bank of Namibia
Nepal: Nepal Rastra Bank
Netherlands: De Nederlandsche Bank
Bank van de Nederlandse Antillen
Antilles:
New Zealand: Reserve Bank of New Zealand
Nicaragua: Banco Central de Nicaragua
Niger: Banque Centrale des Etats de l'Afrique de l'Ouest
Nigeria: Central Bank of Nigeria
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Norway: Norges Bank
Oman: Central Bank of Oman
Pakistan: State Bank of Pakistan
Bank of Papua New Guinea
Guinea:
Paraguay: Banco Central del Paraguay
Peru: Banco Central de Reserva del Peru
Philippines: Bangko Sentral ng Pilipinas
Poland: National Bank of Poland
Portugal: Banco de Portugal
Qatar: Qatar Central Bank
Romania: National Bank of Romania
Russia: Central Bank of Russia
Rwanda: Banque Nationale du Rwanda
Saudi Arabia: Saudi Arabian Monetary Agency
Senegal: Banque Centrale des Etats de l'Afrique de l'Ouest
Sierra Leone: Bank of Sierra Leone
Singapore: Monetary Authority of Singapore
Slovakia: National Bank of Slovakia
Slovenia: Bank of Slovenia
South Africa: South African Reserve Bank
Spain: Banco de Espa a
Sri Lanka: Central Bank of Sri Lanka
Sudan: Bank of Sudan
Suriname: Centrale Bank van Suriname
Sweden: Sveriges Riksbank
Switzerland: Schweizerische Nationalbank
Tanzania: Bank of Tanzania
Thailand: Bank of Thailand
Togo: Banque Centrale des Etats de l'Afrique de l'Ouest
Trinidad and Central Bank of Trinidad and Tobago
23
Tobago:
Tunisia: Banque Centrale de Tunisie
Turkey: T rkiye Cumhuriyet Merkez Bankasi
Ukraine: National Bank of Ukraine
Central Bank of United Arab Emirates
Emirates:
United Kingdom: Bank of England
United States: Board of Governors of the Federal Reserve
System (Washington)
Federal Reserve Bank of New York
Venezuela: Banco Central de Venezuela
Yemen: Central Bank of Yemen
Yugoslavia: National Bank of Yugoslavia
Zambia: Bank of Zambia
Zimbabwe: Reserve bank of Zimbabwe
What Next
Well now we have a basic understanding of how the FX market works
and who the main players are, what next?
You are now going to have to decide the best way to trade the
market. The two most common approaches are that of fundamental
analysis and technical analysis.
Fundamental analysis concentrates on the forces of supply and
demand for a given security. This approach examines all the factors
that determine the price of a security and the real value of that
security. This is referred to as the intrinsic value. If the intrinsic value
is below the market price then there is an opportunity to buy and if the
market is above the intrinsic price then there is an opportunity to sell.
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Technical analysis is the study of market action, mainly through the
use of charts and indicators to forecast the future price of a security.
There are three main points that a technical analyst applies.
A. Market action discounts everything. Regardless of what the
fundamentals are saying, the price you see is the price you get.
B. The price of a given security moves in trends.
C. The historical trend of a security will tend to repeat.
Of all of the above things the most important of them is point A. The
tools of the technical analyst are indicators, patterns and systems.
These tools are applied to charts. Moving averages, support and
resistance lines, envelopes, Bollinger bands and momentum are all
examples of indicators.
There are many ways to skin a cat, as the saying goes but
fundamental and technical analysis are the two most popular ways of
trading FX.
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