Forex Trading System for major currencies and futures

A futures contract is an agreement between two parties: A short position is taken by the party who agrees to deliver a commodity, and a long position is taken by the party who agrees to receive a commodity on a pre-arranged date. For example, a grain farmer would be the holder of the short position (agreeing to sell the grain), while the bakery would be the holder of the long position (agreeing to buy the grain).

In every futures contract, everything is precisely specified: the quantity and quality
(or grade) of the underlying commodity, the specific price per unit, and the date and
method of delivery. The price of a futures contract is represented by the agreed-upon
price of the underlying commodity or financial instrument that will be delivered in the future. For example, in the above scenario, the size of the contract is 5,000 bushels of soft red #2 wheat at a price of 317 cents per bushel, and the delivery date may be the third Wednesday in September of the current year.

The Forex market is essentially a cash or spot market in which over 90 percent of
the trades are liquidated within 48 hours. Currency trades held longer than this are normally routed through an authorized commodity futures exchange such as the Interna-
tional Monetary Market (IMM). It was founded in 1972 and is a division of the Chicago
Mercantile Exchange (CME) that specializes in currency futures, interest-rate futures,and stock index futures, as well as options on futures. Clearing houses (the futures exchange) and introducing brokers are subject to more stringent regulations from the SEC, CFTC, and NFA agencies than the Forex spot market (see www.cme.com and
www.cbot.com for more details).

FUTURES VOLUME AND OPEN INTEREST

Volume is the number of futures contracts traded within a given time period. Open in-
terest is the number of open futures contracts at any given time. Even though the volume and open interest of Forex spot currencies are presently not accessible, it is still possible to compare them with currency futures just as a point of perspective. Table 21.1 summarizes the trading activity of selected futures contracts in currencies, precious metals, and some financial instruments. The volume and open interest readings are intended only to provide a brief synopsis of each market’s liquidity and volatility based on the average of 30 trading days.

Table 21.2 lists the identical contracts but for the date June 4, 2004.

Note that all currency contracts (except the Canadian Dollar) exhibited a signifi-
cant increase in volume and most showed an increase in open interest over the five-
month time frame.

Forex Trading System- Cross rate charts

OVERVIEW

A cross rate is any currency pair in which neither the base currency nor the quote currency is the U.S. Dollar. For example, a long position in the British Pound with a simultaneous short in the Swiss Franc is a cross rate. Obviously. this definition is relative.

When trading Forex markets in Tokyo, the EURUSD currency pair is considered a
cross rate.

Cross rate futures provide a way for banks, corporations, money managers, and
individuals with the tools to manage the risks associated with currency rate fluctua-
tion and to take advantage of profit opportunities stemming from changes in cur-
rency rates. Currency cross rate futures are physically delivered at expiration.
Exercised options contracts are settled by the delivery of futures contracts.

Visit http://www.cme.com/trading/prd/fx/crossrate2625.html for additional information.

In the analysis below, we will restrict ourselves to those cross rates involving the
major currencies EUR, GBP, CHF, and JPY.

Forex Trading System- The History of Japanese Yen

WHY TRADE THE YEN?

The Japanese economy is one of the strongest in the world. Only the United States has a higher Gross Domestic Product. Japan’s main export goods are cars, electronic devices, and computers. The most important single trade partner is the United States, which imports more than one-quarter of all Japanese exports. Other major export countries are Taiwan, Hong Kong, South Korea, China, and Singapore.

Japan has a large surplus in its export/import balance. The most important import
goods are raw materials such as oil, foodstuffs, and wood. Major suppliers are the
United States, China, Indonesia, South Korea, and Australia. Manufacturing, construc-
tion, distribution, real estate, services, and communication are Japan’s major industries today. Agriculture makes up only about 2 percent of the GNP. The most important agricultural product is rice. Resources of raw materials are very limited and the mining industry rather small.

HISTORICAL PERSPECTIVE

The history of Japan is lost in legend, and reliable records date back only to about A.D. 400. Korean invaders probably introduced bronze and iron implements around the first century. Portuguese sailors made the first European contact with Japan in 1542. Commercial trading with the West developed gradually but only on a very limited scale. The Yen was established as the official unit of currency in 1871 by order of the Meiji government. The Bank of Japan, established in 1882, issued its first Yen bank notes in 1885.

In 1945, in accordance with the emergency measures intended to suppress the post-
war hyperinflation, the Japanese people were obligated to deposit their money by a certain date in monetary institutions for a specific period of time. Banknotes then in
circulation were made invalid. Withdrawal of the frozen deposits in the form of the new banknotes was then allowed to a limited extent. But not enough new banknotes were
printed for withdrawal. To cope with this, existing banknotes with adhesive stickers
were regarded as new banknotes and circulated until the end of October in that year as a makeshift arrangement.

Japan’s economy crashed as a result of defeat by the Allies, causing a 49.6 billion
Yen loss due to wartime damages. The total reached 1.38 trillion Yen by the end of 1947 (equal to 20 percent of Japan’s pre-war domestic assets). National income dropped to 6.5 million Yen.

In 1946 the Economic Stabilization Board was established, which put almost all sec-
tors of the national economy (commodities, prices, transport, banking, etc.) under the systematic control of the board. In October the Reconstruction Finance Bank was established, which furnished enormous volumes of funds to industries vital to economic recovery, such as the coal, steel, and chemical fertilizer industries.

In 1949 Joseph Dodge, the economic advisor to the General Headquarters of the Al-
lied Occupation Forces, mapped out the Dodge Line Policy to promote a self-sustaining
economy. This plan established a single exchange rate for the Yen and attempted to stabilize the currency as well as close the gap between domestic and overseas prices in general. It also curtailed government spending with a tight-money policy. By this time, the exchange rate had risen to 360 Yen to the U.S. dollar.

During the Korean War (1950–1953), special procurement contracts by the Ameri-
can government for goods and services generated $315 million for Japan. During this
time period, Japan attempted to reduce dependence on imports by increasing modern-
ization of processing in the four major industries (steel, coal, etc.), importing new technologies, and improving on old ones (synthetic fibers and petrochemicals). Japan’s foreign exchange reserves quadrupled from $260 million in 1949 to $1.06 billion in 1951.

In 1953 Japanese exports were 50 percent greater than before the Korean War. Domestic
prices rose in response to the increase in export and import prices.

Due to a drop in exports from 1963 to 1965, Japan experienced another reces-
sion. The government issued long-term public bonds. Foreign exchange reserves re-
mained stable at about $2 billion. From 1965 to 1970, the Japanese economy began to
prosper. Average growth rate of the economy remained stable at 11.8 percent for
these five years. Today, Japan has the second highest GNP in the world behind the
United States.

In 1971 Japan’s foreign exchange reserves reached $15.2 billion. Modernization
of industrial equipment over the past 10 years resulted in better prices and more efficient production of goods. The Bretton Woods system of fixed exchange rates for
currency worldwide collapsed as a result of the devaluation of the U.S. dollar. President Nixon enacted an emergency policy that applied a 10 percent surcharge to
imports to the United States and also suspended the conversion of the U.S. dollar
into gold.

The Smithsonian floating exchange rates for worldwide currencies were imple-
mented in 1973. The Japanese Yen was revalued against the U.S. dollar at a lower rate,causing an increase in imports into Japan due to cheaper import prices. In the sameyear war broke out in the Middle East, the export of crude oil was temporarily suspended, and oil prices increased worldwide. Japan was one of the many nations that underwent severe recession due to the oil crisis and collapse of the fixed exchange rate system. In 1979 a second oil crisis broke out, and plunged Japan from a positive $13.9 billion to a $7 billion deficit by 1980.

The rise of the Japanese Yen from 1971 to the present is one of the most dramatic
economic phenomena in recent years. This fact alone makes it a prime Forex trading
candidate. Additionally, the trading volume of the Yen at the Chicago Mercantile Ex-
change is exceeded only by the Euro currency. Further historical information on the Yen can be found at http://www.imes.boj.or.jp.

BANKNOTES AND COINS

The Japanese currency is the Yen, which literally means “circle” since the previous
coinage was oblong. One Yen corresponds to 100 sen. However, sen are not used in
everyday life anymore. Coins come in 1 Yen, 5 Yen, 10 Yen, 50 Yen, 100 Yen and 500 Yen.

Bank note denominations are 1000 Yen, 2000 Yen, 5000 Yen, and 10000 Yen.