The Way Of The Dollar Part 7

It would doubtless be a worthy objective to work to vanquish stress a"as much in our lives as in our trading. But in trading, the more practical solution (in life too perhaps) is to take on a series of rules for action in all circ.u.mstances. This is not complicated: the only things we do in trading are to initiate positions and then close them. Itas a relatively simply matter to formulate rules for each proposition. For example, we only open positions awhen all the pieces fita: and we only close them when the pieces cease to fit or when our stop is. .h.i.t whichever is first. OK, adhering to the rules is not as easy as formulating them. But we can get there, step by step, if we are committed to winning.

Also, there may be something physical we can do under fire. In moments of stress youare apt to respond emotionally, on the lowest common level of the crowd. You may notice that your stress is reflected in your physical condition. At such moments, make it a rule never to act. Pause. Take afew slow, deep breaths. And look away from the market. Go for a walk if you can, and empty your mind. Look at the trees in the park and at the sky and the pigeons or whatever. Then, when the adult computer in you is ready to takeover, rea" examine the reasons for your position. Remember: the right decision is just a probability a"a 51/49 shot or better. If you keep on following the probability , you will be doing the right thing.

Are you lucky?

If you should happen to be interviewing someone fora job, hereas a tip. Ask them, out of the blue, if they are lucky? Winners believe they are lucky a"so the theory goes. What role does luck play in trading? Ed Seykota said this: aLuck plays an enormous role in trading success. Some people were lucky enough to be born smart while others were even smarter and got born luckya aLucka or asmartsa or agifta are words indicating an att.i.tudinal proclivity for mastery.a Jesse Livermore frequently noted that when he was trading well he also seemed to get lucky. So have many others, in many different fields. The Roman word felix meant both happy and lucky, which may be what we mean by ahappy-go-lucky.a Luck comes along with the transformation from being a loser.

Are you jealous of wizard traders?

My own answer is ayou bet I am!a. But Iam working on it. Peter Steidlmayer is categorical: aYou canat be a jealous person. A jealous person has a very hard time succeeding. Heas always reacting and not thinking. In other words, making emotional decisions. A good trader is not affected when someoneas doing better than he is.a Steidlmayer sees generosity towards your fellow man as the first requisite of a great trader. What does he mean?

It goes back to his a.n.a.lysis of what determines results in trading, namely: your market understanding; your trading strategy; and you. aYoua is something you have to know, says PS. aYou have to be youa and you have to work within your capacity. That means sticking to the position size, time-frames and method with which you are comfortable. And doing these things obviously has nothing to do with anyone else, so comparisons are unhelpful and could be seriously damaging. Indeed, wise traders sometimes say there is no such thing as a good method or a bad method; there are only methods that suit you and methods that donat suit you. Which leads on to other things like independence and taking responsibility for the trade, which are hallmarks of the successful trader a"and of the Adult in us. And of the winner: itas the loser, remember, who says aIf onlyaa. Perhaps thatas also part of what Steidlmayer meant.

Winning

Currency Bulletinas method for a.n.a.lysing the currency markets rests on agea" old principles. It a.s.sumes that the big money is made in the big swings: but you cannot make big money out of the big swings unless you are confident about the direction of the swing. Big swings are regularly interrupted by counter-trend corrections, which challenge our confidence. Since we do not know in advance whether a counter-trend movement is a correction or a complete reversal, it follows that we can only trade the main trend with confidence if we have a method for locating and monitoring all major counter-trend movements. The one thing that all changes in price trend have in common is a change in sentiment among partic.i.p.ants. CBas method provides a systematic way of determining the main trend, its corrections, and its reversal.

Over to you.

The method is only one third of the winning formula: the rest is you. The method works. If you follow it, you will usually hit the target. You will sometimes miss. Thatas OK. All you have to do to win over time is to shoot.

Donat worry about hitting or missing. When you know itas the right thing to do, whatever the crowd is saying, just shoot. Thatas the winning formula.

GLOSSARY.

NOTE: Terms elaborated in the glossary are in bold type. So if you see bold type in the text you are invited to look up the entry in its alphabetic sequence. The numerals after each entry refer to the page number where the subject is first mentioned a" or where it is dealt with in depth. A short-list of highly recommended books will be found on the last page.

Arbitrage 39,93 . To arbitrage is to undertake a trade with little or no risk, by simultaneously buying and selling different forms of the same risk: for example buying a forward currency and selling a future at similar maturity (see EFP )a" or borrowing a currency and selling it forward at the same time. Used as a noun, this is an arbitrage.

At-the-money 96 . The right to buy or sell and option is available at a specific price, some-times called the strike price. When the strike price is close to the going market price, it is aat-the-marketa. When itas on the profit side, itas ain-the-marketa; when itas on the loss side, itas aout-of-the-marketa. See also Strike price.

Bear (ish). a would-be seller a" opposite of bull (ish).

Berne, eric 111 . Eminent psychiatrist of the psychoa.n.a.lysis school of Freud and Adler; founder of the school of Transactional a.n.a.lysis ; and author of several influential books including Transactional a.n.a.lysis in Psychotherapy (Souvenir Press, ISBN 0 285 64776 8), and best-sellers Games People Play (Penguin, ISBN 0 1400 2768 8) and What Do You Say After You Say h.e.l.lo (see book list).

Big Hitters, The 68 . By Kevin Koy. Intermarket Publishing, Chicago 1986. Interviews with market traders (see book list).

Break-out 62. when a price has been moving more or less sideways in a consolidation range, it is said to break out, or to make a break-out when it moves out of the range either up or down. Such a move is defined by hindsight: if the move out of the range is not followed by a decisive continuation in the direction of the breakout, it is called a afalse break-outa.

Bretton Woods 7 . the location of the meeting in 1944 between Britain, USA and Canada at which the IMF (International Monetary Fund) and the World Bank were established. The original purpose of the IMF was to set up a system of monetary and currency stability in the post-ward period, involving exchange rates fixed to the US dollar, which was in turn fixed in relation to gold (at $35 per ounce). Hence athe Bretton Woods systema came to mean that fixed exchange regime, in which rates would only be changed in the event of afundamental disequilibriuma.

Broker 17,93 . Most banks deal in the cash and forward foreign exchange markets on behalf of customers as well as for themselves. Dealing through banks can be economical if you use at least three banks and deal in size (over 5m or $10m), particularly in spot markets. You can also deal in the cash and forward markets (also called the a interbank marketa) through a broker a" though there are not many left who still transact this business. Most American futures brokers will handle the currency futures, and the big ones such as Merrill Lynch, Shearson Lehman, Prudential Securities have offices in the big European financial centres. You may have to pay $100 per around tripa (in and out). There are also smaller brokers who can be cheap, friendly and efficient. Not many are happy about accepting one-or-two-contract customers. Lind-Waldock (UK 020 7247 0471 or 0800 262 472 a" toll-free), claims to be the worldas largest futures-only broker a" offering the round-trip at $36 a" and welcomes enquiries from anywhere in Europe or the rest of the world. Both these brokers offer a so-called execution-only service for these rates a" meaning no advice. This is the kind of service you want, not opinions.

Bull (ish), bear ish48 . A bull thinks a currency or security or whatever will go up and holds it (long ) or would like to: heas bullish. a bear is the opposite and is short or would like to be.

Cash 92 , Same as spot.

Chaos. the science of seemingly infinitely complex developments in adynamical systemsa, e.g. turbulence a" and stock market crashes? Also the t.i.tle of a marvellous book by James Gleick. (See also fractal ).

Chartist 5 9 . A pure chartist believes that the only data worth studying for the a.n.a.lysis of market prices is price. Some also look at volume and open interest and other market data, in which case they may be referred to as Technical a.n.a.lysis.

Clearing process 3 0 . The process whereby an order, which may be for billions of dollars, spreads through the market-dealing mechanism until buyers and sellers are finally matched.

Commercial 13 . Companies who need to deal in foreign exchange (or any other commodity) for the purposes of carrying on their business.

Consensus 54 . Majority opinion, sometimes bordering on universal opinion. a"

realism 62 . Means expecting chart patterns to be self-fulfilling.

Consolidation 62 (see also Breakout). The settling down of a price after a significant move, sometimes in a definable fluctuating range.

Contrarian 50 , 111 . One who endeavours to go systematically against the consensus .

Conversion flow, process 55,77. at a price peak, sentiment is widely bullish at a trough itas widely bearish . In between , bulls are being gradually converted to bears. This is the conversion process or flow. We can track it through actual people of our acquaintance, or through media reports.

Core position 78 . The position we hold for the underlying trend, without concern for adverse fluctuations. We may add trading positions when we are particularly confident about the short-term direction.

Correction 55 . Or reaction. When a price moves against the underlying trend, temporarily.

Cross rate 17,32,105-6 . All non-dollar parities. The Dm-, SF-DM and Yen-DM were quoted on theIMM from 29 may 1991.

a" games 108. Trend-following speculation in the cross-rates.

Cross es 3 2 . Short for cross-rate. Beware short-hand. You will hear professionals talking of abuying the Yen crossa. Ask them what they mean: buying what, selling what?

Currency overcoat 9 5 , or overlay . In the early 1980s, CB drew attention to the fact that trading international securities and trading currency were two separate processes that had no criteria in common. In fact, when you trade a currency, you have to choose two currencies, on to sell as well as one to buy.

It followed that allowing currency preferences to influence choice of securities resulted in a muddle of apples and pears, and made no sense. The solution was, having selected oneas a.s.set portfolio, to then a.s.sess the resulting currency exposure; and where it conflicted with your currency preferences, you superimposed you preferred currency over-coat, so as to achieve exactly the currency exposure you desired.

International fund managers are coming round to the sense in this approach. In fact, it iis becoming fashionable to refer to currencies as aa new a.s.set cla.s.sa. That phrase and acurrency overlaya are likely to be investment buzzwords of the 1990s.

De Bono, edward 115 . An engaging Maltese psychologist who popularised the notion of alateral thinkinga (LT), which is the opposite of avertical thinkinga (VT), VT is easy to define: itas logical, step-by-step, left-brain, a.n.a.lytical reasoning.

Many problems of the non-linear kind (like price movements) are effectively insoluble by VT. LT sees the answer in the same whole picture as the question. It is holistic, right-brain thinking.

Edward De B has written scores of books. Best sellers include The Use of Lateral Thinking and a fistful of others.

Dennis, richard 74. Legendary trend-following futures fund manager, and one of the first to understand and preach the over-riding importance ofdiscipline in trading.

Differential 36 . Mostly used of the difference or gap between the yield structure in one country versus another. It is basic to ex-change rates, because one currency quoted against another in the future, accurately reflects the yield differential.Also used of relative inflation rates or relative anything you like.

Drawdown 94,99,100 . A useful word meaning reduction in equity value from any given level. Not the same as loss; more like potential loss or apaper lossa. Maximum drawdowna from peak equity to trough is a commonly used measure of historical risk.

Discipline 8 6 . The quality that makes the difference between successful and unsuccessful traders, as opposed to good and bad forecasters: adhering rigidly to a prepared formula of trading rules.

Discounted 3 . price being a function of the expectations of traders, whatever is generally expected is already reflected or discounted in price.

EFP (aexchange for physicala) 93 . At a certain cost, futures traders can deal 24 hours a day. There are dealers who are prepared to trade futures contracts 24 hours a day because they can offset the risk in the interbank market at some centre or another 24 hours a day. They are arbitraging between the cash and futures market.The cost to the trader comes in the spread . normally the spread between bid and offer price is a mere 1 point (about 0.015% or $12.50) in Chicagoas IMM. in the efp market, the spread is more typically 3 points ($37.50) to 5 points.

Elliot, r a lp h n 65 . A chartist who proposed that prices moved in more or less predictable wave patterns.

EMS. the european Monetary System.

ERM. the exchange rate Mechanism of the EMS binds the partners to keep their currencies within certain fixed ranges against each other a" by intervention or other means. Since it takes two currencies to make an exchange rate, the central banks of both sides are obliged to take steps to maintain the agreed ranges. If they fail, at least one currency must be realigned.

The normal permitted fluctuation range is 2.25%. The Lira originally had a wider 6% fluctuation range, as did the Peseta and sterling into 1991. Meanwhile, the Benelux countries have move towards an almost fixed rate with the D-Mark.

Eurodollar 22 US dollars outside America, simply.

Extreme (price extreme) 54 . In other market prices one would talk of a peak or a trough a" either within an underlying trend or a the end of it. In the currencies, a peak for one is of course a trough for the other: the word aextremea avoids the ambiguity. Price extremes coincide with extremes of sentiment, which can vary from euphoria to revulsion .

Fixing 71 . The setting of an agreed price for currency transactions with a central bank (or bullion dealer in the case of gold).

Flag 6 5 . Chartist term for a tight fluctuation range atop a sharp move, implying consolidation or reversal pattern.

Flat 30 , Having no position.

Float (ing) 20 . When currencies are not fixed in relation to gold or another currency.

Floor. metaphor for a limit on the downside, which might call for central bank intervention in the case of the EMS, or a G7 agreement. opposite is aceilinga.

Forex 47 . Short for foreign exchange.

Forward 17, 92 . You can sell one currency and buy another at a price fixed today with a bank, for delivery at a specified future date. If you wish to be free to close the transaction before the specified date, you indicate aat my optiona.

The forward rate will only be the same as the going spot rate if the interest rates over the period for the two currencies happen to be exactly the same. Otherwise the forward rate will reflect the difference between the respective interest rates. E.g. if the interest rate on the currency being sold is higher, the forward price will be lower (because you are getting the benefit of the higher yield meantime). Thus sterling quoted 3 months forward against the dollar is a couple of cents lower than the going spot rate (as at June 1991).

Fractal 48 . A term invented by the mathematician Benoit Mandelbrot a" inspired by the study of soybean prices. It describes a ubiquitous phenomenon of nature in which a pattern, which in turn is part of a yet larger pattern.

In theory, the composition can extend in both, directions to infinity; and the patterns, while similar, are not identical. Under a microscope, snowflakes appear to reveal a fractal character: as with an island sh.o.r.e-line, the more precisely you try and measure it, the closer the circ.u.mference seems to approach infinity.

Certain very simple mathematical formulae, which can be programmed with a few lines of computer code, can on constant repet.i.tion produce fractal patterns of apparently infinite complexity. The aMandelbrot seta is an exquisite example.

One can speculate that the natureas process of genetic creation is achieved by just such a constant repet.i.tion of simple formulae. Read Chaos by James Gleick (Viking Penquin, New York 1988).

Fundamental (s). 31 . Notionally, the underlying support for prices a" linked with the perception of value. In the case of share, this would be to do with the ultimate dividend-paying power of a company. In bonds, yield to maturity plus security of capital. In commodities, simply supply and demand in currencies, the fundamentals are seen to lie in buying power (value for money) and yield.

Future (s) 17, 92 . Soon after the dollar began to float in 1971, the main dollar parities were added to the array of commodities a" from pork bellies to palladium a" quoted for future delivery dates in Chicago. This made the currencies the first financial futures. The purpose of the commodity futures markets was to allow producers and users to fix a price for crops or metals that would not be available for delivery until a later date. For currencies, this facility had already existed for centuries in the interbank forward market. but there was no open exchange, like a stock exchange, where this could be done. This is what the Chicago IMM (international money market) provided.the imm also provided Americans with a practical means for trading in the major acurrenciesa (the US dollar is the dollar: other monies are the athe currenciesa). This they had lacked because few US banks outside New York had experience with foreign exchange a" or any desire for experience.

So the Chicago currency futures market came to be a highly efficient market. Else-where, only the Singapore futures market has succeeded; and itas contracts are inter-changeable (afungiblea) with Chicagoas. You can open a position in Singapore and close in Chicago a" or in the EFP market.

G7 the agroup of 7a leading trading countries: USA, j.a.pan, Germany, Britain, France, Italy and Canada. At times these countries have agreed to co-ordinate efforts towards international financial stability a" by concerted bank intervention or other means.

GAMut Futures Fund 5 4 . One of the stable of (mostly equity) funds offered by the $2bn+ Global a.s.set Management group, having one of the best track records of any public futures fund. Advised by Caxton corporation (chairman Bruce Kovner ) which largely through sheer performance has become the biggest futures fund group, with over $ 1bn under management.

Gann , william 6 5 . Legendary trader, responsible for a complex technical trading system with many adherents today.

German-zone 22 . Germany and its hard-currency neighbours incl Switzerland, Austria, Holland.

GTC (good till cancelled) 76 . You need to specify the validity of an order in terms of time, unless itas GTC.

Harris, dr thomas 112 . A psychotherapist of the Transactional a.n.a.lysis (ta) school, author of bestseller Iam OK, Youare OK.

Head & shoulders 6 2 . Famous self-descriptive chart pattern.

Hedge (s) 13,108 . As a verb, to insure against market risk, particularly foreign exchange risk, as in ahedge your betsa. Also a noun.

Hite, larry 71,85,89 . One of the founders of Mint investment corp, the well-known, near $1bn futures fund group.

IG Index . a way of making bets on the imm currencies (and other instruments) a" interesting because betting profits are not taxable in Britain; also, for smaller players, because you donat have to bet full contract amounts. But dealing costs are high.

IMM 17,92-4 . International Monetary Market, part of the Chicago Mercantile Exchange, is the major global centre for trading in currency futures . on a busy day it turns over $20bn and represents a large slice of global speculative business. It has been said that only 5% of world interbank forex turnover ($600bn a day) is customer orders, the rest being the froth of the clearing process. by contrast, most the IMM currency turnover represents original customer-generated risk business. Thus IMM turnover represents original customer-generated risk business. Thus IMM turnover probably accounts for as much as a third of world customer orders on occasions. The IMM is an open-cry market dealing in options into futures as well as futures them-selves, in which volume is published and open interest made available daily at the start of trading on the next day. The currencies traded included DM (125,000 per contract), Yen (12.5m), SF (125,00), Pound (62,500), Can $ (100,000) and Aus $ (100,000). They are quoted in US dollars a" to four significant figures a" i.e. the yen is quoted at say 7315-7316. The spread or aturna is usually just one point or aticka, and represents the dealing cost to the customer ($12.5) of one contract, before commission. Initial margins tend to be of the order of $2,500per contract (around 3%). As with all futures, currency contracts have specific maturity dates, currently the third Wednesday in March, June, September and December a" though monthly maturities are offered in IMM options. Stops conveyed to the market-place are observed under strictly-defined exchange rules.

As with any exchange, you learn about it by trading in it. And this is the place to start currency trading for profit.

Iam OK a" Youare OK 112 . By Dr Thomas Harris a" Pan paperback: ISBN 0 330 23543 5.

Interbank 17,92 . Name given to the forward and cash or spot currency markets made by banks all over the world. Turnover in the (most of it among banks rather than with customers) in 1989 a" London being the largest centre with a share of about 30%. However no regular statistics are available for interbank business. For practical purposes, dealing in all currencies but Yen, DM, , SF and Can $ must be done in the interbank market.

In practice too, most large currency traders in the European sphere tend to use the interbank market for speculative trading as well as for commercial hedging . one reason for this is historical and cultural. The banks have done an excellent job of persuading clients that transaction costs in the futures markets are much higher than in the interbank market. The currency section of the London futures exchange, LIFFE, was virtually stillborn, as a result.

Banks do not charge commissions on forex transactions, but make their money out of the spread between bid and offer prices. Clients often find that the spread is pleasantly narrow when they open a position, but decidedly adverse when it comes to closing, in the case offorward positions. few know just how adverse, unless they have access to simultaneous quotes from other banks.

Interest yield 39 . Used to denote yields on deposits and across the maturity spectrum in fixed interest and money instruments.

Intervention 47 . In most countries, the exchange rate is regarded as part of the panoply of tools by which the economy can be influenced. In those with an independent central bank, the value of the currency is usually regarded as the concern of the central bank. In America and Britain, it is the responsibility of the Treasury a" and the Bank of England and the Fed are just instruments of Treasury policy.

Jawboning aside, only two ways are known of directly moving the value of the currency a" interest rate manipulation and market intervention to support the currency by buying or depress it by selling. The central banks a" Bundesbank in particular a" have got more sophisticated in intervention. Even the underlying trend in a currency can be turned when the central bank is prepared to meet speculative sales-purchases until they are exhausted. This has been likened to an angler tightening the reel to exhaust the fish.