in scheduling their primary tradingsessions.  In  accordance  with  our  time  deﬁnitions  described  at  the  beginning  of  thischapter, 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.
Tools of the Trade
13
FIGURE 2.10 Weekly Composite Chart—Activity
PART II
Euro Currency
CHAPTER 3
History ofthe Euro Currency
WHY TRADE THE EURO CURRENCY?
The EURUSD is the most actively traded of all pairs available on the Foreign Exchangemarkets  globally.  This  fact  alone  ensures  both  volatility  (that  is,  prices  will  ﬂuctuatewith sufﬁcient standard deviation to make trading proﬁtable) and liquidity (the ability toenter 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,  theNetherlands, Portugal, and Spain. Greece followed on January 1, 2001. The Vatican Cityalso participated in the changeover. This changeover is now complete.
It is worth noting that any place that previously used one or more of the currencieslisted 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 auto-matically  to  any  territories,  departments,  possessions,  or  collectivities  of  Euro-zonecountries,  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in those countries were valued in Euro, and the “old”notes  and  coins  of  these  countries  were  gradually  withdrawn  from  circulation.  (SeeTable 3.1.)
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18
EURO CURRENCY
TABLE 3.1 EMU Member Legacy Currencies
ISO  stands  for  the  International  Standards  Organization.  Most  outgoing  pre-Eurocurrencies will still be physically convertible at special locations for a period of severalyears. 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 CurrencyUnit (or ECU), which used to be listed as XEU. The ECU was a theoretical basket ofcurrencies rather than a currency in and of itself, and no ECU bank notes or coins everexisted. At any rate, the ECU has been replaced by the Euro, which is a bona ﬁde cur-rency.
A note about spelling and capitalization: the ofﬁcial spelling of the EUR currencyunit in the English language is “euro,” with a lower case “e.” However, the overwhelm-ingly prevailing industry practice is to spell it “Euro,” with a capital “E.” Since other cur-rency names are capitalized in general use, doing so helps differentiate the noun “Euro,”meaning EUR currency, from the more general adjective “euro,” meaning anything evenremotely having to do with Europe.
BANKNOTES AND COINS
On January 1, 2002, the euro coins came into circulation. The eight denominations ofcoins 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  areacountries; these designs show different maps of Europe surrounded by the 12 stars ofthe European Union. The reverse side of each coin shows individual designs relating to
History of the Euro Currency
19
the member state where the coin originates, surrounded by 12 stars. Euro coins can beused  anywhere  in  the  euro  area,  regardless  of  their  national  sides.  Milled  edges  havebeen introduced to make it easier, especially for those with impaired sight, to recognizedifferent values. Sophisticated bi-metal technology has been incorporated into the EUR1 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  designthroughout Europe; each banknote has a different color and different size; the EUR 5 isthe smallest banknote and the EUR 500 the biggest. The banknotes that circulate in de-nominations 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 replacethe national banknotes in circulation and nearly 5 billion are to be held in reserve. SeeFigures 3.1 through 3.5.
FIGURE 3.1 500 Euro Banknote Front and Back
Denomination:Size:Color:Architectural period:
EUR 500160 × 82 mmPurpleModern 20th century architecture
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EURO CURRENCY
FIGURE 3.2 200 Euro Banknote Front and Back
Denomination:Size:Color:Architectural period:
EUR 200153 × 82 mmYellow-brownIron and glass architecture
History of the Euro Currency
21
FIGURE 3.3 100 Euro Banknote Front and Back
Denomination:Size:Color:Architectural period:
EUR 100147 × 82 mmGreenBaroque and rococo
22
EURO CURRENCY
FIGURE 3.4 2 Euro Coin Obverse and Reverse
Denomination:Diameter:Thickness:Weight:Composition:
EUR 225.75 mm2.20 mm8.50 gOuter part: copper-nickel; inner part: three layers: nickelbrass, nickel, nickel brass
FIGURE 3.5 1 Euro Coin Observe and Reverse
Denomination:Diameter:Thickness:Weight:Composition:
EUR 123.25 mm2.33 mm7.50 gOuter part: nickel brass; inner part: three layers: copper-nickel, nickel, copper-nickel
Visit http://www.euro.ecb.int/en/section/testnotes.nd100.html for additional details.
History of the Euro Currency
23
EURO CURRENCY VERSUS EURO DOLLAR
The Euro currency contract is a futures contract of the Euro, the currency in circulationin 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  deliverymonths 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  interestrate rather than a currency. It is based upon the number of U.S. dollars deposited in Eu-ropean banks. Trading contracts occur in each calendar month and each point equals$25.00.
CHAPTER 4
Annual Charts
OHLC AND ACTIVITY CHARTS
In this chapter, we examine historical charts for the years 2000 through 2005 using dailyinterval data. In the lower portion of each chart, activity is expressed in terms of ticks ofthe currency pair. See Figures 4.1 through 4.7.
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26
EURO CURRENCY
FIGURE 4.1 EURUSD OHLC and Activity 2000
EURUSD Properties 2000
OpenHighLowCloseMidrangeAbsolute RangeRelative RangeArithmetic MeanStandard DeviationCoefﬁcient of Variation
0.94230.95940.83490.89010.89720.124513.87730.89600.02612.9100
Annual Charts
27
FIGURE 4.2 EURUSD OHLC and Activity 2001
EURUSD Properties 2001
OpenHighLowCloseMidrangeAbsolute RangeRelative RangeArithmetic MeanStandard DeviationCoefﬁcient of Variation
1.00881.04140.82290.94230.93220.218523.44040.92380.05025.4367
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EURO CURRENCY
FIGURE 4.3 EURUSD OHLC and Activity 2002
EURUSD Properties 2002
OpenHighLowCloseMidrangeAbsolute RangeRelative RangeArithmetic MeanStandard DeviationCoefﬁcient of Variation
0.89011.05120.85621.04940.95370.195020.44670.94620.05375.6733
Annual Charts
29
FIGURE 4.4 EURUSD OHLC and Activity 2003
EURUSD Properties 2003
OpenHighLow CloseMidrangeAbsolute RangeRelative RangeArithmetic MeanStandard DeviationCoefﬁcient of Variation
1.04941.26471.03311.25921.14890.231620.15841.13240.05094.4907
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EURO CURRENCY
FIGURE 4.5 EURUSD OHLC and Activity 2004
EURUSD Properties 2004
OpenHighLow CloseMidrangeAbsolute RangeRelative RangeArithmetic MeanStandard DeviationCoefﬁcient of Variation
1.25901.36671.17601.35531.27140.190714.99981.24400.04303.4560
Annual Charts
31
FIGURE 4.6 EURUSD OHLC and Activity 2005
EURUSD Properties 2005
OpenHighLowCloseMidrangeAbsolute RangeRelative RangeArithmetic MeanStandard DeviationCoefﬁcient of Variation
1.35531.35801.16381.18491.26090.194215.40171.24420.05034.0398
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EURO CURRENCY
FIGURE 4.7 EURUSD OHLC and Activity 2000–2005
STATISTICS
EURUSD Properties 2000–2005
Year200020012002200320042005 Avg
High0.95941.04141.05121.26471.36671.35801.3667
Low0.83490.82290.85621.03311.17601.16380.8229
Mean0.89600.92380.94621.13241.24401.24421.0645 
Rel Range13.877323.440420.446720.158414.999815.401714.5723
Coef Var2.91005.43675.67334.49073.45604.03983.9036
CHAPTER 5
Monthly Charts
OHLC AND ACTIVITY CHARTS
In  the  current  chapter,  we  examine  recent  market  behavior  in  the  EURUSD  currencypair for the months January through March 2006 using daily interval data. See Figures5.1 through 5.3.
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34
EURO CURRENCY
FIGURE 5.1 EURUSD OHLC and Activity January 2006
EURUSD Properties January 2006
OpenHighLowCloseMidrangeAbsolute RangeRelative RangeArithmetic MeanStandard DeviationCoefﬁcient of Variation
1.18331.23241.18011.21480.20630.05234.33581.21150.00920.7586
Monthly Charts
35
FIGURE 5.2 EURUSD OHLC and Activity February 2006
EURUSD Properties February 2006
OpenHighLowCloseMidrangeAbsolute RangeRelative RangeArithmetic MeanStandard DeviationCoefﬁcient of Variation
1.21481.21671.18251.19461.19960.03422.85101.19410.00620.5153
36
EURO CURRENCY
FIGURE 5.3 EURUSD OHLC and Activity March 2006
EURUSD Properties March 2006
OpenHighLowCloseMidrangeAbsolute RangeRelative RangeArithmetic MeanStandard DeviationCoefﬁcient of Variation
1.19421.22091.18591.21141.20340.03502.90841.20350.00880.7332
Monthly Charts
STATISTICS
37
EURUSD Properties Jan–Mar 2006
MonthJanFebMarAvg
High1.23241.21671.22091.2233
Low1.18011.18251.18591.1828
Mean1.21151.19411.20351.2030
Rel Range4.33582.85102.90843.3651
Coef Var0.75860.51530.73320.6690
A quick survey of the list above indicates that all values fall within expected bound-aries.  The  average  daily  range  during  the  overall  time  frame  (1/1/2006  through3/31/2006) was 78 pips.
CHAPTER 6
Composite Charts
DAILY COMPOSITE CHARTS
Refer  to  Chapter  2,  Tools  of  the  Trade,  for  a  detailed  description  of  both  daily  andweekly composite charts
The  time  frame  in  the  following  charts  (Figures  6.1  through  6.9)  spans  1/1/2005through 4/14/2006. Daily composite activity charts are calculated by averaging the sumof  the  upticks  and  downticks  over  that  period  using  one-minute  time  intervals.  Theirpurpose  is  to  assist  traders  in  determining  when  to  schedule  online  trading  sessionsbased upon traders’ predilection to the nebulous risk/reward factor and the volatility ofthe targeted currency pair.
The vertical numeric scale on the right of each chart is activity expressed in totalnumber of ticks (upticks plus downticks) during each time interval. The bottom band(the  darkest)  represents  the  activity  for  the  current  one-minute  interval.  The  centralband plus the lower band represents 3-minute activity. The sum of the all three bandsrepresents the 5-minute activity.
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40
EURO CURRENCY
FIGURE 6.1 Sunday Composite Activity Chart
Composite Charts
41
FIGURE 6.2 Monday Composite Activity Chart
42
EURO CURRENCY
FIGURE 6.3 Tuesday Composite Activity Chart
Composite Charts
43
FIGURE 6.4 Wednesday Composite Activity Chart
44
EURO CURRENCY
FIGURE 6.5 Thursday Composite Activity Chart
Composite Charts
45
FIGURE 6.6 Friday Composite Activity Chart
A  close  inspection  of  the  composite  charts  above  reveals  that  each  daily  chart  isunique. This can be primarily attributed to intervention and to the fact that various regu-latory agencies schedule their news releases on different days of the week, and at anytime  between  8:30  A.M. ET  and  4:00  P.M. ET  (usually).  Without  invention,  these  chartswould most likely exhibit a smoother, less “spikey” behavior.
46
EURO CURRENCY
WEEKLY COMPOSITE CHARTS
FIGURE 6.7 Weekly Activity Composite Chart
Composite Charts
47
FIGURE 6.8 Weekly Range Composite Chart
48
EURO CURRENCY
FIGURE 6.9 Weekly Momentum Composite Chart
CAVEAT
Traders  should  be  aware  that  starting  around  3:30  P.M. Eastern  Time,  many  currencybrokers  begin  gradually  increasing  their  transaction  costs.  One  NY  broker  raises  theEURUSD transaction cost from its standard 3 pips to 5 pips. Shortly after 4:00 P.M., thisis again incremented to 7 pips then 10 pips by 4:30 P.M. Unless traders intend to stay inan open position over the weekend and risk rollover charges, they should liquidate alltrades prior to 3:00 P.M. Friday Eastern Time. It is possible, for whatever reason, to tradeover the weekend, but the high transaction costs and lack of volatility usually defeat theprospect of any proﬁtability.
Additionally, traders should also be aware of another phenomenon which, though itoccurs very infrequently, can have a very damaging effect on placing orders. The trans-action cost may spike wildly without warning and for no apparent reason. Currency bro-kers  protect  themselves  whenever  the  electronic  order  book  becomes  lopsided.  This
Composite Charts
49
book is a list of the incoming trades at the lowest level. Normally, buy orders must beoffset with corresponding sell orders of the same quantity, thus maintaining a state ofequilibrium (in futures contracts, this equilibrium is rigidly enforced; a long always hasa corresponding short). If the number of incoming buy orders far exceeds the number ofincoming sell orders (or vice versa), the broker may increase the bid-ask spread to en-sure liquidity and to avoid brokerage house losses.
PART III
British Pound
CHAPTER 7
History of the Pound
WHY TRADE THE BRITISH POUND?
Aside  from  being  one  of  the  most  actively  traded  currency  pairs,  the  British  Poundholds a position of being the king of currencies in the international arena. Its stabilityand status as legal tender globally during the period of the British Empire contribute toits appeal.
HISTORICAL PERSPECTIVE
As a unit of currency, the term pound originated from the value of a troy pound of highpurity  silver  known  as  sterling  silver.  The  sterling  was  originally  a  name  for  a  silverpenny of 1/240 pound. Originally a silver penny had the purchasing power of slightly lessthan a modern pound. In modern times the pound has replaced the penny as the basicunit of currency as inﬂation has steadily eroded the value of the currency.
The pound sterling, established in 1560 by Elizabeth I, brought order to the ﬁnancialchaos  of  Tudor  England  that  had  been  caused  by  the  “Great  Debasement”  of  thecoinage, which brought on a debilitating inﬂation during the years 1543–1551. By 1551,the silver content of a penny had dropped to one part in three. The coinage had becomea mere ﬁduciary currency (as modern coins are), and the exchange rate on the Euro-pean continent deteriorated accordingly. All the coins in circulation were called in forreminting at the higher standard, and paid for at discounted rates.
The pound sterling maintained its intrinsic value uniquely among European curren-cies,  even  after  the  United  Kingdom  ofﬁcially  adopted  the  gold  standard,  until  afterWorld War I; it weathered ﬁnancial crises in 1621, in 1694–1696, and again in 1774 and1797. Not even the violent disorders of the Civil War devalued the pound sterling in Eu-
53
54
BRITISH POUND
ropean money markets. England’s easy credit, security of contracts, and rise to ﬁnancialsuperiority during the 18th century all contributed to the fact that the pound was neverdevalued over the centuries. The pound sterling has been the money of account of theBank of England from its inception in 1694.
THE GOLD STANDARD
Sterling unofﬁcially moved to the gold standard from silver due to an overvaluation ofgold in England that drew gold from abroad and caused a steady export of silver coin, inspite of a reevaluation of gold in 1717 by Sir Isaac Newton, Master of the Royal Mint.The de facto gold standard continued until its ofﬁcial adoption following the end of theNapoleonic Wars in 1816. This lasted until the United Kingdom abandoned the standardafter World War I in 1919. During this period, the pound was generally valued at aroundU.S. $4.90.
In an attempt to resume stability, a variation on the gold standard was reintroducedin  1926,  under  which  the  currency  was  pegged  to  the  gold  price  at  pre-war  levels,  al-though people were only able to exchange their currency for gold bullion, rather thanfor coins. This was abandoned on September 21, 1931, during the Great Depression, andthe pound was devalued by 20 percent.
In common with all other world currencies, the pound no longer has any link toprecious metals. The U.S. dollar was the last to leave gold, in 1971. The pound wasmade fully convertible in 1946 as a condition for receiving a U.S. loan of $3.75 billionin the aftermath of World War II. At this time the pound sterling was used as the cur-rency of the British Empire. As the Empire became the Commonwealth of Nations,dominions  introduced  their  own  currencies  (such  as  the  Australian  pound).  Visithttp://en.wikipedia.org/ for further details.
The post-World War II GBPUSD exchange rates are shown in Figure 7.1:
History of the Pound
55
FIGURE 7.1 GBPUSD Annual Closes 1948 to 2004
GBPUSD 1948 to 2004
Year1948194919501951195219531954195519561957195819591960196119621963196419651966
GBPUSD4.03003.72252.80002.80002.80002.80002.80002.80002.80002.80002.80002.80002.80002.80002.80002.80002.80002.80002.8000
Year1967196819691970197119721973197419751976197719781979198019811982198319841985
GBPUSD2.76162.40002.40002.40002.43362.49762.45002.33782.21221.79691.74441.91752.11782.32402.00951.74691.51581.33011.2833
Year1986198719881989199019911992199319941995199619971998199920002001200220032004
GBPUSD1.46591.63421.77881.63621.77561.76361.75511.49981.53041.57811.56021.63711.65611.61801.51301.43961.49871.63271.8309
56
BRITISH POUND
BANKNOTES AND COINS
As of July 2005, the Bank of England circulates the following banknotes, known asSeries E:
• 5-pound  note  depicting  Elizabeth  Fry,  showing  a  meeting  of  people  possibly  dis-
cussing prisoners’ rights.
• 10-pound note depicting Charles Darwin, a hummingbird, and the HMS Beagle. (See
Figure 7.2.)
• 20-pound note depicting Sir Edward Elgar, with a view of the west face of Worces-
ter Cathedral.
• 50-pound note depicting Sir John Houblon, with a view of his house in Threadnee-
dle Street.
FIGURE 7.2 Ten-Pound Banknote
Currently there are eight British coins in circulation. (See Figures 7.3 and 7.4.)
FIGURE 7.3 One Penny, Two Pence, Five Pence, and Ten Pence
History of the Pound
57
FIGURE 7.4 Twenty Pence, Fifty Pence, One Pound, Two Pound
CHAPTER 8
Annual Charts
OHLC AND ACTIVITY CHARTS
In  this  chapter,  we  examine  GBPUSD  historical  charts  for  the  years  2000  through2005  using  daily  interval  data.  In  the  lower  portion  of  each  chart,  activity  is  ex-pressed  in  terms  of  ticks  (the  sum  of  upticks  and  downticks).  (See  Figures  8.1through 8.7.)
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60
BRITISH POUND
FIGURE 8.1 GBPUSD OHLC and Activity Chart 2000
GBPUSD Properties 2000
OpenHighLowCloseMidrangeAbsolute RangeRelative RangeArithmetic MeanStandard DeviationCoefﬁcient of Variation
1.61471.65791.39531.49291.52660.262617.20161.51600.06814.4941
Annual Charts
61
FIGURE 8.2 GBPUSD OHLC and Activity Chart 2001
GBPUSD Properties 2001
OpenHighLowCloseMidrangeAbsolute RangeRelative RangeArithmetic MeanStandard DeviationCoefﬁcient of Variation
1.49291.51041.36851.45461.43950.14199.85791.44070.02371.6444
62
BRITISH POUND
FIGURE 8.3 GBPUSD OHLC and Activity Chart 2002
GBPUSD Properties 2002
OpenHighLowCloseMidrangeAbsolute RangeRelative RangeArithmetic MeanStandard DeviationCoefﬁcient of Variation
1.45461.61421.40441.60981.50930.209813.90051.50380.06274.1683
Annual Charts
63
FIGURE 8.4 GBPUSD OHLC and Activity Chart 2003
GBPUSD Properties 2003
OpenHighLowCloseMidrangeAbsolute RangeRelative RangeArithmetic MeanStandard DeviationCoefﬁcient of Variation
1.60981.79421.54621.78551.67020.248014.84851.63560.05363.2764
64
BRITISH POUND
FIGURE 8.5 GBPUSD OHLC and Activity Chart 2004
GBPUSD Properties 2004
OpenHighLow CloseMidrangeAbsolute RangeRelative RangeArithmetic MeanStandard DeviationCoefﬁcient of Variation
1.78341.95501.74821.91901.85160.206811.16871.83320.04232.3052
Annual Charts
65
FIGURE 8.6 GBPUSD OHLC and Activity Chart 2005
GBPUSD Properties 2005
OpenHighLowCloseMidrangeAbsolute RangeRelative RangeArithmetic MeanStandard DeviationCoefﬁ