<s> Chartingthe MajorForex Pairs
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Chartingthe MajorForex Pairs
Focus onMajor Currencies
JAMES L. BICKFORDMICHAEL D. ARCHER
John Wiley & Sons, Inc.
Copyright © 2007 by Jim Bickford and Michael Archer. All rights reserved
Published by John Wiley & Sons, Inc., Hoboken, New JerseyPublished simultaneously in Canada
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Library of Congress Cataloging-in-Publication Data:
Archer, Michael D. (Michael Duane)
Charting the major Forex pairs : focus on major currencies / Michael
Archer, Jim Bickford.
p.
cm.—(Wiley trading series)Includes bibliographical references and index.ISBN 978-0-470-12046-0 (pbk.)
1. Foreign exchange rates—Mathematical models.
2. Foreign exchange market.
I. Bickford, Jim L.HG3852.A782007332.4'5—dc22
II. Title.
Printed in the United States of America.
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Contents
Acknowledgment
About the Authors
Introduction
PART I Getting Started
CHAPTER 1 Understanding Forex Data
Overview
Streaming Data
Interval Data
CHAPTER 2 Tools of the Trade
Overview
Activity
Direction
Absolute Range
Midrange
Relative Range
Absolute Momentum
Standard Deviation
Coefﬁcient of Variation
Composite Charts
PART II Euro Currency
CHAPTER 3 History of the Euro Currency
Why Trade the Euro Currency?
Historical Perspective
Banknotes and Coins
Euro Currency versus Euro Dollar
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CONTENTS
CHAPTER 4 Annual Charts
OHLC and Activity Charts
Statistics
CHAPTER 5 Monthly Charts
OHLC and Activity Charts
Statistics
CHAPTER 6 Composite Charts
Daily Composite Charts
Weekly Composite Charts
Caveat
PART III British Pound
CHAPTER 7 History of the Pound
Why Trade the British Pound?
Historical Perspective
The Gold Standard
Banknotes and Coins
CHAPTER 8 Annual Charts
OHLC and Activity Charts
Statistics
CHAPTER 9 Monthly Charts
OHLC and Activity Charts
Statistics
CHAPTER 10 Composite Charts
Daily Composite Charts
Weekly Composite Charts
PART IV Swiss Franc
CHAPTER 11 History of the Swiss Franc
Why Trade the Swiss Franc?
Historical Perspective
Banknotes and Coins
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Contents
CHAPTER 12 Annual Charts
OHLC and Activity Charts
Statistics
CHAPTER 13 Monthly Charts
OHLC and Activity Charts
Statistics
CHAPTER 14 Composite Charts
Daily Composite Charts
Weekly Composite Charts
PART V Japanese Yen
CHAPTER 15 History of the Japanese Yen
Why Trade the Yen?
Historical Perspective
Banknotes and Coins
CHAPTER 16 Annual Charts
OHLC and Activity Charts
Statistics
CHAPTER 17 Monthly Charts
OHLC and Activity Charts
Statistics
CHAPTER 18 Composite Charts
Daily Composite Charts
Weekly Composite Charts
PART VI Cross Rates
CHAPTER 19 Cross Rates Charts
Overview
Monthly OHLC and Activity Charts
Daily OHLC and Activity Charts
Composite Activity Charts
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CONTENTS
CHAPTER 20 Cross Rate Statistics
Cross Rate Activity Summary
Single Currency Activity
PART VII Comparative Studies
CHAPTER 21 Major Currencies and Currency Futures
Overview
Futures Volume and Open Interest
Pip Differential Oscillator
Activity versus Volume and Open Interest
CHAPTER 22 Major Currencies and Precious Metals
Overview
Gold Charts
Gold Statistics
Silver Charts
Silver Statistics
Caveat
CHAPTER 23 The Mundo Currency
Overview
International Currency Unit
Mundo Calculation
Mundo Differential Chart
Usage
A. ISO Currencies Pairs
B. Exchange Rates
C. Global Banking Hours
APPENDIXES
Resources
Index
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Acknowledgment
W e wish to thank Paul J. Szeligowski, friend and economic analyst, for his editor-
ial assistance in the preparation of this book. His insightful recommendationsand  novel  ideas  proved  invaluable  in  researching  the  nature  of  and  the  occa-
sionally cryptic relationships between the major currency pairs.
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About the Authors
Michael  D.  Archer  has  been  an  active  commodity  futures  and  Forex  trader  for
more than 30 years. Mike has also worked in various registered advisory capaci-ties, notably as a Commodity Trading Advisor (CTA) and as an investment advi-sor.  He  is  currently  CEO  of  www.FxPraxis.com,  a  website  specializing  in  currencytrading instruction and money management. His special interest is in complexity theory,especially cellular automata, applied to Forex trading. James L. Bickford is a senior soft-ware engineer, technical analyst, and also a very active Forex day trader with an academicbackground in applied mathematics and statistics. He has numerous books to his creditand recently published Chart Plotting Algorithms for Technical Analysts.
The co-authors also collaborated on another best-selling Wiley title, Getting Started
in Currency Trading (2005).
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Introduction
Trading in the foreign exchange currency markets has recently exceeded $2 trillion
a day and this ﬁgure is expected to double within the next ﬁve years. The reasonfor  this  astonishing  surge  in  trading  popularity  is  quite  simple:  no  commissions,low transaction costs, easy access to online currency markets, no middlemen, no ﬁxedlot  order  sizes,  high  liquidity,  low  margin  with  high  leverage,  and  limited  regulations.These factors have already attracted the attention of both neophyte traders and veteranspeculators in other ﬁnancial markets.
In this volume, special focus is given to the ﬁve most frequently traded Forex cur-rency pairs: the U.S. Dollar, the Euro currency, the British Pound, the Swiss Franc andthe Japanese Yen. It is estimated that trading among these ﬁve pairs comprises 78 per-cent of all orders in the spot currency markets.
ABOUT THIS BOOK
This  book  was  written  speciﬁcally  for  those  currency  and  futures  traders  who  have  areasonable degree of experience in the foreign exchange markets and who are familiarwith the inner trading mechanisms and the risks and rewards intrinsically involved. Fornovice currency traders, we highly recommend Getting Started in Currency Trading bythe  co-authors  of  this  book  (Wiley,  2005)  as  a  comprehensive  primer  for  entering  thisonce exclusive arena of investing.
The authors have intentionally followed the thematic precedent established in theirpreviously published book entitled The Forex Chartist Companion (Wiley, 2007). Thatprecedent is to make each technical analysis opus as visual and graphic as possible, re-plete with numerous charts, tables, and explanatory diagrams. Many of the innovativetools  introduced  in  that  work  (FCC)  are  employed  here,  and  the  underlying  theme  isagain borne out in this tome: The most lethal weapons in the successful traders’ arse-nals are the diversity and creativity of their technical charts.
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INTRODUCTION
HOW THIS BOOK IS ORGANIZED
There are eight major divisions in this book:
Part I: Getting Started
In this section, we expose little known characteristics unique to spot currency data anddeﬁne the mathematical and statistical tools that facilitate the visual approach to tech-nical analysis.
Part II: Euro Currency
It  is  only  ﬁtting  to  begin  our  analysis  of  major  currency  pairs  with  the  most  heavilytraded pair: the EURUSD. A comprehensive history and a detailed account of the Euro’smodern evolution are included here. More importantly we supply numerous charts de-picting the status of the Euro currency in today’s marketplace.
Part III: British Pound
The old adage “The sun never sets on the British Empire” applies to its ofﬁcial currencytoo. This king of currencies has the highest parity ratio of all the major currencies (1Pound = 1.70 U.S. Dollars) and is subjected to detailed analysis in this section.
Part IV: Swiss Franc
The Swiss Franc has always held a position of respect and honor in the ﬁnancial com-munity. Switzerland’s political neutrality and banking policies have contributed to its al-most  mystical  attraction.  In  this  section,  we  reveal  its  innermost  secrets  andmathematical properties.
Part V: Japanese Yen
To characterize the Japanese Yen with only one word, it would have to be “resilient.” Itsdecline and recovery history is very impressive. Of all the major currencies, it has thelowest parity ratio (110 Yen = 1 U.S. Dollar). The Yen is heavily inﬂuenced by Japanesebanking policies and national intervention, the technical results of which are thoroughlyexamined in this section.
Part VI: Cross Rates
In this section, we examine the six non-USD cross rates: EURGBP, EURCHF, EURJPY,GBPCHF, GBPJPY, and CHFJPY which, fortunately, no longer carry outlandish transac-tion costs, making them now available to small-cap investors.
Introduction
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Part VII: Comparative Studies
Here we analyze spot currency prices with comparable futures prices and precious met-als. We also examine a global synthetic currency called the Mundo that we concocted inorder to describe the interrelationships between price ﬂuctuations within the ﬁve majorcurrencies.
Appendixes
Additional Forex information is provided in this section. After the appendixes, readerswill ﬁnd a list of resources that will help them further their currency trading education.
DISCLAIMER
We wish to emphasize that spot currency trading may not be suited to everyone’s dispo-sition. All investors must be keenly aware of the risks involved and of the consequencesof  ineffective  trading  habits  and/or  mismanaged  resources.  Neither  the  publisher  northe authors are liable for any losses incurred while trading currencies.
PART I
Getting Started
CHAPTER 1
UnderstandingForex Data
OVERVIEW
Every Forex trade involves the simultaneous buying of one currency and the selling ofanother  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 iscalled the quote  currency. The exchange  rate deﬁnes how much the base currency isworth 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 neithercurrency is the U.S. Dollar (USD). In major and minor currencies either the base cur-rency or the quote currency is the USD.
Minor currencies are deﬁned as those currency pairs with low trading activity, whilethe major currencies are those currency pairs with the highest trading volume. Differentcurrency brokers list different pairs as being major or minor. On the average, major cur-rencies carry a slightly lower transaction cost due to their high liquidity. In this book, wearbitrarily deﬁne the major pairs as the U.S. Dollar versus the Euro currency, the BritishPound, the Swiss Franc, and the Japanese Yen.
A  pip  is  the  smallest  unit  of  price  that  any  currency  pair  can  ﬂuctuate.  Nearly  allcurrency pairs consist of ﬁve signiﬁcant digits, and most pairs have the decimal pointimmediately after the leftmost digit; for example, EURUSD is displayed as 1.2329. In thisinstance, a single pip equals the smallest change in the fourth digit to the right of thedecimal 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 smallestunit of time (x-axis) that occurs between two trades. When trading the most active cur-rency  pairs  during  peak  trading  periods,  multiple  ticks  may  and  will  occur  within  the
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GETTING STARTED
FIGURE 1.1 Pip-Tick Relationship
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  butevery two or three hours. (See Figure 1.1.)
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 tothe early 1970s.
Forex data can be packaged either as streaming data or as interval data. Streamingdata consists of every single price change as it occurs regardless of the time elapsedbetween  ticks.  This  creates  voluminous  amounts  of  data.  For  example,  all  the  tickquotes for the EURUSD currency pair from January 1, 2005, to December 31, 2005, pro-vide  the  statistical  sample  for  numerous  analyses  in  this  book  with  a  sample  size  of7,974,098 prices.
Streaming data uses the following comma-delimited ﬁeld conventions for tick data:
Date,Time,Close01/01/2002,0116,0.889601/01/2002,0116,0.889501/01/2002,0116,0.889701/01/2002,0116,0.889301/01/2002,0126,0.8902
Understanding Forex Data
5
Data is shipped on compact disks and DVDs since the sheer volume of data is toolarge to download at current modem speeds. CSV (Comma separated values) ﬁles mustbe unzipped and then read as ﬂat ASCII ﬁles.
INTERVAL DATA
Interval data, in contrast, is compiled from the streaming data by coercing the data intothe 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,D4/20/1998,0920,1.0982,1.0982,1.0982,1.0982,2,04/20/1998,0925,1.0980,1.0983,1.0980,1.0983,3,14/20/1998,0930,1.0985,1.0990,1.0982,1.0989,8,34/20/1998,0935,1.0987,1.0993,1.0987,1.0988,2,34/20/1998,0940,1.0987,1.0989,1.0983,1.0985,4,3
Dates  are  always  expressed  using  the  standard  convention  MM/DD/YYYY,  whilethe 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  andopen 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. Ac-tivity  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.
CHAPTER 2
Tools of the Trade
OVERVIEW
In  The  Forex  Chartist  Companion (Wiley,  2006),  we  introduced  several  innovativecharting techniques and some new technical analysis tools. In this chapter we reviewthe 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 anyconfusion.
The time frame of a chart is the overall duration that the chart spans. On the leftside of the chart is the starting date and time and on the right side is the ending date andtime. Date and time are represented in the conventional MM/DD/YY HH:MM format. The24-hour (military) time format is used throughout.
The  time  interval of  a  chart  is  the  equally  spaced  time  unit  into  which  the  timeframe is divided. In the case of a vertical OHLC bar chart, the time interval is the widthalong the x-axis of a single OHLC bar, that is, the amount of time elapsed between theopening 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 characteristicsof a speciﬁc currency pair and acts as a surrogate tool for trading volume, a statistic notreadily available for spot currencies due to the decentralized nature of Forex markets.(See Figure 2.1.)
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.
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GETTING STARTED
Activity Upticks Downticks
+
=
FIGURE 2.1 Activity Formula
Nonetheless, this is a case in which any information is better than no information. Thusactivity is more representative of trading volatility than actual trading volume.
DIRECTION
For the purpose of this book, we deﬁne direction as the difference between the numberof upticks and the number of downticks over a speciﬁed period of time for a single cur-rency pair. (See Figure 2.2.)
We wish to clarify that there is no direct correlation between our arbitrary deﬁni-tion and that of J. Welles Wilder, the noted trader/author of the 1970s who developed theAverage  Directional  Index  (ADX),  which  uses  a  Positive  Directional  Indicator  and  aNegative Directional Indicator to evaluate the strength of a trend. Further informationon Wilder’s method can be found in his highly acclaimed book entitled New Concepts inTechnical Trading Systems (Trend Research, 1978).
ABSOLUTE RANGE
Range—or, more accurately, absolute range—is one of the trader’s most important toolsfor deciphering the hidden personality of an underlying security and is simply the differ-ence between the highest high and the lowest low over a period of time. (See Figure 2.3.)An increase in range nearly always indicates that a new trend is developing, whereas
a decrease in range usually marks either the end of a trend or a reversal in trend.
Direction Upticks Downticks
−
=
FIGURE 2.2 Direction Formula
Absolute Range Highest High Lowest Low
−
=
FIGURE 2.3 Absolute Range Formula
Tools of the Trade
9
Midrange
=
+Highest High Lowest Low2
FIGURE 2.4 Midrange Formula
MIDRANGE
Another  classical  statistic  based  on  the  highest  high  and  the  lowest  low  is  called  themidrange and is the midpoint between the two extremes. (See Figure 2.4.)
RELATIVE RANGE
Whereas the absolute range described earlier is an excellent tool for use in the analysisof the internal characteristics within a single individual security, relative range is usedto compare the characteristics of two or more similar securities. (See Figure 2.5.)
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  comparingdifferent sets of similar data. Where absolute range is expressed in terms of pips of thequote currency in the currency pair, relative range is expressed as a percentage and actsas a dimensionless index number. It is this characteristic that permits comparisons be-tween different currency pairs.
A relative range chart differs only slightly from the absolute range chart describedearlier  in  this  chapter:  The  vertical  bars  in  the  lower  half  of  the  chart  are  slightlysmoothed, 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 traderin determining which currency pairs to monitor based on the trader’s predilection forthe ubiquitous risk/reward factor. Trading pairs with high relative ranges increases therisk factor while also increasing the likelihood of greater proﬁts.
A high relative range does not mean that a currency pair is more actively tradedthan other pairs. Instead, it implies that over time the underlying security prices willtravel  greater  distances  from  a  critical  statistical  point  (in  this  case,  the  midrangepoint).
Relative Range
=
100
×
Absolute RangeMidrange
FIGURE 2.5 Relative Range Formula
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GETTING STARTED
Absolute Momentum Abs Close
(
=
n
−
Close
)
−n lag
n
FIGURE 2.6 Absolute Momentum Formula
ABSOLUTE MOMENTUM
Standard  momentum  (one  close  minus  a  previous  close  separated  by  lag time  units)generates  a  stream  of  data  consisting  of  both  positive  and  negative  numbers  whosemean 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, allnegative numbers are converted to positive numbers. (See Figure 2.6.)
Thus, when using absolute momentum, we are not concerned about the directionof 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  anabsolute  momentum  oscillator  inform  us  at  what  time  of  day  breakouts  are  mostlikely  to  occur,  although  we  do  not  know  which  direction  they  will  take.  This  is,nonetheless, valuable information to traders, particularly for those who subscribe totrend-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 as in Figure 2.7.
Variance
Standard Deviation
2
Σ
x
−
n
Σ−
2x n/1
Variance
=
=
FIGURE 2.7 Standard Deviation Formula
where
x = the sample elements (prices)n = the sample size (number of prices)
Variance = the sample variance (sum of the deviations squared)
Tools of the Trade
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Coefficient of Variation
=
100
×
Standard DeviationMean
FIGURE 2.8 Coefﬁcient of Variation Formula
Generally the standard deviation increases as a clear price trend begins emerging ineither direction and decreases when lateral congestion originates. A sharp decline in thestandard deviation indicates that a price reversal has begun, after which the standarddeviation 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 cur-rency  pair,  the  coefﬁcient  of  variation  is  a  measure  of  relative  dispersion.  The  coefﬁ-cient of variation is calculated as in Figure 2.8.
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 expressedas a percentage (or dimensionless index number), which makes it an ideal tool for com-paring two or more similar data sets.
Traders should not confuse the coefﬁcient of variation with another statistic calledthe coefﬁcient of correlation, which measures how closely the estimated values matchthe raw data in a speciﬁed regression model, such as a linear, parabolic, sinusoidal, orlogistic regression. The coefﬁcient of variation is analogous to relative range, describedearlier.
COMPOSITE CHARTS
Another important analytic tool that we introduced in The Forex Chartist Companionis the composite chart, of which we presented two general types: the Time of Day Chartand the Day of Week Chart (deﬁned by their time span, one day or one week respec-tively).
Composite charts are constructed by averaging one speciﬁc statistical category (ac-tivity, range, or momentum) over a selected time frame. For example, the daily compos-ite chart in Figure 2.9 illustrates the average range on all Wednesdays between 1/1/2005and 4/14/2006.
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GETTING STARTED
FIGURE 2.9 Daily Composite Chart—Range (Wednesdays)
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  and4/14/2006 is examined.
Composite charts are designed to assist traders