of the many nations that un-derwent severe recession due to the oil crisis and collapse of the ﬁxed exchange ratesystem. In 1979 a second oil crisis broke out, and plunged Japan from a positive $13.9billion to a $7 billion deﬁcit by 1980. (See Table 15.1 and Figure 15.1.)
The rise of the Japanese Yen from 1971 to the present is one of the most dramaticeconomic phenomena in recent years. This fact alone makes it a prime Forex tradingcandidate.  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 Yencan be found at http://www.imes.boj.or.jp.
TABLE 15.1 USDJPY 1948 to 2004
120
JAPANESE YEN
FIGURE 15.1 USDJPY 1948 to 2004
BANKNOTES AND COINS
The  Japanese  currency  is  the  Yen,  which  literally  means  “circle”  since  the  previouscoinage  was  oblong.  One  Yen  corresponds  to  100  sen.  However,  sen  are  not  used  ineveryday 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. (See Figures15.2 and 15.3.)
History of the Japanese Yen
121
FIGURE 15.2 2000 Yen Banknote
FIGURE 15.3 Yen Coins (1, 5, 10, 50, 100, and 500)
CHAPTER 16
Annual Charts
OHLC AND ACTIVITY CHARTS
Figures 16.1 through 16.7 show the annual USDJPY charts for the years 2000 through2005.
123
124
JAPANESE YEN
FIGURE 16.1 USDJPY OHLC and Activity Chart 2000
USDJPY Properties 2000
OpenHighLowCloseMidrangeAbsolute RangeRelative RangeArithmetic MeanStandard DeviationCoefﬁcient of Variation
102.2100115.0800101.3600114.3900108.220013.720012.6779107.80822.10731.9546
Annual Charts
125
FIGURE 16.2 USDJPY OHLC and Activity Chart 2001
USDJPY Properties 2001
OpenHighLowCloseMidrangeAbsolute RangeRelative RangeArithmetic MeanStandard DeviationCoefﬁcient of Variation
114.3900132.0500113.6000131.6200122.825018.450015.0214121.51693.39262.7918
126
JAPANESE YEN
FIGURE 16.3 USDJPY OHLC and Activity Chart 2002
USDJPY Properties 2002
OpenHighLowCloseMidrangeAbsolute RangeRelative RangeArithmetic MeanStandard DeviationCoefﬁcient of Variation
131.6200135.1600115.4900118.8000125.325019.670015.6952125.20005.47914.3763
Annual Charts
127
FIGURE 16.4 USDJPY OHLC and Activity Chart 2003
USDJPY Properties 2003
OpenHighLowCloseMidrangeAbsolute RangeRelative RangeArithmetic MeanStandard DeviationCoefﬁcient of Variation
118.7600121.8900106.7000107.2200114.295015.190013.2902115.87664.46593.8540
128
JAPANESE YEN
FIGURE 16.5 USDJPY OHLC and Activity Chart 2004
USDJPY Properties 2004
OpenHighLowCloseMidrangeAbsolute RangeRelative RangeArithmetic MeanStandard DeviationCoefﬁcient of Variation
107.2000114.9200101.8500102.5200108.385013.070012.0589108.10892.71942.5154
Annual Charts
129
FIGURE 16.6 USDJPY OHLC and Activity Chart 2005
USDJPY Properties 2005
OpenHighLowCloseMidrangeAbsolute RangeRelative RangeArithmetic MeanStandard DeviationCoefﬁcient of Variation
102.6100121.4200101.7000117.7500111.560019.720017.6766110.15954.99224.5318
130
JAPANESE YEN
FIGURE 16.7 USDJPY OHLC and Activity Chart 2000–2005
STATISTICS
USDJPY Properties 2000-2005
Year200020012002200320042005All
High115.08132.05135.16121.89114.92121.42135.16
Low101.36113.60115.49106.70101.85101.70101.36
Mean107.81121.52125.20115.87108.11110.16115.18
Rel Range12.677915.021415.695213.290212.058917.676628.5811
Coef Var1.95462.79184.37633.85402.51544.53187.0637
CHAPTER 17
Monthly Charts
OHLC AND ACTIVITY CHARTS
In the current chapter, we examine recent market behavior in the USDJPY currency pairfor the months January through March 2006 using daily interval data. (See Figures 17.1through 17.4.)
131
132
JAPANESE YEN
FIGURE 17.1 USDJPY OHLC and Activity January 2006
USDJPY Properties January 2006
OpenHighLowCloseMeanMidrangeAbsolute RangeRelative RangeStandard DeviationCoefﬁcient of Variation
117.7500118.0700113.4100117.2000115.5606115.74004.66004.02631.24781.0798
Monthly Charts
133
FIGURE 17.2 USDJPY OHLC and Activity February 2006
USDJPY Properties February 2006
OpenHighLowCloseMeanMidrangeAbsolute RangeRelative RangeStandard DeviationCoefﬁcient of Variation
117.2100119.4200115.6600115.7700117.9104117.54003.76003.19890.84360.7154
134
JAPANESE YEN
FIGURE 17.3 USDJPY OHLC and Activity March 2006
USDJPY Properties March 2006
OpenHighLowCloseMeanMidrangeAbsolute RangeRelative RangeStandard DeviationCoefﬁcient of Variation 
115.8000119.2100115.4500117.7900117.3061117.33003.76003.20460.94890.8089
Monthly Charts
135
FIGURE 17.4 USDJPY OHLC and Activity January–March 2006
USDJPY Properties January–March 2006
OpenHighLowCloseMeanMidrangeAbsolute RangeRelative RangeStandard DeviationCoefﬁcient of Variation
117.7500119.4200113.4100117.7900116.8929116.41506.01005.16261.43101.2242
136
STATISTICS
JAPANESE YEN
USDJPY Properties January–March 2006
MonthJanFebMarAll
High118.07119.42119.21119.42
Low113.41115.66115.45113.41
Mean115.56117.91117.31116.89
Rel Range4.02633.19893.20465.1626
Coef Var1.07980.71540.80891.2242
CHAPTER 18
Composite Charts
DAILY COMPOSITE CHARTS
See Chapter 2, Tools of the Trade, for a detailed description of both daily and weeklycomposite charts
The time frame in the following charts spans 1/1/2004 through 12/31/2005. (See Fig-ures 18.1 through 18.8.) Daily composite activity charts are calculated by averaging thesum  of  the  upticks  and  downticks  over  that  period  using  one-minute  time  intervals.Their purpose is to assist traders in determining when to schedule online trading ses-sions  based  upon  traders’  predilection  to  the  nebulous  risk/reward  factor  and  thevolatility of the 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 ﬁve-minute interval. The sum of thelower and upper bands represents ten-minute activity.
137
138
JAPANESE YEN
FIGURE 18.1 Sunday Composite Activity Chart
Composite Charts
139
FIGURE 18.2 Monday Composite Activity Chart
140
JAPANESE YEN
FIGURE 18.3 Tuesday Composite Activity Chart
Composite Charts
141
FIGURE 18.4 Wednesday Composite Activity Chart
142
JAPANESE YEN
FIGURE 18.5 Thursday Composite Activity Chart
Composite Charts
143
FIGURE 18.6 Friday Composite Activity Chart
144
JAPANESE YEN
WEEKLY COMPOSITE CHARTS
FIGURE 18.7 Weekly Composite Activity Chart
Composite Charts
145
FIGURE 18.8 Weekly Composite Range Chart
PART VI
Cross Rates
CHAPTER 19
Cross Rates Charts
OVERVIEW
A cross rate is any currency pair in which neither the base currency nor the quote cur-rency is the U.S. Dollar. For example, a long position in the British Pound with a simul-taneous 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  across rate.
Cross rate futures provide a way for banks, corporations, money managers, andindividuals 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.Presently, the Chicago Mercantile Exchange offers the cross rate contracts shown inTable 19.1.
149
150
CROSS RATES
TABLE 19.1 CME Cross Rate Futures
Australian Dollar/Canadian DollarAustralian Dollar/New Zealand DollarAustralian Dollar/Japanese YenBritish Pound/Swiss FrancBritish Pound/Japanese YenCanadian Dollar/Japanese YenEuro/Australian DollarEuro/British PoundEuro/Canadian DollarEuro/Czech KorunaEuro/Hungarian ForintEuro/Japanese YenEuro/Norwegian KroneEuro/Polish ZlotyEuro/Swedish KronaEuro/Swiss FrancSwiss Franc/Japanese Yen
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.
MONTHLY OHLC AND ACTIVITY CHARTS
This  section  uses  the  time  frame  1/1/2000  to  12/31/2005  as  the  basis  for  monthlyOHLC  and  activity  charts  in  the  six  cross  rate  currency  pairs.  (See  Figures  19.1through 19.6.)
Cross Rates Charts
151
FIGURE 19.1 EURGBP OHLC and Activity Chart 2000–2005
152
CROSS RATES
FIGURE 19.2 EURCHF OHLC and Activity Chart 2000–2005
Cross Rates Charts
153
FIGURE 19.3 EURJPY OHLC and Activity Chart 2000–2005
154
CROSS RATES
FIGURE 19.4 GBPCHF OHLC and Activity Chart 2000–2005
Cross Rates Charts
155
FIGURE 19.5 GBPJPY OHLC and Activity Chart 2000–2005
156
CROSS RATES
FIGURE 19.6 CHFJPY OHLC and Activity Chart 2000–2005
Cross Rates Charts
157
DAILY OHLC AND ACTIVITY CHARTS
This section uses the time frame 1/1/2006 to 4/14/2006 as the basis for daily OHLC andactivity charts in the six cross rate currency pairs. (See Figures 19.7 through 19.12.)
FIGURE 19.7 EURGBP OHLC and Activity Chart 1/1/2006–4/14/2006
158
CROSS RATES
FIGURE 19.8 EURCHF OHLC and Activity Chart 1/1/2006–4/14/2006
Cross Rates Charts
159
FIGURE 19.9 EURJPY OHLC and Activity Chart 1/1/2006–4/14/2006
160
CROSS RATES
FIGURE 19.10 GBPCHF OHLC and Activity Chart 1/1/2006–4/14/2006
Cross Rates Charts
161
FIGURE 19.11 GBPJPY OHLC and Activity Chart 1/1/2006–4/14/2006
162
CROSS RATES
FIGURE 19.12 CHFJPY OHLC and Activity Chart 1/1/2006–4/14/2006
Cross Rates Charts
163
COMPOSITE ACTIVITY CHARTS
The composite charts in this section have a time frame spanning 1/1/2005 to 4/14/2006daily composite activity charts for six cross rates. (See Figures 19.13 through 19.18.)
FIGURE 19.13 EURGBP Composite Activity Chart
164
CROSS RATES
FIGURE 19.14 EURCHF Composite Activity Chart
Cross Rates Charts
165
FIGURE 19.15 EURJPY Composite Activity Chart
166
CROSS RATES
FIGURE 19.16 GBPCHF Composite Activity Chart
Cross Rates Charts
167
FIGURE 19.17 GBPJPY Composite Activity Chart
168
CROSS RATES
FIGURE 19.18 CHFJPY Composite Activity Chart
By convention, most currency data providers express date and time as U.S. EasternTime  (a  format  that  we  use  throughout  this  book  also).  It  is  interesting  to  note  howmuch  the  different  cross  rate  composite  charts  vary  due  to  the  differences  in  globalbanking hours. See Appendix C for a table of global banking periods.
CHAPTER 20
Cross Rate Statistics
CROSS RATE ACTIVITY SUMMARY
Tables 20.1 and 20.2 show a comparison of activity between cross rates and USD majorcurrencies for the time frame 1/1/2005 through 4/14/2006.
TABLE 20.1 Cross Rate Activity
Currency
Upticks
Downticks
Activity
EURGBPEURCHFEURJPYGBPCHFGBPJPYCHFJPY 
318,197,106369,830,595591,791,530595,421,070674,085,176315,365,775
317,236,750379,228,858609,238,793576,094,525674,717,234329,132,994
635,433,856749,059,4531,201,030,3231,171,515,5951,348,802,410644,498,769
TABLE 20.2 USD Major Currency Activity
Currency
Upticks
Downticks
Activity
EURUSDGBPUSDUSDCHFUSDJPY
547,639,484594,607,675552,015,832469,593,946
567,189,089627,664,473582,785,614516,389,523
1,114,828,5731,222,272,1481,134,801,446985,983,469
169
170
CROSS RATES
SINGLE CURRENCY ACTIVITY
By arranging all ﬁve major currencies in a two-dimensional matrix format and addingeach row, we can determine the total activity of each individual currency. In Table 20.3,values are expressed in millions of ticks.
This is somewhat of a surprising result. (See Table 20.4.) By virtue of the fact thatthe EMU is composed of twelve member nations and three of these are members of theGroup of Eight (G8), we anticipated a much higher position for the Euro. G8 consists ofthe United States, UK, Japan, Germany, France, Italy, Canada, and the Russian Federa-tion. They represent 67 percent of the world economy
Therefore we performed the same analysis on the same ﬁve currencies but with an
earlier time frame spanning 1/1/2000 through 12/31/2003; this is shown in Table 20.5.
TABLE 20.3 Two-Dimensional Matrix Format
EUR
GBP
USD
CHF
JPY
Total
EURGBPUSDCHFJPY
—6351,1157491,201
635
1,115— 1,222—1,135986
1,2221,1721,349
7491,1721,135—645
1,2011,349986645—
3,7004,3784,4583,7014,181
TABLE 20.4 Currencies Sorted TABLE 20.4 by Activity Percentage
USDGBPJPYCHFEUR
21.8321.4420.4818.1318.12
TABLE 20.5 Currencies Sorted TABLE 20.5 by Percentage 
(2000–2003)
USDEURGBPJPYCHF
27.9022.8218.8517.7512.68
Cross Rate Statistics
171
This conﬁrms the rather obvious hypothesis that the currency markets are in per-petual ﬂux (not just price, but volatility and activity also) and that indicators which maybe valid at one time may not be valid at a later time. Also it is estimated that these ﬁvecurrencies comprise 78 percent of all trading in the foreign exchange markets.
Again we must reiterate that tick activity is not a direct substitute for volume and
open interest but is nonetheless a valid statistic for volatility studies.
PART VII
Comparative Studies
CHAPTER 21
Major Currenciesand Currency Futures
OVERVIEW
A futures contract is an agreement between two parties: A short position is taken by theparty who agrees to deliver a commodity, and a long position is taken by the party whoagrees  to  receive  a  commodity  on  a  pre-arranged  date.  For  example,  a  grain  farmerwould be the holder of the short position (agreeing to sell the grain), while the bakerywould 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  andmethod of delivery. The price of a futures contract is represented by the agreed-uponprice of the underlying commodity or ﬁnancial instrument that will be delivered in thefuture. For example, in the above scenario, the size of the contract is 5,000 bushels ofsoft red #2 wheat at a price of 317 cents per bushel, and the delivery date may be thethird Wednesday in September of the current year.
The Forex market is essentially a cash or spot market in which over 90 percent ofthe trades are liquidated within 48 hours. Currency trades held longer than this are nor-mally 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 ChicagoMercantile Exchange (CME) that specializes in currency futures, interest-rate futures,and stock index futures, as well as options on futures. Clearing houses (the futures ex-change)  and  introducing  brokers  are  subject  to  more  stringent  regulations  from  theSEC,  CFTC,  and  NFA  agencies  than  the  Forex  spot  market  (see  www.cme.com  andwww.cbot.com for more details).
175
176
COMPARATIVE STUDIES
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 vol-ume and open interest of Forex spot currencies are presently not accessible, it is stillpossible  to  compare  them  with  currency  futures  just  as  a  point  of  perspective.  Table21.1  summarizes  the  trading  activity  of  selected  futures  contracts  in  currencies,  pre-cious  metals,  and  some  ﬁnancial  instruments.  The  volume  and  open  interest  readingsare  intended  only  to  provide  a  brief  synopsis  of  each  market’s  liquidity  and  volatilitybased 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.
TABLE 21.1 Selected Futures Volume and Open Interest 1/16/2004
Market
Sym
EurodollarEurocurrency10-yr. T-NoteGold5-yr. T-Note30-yr. T-BondJapanese YenCanadian DollarBritish PoundSilverSwiss FrancMexican PesoAussie Dollar2-yr. T-NoteCopper
EDECTYGCFVUSJYCDBPSISFMEADTUHG
Exch
CMECMECBOTNYMEXCBOTCBOTCMECMECMENYMEXCMECMECMECMENYMEX
Vol
93.949.543.133.729.625.918.618.012.210.09.38.87.87.04.2
OI
772.5112.9676.4163.0582.8324.1132.164.258.384.245.630.555.7108.632.8
Legend:Sym: Ticker symbol.Exch: Futures exchange on which contract is traded.Vol:OI:
30-day average daily volume, in thousands.Open interest, in thousands.
Source: Active Trader Magazine, Jan. 16, 2004 (www.activetradermag.com)
Major Currencies and Currency Futures
177
TABLE 21.2 Selected Futures Volume and Open Interest 6/4/2004
Market
Sym
EurodollarEurocurrency10-year T-NoteGold5-year T-Note30-year T-BondJapanese YenCanadian DollarBritish PoundSilverSwiss FrancMexican PesoAussie Dollar2-year T-NoteCopper
EDECTYGCFVUSJYCDBPSISFMEADTUHG
Exch
CMECMECBOTNYMEXCBOTCBOTCMECMECMENYMEXCMECMECMECMENYMEX
Vol
152.866.167.744.846.029.321.616.814.015.912.110.98.28.86.0
OI
844.9132.61120.0125.1935.7451.7106.971.645.552.838.255.735.5176.219.8
PIP DIFFERENTIAL OSCILLATOR
Figures 21.1 and 21.2 are the comparison charts for the EURUSD and the GBPUSD cur-rency pairs. In both cases, the spot currency prices are displayed in the upper third ofthe  chart.  In  the  center  is  displayed  the  corresponding  futures  currency.  In  the  lowersection of the chart is displayed the Pip Differential Oscillator derived as follows:
Pip Differential Oscillator = 10,000 × Spot Close – 10,000 × Futures Close
First, the explanation of the Chicago Mercantile Exchange (CME) ticker symbols is:
ECM4 = Eurocurrency June 2004BPM4 = British Pound June 2004
where June 2004 is the expiration (or delivery) month.
Our ﬁrst observation is that the spot data has a greater daily range than the futuresdata, which we attribute to its greater trading activity. Also, futures contracts are usu-ally thin markets during their infancy and grow more liquid as they mature, the result ofincreased volume and open interest.
Interesting to note is that, in Figure 21.1, the price differential oscillates on bothsides  of  a  zero  mean  while,  in  the  second  chart,  the  spot  price  is  almost  alwayshigher than the futures price. This anomaly can probably be explained, though with
178
COMPARATIVE STUDIES
FIGURE 21.1 Pip Differential Oscillator—ECM4
Major Currencies and Currency Futures
179
FIGURE 21.2 Pip Differential Oscillator—BPM4
180
COMPARATIVE STUDIES
some tedious research, by the changes in short term interest rates between the threecurrencies involved (USD, EUR, and GBP). Veteran commodity traders will probablyrecognize this phenomenon as a variation of “backwardization.”
Also the fact that the pip differential oscillator for EURUSD/ECM4 does in fact un-dulate around a zero mean brings up an important point. There may be a very proﬁtableleader/lagger relationship between the two ﬁnancial vehicles if a discernible pattern canbe uncovered.
ACTIVITY VERSUS VOLUME AND OPEN INTEREST
In Figures 21.3 and 21.4, the upper section displays the daily activity of the Forex cur-rency pair. The volume and open interest of