7 above the 20 and the 20 above the 65 in the case of a long,and the 7 below the 20 and the 20 below the 65 in the case of a short.4. In the case of a long buy, as price retraces to the 7 SMA, place a stop afew points below the 65 SMA.5. Exit the trade when the 7 SMA crosses the 20 SMA.In and of themselves moving averages are notoriously poor indicatorsbecause by definition they lag price action and send late signals that are vulnerable to whipsaws. However, the three simple moving average filter is designed to place the trader on the right side of the trend by making sure thatshort-term, intermediate-term, and long-term price forces are all aligned inthe same direction. Furthermore, because this setup waits for low volatilityenvironments it assumes very little risk for a potentially large reward. Priceaction itself can be very noisy. By showing the average price movement onthe short-term, intermediate-term, and longer-term time frames, the 3 SMA
Setups! Setups! Setups!
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FIGURE 10.15 Three Simple Moving Average “Fan Out”Source: FXtrek IntelliChart™. Copyright 2001–2005 FXtrek.com, Inc.
setup can reveal the underlying direction that may not be visible throughpure price action alone. The setup is still prone to stop-outs, but as Figures10.16 and 10.17 show, when it catches the move the profits are large.
CONCLUSIONTechnical analysis is a wonderful tool. Academics scoff at the value ofindicators and chart patterns, blithely dismissing all price movement asrandom; but most real-life traders find technical analysis critical totheir success. It is very difficult to mount an effective intellectual argument against the academics. To buttress their argument, researcherslike to use fancy words such as stationarity (meaning that every time element in a series is independent of those preceding it) along with reamsof statistical data to prove their points. On a practical level, however,the performance of thousands of technically oriented traders contradicts their thesis.One simple example of how academic exercise is so far removedfrom the real world is the common assumption among academicians thatany given trade has a 50 percent chance of success. I’ll never forget a
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TECHNICAL ANALYSIS OF THE CURRENCY MARKET
FIGURE 10.16 3 SMA Short in EUR/USDSource: FXtrek IntelliChart™. Copyright 2001–2005 FXtrek.com, Inc.
FIGURE 10.17 3 SMA Long in EUR/USDSource: FXtrek IntelliChart™. Copyright 2001–2005 FXtrek.com, Inc.
Setups! Setups! Setups!
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conversation I once had with Tom Sarnoff, who runs an options brokerage boutique called thinkorswin.com and prior to that was one of thebiggest market makers on the floor of the Chicago Board Options Exchange. Tom, a true trader, once noted that while most novices approachthe market thinking that their odds of success are 50–50, the actual oddsare probably more like 25–75 against them.Why? Because markets are driven not by some random number–generating machine, but by very skilled and wily human beings who constantly try to trap, bluff, and sucker newbies into losing their capital.Tom’s insight explained several things. First, it demonstrates that almostall mechanical systems are doomed to fail or at the very least to trade verypoorly for extended periods of time. Why? Because all systems are optimized for either range trading or trend trading. Once the environmentchanges they inevitably begin to degrade. Much like a frog that getscooked in gradually hotter water, the systems are unable to adjust to thechange in market conditions until it is too late.Tom’s point also explains a lot about my own journey. When I startedtrading seven years ago as a clueless newbie I remember a particularlynasty string of 12 consecutive losing trades followed by a cruel reprieve ofone win and then an additional 10 losses. As I started to write this book inearnest in July 2005 I decided to actively day trade both my futures accountin which I trade the E-mini Dow Jones index and my spot FX account inwhich I trade mainly the major pairs. I did this basically to see, as the sayingin the software business goes, if I would eat my own dogfood—in otherwords, if I could trade successfully with technical analysis while I was writing a book on the subject. In the futures account I made 91 trades with 83winners. In FX I made 46 trades and 42 of those were winners. So in sevenyears I went from generating a record of 1 win and 22 losses to compiling astring of 125 wins and 12 losses.Now, does this prove anything? No, of course not. Any moderatelyknowledgeable analyst could make mincemeat of my data. For one, my fewlosses were much larger than my many wins. For another, my maximum adverse excursion (the amount I allowed positions to move against me) almost always exceeded my maximum gains. In the end I ended net positivein both accounts, making approximately 3 percent in futures and 16 percentin my currency account over that time frame. Still, any skilled statisticiancould easily argue that I was just lucky and the statistician may well be correct. But let’s look at what I did differently this time versus my early years.• I used technical analysis to pinpoint overbought and oversold areasand traded only when a specific setup appeared on the chart.• I utilized risk management tactics that were in sync with my personality, which in my case called for taking profits very quickly. This type of
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trading generated many small wins and a few large losses that I waspsychologically willing to accept.• Once I developed my setups I was highly methodical in my approach—having thought through every possible scenario to the end. Iknew exactly where I would get out on my winners and also whatmarket conditions would force me to fold and accept my losers. Ieven had a plan for what I would do when my Internet connectionwould inevitably crash.That’s it. It’s as simple as that. Comparing the results of my early yearsto my trading now, the single biggest difference can be summarized in oneword: organization. The most random aspect of my early trading wasn’tprice action, but my own behavior. My responses to the market, like thoseof most novice traders, were wildly illogical and highly inconsistent. “Thefault, dear Brutus, is not in our stars, but in ourselves,” as Shakespeareonce wrote in Julius Caesar.This is the primary reason why technical analysis is so valuable to trading. It systematizes and categorizes price data, allowing the trader to recognize discernible repetitive patterns. Technical analysis cannot guaranteesuccess. It cannot accurately predict the next move. At best it can foreshadow and offer clues to future direction, most notably when momentumdiverges from price action. This is the crux of its value. Yet for many skilledtraders that is enough to provide a meaningful and profitable edge.Success in trading can be summarized with three C’s—confidence,consistency, and compounding. Confidence comes only from failure. Thatmay sound convoluted, but allow me to explain. Confidence in trading is adirect result of experience. A trader needs to put on many trades—perhaps thousands of trades—before he will be comfortable and confident inhis approach. He needs to see repetitive price patterns through a varietyof market environments before he can develop the courage to consistentlyenter trades with strong expectation of profit. The sheer nature of thisprocess implies that traders need to make many mistakes in order to acclimate themselves to the vagaries of the market. Thus confidence breedsconsistency, and consistency leads to compounding of returns, which isthe only path to wealth.Trading with technical analysis, like any great vocation in life, is anever-ending study of self and the world around you. The currency market, with its massive liquidity, complete customization of size, and roundthe-clock markets, makes this enterprise only that much more attractive. Itruly enjoy the journey every day. I hope you will, as well.
Glossary
account A record of transactions of goods and services owed to one person by another.ADX.
See Average Directional Index.
agent An intermediary or person hired to carry out transactions on behalf of another person.aggregate demand Total demand in an economy, consisting of government spending, private/consumer purchasing, and business investment.all or none Refers to requests for a broker to fill an order completely ata predetermined price or not at all. Refers to both buy and sell orders.anonymous trading Visible bids and offers on the market without theidentity of the bidder and seller being revealed. Anonymous trades allowthe high-profile investors to execute transactions without the scrutiny ofthe whole market.appreciation An increase in the value of a currency in response tomarket demand.arbitrage A riskless opportunity to profit, with no uncertainty involved.In the foreign exchange market, arbitrage arises when a profit can be madeby locking in differentials in exchange rates of identical currency pairs.For example, a trader who is able to execute equal-amount purchases ofGBP/USD and USD/JPY against a sale of GBP/JPY for a profit would be engaging in arbitrage. Arbitrage opportunities in the foreign exchange market are rare.ascending triangle A bullish continuation pattern that is shaped like aright triangle consisting of two or more equal highs forming a horizontalline at the top.
185
186
GLOSSARY
ask rate The lowest price at which a financial instrument will be offered for sale, such as the bid/ask spread in the foreign exchange market.ask size The number of units a seller is willing to sell at his/her ask rate.asset allocation The diversification of one’s assets into different sectors, such as real estate, stocks, bonds, and forex, to optimize growth potential and minimize risk.asset swap An interest-rate swap used to alter the cash flow characteristics of an institution’s assets in order to provide a better match with itsliabilities.attorney in fact A person given the right or authority to act on behalfof another to carry out business transactions and implement documents.authorized forex dealerdeal in foreign exchange.
A financial institution or bank authorized to
Aussie Term for Australian dollar.Average Directional Index (ADX) Unlike most oscillators, ADX doesnot attempt to gauge the direction of the trend; instead, it works to gaugethe strength of the trend. ADX operates on a scale of 0 to 100; the higherthe oscillator, the stronger the trend. Typically readings of 20 or higher indicate presence of trend.away from the market When the bid on an order is lower (or the askprice is higher) than the current market price for the security traded.back office Refers to the administrative departments of financial service companies, which carry out and confirm financial transactions. Duties include accounting, settlements, clearances, regulatory compliance,and record maintenance.back-testing The process of designing a trading strategy to be tested onhistorical data of the financial instrument. Most technical analysis strategies are tested via this approach.balance/account balance The net value of an account.balance of payments A record of all transactions made by one particular country with the rest of the world. It compares the amount of economic activity between a specific country and all other countries within acertain period. This number includes trade balance, foreign investments,and investments by foreigners.
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Glossary
balance of trade Net flow of goods (exports minus imports) betweentwo countries.Bank for International Settlements (BIS) An international organization fostering the cooperation of central banks and international financial institutions. BIS, located in Basel, Switzerland, is essentially a centralbank for central banks. It monitors and collects data on internationalbanking activity and promulgates rules concerning international bankregulation.bar chart On a daily bar chart each bar represents one day’s activity.The vertical bar is drawn from the day’s highest price to the day’s lowestprice. Opening price and closing price are represented by marks on thebar to the left and right, respectively.base currency In general terms, currency in which an investor or issuermaintains its book of accounts. In the FX markets, the base currency isthe first currency of the currency pair, meaning that quotes are usually expressed as one U.S. dollar per the other currency. USD/JPY = 120 wouldmean that one dollar would purchase 120 yen. The primary exceptions tothis rule are the British pound, the euro, and the Australian dollar, whichare quoted as EUR/USD, GBP/USD, and AUD/USD.basis
The difference between the cash price and the futures price.
basis point Measure of a bond’s yield equal to 1/100th of 1 percent. A 1percent change in yield is equal to 100 basis points, and 0.01 percent isequal to one basis point.bear
Investor acting on the belief that prices will decline.
bear market Any market that exhibits a declining trend. Typicallybear markets are defined as declines of 20 percent or more from peak totrough.bear trap A bear trap occurs when prices break below a significantlevel and generate a sell signal, but then reverse direction and hence invalidate the sell signal. Bear traps serve as opportunities for reversal traders,whereas trend/momentum traders suffer losses due to the whipsawchange in direction.bid The price an investor is willing to pay for an asset.bid/ask spreadprice.
The difference between the bid price and the ask
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GLOSSARY
big figure Refers to the first number to the left of the decimal point inan exchange rate quote, which changes so infrequently that dealers oftenomit them in quotes. For example, EUR/USD may be trading 1.2000 by1.2003 with 1 considered to be the big figure.Bollinger bands An indicator that allows users to compare volatilityand relative price levels over a period of time. This indicator consistsof three bands designed to encompass the majority of a security’s priceaction: a simple moving average in the middle; an upper band 2 standard deviations away from the simple moving average (usually set to atime frame of 20); and a corresponding lower band that is also 2 standard deviations away from the moving average. Since the band width isa function of standard deviation, assets with greater volatility will havewider bands.bonds Debt instrument used to raise capital, issued for a period greaterthan one year. Bondholders are loaning money (investing in debt) to companies and governments for a defined period of time, at the end of whichthey will be repaid the principal and paid a specified interest rate. Bondprices are inversely related to interest rates; as interest rates rise, bondprices fall. There are numerous types of bonds, including Treasury bondsand notes, municipal bonds, and corporate bonds.book
Recording of the total positions held by a trader or desk.
Bretton Woods Accord This 1944 accord established a fixed exchangerate regime, whose aim was to provide stability in the world economy after the Great Depression and World War II. The agreement fixed the exchange rates of major currencies to the U.S. dollar and set the price ofgold to $35. It required central bank intervention to maintain the fixed exchange rates. The U.S. central bank was required to exchange dollars forgold, which eventually led to the demise of this system when the demandfor the dollar declined, forcing President Richard Nixon to stop the exchange of dollars for gold, effectively ending the system in 1971.broker Individual or firm acting as an intermediary to bring togetherbuyers and sellers typically for a commission or fee.bull
Investor who expects markets to rise.
bull market
A market where prices are rising.
bull trap The opposite of a bear trap; occurs when indicators suggestan uptrend, but the market reverses its momentum and begins to declineonce more.
Glossary
Bundesbank/BubaEuropean Union.
189Central bank of Germany—the largest economy in
buy a bounce A recommendation to initiate a long trade if the pricebounces from a certain level.buy break A recommendation to buy the currency pair if it breaks thecurrent level specified.buy stops above A recommendation to enter the market when the exchange rate breaks through a specific level. The client placing a stop entryorder believes that when the market’s momentum breaks through a specified level, the rate will continue to move in that direction.cable Term used to describe the exchange rate between the U.S. dollarand the British pound.candlestick chart Identical to a bar chart in the information conveyed,but presented in an entirely different visual context. The candlestick encapsulates the open, high, low, and close of the trading period in a singlecandle. If the close is above the open, the actual candle is either hollow orgreen in color. If the close is below the open, the actual candle is filled inor red in color.capital marketstraded.
Markets in which capital (stocks, bonds, etc.) are
carry trade An investment strategy of buying a higher-yielding currencywith the capital of a lower-yielding currency to gain an interest rate differential. In late 2005 the NZD/JPY pair serves as a classic example of a carrytrade. With the New Zealand dollar yielding 7.25 percent and the yen yielding 0 percent, the investor would in effect be able to generate a 7.25 percent rate of return from interest rate differentials but would of course beexposed to any capital depreciation risk should the exchange rate decline.central bank A banking organization, usually independent of government, responsible for the control and production of the country’s monetary stock and implementation of the country’s monetary policy.channel An upward or downward trend whose boundaries are markedby two straight lines. A break above/below the channel lines signals a potential change in the trend.chartist Refers to a technical analyst or one who analyzes charts/graphsand data to uncover potential trends and price patterns.
190clearing
GLOSSARY
Refers to the confirmation and final settlement of trades.
close a position (position squaring) Refers to getting rid of a position by either buying back a short position or selling a long position.commission A fee charged by a broker or an agent for carrying outtransactions/orders.confirmation A written document verifying the completion of atrade/transaction to include such things as date, fees or commissions, settlement terms, and price.confirmation on a chart A subsequent indicator or chart pattern, following an initial alert for a trade opportunity, which serves to legitimizethe initial alert. Confirmation of a trade is believed to reduce the risk associated with that trade by forcing the trader to comply with more rigorousconditions before putting on a position.contagion Term used to describe the spread of economic crises fromone country to another within close geographic proximity. This term wasfirst used following the Asian financial crisis in 1997, which began in Thailand and soon spread to other East Asian economies. It subsequently hasbeen used to refer to the recent crisis in Argentina and its effects on otherLatin American countries.continuation Refers to an extension of the trend. The trend continuesto have momentum, and hence it moves onward without reversal.contract (unit or lot) The standard trading unit on certain exchanges.A standard lot in the forex market is 100,000 units of currency. In thelarger institutional interbank market a standard lot is one million units ofcurrency.convertible currency Currencies that can be exchanged for other currencies or gold.correction A partial reversal of trend to correct a potentially overbought or oversold condition.cost of carry When an investor borrows money to sustain a position.For example, a cost of carry for an investor short the NZD/USD pair at theend of 2005 would accrue to 7.25 percent annually on a cash-on-cash basis.counterparty A participant, either a person or an institution, involved in one side of a financial transaction. With such transaction
Glossary
191
there is an associated risk (counterparty risk) that the counterparty willnot be able to meet the terms outlined in the contract. This risk is usually default risk.country risk The risk that a government might default on its financialcommitments/contracts, which typically brings serious harm to capitalmarkets of that country, creating massive depreciation of assets.cover on a bounce A recommendation to exit trades on a bounce outof a support level.cover on approach A recommendation to exit trades for profit on approach to a support level.credit checking The process of verifying the creditworthiness of thecounterparty. Before making a large financial transaction, it is imperativeto check whether the counterparty has enough available credit to carryout/honor said transaction.credit netting Agreements that are made to avoid having to continually recheck credit, usually established between large banks and trading institutions.cross rate The exchange rate between two countries’ currencies. Crossrates usually refer to pairs quoted that do not include the domestic currency. For example, in the United States, the EUR/JPY rate would becalled a cross rate.cup with handle A chart pattern that resembles the formation of a cupand handle and offers insight into where a bullish trend can begin. Oncethe pattern begins to curve upward and reaches the cup line, the asset isbelieved to have bullish tone and be set for a rise.currency Notes and coins issued by the central bank or government,serving as legal tender for trade.currency (exchange rate) risk Risk associated with drastic changes/fluctuations in exchange rates in which one could incur a major loss.daily charts Charts that encapsulate the daily price movement for thecurrency pair traded. Since the currency market operates 24 hours a day,the daily chart typically runs from 5 P.M. New York time to the same timeon the following day.day trading Refers to the process of entering and closing out tradeswithin the same day or trading session.
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GLOSSARY
dealer One who acts as a principal in the transaction and accepts theorder to buy or sell. A dealer differs from an agent in that he takes ownership of the asset, and thereby is exposed to market risk.deficit An excess of liabilities over assets, of losses over profits, or ofexpenditure over income.delivery The exchange by both parties (buyer and seller) of the tradedcurrency.deposit Refers to the process of borrowing and lending money. The deposit rate is the rate at which money can be borrowed or lent.depreciation
The decline in the value of an asset or a currency.
derivative A security derived from another and whose value is dependent on the underlying security from which it is derived. Examples of derivatives are future contracts, forward contracts, and options. Underlyingsecurities can include stocks, bonds, or currencies. Derivatives can bevery actively traded, often in greater volume than the underlying asset,and are usually used to hedge portfolio risk.descending triangle A bearish continuation pattern indicating distribution consisting of two or more comparable lows forming a horizontal lineat the bottom. Descending triangles are bearish patterns that indicate distribution. The definitive bearish signal of a descending triangle is whensupport on the lower edge of the triangle is broken.devaluation When the value of a currency is lowered against another(i.e., it takes more units of the domestic currency to purchase a foreigncurrency). This differs from depreciation in that depreciation occursthrough changes in demand in the foreign exchange market, whereas devaluation typically arises from direct government policy. A currency isusually devalued to improve the country’s balance of trade, so that its exports become cheaper for the rest of the world and imports more expensive to domestic consumers.dirty float (managed float) An exchange rate system in which thecurrency is not pegged, but is managed by the central bank to prevent extreme fluctuations in the exchange rate. The exchange rate is managedthrough changes in the interest rate to attract/detract capital flows orthrough the buying and selling of the currency. This system is contrastedwith a pure float.
Glossary
193
double top and bottom A pattern that implies an upper limit—thetop—and lower limit—the bottom—that the currency pair has touchedtwice but has failed to penetrate. Accordingly, the asset can be expectedto meet resistance or find support at those price levels.Dow Theory One of the first technical analysis ideas, the Dow Theoryholds that all major trends can be subdivided into three phases: entrance,whereby savvy market participants enter the market; acceleration,whereby a slew of additional participants see the trend and enter the market, thereby accelerating the trend; and consolidation, a period characterized by the initial participants exiting their trades.economic exposure When the cash flow of a country is vulnerable tochanges in the exchange rate.economic indicator An economic statistic used to indicate the overallhealth of an economy, such as gross domestic product (GDP), unemployment rates, and trade balances. Used in fundamental analysis of foreignexchange markets to speculate on the direction of an exchange rate.efficient markets Markets where assets are traded at prices that arereflective of all current and relevant information.Efficient Market Theory The theory that the current market price reflects all information and expectations regarding the asset in question.The theory also assumes that the market cannot overprice or underpricean asset such as a currency pair, and hence the current price is the correctvaluation at the time.Elliott Wave Theory A theory based on the notion that the marketmoves in waves consisting of trends followed by partial corrections. TheElliott Wave Theory states that there are five waves within an overalltrend with each wave experiencing three corrections.end of the day (mark to market) Accounting measure, referring to theway traders record their positions, in which the value of an asset isrecorded at the end of each trading day at the prevailing market price at thetime. Another way that a trader can record his positions is to use the accrual system, in which only cash flows from closed-out trades are recorded.envelopes While Bollinger bands place boundary lines based on standard deviation, envelopes place lines at fixed percentage points above andbelow a moving average line. The upper and lower limits specify entry andexit points for traders.
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GLOSSARY
equilibrium A price region that suggests a balance between demandand supply for a currency pair in the marketplace.euro The monetary unit of the European Monetary Union (EMU) usedby 12 countries in the European Union. It is now the legal tender in Germany, France, Belgium, the Netherlands, Luxembourg, Spain, Portugal,Italy, Austria, Ireland, Finland, and Greece.European Central Bank The central bank of the EMU, responsible forthe monetary policy of all member countries.European Monetary Union (EMU) An institution of the EuropeanUnion (EU), whose primary goal is to establish a single currency (theeuro) for the entire EU.exponential moving average (EMA) While the simple moving average distributes weight equally across the data series, exponentiallyweighted moving averages give greater weight to more recent data.Federal Deposit Insurance Corporation (FDIC) A regulatoryagency of the United States created to oversee that bank deposits are insured against bank failures. It was created in 1933 to restore confidence inthe banking system. It insures up to U.S. $100,000 per banking institution.Federal Reserve/Fed The central bank of the United States, responsible for monetary policy of the country.Fibonacci numbers Derived from a sequence of numbers in whicheach successive number is the sum of the two previous numbers, Fibonacci numbers quickly dovetail to stable ratios. These Fibonacci ratiosare used frequently in the FX market to project possible price retracementand extension levels or recent moves.fixed exchange rate When the exchange rate of a currency is not allowed to fluctuate against another (i.e., the exchange rate remains constant). Typically, under fixed exchange rate regimes, currencies areallowed to fluctuate within a small margin. Fixed exchange rate regimesrequire central bank intervention to maintain the fixed rate.fixed interest rate An interest rate used for loans, mortgages, andbonds that remains constant throughout the period of the loan.flag/pennant A flag or pennant formation is characterized by a quickprice thrust followed by a period of consolidation. It is considered a con-
Glossary
195
tinuation pattern with price expected to follow through in the direction ofthe original thrust.flat on a failure A recommendation to take profits on a long trade if therate tests but fails to break the specified level.flat/square To have either no positions or positions that cancel eachother out.floating interest rate An interest rate that is allowed to adjust with themarket. The opposite of a fixed interest rate.foreign currency effect Refers to how changes in the exchange rateaffect the return on foreign investments such as stocks or bonds.foreign exchange (FX, forex) The buying and selling of currencies.forward contract A deal in which the price for the future delivery of acommodity is set in advance. The forward rate is obtained by adding themargin to the spot rate. It is used to hedge against adverse fluctuations inthe exchange rate that can affect the amount of profit or loss at that future date.forward points Refers to the pips that were added to or subtractedfrom the current exchange rate to obtain the forward price/rate.forward rate agreement (FRA) An agreement that allows for borrowing and lending at a constant interest rate for a specified period inthe future.front office Refers to the sales personnel (trading and other businesspersonnel) in a financial company.fundamental analysis The analysis of economic indicators and political and current events that could affect the future direction of financialmarkets. In the foreign exchange market, fundamental analysis is basedprimarily on macroeconomic events.futures (financial futures) Future contracts that commit bothsides to an exchange/transaction of financial instruments, currencies,or commodities at a future date and a predetermined price. Futurecontracts are similar to forward contacts, but have uniform size andsettlement dates and are traded on central exchanges rather than overthe-counter.
196
GLOSSARY
good till canceled (GTC) Refers to an order given by an investor to adealer to buy or sell a security at a fixed price that is considered good until the investor cancels it.head and shoulders pattern A pattern resembling two peaks (theshoulders) with a higher peak between the two shoulders (the head). Theneckline, or the bottom boundary that both shoulders reach, is regardedas a key point traders can use to enter/exit positions.hedge/hedging Strategy to reduce the risk of adverse price movementson one’s portfolio and to protect against the volatility of the market. Hedging typically involves selling or buying at the forward price or taking a position in a related security. Hedging becomes more prevalent withincreased uncertainty about current market conditions.high/low Refers to the daily traded high and low price.historical volatility A measure of the change in price over a specifiedtime frame. Higher volatility suggests that the asset is more likely to tradewithin a wider range, while reduced volatility suggests the asset will tradein a tighter range.inflation Refers to the increase in prices (price level) over time thatdecreases the purchasing power of the consumer. It is calculated fromchanges in the price index, usually a consumer price index or a GDPdeflator.initial margin The percentage of the price of a security that is required for the initial deposit to enter into a position. The Federal Reserve Board requires a minimum of 50 percent initial margin. For futurescontracts, the market determines the initial margin. Typically in futuresmarkets the margin is set at 5 percent. In currencies standard margin isset at 1 percent.interbank rate The dealing rate at which the major banks (UBS,Deutsche Bank, Citibank, Bank of Tokyo) trade in foreign exchange.interest parity Theory that says that the difference in interest ratesacross countries should be equal to the difference between the forwardrate and the spot rate.interest-rate swap Interest-rate swaps are often used by companies toreallocate their exposure to interest-rate fluctuations, typically by exchanging fixed-rate obligations for floating-rate obligations.
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Glossary
interest-rate swap points Refers to the basis point differential between the swap rate and some reference point, usually Treasury yields.intermarket analysis An analysis of an underlying asset that incorporates the interrelationship of various markets—typically currencies, commodities, stocks, and bonds. Intermarket analysis is centered on the ideathat the four markets are correlated.International Swaps and Derivatives Association (ISDA) Organization defining the terms and conditions for trade in derivatives.kiwi
Term for New Zealand dollar.
leading economic indicators Such statistics as unemployment rates,consumer price index, federal funds rate, retail sales, personal income,discount rate, and the prime rate that are used to predict economicactivity.LIBOR.
See London Interbank Offered Rate.
LIFFE.
See London International Financial Futures Exchange.
limit order An order with restrictions on the maximum price to be paidor the minimum price to be received. As an example, if