forex trading using intermarket analysis-louis mendelsohn

7/15/2019 Forex Trading Using Intermarket Analysis-Louis Mendelsohn

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SummaryWant to Make Money Trading FOREX?

Forex Trading Using Intermarket Analysis can help you better understand what it takes to besuccessful with VantagePoint. The easy to read book covers:

• Fundamental factors that drive currency markets.

• Mechanics of forex trading.

• Chart patterns that can indicate break out moves.

• How markets drive and influence each other.

BioLouis B. Mendelsohn is a world-renowned pioneer in the use of intermarket analysis combined with neural-network based software to analyze global financial markets. He is President and

Chief Executive Officer of Market Technologies, which he founded in 1979 to develop technical

analysis trading software for the commodity futures markets.

In 1983 Mr. Mendelsohn authored a series of ground-breaking articles in Futures magazine in

which he outlined his vision for strategy back testing for personal computers. That same year he

introduced ProfitTaker Futures Trading Software, the world’s first commercially availablestrategy back-testing trading software for personal computers.

In 1987, Lou introduced the first commercially available software to address the emergingglobalization of the financial markets through the application of intermarket analysis in trading

software. In 1991, he introduced his second-generation intermarket analysis software program,VantagePoint Intermarket Analysis Software, which applies the pattern recognition capabilities

of artificial intelligence to global intermarket data, and quantifies the effects of related global

markets on each other in order to make short-term market forecasts. Since then, Lou has

continued to improve VantagePoint’s predictive accuracy, which now makes trend forecasts for more than 600 global financial markets with nearly 80% forecast accuracy.

Lou is a prolific author, having written dozens of articles on technical analysis and the globalfinancial system in such publications as Barron's; Futures; The Journal of Trading; Technical

Analysis of Stocks & Commodities; Stocks, Futures and Options Magazine; and the Journal of

Commerce. As a contributor to TraderPlanet.com, he now brings his wealth of knowledge totraders and investors around the globe.

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Chapter 1

What Is 'Forex'?

Every country has its own currency to facilitate its business and trade. The value of one currencyversus another depends on the economic health of the nations involved relative to one another as wellas the perception of stability and confidence in the political climate in those countries. As conditionschange, currency values fluctuate to reflect the new situation. These fluctuations create challengesfor corporate financial officers and institutional fund managers but also provide opportunities for traders who want to speculate on impending changes in currency values.

By their very nature, currencies entail strong intermarket relationships. It is obvious that a currencycannot trade in isolation and that the mass psychology that drives changes in the value of onecurrency is bound to have an influence on what happens to other currencies as well as other related

markets. Because government policies and economic developments that affect currency values tend to evolve over time, currencies also have a reputation as trending markets.

The key to successful trading is understanding how these markets relate to each other and how patterns of past price action can be expected to occur again in the future as markets respond toongoing financial, political, and economic forces. These patterns and trends are elusive and may not be so visible to the naked eye when you examine price charts, however. Underlying forces areconstantly at work in markets, and you need to spot them early to get into what are potentially highly profitable positions.

Clearly, intermarket analysis tools that can help to identify these reoccurring patterns and trends intheir early stages can give traders a broadened perspective and a competitive edge in today's fast- paced Forex trading arena. It was this realization more than twenty years ago that led me to focus onintermarket analysis and to develop intermarket-based market forecasting tools that could discernshort-term trend changes that are likely to occur based upon the pattern recognition capabilities of neural networks when applied properly to intermarket data.

The Forex market, by its very nature, is an ideal trading vehicle for the intermarket analysis and trend-forecasting approaches explained in this book.

Why trade Forex?

The first question you may have is, "Why trade Forex? Isn't Forex something that should interestonly bankers and big money managers?" The various ways you can trade Forex each have their advantages, as will be explained in more detail in Chapter 2. However, here are some characteristicsthat all Forex trading has in common, which should help you realize that you ought to include Forexin your trading portfolio: Diversification. We live in a world where terrorist attacks can occur at any place at any time, where geopolitical tensions over nuclear power, oil, human rights and many other issues threaten to disrupt normal trade and economic relationships, where U.S. companies areinvesting heavily in China and elsewhere to reduce their labor costs and China, in turn, is trying toinvest in U.S. companies. Economic uncertainty seems to be a way of life. You can't express your investment concerns about many of these issues, whether for protection or speculation, in anyindividual nation's stock or interest rate markets. Forex is the only universal instrument that

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incorporates all of these areas of potential concern and serves as another asset class for speculatorsand investors.

Global market. Markets such as equities or interest rates tend to be traded locally during the business day in their own time zone. For example, Japanese traders focus on Japanese stocks,European traders on European stocks and U.S. traders on U.S. stocks. All of these traders certainlyshould be aware of what is happening elsewhere as the global integration of financial markets

continues, but an event in Japan that directly affects Japanese stocks may not have the same effect inEurope, and traders of European stocks may not pay as much attention to what happens in the U.S. or Japanese stock markets.

Forex, on the other hand, has become an asset class that is truly a global investment reflecting everyeconomic development on earth. Whatever has an influence on currencies in Japan has an effect onwhat happens to currencies in London or Chicago. It is clear that intermarket relationships amongcurrencies are extremely important in today's world.

24-hour trading. Forex trading begins Monday morning in Sydney, Australia (Sunday afternoon inthe United States) and moves around the globe as business days begin in financial centers from

Tokyo to London to New York, ending with the close of trading Friday afternoon in New York.Anything that happens anywhere in the world at any time of the day or night affects the Forex marketimmediately without waiting for an exchange to open before the effects can be seen. The Forexmarket is always open for trading.

Electronically traded. With the advances of technology – specifically, the Internet and onlinetrading – and electronic trade-matching platforms, most Forex trade executions are instantaneous,getting you into and out of positions with the click of a mouse once you have made a tradingdecision. All of the benefits of electronic trading and updates of your positions and current status areavailable to today's Forex trader.

Liquidity. With the size of the Forex market, around-the-clock trading, and electronic tradeexecution mentioned above, illiquidity is not much of an issue in most venues of Forex trading.There is almost always a party to take the other side of a position you want to establish, no matter when you place your order. Forex bids and asks tend to be tight and slippage minimal.

Leverage. Forex markets provide some of the highest leverage of any investment vehicle. You mayhave to put up only a few hundred dollars to control a sizable position worth $100,000. As a result, asmall move in your favor can produce a big return on your investment. However, whenever you talk about the benefits of leverage, you also have to remember that leverage works both ways. A smallmove that is against your position can eat up the money in your account quickly if you are not animble trader who takes quick action to cut losses before they become too large. What leveragegives, it can also take away.

Plenty of information. Governments issue dozens of reports every month that influence the Forexmarket. Information is widely disseminated by the financial media. With advances in the Internet and financial news services, prices and economic data are delivered within moments of being released and are available to Forex traders of all types throughout the world. If anything, there may even betoo much information for traders to sort out at times, which has its own negative consequences.

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Simplicity. You don't have to watch or analyze reports and price movements of hundreds of companies or mutual funds, trying to figure out which to buy or sell. With all of the fundamentalinformation coming at you from many sources every day, you can make your trading life easier byconcentrating on the Forex market because you could easily limit yourself to monitoring movementsof a half dozen Forex pairs. In addition, you don't have to worry about going short or selling on adowntick as you do with equities because it's as easy to sell as it is to buy in the Forex market.

Good technical market. Once you understand the basics of technical analysis and how you canapply a software program to your trading, you can extend that knowledge to all your Forex marketswithout having to learn and understand a whole new set of market factors. Because currencies areinfluenced by government policies and economic developments that usually stretch over longer periods of time, Forex markets are good for trend-following techniques. As a result, if you keep aneye on economic conditions and charts as they evolve, you may find that Forex market moves areeasier to follow and predict than are movements in other markets. A glance at a currency chart suchas euro futures is enough to show clear longer-term trends, which often have enough movementwithin them to also satisfy the trader looking for shorter-term swing moves.

The euro chart illustrates the trending nature of currencies. Source VantagePoint Trading Software

( www.tradertech.com )

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http://www.tradertech.com/




Although currencies often have extended trends, the same euro market shows they also tend to have tradable

counter-trends that appeal to the active trader who moves into and out of positions. Source VantagePoint

Trading Software ( www.tradertech.com )

Active price movement. Whether looking at price movements intraday or over a number of days,currencies tend to have trading ranges that are wide enough to produce attractive tradingopportunities. Volatility is necessary for a trader to make money in any market, and the Forex marketusually provides more than enough volatility because there are new developments that affect theForex market every day.

But not too volatile. Forex markets can have abrupt price movements, but as a 24-hour marketwhere price changes are always flowing through the system, Forex markets rarely make the type of price move you sometimes see in stocks or futures. Stocks can plunge or soar 10 percent or more onsome overnight earnings report or other announcement, leaving gaps on price charts when anexchange opens. A $3 change on a $30 stock is not that unusual, but a 10 percent move in a currency – for example, 14 cents if the euro were at $1.40 – is quite unlikely.In addition, while emerging markets may incur some extreme currency price movements, the major currencies are not like an Enron or Worldcom or dotcom stock that will fly all over the chart or even plummet and declare bankruptcy. If you have thought that Forex trading was too volatile and riskyfor you, it may surprise you to learn that the Forex market is probably more stable than the equitiesmarkets.

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Pairs, pips and points

Unlike markets such as soybeans or T-notes where you are either long or short the market when youenter an outright position, in the Forex market you are always trading pairs of currencies – that is,you are always long one currency and short another. Forex trades are expressed in terms of the firstcurrency of the pair. For example, a U.S. dollar/Japanese yen position – USD/JPY to the Forex trader – means you are long the dollar and short the yen, believing the value of dollar will gain relative tothe value of the yen.

Together with the U.S. dollar, six other major currencies – the Japanese yen, euro, British pound,Swiss franc, Canadian dollar and Australian dollar – account for more than 90 percent of all Forextransactions. For the most part, the Forex trader can focus on just six major currency pairs:

Euro/U.S. dollar (EUR/USD)U.S. dollar/Japanese yen (USD/JPY) British pound/U.S. dollar (GBP/USD)U.S. dollar/Swiss franc (USD/CHF)U.S. dollar/Canadian dollar (USD/CAD)U.S. dollar/Australian dollar (USD/AUD)

Changes in currency values are quoted in terms of "price interest points" or "pips." Pips are alsocalled points and are similar to ticks in stocks or futures markets, the smallest increment of pricemovement. In most cases, a pip is a one-point change in the fourth digit to the right of the decimal – for example, a change from 1.3918 to 1.3919 for the euro. The value of a pip depends on the size of the contract or lot being traded, and that depends on where you trade Forex, as you'll see in the nextchapter.

Chapter 2

The Forex Marketplace

Forex trading can be accomplished in three main venues: Interbank market, cash Forex firms, or exchange-traded futures and options.

By far, the greatest share of Forex trading takes place in the interbank market, a global over-thecounter network that includes, as its name suggests, the world's largest banks as its backbone alongwith other large financial institutions and corporations that have to be members of the network to participate. There is no centralized marketplace, no standardized contracts, and no central regulator.

However, unless you are a corporate treasurer or global money manager or someone in that type of position, the interbank market is probably not something with which you will be involved.

Cash Forex trading

One of the fastest-growing segments of trading in recent years has been in cash Forex as dozens of new firms have sprouted up, taking advantage of online trading and less restrictive regulations. CashForex trading offers a number of advantages:

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Low entry cost, as low as a few hundred dollars.High leverage, sometimes 100-to-1.Real-time quotes provided by the cash Forex firm.No commissions or fees. Cash Forex firms make their money on the difference in the bid/ask spread.

Forex futures trading

Traders must put up more margin money – exchanges prefer “performance bond” – to trade futures, but Forex futures do provide some specific advantages:

One central market, with many buyers/sellers making bids/offers distilled into one market priceand not just one firm’s bid/ask quotes. Tight bid/ask spreads in a very competitive environment.Transparent pricing available to all traders of all sizes at the same time. No counter-party risk.

The exchange's clearing organization is actually the counter-party to every trade.

Chapter 3

Analyzing Forex Markets

The underlying cause of price movement in any market is fundamentals – those factors that affect the basic value of that market. For many markets, the focus is on supply and demand as free-marketforces determine what is "expensive" or "cheap," depending on how much is available and how badlysomeone wants to buy or sell it.

Forex markets go far beyond basic supply and demand figures. Everything that affects the politicaland economic situation of the two nations involved in a Forex pair has some bearing on the value of

the two currencies against each other. Forex traders have plenty of fundamentals to consider astraders are bombarded by news broadcasts, government reports, newsletters, brokerage firm research,television analysts, and many other sources.

In fact, the amount of information can become overwhelming. The challenge for the Forex trader isnot in finding enough information but in determining what is most significant from the enormousamount of information available and interpreting what the effects on the markets are likely to be.

When you don't know something is going to happen, it's naturally pretty hard to prepare. How could a Forex trader have prepared for the terrorist attacks of September 11, 2001? Or for a massivetsunami or hurricane or other natural disaster? Such shocks are a part of trading in the real world but,fortunately, are still rather infrequent. Even if you could anticipate such an event, you probablywould not be able to predict how and to what extent the markets might react. The mass psychology of the marketplace sometimes does funny things that you might not expect. So it's hard to tradeunknown, untimed shocks.

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Preparing for the known

Sometimes traders know an event or announcement is coming. Elections, meetings of the FederalOpen Market Committee or European Central Bank, releases of government reports, and other suchevents are scheduled, and the timing is known in advance to traders. That doesn't mean the marketwon't react in an unforeseen manner that could surprise you – in fact, these events or announcementsoften do produce market reactions that are not widely expected. But those are situations for which atrader can make some preparation with a sound trading strategy that can help to minimize the risk of being caught off guard. A few general points should be made about these fundamental factors.

First, when the government releases an economic report, most of the numbers are estimates based onother estimates. Yes, the estimates are tabulated by experienced officials who have access toextensive data, but they generally are not precise counts. Nevertheless, these are numbers that alltraders have, and the market has to live with them.Second, when traders react to the numbers or results, they may actually be responding to what themarket expected rather than the numbers themselves. A report that might seem bullish may instead send prices sharply lower. You have probably heard the market axiom, “Buy the rumor, sell the fact.”In some cases, bullish numbers may not be bullish enough to drive the market higher the way you

think they should. Or bad news may not be as bad as expected, and prices actually go up instead. Inaddition to being aware of the date and time of a report or announcement, you should also have anidea what the market expects so you can reduce your chances of being surprised and hurt bysubsequent price action.

Third, an outcome or number that may be bullish at one point may not be bullish the next time.Perhaps traders have become conditioned to the contents of a report and don't react as you mightexpect. Old news is old news; markets usually require something new to spark price moves.

Fourth, your analysis may be correct but too far ahead of what the market is thinking, so you may be positioned way before the market is ready to move. The fundamental numbers may be just what you

anticipated, but the timing of a price move is off because it takes time for traders to digest whatthey've seen.

Applying Technical Analysis to Forex

As you consider all the possible unknown and known events and reports collectively known as thefundamentals, you may have been overwhelmed by all the news you would have to follow and numbers you would have to digest and understand to trade Forex on the basis of fundamentals. That'swhy most traders tend to prefer technical analysis, a study of price action that can be applied to anymarket.

Technical analysis combines the influence of all the fundamentals affecting a market into oneelement, the current price. Rather than try to keep up with all the fundamentals, traders can analyze price movements on a chart, knowing that the price synthesizes every factor known to the market atthe present time – at least, in the perception of traders. Price is the visible reflection of all underlyingmarket forces, much like limbs and branches are the visible parts of a tree and fundamentals are theroots that feed and nourish their growth.

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When it comes to technical analysis, what Forex traders really need in the way of information for their decision-making boils down to answering four questions:

1 Which direction is the market heading?2 How strong will the move be?3 When will the current trend lose its strength and make a top or bottom?4 What will tomorrow’s high/low trading range be?

Enter charts

Many traders then turn to charts, starting with basic chart analysis such as trendlines and chart patterns. Much of the basic charting education material today is the same as what was available morethan thirty years ago when I first began trading, except for the updated charts, graphs and revised hypothetical track records.

We don’t have space in this brief e-book to discuss chart analysis, but I recommend that you read a book or attend a seminar on technical analysis to learn the details.

Chapter 4

Intermarket Analysis of Forex Markets

Traders need to look back at past price action to put current price action in perspective. They also

need to look forward to anticipate what will happen to prices if their analysis is to pay off in the realtrading world. To be able to look ahead with confidence, however, traders need to look in one other direction, and that is sideways to what is happening in related markets, which has a major influenceon price action in a target market. Intuitively, traders know that markets are interrelated and that adevelopment that affects one market is likely to have repercussions in other markets. No market isisolated in today's global marketplace.

Many individual traders still rely upon the same types of mass-marketed, single-market analysis toolsand information sources that have been around since the 1970s when I first started in this industry.And a large percentage of traders continue to end up losing their trading capital. If you’re still doingwhat the masses are doing, isn’t it likely that you’ll end up losing your hard-earned money, too?

In the Forex markets especially, you cannot ignore the broader intermarket context affecting themarket that you are trading. You still need to analyze the behavior of each individual market to seethe double tops or broken trendlines or indicator crossovers that so many other traders are following because that's part of the mass psychology that drives price action. However, it is increasinglyimportant that you factor into your analysis the external intermarket forces that influence each market being traded.

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Historical roots

Intermarket analysis is certainly not a new development for traders, having roots in both the equitiesand commodities markets. You are probably familiar with equities traders who compare returns between small-caps and big-caps, one market sector versus another, a sector against a broad marketindex, one stock against another, international stocks versus domestic stocks. Portfolio managers talk about diversification as they try to achieve the best performance. Whether they are speculating for profits or arbitraging to take advantage of temporary price discrepancies, intermarket analysis in thissense has been part of equities trading for a long time.

Traders in the commodities markets have also been into intermarket analysis for a long time, tradingspreads that have a reliable track record. Farmers have been involved in intermarket analysis for years although they may not have thought of what they do in those terms. When they calculate whatto plant in fields where they have several crop choices – between corn and soybeans, for example – they typically consider current or anticipated prices of each crop, the size of the yield they can expectfrom each crop and the cost of production in making their decision. They do not look at one marketin isolation but know that what they decide for one crop will likely have a bearing on the price of theother, keeping the price ratio between the two crops somewhat in line on an historical basis.

The next logical step

So, a quantitative approach to implement intermarket analysis, which has been the basis of myresearch since the mid-1980s, is neither a radical departure from traditional single market technicalanalysis nor an attempt to undermine it or replace it. Intermarket analysis, in my opinion, is just thenext logical developmental stage in the evolution of technical analysis, given the global context of today’s interdependent economies and financial markets.

Bottom line: If you want to trade Forex markets today, you have to use a trading tool or adopt anapproach or trading strategy that incorporates intermarket analysis in one way or another. An

important aspect of my ongoing research involves analyzing which markets have the most influenceon each other and determining the degree of influence these markets have on one another.

Many market inter-relationships are obvious, but others may seem more distant and unrelated, suchas the importance of stock indices, U.S. T-notes or crude oil prices on pricing of the USD/JPY Forex pair. Research has verified that these related markets do have an important influence on a targetForex market and can provide early insights into the Forex market's future price direction.

Multi-market effect

The amount of influence that one market will have on another market will naturally shift over time so

these relationships are not static but should be the subject of ongoing study. Forex traders should also be aware that the impact from related markets may not be instantaneous. It may take some time for a policy decision or other development to have an impact on the ever-changing marketplace, or aninfluencing condition may have a bearing on market direction for only a short time, meaning tradersmay have only a brief window in which to capitalize on a trading opportunity.

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Correlation studies do have limitations because they compare prices of only two markets against eachother and do not take into account the influence exerted by other markets on the target market. In thefinancial markets and especially the Forex markets, a number of related markets need to be included in the analysis rather than assuming that there is a one-to-one cause-effect relationship between justtwo markets.

Nor do the correlation studies take into account the leads and lags that may exist in economic activity

or other factors affecting a Forex market. Their calculations are based only on the values at themoment and may not consider the longer-term consequences of central bank intervention or a policychange that takes some time to play itself out in the markets.The Forex market is a dynamic marketplace, constantly shifting and evolving. It is not one currencyversus the world but all currencies affecting all other currencies to a greater or lesser degree. Forexmarket inter-relationships cannot be ferreted out with single-market analysis tools. If you are seriousabout Forex trading, you need to make the commitment to get the right tools from the get go, or youare likely to struggle to keep your account intact. Since we are talking currencies here, we mightinterject another familiar saying: "Penny wise and pound foolish" when it comes to investing inanalytical tools.

Chapter 5

Using Neural Networks to Analyze Forex

When you consider all of the many intermarket relationships in the Forex markets discussed in the previous chapter – and all of them shifting and changing at the same time – you might wonder how

you could possibly pick out patterns and relationships from such a mass of data. Unlike thesubjective approach of chart analysis, neural networks provide an objective way to identify and analyze the complex relationships that exist in Forex and related markets. They can reveal hidden patterns and correlations in these markets that the eye could never spot on a chart or through the useof traditional single-market indicators that tend to lag the markets.

A neural network is not a human brain, but it takes on some brain-like functions as it studies data,"learns" relationships within and between markets, recognizes patterns in past data and uses thisinformation to make forecasts about the target market. The neural net is essentially a modeling toolthat accepts a variety of data and processes information in a manner similar to how the brainfunctions.

Input layer

A critical first step in neural network analysis is data input. The forecasts you get out of a neuralnetwork will be only as good as the data you put into it. Collecting, cleaning, selecting and preparingthe data for analysis are all important. Neural networks are not limited to single-market data inputsnor are they limited solely to technical data inputs. The data can go far beyond just price or technicalindicators but can include such items as volume and open interest for the target market as well asintermarket data from related markets and even fundamental data.

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Once all of the raw input data has been selected, it is preprocessed or massaged using variousalgebraic and statistical methods of transformation which help to facilitate "learning" by the neuralnetwork. That means it is converted into a form that the learning algorithm in the next layer can bestexploit to get the most accurate forecasts in the shortest amount of time.

Hidden layer

The hidden layer is the learning algorithm used for internal processing to store the "intelligence"gained during the learning process. There are a number of types of learning algorithms. The network recodes the input data into a form that captures hidden patterns and relationships in the data, allowingthe network to come to general conclusions from previously learned facts and apply them to newinputs. As this learning continues, the network creates an internal mapping of the input data,discerning the underlying causal relationships that exist within the data. This is what allows thenetwork to make highly accurate market forecasts.Training a neural network is somewhat like human learning: repetition, repetition, repetition. Theneural network learns from repeated exposures to the input data, and learned information is stored bythe network in the form of a weight matrix. Changes in the weights occur as the network "learns."Similar to the human learning process, neural networks learn behaviors or patterns by being exposed

to repeated examples of them. Then the neural networks generalize through the learning process torelated but previously unseen behaviors or patterns.

Output layer

The output layer is where the network’s forecasts are made. During training, the network makes itsforecasts, errors are computed and "connection weights" between neurons are adjusted prior to thenext training iteration. Connection weights are altered by an algorithm – the "learning law" includingthe back-propagation method – to minimize output errors. Lots of adjustments may be necessary atany point along the way to get the desired results.

Two types of real number outputs in financial analysis include price forecasts, such as the next day’shigh and low, and forecasts of forward-shifted technical indicators. The programmer has to decidenot only what output to forecast but also how far into the future to make the forecast.

Then comes extensive testing to verify the network’s ability to forecast accurately. Testing is performed by creating an independent test file of data not used during the training process. This isanalogous to "walk-forward" or "out-of-sample" testing of rule-based trading strategies. The programmer can compare performance results from various networks and decide which network touse in the final application.

Just like you don’t have to become an automotive engineer to drive your car, you shouldn’t have to become a rocket scientist to apply the forecasting power of neural networks in trading the Forexmarkets.

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Chapter 6

Wave of the Future: Synergistic Market

Analysis

When I began trading in the early 1970s, there were no stock indexes futures, no Eurodollar futures,no options on futures of any kind. Futures on currencies, gold, interest rates, and energy and optionson stocks were all still in their infancy. There was no electronic trading and no personal computer toanalyze those markets that I was actively trading.

The trading world has evolved considerably since then, offering many new markets to trade,especially in the financial arena; lots of different trading instruments; lots of sophisticated tradingsoftware, and a global marketplace that features electronic trading around the clock. It is difficult toimagine that the next twenty-five years could offer as many trading innovations as the last twenty-

five years have.

Whatever the future holds, one of the most promising and lucrative trading areas is likely to be theForex market, which is so responsive to global economic shifts and geopolitical tensions. Years agothe Forex market was limited to banks and financial institutions; individual traders were not part of the picture. Then came the trading prowess of George Soros and other currency speculators whowere credited with bringing down the British pound in 1993, the Asian financial crisis in 1997, thelaunch of the euro in 1999, and other events that brought increased attention to the Forex markets, both for speculation and as a means for knowledgeable traders to protect or hedge themselves againstadverse changes in currency values.

The introduction of the Internet in the mid-1990s gave Forex trading a big boost as it made it

possible for individual traders to get information and to trade on a level playing field with any trader of any size any place in the world at almost any time of the day or night. As a result, numerous cashForex firms popped up in the late 1990s and early 2000s to accommodate this exploding interest inForex trading, making Forex trading available to almost any pocketbook. Electronic Forex futurestrading volume has skyrocketed, and the growth in trading Forex options promises to be just asdramatic in the next few years as exchanges facilitate that type of trading.

The global war on terrorism and other geopolitical, economic and hurricaneomic shocks and eventswill undoubtedly keep Forex markets at the center of the global financial marketplace. The growinginfluence of China and other Asian markets on the global economy will affect many markets, theForex market foremost among them.

With unprecedented trading opportunities provided by the Forex market, what the individual trader needs in today's world of speedy telecommunications and sophisticated trading techniques is what Icall Synergistic Market Analysis. As I have emphasized in this book, I believe that includes:Intermarket analysis. No country, no currency, no economy, no market is isolated in today's globaleconomy. When you look at one market, you have to look at a number of related markets to get thefull story about the market forces driving any one market. With Forex, that obviously means other currencies, but it also means interest rate and equities markets as well as commodities, particularlyinternational markets such as gold and oil. Single-market analysis just isn’t sufficient anymore.

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Accurate, reliable market forecasting. The trader who wants to have an edge in today's tradingneeds to look ahead using techniques and tools such as predicted moving averages that do not lag behind the market but have the ability to anticipate what is likely to happen to price and trend direction in the near term. Because of their trending tendencies, Forex markets are especially good candidates for such market forecasting. Failure to incorporate leading indicators and information onrelated markets into your trading strategy puts you at a great disadvantage in competing with other more sophisticated traders including professionals who make their full-time livelihood trading Forex

markets.

Neural networks are not only well-suited to analyzing these markets from both a single-market and intermarket perspective but can also incorporate fundamental data as inputs. By using thecomputational modeling capabilities of neural networks in a structured framework that synthesizesthese three approaches and integrates seemingly disparate technical, intermarket and fundamentaldata, quantitative trend and market forecasting, I believe, will continue to be at the cutting edge of

financial market analysis in the early decades of the 21st

century.

Trading education. Many people get into trading with only a vague notion about how to analyzemarkets, how to trade them successfully, how to assess risk/return in trading, and many other factors

that trading involves. With today's more volatile and erratic markets, education and information will be even more important for successful trading in the future, and traders will need to go to web sitessuch as www.TraderPlanet.comfor valuable assistance and free information on trading.

Even if you take the Synergistic Market Analysis approach, a myriad of additional factors can affectyour chances for trading success. These include mass psychology, judgment, trading experience, risk propensity, fear, greed and amount of risk capital that you really have available. It probably willnever be possible to predict the trend direction of financial markets with more than perhaps 80%accuracy, due to randomness and unpredictable events, as well as the difficulty of developingeffective forecasting tools. I am, nevertheless, determined to continue my research to push theforecast accuracy envelope as far as it will go since this has been my intellectual passion for the pastseveral decades and continues to excite me.

I hope that this book has helped to make you more aware of the implications that the globalization of the financial markets has on your own Forex trading. By broadening your perspective to includeintermarket analysis and various forecasting techniques that I have outlined briefly in this e-book, Iam confident that you will be able to improve your trading performance by gaining more self-confidence to make better trading decisions, whether you trade only the Forex market or also tradeequities, options, or futures.

14



About the Author and Market Technologies, LLC

Louis B. Mendelsohn is a world renowned pioneer in the application of personal computers and trading software to the global financial markets. He is President and Chief Executive Officer of Market Technologies which he founded in 1979 to develop technical analysis trading software for the

commodity futures markets. Mr. Mendelsohn, himself, began trading equities and stock options inthe early 1970s. Then, in the late 1970s he switched to commodities, as both a day and positiontrader, and developed trading software for the commodities futures markets.

In 1983 Mr. Mendelsohn authored a series of ground-breaking articles in Futures magazine in whichhe outlined his vision for strategy back testing and optimization for personal computers. That sameyear he introduced ProfitTaker Futures Trading Software, the world’s first commercially availablestrategy back-testing trading software for personal computers. By the mid-1980s these capabilitieshad become the standard in technical analysis trading software for both stock and futures tradersthroughout the world.

Following the October, 1987 global market crash, first predicted by ProfitTaker in August, 1987, Mr.

Mendelsohn took technical analysis to the next generation when he introduced the first commerciallyavailable PC software in the financial industry to address the emerging globalization of the financialmarkets through the application of intermarket analysis in trading software. Several years later, in1991 he introduced his second generation intermarket analysis software program, VantagePointIntermarket Analysis Software, which applies the pattern recognition capabilities of artificialintelligence to global intermarket data, and quantifies the effects of related global markets on eachother in order to make short term market forecasts.

Since then, Mr. Mendelsohn along with his research and development team, The PredictiveTechnologies Group, has been focused on the accelerating globalization of the financial markets and has continued to make improvements to VantagePoint’s predictive accuracy, which now makes trend forecasts for more than 600 global financial markets with nearly 80% forecast accuracy. Theseachievements have been responsible for Market Technologies’ phenomenal growth over the pastdecade, with thousands of trading software customers in nearly 100 countries worldwide, and threewins since 2004 in the Inc. magazine competition of the fastest growing privately-held companies inthe United States.

Mr. Mendelsohn is a prolific author, having written dozens of articles on technical analysis and theglobal financial system in such publications as Barron's; Futures; The Journal of Trading; TechnicalAnalysis of Stocks & Commodities; Stocks, Futures and Options Magazine; and the Journal of Commerce.

Following the October, 1989 aftershock exactly two years after the 1987 crash, Mr. Mendelsohnwarned traders about the likelihood of more frequent and severe global financial aftershocks and the potential for a full-scale global meltdown. In numerous articles and editorials he called for clearingfirms, regulators, and central banks to develop coordinated, worldwide contingency plans before, notafter, the onset of a crisis that could ripple through the global financial system and bring about a full-scale meltdown.

In a Journal of Commerce editorial on February 5, 1990 entitled “Build a Global Safety Net”, Mr.Mendelsohn argued that “vital security, clearing and regulatory issues must be resolved to assure thefiduciary integrity of the international financial and banking systems, particularly during times of worldwide financial or political crisis”. In this editorial he went on to caution that “The integrity of the world financial and banking systems necessitates that international coordination and cooperation

15



among the various stock and futures exchanges, central banks, finance ministries, regulatory agenciesand international banks be implemented through formal agreements and informal understandings” toreplace the “last minute, frantic telephone discussions during a crisis [which] has been the modusoperandi”.

Months later in an April, 1990 editorial in Futures magazine entitled “24-Hour Trading: Let’s do itright”, Mr. Mendelsohn warned that “aftershocks following Black Monday's financial earthquake

may become more commonplace…as the 24-hour electronic trading systems are fully implemented --unless serious clearing, security and regulatory deficiencies are overcome”, and that “Global tradingon a 24-hour basis, without a real-time global clearing mechanism, presents a major threat to theintegrity of the world's financial markets”.

In 1995 in a seminal book entitled Artificial Intelligence in the Capital Markets, Mr. Mendelsohndevoted Chapter 5 to a detailed overview of the global financial system and the systemic risks thatwould become an ever-present danger for traders. In this chapter, Mr. Mendelsohn indicated that“…few traders comprehend the intricacies of derivatives… Since most derivatives did not existduring the last major bear equities market in 1974, the degree of influence that derivatives mighthave in precipitating or accelerating a major worldwide financial crisis, more severe than 1987, cannot yet be measured”.

Mr. Mendelsohn has been widely quoted in other financial publications over the past quarter-century,including the Wall Street Journal and Investor's Business Daily, has contributed to more than half adozen books on the global financial markets, has been interviewed live on CNN, Bloomberg, and CNBC, and since 2000 has authored three books on the global financial markets.

His book, Trend Forecasting with Technical Analysis: Unleashing the Hidden Power of IntermarketAnalysis to Beat the Market, released in December 2000, has more than 45,000 copies in print todate. Chapter 1, entitled “Trading in the Global Economy”, addresses the factors that have brought

about the global financial system in the 21st

century and cautions traders and investors about theincreasing risk that “financial crises can spin out of control quickly, as interdependent financialmarkets fall, setting off a chain reaction that reverberates worldwide”. His next book, Forex TradingUsing Intermarket Analysis: Discovering Hidden Market Relationships That Provide Early Clues For Price Direction was released in March 2006. In this book he discussed the role of the currency and foreign exchange markets in the global financial system.

The following year, in a cover page article entitled “Ripple Effect Looms Large in FX Markets” inthe November, 2007 issue of Stocks, Futures and Options Magazine, Mr. Mendelsohn was propheticin his prediction of an impending worldwide financial meltdown. In this article he warned that “Thecommodity markets, such as crude oil and gold, have a tremendous effect on other financialmarkets—including U.S. Treasury notes and bonds, which, in turn, have a powerful impact on theglobal equity, debt and derivatives markets. They subsequently affect the U.S. dollar and Forexmarkets, which then further influence prices of commodities. This dynamic has already played itself

out a number of times since the 1987 crash, including the 1997 Asian currency crisis, the 1998 LongTerm Capital Management debacle and the crisis following the 2001 terrorist attack on the United States. Each occurrence underscored the far-reaching implications regarding the fragile stability of the global financial system, itself, amid the ever-present prospect of a worldwide Category 5financial meltdown”.

Again, in Mr. Mendelsohn’s most recent book published in June, 2008, entitled Trend Forecastingwith Technical Analysis: Predicting Global Markets with Technical Analysis, he spelled out exactlywhat actions traders needed to take to protect their wealth and prosper at the onset of a global crisisthat he believed would roil the global financial system and precipitate a full-scale meltdown of thefinancial markets. Traders who have applied Mr. Mendelsohn’s global intermarket software tools

16



have been able to make rational, effective trading decisions during the 2008 global meltdown and arewell positioned to take advantage of unprecedented trading opportunities while many other tradersand investors have become paralyzed with fear and weakened financially because they lacked the

proper analytic tools needed to succeed in the global financial markets of the 21st

century.

Because of his expertise and pioneering achievements in the application of computers and tradingsoftware to the global financial markets over the past three decades, Mr. Mendelsohn's biography ishighlighted in Marquis Who's Who in the World, Who's Who in America, Who's Who in Financeand Industry, and in a time capsule at the White House in Washington, D. C. He has been a fullmember of the Market Technicians Association since 1988 and a colleague of the InternationalFederation of Technical Analysts.

Born in 1948 in Providence, Rhode Island, Mr. Mendelsohn received a B.S. degree in Administrationand Management Science from Carnegie Mellon University's Tepper School of Business in 1969, aM.S.W. degree from the State University of New York at Buffalo in 1973, and a M.B.A. degree withHonors from Boston University in 1977.

As an avid collector of antique office technology and equipment, Mr. Mendelsohn has antiquetypewriters and pre-electric calculating machines (which are early forerunners to today's personal

computers) that date back to the late 19th

and early 20th

centuries on display in his private office. Hehas also collected classic cars, including his favorite, a 1937 Buick four-door sedan luxo-rod. Mr.Mendelsohn, his wife of 32 years, and two of his three sons live on a ranch near Tampa, Floridawhere they raise Paso Fino horses and a variety of cattle and other livestock.

A comprehensive collection of Mr. Mendelsohn's published articles and books is available for your review at: Http://www.tradertech.com/lbm_library.asp

Company Information:

Market Technologies, LLC E-mail address: [email protected] Internet Web site address:http://www.tradertech.com

Phone: USA and Canada: 1-800-732-5407 Others: 813-973-0496 Fax: 813-973-2700

17





M b h FREE J T d T d Pl

STUDYING MARKETS AND TRADING ...

Lane J. Mendelsohn,

Publisher, TraderPlanet.com

Less-experienced traders are always askingquestions about how to best learn and study "fundamentals" or "technicals" in markets.

market fundamentals, and few tradingbooks focus only on fundamentals that

books on fundamental analysis of futuresmarkets are so rare is because the subjectmatter is so enormous. Here is just asmattering of macro fundamental factors

futures prices: weather, world politics,

consumer tastes and consumer demand,

interest rates, currency values, naturaldisasters ... and the list could go on and on.

Technical analysis addresses part of thedilemma of keeping up with all thefundamental factors impacting futuresmarket prices because price activity is a

and/or other fundamental factor known toall traders. Price activity also factors in ideasand speculation about the future prospects,and future news, for the market.

But the big challenge for traders has alwaysbeen to be among those people who know about all those fundamentals and chartpatterns in a timely manner and caninterpret what they mean for prices in themarket they are trading.

Now a new trading portal calledTraderPlanet (www.TraderPlanet.com) givestraders a source of fresh fundamental andtechnical analysis information daily as well

as many trading education features to helpmove the trader down the road of moresuccessful trading. Markets are changingconstantly every day and every minute, asanyone who has observed recent events canattest. What you read in newspapers andmagazines can become outdated quickly,and traders need current information anddata to succeed.

But TraderPlanet is more than just a

one-way conduit of current news andinformation directed to users. It is a new social networking experience for tradersthat provides them with plenty of interaction with other traders and with toptrading analysts and experts – blogs on a

variety of topics, chat rooms, tradingcontests, sentiment surveys and a new gauge of market opinion, the TraderPlanetIndexes for eight market areas. And thereare even “My Planet” personal pages forphotos and details you may want to sharewith other traders.

Got a question and looking for an answerabout a product, trading strategy orwhatever else is on your mind? It is quitelikely that there’s someone else out there onthis trading planet who has been wonderingthe same thing or is willing to share theirexperience to help you out.

Want to talk to a corn farmer in Iowa or asugar cane grower in Brazil or a banker inLondon? Somewhere on this planetsomeone may want to share their views withyou, and TraderPlanet.com’s goal is tofacilitate those connections wherever

is now a local community, andTraderPlanet.com is designed to get you

acquainted with your trading neighbors.

Now, TraderPlanet.com is not going toguarantee you instant market knowledgeand trading success. Many traders feelalmost "naked" if they attempt to trade amarket when they know little about the

to know all of the details about the market

the timing of key economic reports, thepotential head-and-shoulders top and allthose other things that make for aninformed trader.

But wouldn’t you feel more comfortable

trading if you had access to current newsreports and expert commentaries and couldtap the views and opinions of others in thetrading community around the world? Anddo all of this for free?

TraderPlanet.com is a web site where, as itsmotto says, traders are likely to gravitate inthe future.

I have been fortunate in my career in the futures industry. When I was a

reporter and editor for Futures World News (now Dow Jones Newswires), I was

forced to learn about the fundamentals impacting all the markets I covered,

which included all the U.S. markets and some traded overseas. I was able to

talk to traders and analysts every day for about a dozen years regarding thefundamentals and chart action that impacted the particular market on

which I was reporting. Indeed, very few get that kind of unique opportunity to

learn about markets. But now TraderPlanet.com gives almost any trader

access to the same kind of information and insights at no charge.

The markets volatility has made it more important than ever for the

trader or investor to be educated, and TraderPlanet is the one community that

brings all of us that education. It gives me the opportunit y to share my

experience and insight with other traders around the world, and learn from

them to build my knowledge base. Having so much educational content

from so many providers, in so many different forms like the videos, webinars,

and blogs, all in one place that I can trust, helps me ultimately become a more

successful trader! Keep up the great work TraderPlanet.

Grant Stern

Trader Planet has helped me develop my investment strategy by

blogging, which is the best way I can imagine to keep a rolling journal. The

trading community's comments on my investment ideas really give

important feedback about complex ideas.

Chris Mahlmann

forex trading using intermarket analysis-louis mendelsohn

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