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  • 7/29/2019 Futures Sept magazine

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    US $6.95 CAN $8.95

    TAPER WORMHOW FED ACTION

    WILL AFFECT FOREX

    LOOK MA!BUILDING BETTER

    MOVING AVERAGES

    RATIO MATTERS

    BEST TOOLS FORMEASURING PORTFOLIO

    PERFORMANCE

    Midas

    SEPTEMBER 2013

    FUTURESMAG.COM

    ShruggedBEN DAVIESTALKS GOLD, CURRENCIES ANDCENTRAL BANK-FREE MARKETS

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    41years

    EDUC

    ATI

    NGTRADER

    SFOR

    FU

    TURESMAGAZ

    INE

    CONTENTS

    6 Ad Index

    8 Editors NoteMetamorphosis

    10 Forex TraderFed tapering and U.S.

    dollar potential

    12 Options StrategyDeriving income from cash on

    hand by selling premium.

    46 Trader ProfileVallen: Second timesthe charm

    DEPARTMENTS

    SEPTEMBER 2013 // VOLUME XLII NUMBER 7

    Ben Davies:Turning adversity into gold

    By Michael McFarlinAfter a back injury forced him to re-evaluate his Olympic dreams,

    Ben Davies found a new thrill in the competition of trading. Nowmanaging a long-only gold fund, he strives to protect investorswealth while advocating for free market reforms around the globe.

    COVER STORY

    14

    4 FUTURES September 2013

    For reprints and e-prints of FUTURES articles, please contact

    PARS International at [email protected] or (212) 221-9595.

    FEATURES

    MARKETS

    20 Dollar days coming

    as Fed prepares exit

    By Daniel P. Collins

    How will forex markets react to theFed signaling a stimulus exit as othercentral banks are hitting the gas?

    TRADING TECHNIQUES

    26 The 48-hour movement strategy

    By Azeez Mustapha

    Swing-trade yourself to success with

    this strategy for forex markets.

    28 Leveraging futures vs.ETN differentials

    By Paul Cretien

    As metal market relationships have

    shifted this year, the different trading

    contracts have had to evolve.

    30 A closer look at price

    chart choices

    By Jean Folger

    Price charts are a traders portal

    to the markets. Its important to

    choose the style that works for you.

    EQUITY TRADING TECHNIQUES

    34 Stocks, moving averages and

    how to leverage them

    By Bramesh Bhandari

    How to select the best moving

    average to identify opportunities.

    TRADING 101

    36 Quick and easy guide to

    livestock trading

    By Rich Nelson

    Cattle and hogs offer opportunities

    that are unique from other markets.

    MANAGED FUNDS

    40 Measurement matters

    By Mark Anson, Donald Chambers,

    Keith Black and Hossein Kazemi

    There are a number of ways to see

    inside rates of return. Here we look into

    some of the most popular methods.

    For additional information,

    visitfuturesmag.com

    DIGITALEXCLUSIVETHIS EDITION INCLUDES

    ADDED ARTICLES ANDEXPANDED COVERAGE.

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    IDEA

    GENERATION

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    Options trading entails significant risk and is not appropriate for all investors. Certain complex options strategies carry additional risk. Prior to trading options,contact Fidelity Investments by calling 800-343-3548 to receive a copy of Characteristics and Risks of Standardized Options and to be approved for optionstrading. Supporting documentation for any claims, if applicable, will be furnished upon request.

    * See Fidelity.com/ATP200free for further details. Valid for new or existing Fidelity customers opening a Fidelity retail account and funding it with at least $50,000 incash and/or eligible securities.

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    ADVERTISER PAGE

    Amp Futures . . . . . . . . . . . . . . . . . . . . IFC-3

    Classifieds . . . . . . . . . . . . . . . . . . . . . . . 45

    CME Group . . . . . . . . . . . . . . . . . . . . . . . BC

    Daniels Trading . . . . . . . . . . . . . . . . . . . . 47

    eSignal . . . . . . . . . . . . . . . . . . . . . . . . . . 23

    Fidelity Investments . . . . . . . . . . . . . . . . . . 5

    FXCM . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

    Interactive Brokers LLC . . . . . . . . . . . . . . . 7

    Moneyshow. . . . . . . . . . . . . . . . . . . . . . . 43

    OptionsXpress. . . . . . . . . . . . . . . . . . . . . 13

    RJOFutures . . . . . . . . . . . . . . . . . . . . . 24-25

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    TD Ameritrade . . . . . . . . . . . . . . . . . . . . . 37

    SEE CLASSIFIED ADVERTISING ON PAGE 45

    Publisher & Editor-in-Chief

    Ginger Szala

    Associate Editor

    Michael McFarlin

    Editors At LargeDaniel P. Collins

    Steve Zwick

    Contributing Editors

    James T. HolterMurray A. Ruggiero, Jr.

    Art Director

    Michael Beckett

    Vice President of Advertising Sales

    & Associate Publisher

    Chris Casey

    phone: (312) 846-4606

    fax: (312) 846-4638

    e-mail: [email protected]

    Futures Magazine Group Office

    /+FGGFSTPO4Ur4VJUF

    Chicago, Ill. 60661

    phone: (312) 846-4600

    Futures Circulation Offices

    P.O. Box 1144, Skokie, IL 60076

    Circulation Service

    phone: (847) 763-4945

    Calls accepted 8:00 am 4:30 pm CST

    e-mail: [email protected]

    THE ALPHA PAGES, LLC

    Chief Executive Officer

    Jeff Joseph

    e-mail: [email protected]

    President & Executive Editor

    Kristin Fox

    e-mail: [email protected]

    Chief Financial OfficerDavid Friedman

    e-mail: [email protected]

    WANT TO KNOW MORE?

    FEATURED WEB EXCLUSIVES

    futuresmag.com

    Take Your Trading to the Next Level

    Subscribe to our Daily Market Focus enewletter

    FREE and get invaluable inormation on where

    markets are headed and how you can positionyoursel to take advantage o upcoming market

    moves, every day, every weekend!

    Sign Up Today! FuturesMag.com/eNewsletters

    FLOORED

    Watch forthe official

    web pre-

    miere of

    Floored

    in early

    September.

    Released

    for the first

    time on the

    Internet,

    this directors cut version of the

    film follows floor traders as they

    were forced to adapt to the new

    world of electronic trading and

    how some tried to fight against

    that current of change.

    STAY CONNECTED TO

    LinkedIn:

    Futures Magazine

    Twitter:

    FuturesMagazine

    Facebook:

    Futures Magazine

    BOOK REVIEWS

    Leslie Masonsonreviews Trading

    Beyond the

    Matrix: The

    Red Pill for

    Traders and

    Investors by Van

    K. Tharp, and

    Billy Williams

    reviews The

    Art and Science

    of Technical

    Analysis: Market

    Structure,

    Price Action

    & Trading by

    Adam Grimes.

    SEE WHATS NEW AT

    futuresmag.comTODAY!

    BREAKING NEWS DAILY & WEEKLY STRATEGIES

    WEB EXCLUSIVES ECONOMIC RELEASES

    ARCHIVED ISSUES & ARTICLES

    TOOLS & RESOURCES

    AD INDEX

    6 FUTURES September 2013

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    Metamorphosis

    EDITOR'S NOTE

    8 FUTURES September 2013

    Futures (ISSN 0746-2468) is published monthly by The Alpha Pages LLC, 217 N. Jefferson, Chicago, IL 60661. Subscriber rates in the United States, are one year, $78; twoyears, $128. All other areas, $121 per year. International online version also available; call 847-763-4945 for details. All orders from outside the United States must be paid inU.S. dollars by international money order only. Single copies $6.95 in the United States, $8.95 in Canada. Periodical postage paid at Chicago, IL and additional mailing offices .Postmaster: Send address changes to Futures Magazine, P.O. Box 1144, Skokie, IL 60076. Allow four weeks completion of changes. CPC IPM Product Sales Agreement No. 1254545.Canadian Mail Distributor inormation: IBC/Canada Express, 7686 Kimble Street, Units 21 & 22, Mississauga, Ontario, Canada L5S1E9. Canadian Subscriptions: Canada Post Agreement Number 7178957. Sendchange address inormation and blocks o undeliverable copies to IBC, 7485 Bath Road, Mississauga, ON L4T 4C1, Canada. Printed in the USA. COPYRIGHT 2013 by The Alpha Pages LLC. All rights reserved. Nopart o this magazine may be reproduced in any orm without consent. CONTRIBUTORS: Return postage must accompany unsolicited manuscripts, photographs and drawings i return is desired. No responsibility is

    assumed or unsolicited material. Futures Magazine Inc. believes the inormation contained in articles appearing in FUTURES is reliable, and every eort is made to assure its accuracy, but the publisher disclaimsresponsibility or acts or opinions contained herein. MICROFILMS and MICROFICHE o all issues o FUTURES are available rom University Microilms Inc., 300 N. Zeeb Ave., Ann Arbor, MI 48106; Inormation AccessCo., 11 Davis Drive, Belmont, CA 94002. The ull text o FUTURES is available in the electronic versions o the Business Periodicals Index.

    CUSTOMER SERVICE CENTER

    Send your comments or questions to [email protected] [email protected] for a copy of our writers guidelines.

    Visit our website at futuresmag.com to order or change your subscription orcontact our subscription house at [email protected] or call (847) 763-4945

    Order 500 or more or e-prints through Pars International at (212) 221-9595 or [email protected]

    Want to sound off on a Futures article?Article submissions:

    Subscriptions:

    Reprints:

    O

    nce on a flight fromChicago to San Francisco,I (miraculously) was

    upgraded to business class andwas seated next to a very tall manwho was on the phone from thetime we entered the plane to take-

    off. Overhearing the conversation, I picked up some puts andcalls recommendations, which obviously piqued my interest.When we were in the air, I asked him if he was an options trader.He said he used options only to protect his portfolio, which hemanaged for a large East Coast firm.

    As we spoke, he said he had gone to the University of Illinois,where he had played football. It turned out he was the quar-terback and a stand out until sustaining a debilitating injury.He said during those dark days when he was reevaluating hislife goals, he had a real gut check. He eventually went on tobecome a doctor and then an asset manager, where he focusedon health/medical stock funds.

    Although Illinois friends were excited I met one of theirformer football stars, I was most impressed with his ability toreinvent himself successfully. Moving from athlete to doctor toasset manager is quite a curvy path, but he seemed to do it easily.

    I remembered this when reading our cover interview withBen Davies (see Ben Davies: Turning adversity into gold,by Associate Editor Michael McFarlin, page 14). Davies hadbeen on deck to go to the Atlanta summer Olympics to playfield hockey when he was sidetracked with a back injury, which

    basically ended that career. However, a chance meeting led toa stint at Man Financial, which was at that time a private com-modity group. Eventually he came to work for one of the topprimary dealers, Greenwich Capital, where he really cut his teethboth in trading and devising his worldview of free markets andthe importance of hard assets.

    Today Davies manages a multimillion dollar long-only goldfund for his firm, Hinde Capital. Granted, its been a tough yearfor gold, and yes, for Davies fund, but he says his fund has done

    better than gold. He also reminded us that the gold fund is onlyone part of a clients overall portfolio.

    Change is inevitable and often not easy. Moving from an old

    to new media platform has been long, tedious and sometimesexhilarating for us atFutures. However, seeing how the abovetraders/managers used their competitive skills and smarts tochange is a testimony to being agile and opportunistic in mar-kets and in careers.

    One of the sea changes for the futures industry was its moveoff the floor into electronic trading. It was long in comingand then seemed to happen overnight. In early September,FuturesMag.com will host the web premier of the movieFloored. Originally released in theaters in late 2009, thedirectors cut will be available for the first time on the Internet,and, for now, only at FuturesMag.com.

    The documentary shows how the waning days of the flooraffected many traders; some of them had made their moneyand left, while others planned to be the last man standing. Itspoignant, troubling and funny, but captures the trading indus-try and some of its players well and, of course, solidifies theincredible legend of the trading floor.

    Director James Allen Smith, like many successful traders, alsolearned to adapt to his environment. He started off as a painterbut became a web designer, which landed him a job with a for-mer trader who ran an upstairs business. Smith then became afilmmaker, something that never was in his original game plan,when he saw how life on the floor was changing and how manytraders werent adapting.

    No doubt the skills of the floor are different than the skillsneeded upstairs. But perhaps only the best traders are able toadapt to adversity, both in life and in trading. That shouldnt besurprising as volatility is the lifeblood of this business.

    E-mail me at [email protected]

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    1.800.264.8516 | TradeStation.com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    When the U.S. Federal Reserve embarkedupon the policy of asset purchases (knownas Quantitative Easing) in the wake of the

    2008 credit freeze, the goal was to stimulate the econ-omy by keeping longer term interest rates low. This isaccomplished by creating new money that increases thesupply available.

    If a strong economic recovery takes hold, this newmoney looks for a home and immediately can be soldinto other assets or investments. This would weaken thepurchasing power of the U.S. dollar (USD). Therefore,for the past five years, traders have grown accustomedto translating quantitative easing into representing aweaker USD.

    Beginning in May 2013, the Fed communicated morepurposefully to the markets the potential for taperingits purchases. The exact amount of the taper, alongwith when the initial taper might happen, hasnt beenannounced yet, but economists are forecasting it willoccur in September 2013.

    If the Fed follows through with this plan, there are severalreasons for future strength in the greenback. Some of the rea-sons are exclusive of one another, so dont look for all of themto occur. Rather, look for at least one of these reasons to fuela USD rally:

    t If USD weakens on increased money printing, then it makes

    sense for the opposite to occur, and we would see strength ofthe USD on reduced quantities of new money.t If tapering releases the headwinds and interest rates rise with-

    in the context of a stable U.S. economy, then capital may beattracted toward the U.S. currency.

    t If tapering increases rates, the higher rates may act like a taxon income and upset capital markets. Money then looks forsafety that is found in the USD.

    U.S. dollar bottom

    We will use the Dow Jones-FXCM Dollar Index (ticker:USDOLLAR) in our forecast, which reflects the change in valueof the U.S dollar measured against a basket of the most liquid

    currencies in the world. The index is built by equally weightingof the following currency pairs: EUR/USD, GBP/USD, USD/JPY and AUD/USD. Together, this basket typically accounts for80% of world-wide currency spot market activity and reflects adiverse economic and geopolitical make-up.

    Using technical analysis, we can see USDOLLAR has beenhitting a series of higher highs and higher lows. The U.S. dollaralready met the definition of an uptrend before the formalizedtaper plan was announced.

    In fact, the USDOLLAR carved out its bottom in August2011, nearly two years ago (see Taper talks, above). So notonly did the USDOLLAR uptrend begin before the taper

    plan was formalized, theuptrend began before theannouncements of QE3and QE4. [Note: The U.S. Dollar Index bottomed in 2009.]

    This is what we find most compelling because theUSDOLLAR was showing relative strength when it had everyreason to be weak. Think of it like pressing down on a spring.

    Once you remove your thumb, the spring explodes higher. Inthis example, the USDOLLAR is the spring and the Feds assetpurchases are the thumb. If the asset purchases get smaller, itwould be like taking your thumb off a compressed spring.

    How do you trade this?Naturally, we want to look for technical opportunities to buy

    the greenback. In forex, trades are made in pairs, so if we buythe USD, then we need to look for a weak currency to match itagainst simultaneously.

    If the taper results in increased interest rates in the UnitedStates and a stable environment, then look for other low yield-ing currencies to match it against. This way, you can earn a dailydividend by holding the trade open at 5 p.m. each business day.

    At of the time of this writing, the euro (EUR), Swiss franc(CHF) and Japanese yen (JPY) are the major currencies that youcan buy the USD against and earn a daily dividend.

    Therefore, enter trades toward USD strength by selling theEUR/USD pair or buying the USD/CHF and USD/JPY pairs.

    If the Fed taper results in increased interest rates but in a risk-offenvironment, then consider the USD against other higher yieldingcurrencies like the British pound (GBP) or Australian dollar (AUD).That would mean selling the GBP/USD or AUD/USD pairs.

    Jeremy is an active trader and head of DailyFX education of FXCM.

    He currently specializes in FX and writes education/analysis articles.

    Fed tapering and U.S. dollar potential

    BY JEREMY WAGNER

    FOREX TRADER

    10 FUTURES September 2013

    For daily forex updates:

    futuresmag.com/Forex

    TAPER TALKS

    Source: FXTrader

    0 6/18 09/19 12/23 07/01 10/02 04/1 2 07/14 10/15 04 /25 0 7/25 1 0/26 05/01 08/02 11/05 08/1 5

    12/11/2007 03/30/2009 01/07/2010 01/18/2011 01/27/2012 02/08/2013

    2009 2011 2013

    11,750

    11,500

    11,250

    11,000

    10,750

    10,500

    10,250

    10,000

    9,750

    9,500

    9,250

    QE

    QE2

    QE3

    QE4

    USDOLLAR Bottom August 1, 2011

    10,745

    04/19/2013

    The USDOLLAR uptrend began in August 2011.

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    Would you like to collect income regardless of the see-saws in the market? Heres how to use two comple-mentary strategies for collecting short-term income.

    The first thing thats needed is a low-dollar stock with optionsthat have high implied volatility. The higher implied volatilitymeans theres more premium to collect. For this example, takea look at the Yahoo (YHOO) price chart below. At the bottom ofthis chart you can see that the implied volatility is trading in themiddle of its one-year historical range. My rule on this is that ifthe volatility clearly isnt low, then its high. Thats the case here.

    The first strategy is selling a short-term ATM (at-the-money)put spread. With the stock trading at $27.25, and 10 days remain-ing until expiration, selling the 27 strike put for $0.33 providesthe credit. But well also buy to open the 24 strike put for threecents as protection in case the stock drops. The net credit for thespread is now $0.30 and has a maximum risk of $2.70. In thisinstance the net credit represents a potential 11% ROI in 10 days.

    If the stock remainssteady, or moves high-er, the put spread willdrop in value. By expiration, if the stock is higher than $27, thenboth puts should expire worthless and you would keep the fullcredit as the income.

    I said should expire worthless because even though the 27strike put option is out-of-the-money, the option holder still hasthe right to exercise it and might do so in certain circumstances.So best practices would dictate buying to close the option whenit drops to one to two cents. Some brokers offer no, or lower,commission costs to close short options below five cents.

    After buying the short option to close, its time to sell theATM put spread again for the next expiration. Depending onthe stock or ETF youve chosen, the next expiration could beanywhere from one week to one month away. Sell the ATM putoption to open, and buy a lower strike put, as a short verticalput spread. Which strike should you buy? Look for somethingcheap, five cents or less, just to hedge the downside risk.

    Repeat this trade every expiration until the day comes whenyou get assigned the stock. Its going to happen, so you needto be prepared to buy the stock. What do you do now? This is

    where the second strategy comes in: A collar.In a previous issue the use of a cashless collar was discussed,but the implementation of this collar differs. Instead of sell-ing an OTM (out-of-the-money) call as a way of paying for theprotective put, this strategy sells a call with the same strike asthe put on which you were just assigned. Lets assume the 27strike again for this example.

    For those who understand synthetics, youll see that owningthe stock from the assignment and selling the 27 strike callacts just like a short 27 strike put. By buying the OTM put forprotection, this position resembles the same short put spread.

    At expiration, if the stock remains below $27, you keep thecredit income from the call, and your long put protects the stock

    if the price continues to drop. If the stock moves above $27 atexpiration, then you sell the stock back at the same price youbought it, and you still keep the credit.

    As long as the implied volatility remains high, keep this tradegoing. When the implied volatility reverts back to the low end ofthe range, then its time to find another suitable candidate andstart the process again. Over time, taking in these short-term cred-its will start to add up regardless of which way the market moves.

    Greg Loehr is a former CBOE market maker trained by Susquehanna

    Intl. Group, and founder of education firm OptionsBuzz.com. He has

    written and presented extensively on options globally.

    IMPLIED VOLATILITY

    Feb Mar Apr May Jun July Aug

    Question: How can I derive income from cash on hand?

    Answer: Sell premium.

    BY GREG LOEHR

    OPTIONS STRATEGY

    For more options strategies:

    futuresmag.com/Options

    12 FUTURES September 2013

    YAHOO CHAINExp Strike Bid Ask

    $27.25

    Aug 13 23 0.01 0.02

    Aug 13 24 0.02 0.03

    Aug 13 25 0.03 0.05

    Aug 13 26 0.10 0.12

    Aug 13 27 0.33 0.34

    Aug 13 28 0.89 0.91

    Aug 13 29 1.73 1.76

    30

    29

    28

    27

    26

    25

    24

    23

    22

    21

    20

    0.4

    0.35

    0.3

    0.25

    0.2949

    27.2

    Source: Need source...

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    WHY YOU SHOULD

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    Our innovative, easy-to-use platform was also designed for futures traders.

    After all, we specialize in more than just options.

    Options and futures involve substantial risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options andRisk Disclosure Statement for Futures and Options, available by calling 1-888-280-8020, prior to opening an account. Multi-leg option strategies may also besubject to multiple commissions. Profits may be eroded by the commission expended to open and close the positions, and other risks apply. Online trading hasinherent risk due to system response and access times that may vary due to market conditions, system performance, volume and other factors. Website contentand tools are provided for educational and informational purposes only. Supporting documentation for any claims, comparisons, recommendations, statistics,or other technical data will be supplied upon request. optionsXpress, Inc. (Member SIPC) and Charles Schwab & Co., Inc. (Member SIPC) are separate but affiliatedcompanies and subsidiaries of The Charles Schwab Corporation. 2013 optionsXpress, Inc. All rights reserved. Member FINRA, SIPC, NFA.

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    DIGITAL EXCLUSIVE14 FUTURES September 2013

    G O L D

    FUTURES MAGAZINE: Ben, you went to school

    to be an athlete and came very close to com-

    peting in the Olympics. Can you tell us how you

    went from athlete to trader?

    BEN DAVIES: I was born in Cambridge and went tofirst school in Cambridge. That was a very academicschool. I think it is fair to say that I enjoyed the aca-demic rigor but my real passions [were] sports andpsychology. I came to appreciate academia years laterbecause of trading as I wanted to learn for learningssake, not because of the enforced nature of exams.

    So, I made the decision when I was 18 that Iwanted to follow my true passion, which at thetime was sports science. I focused on exercisephysiology, sports psychology and biomechan-ics. I became a sports science and finance studentat Loughborough University, which is very wellknown for its sporting programs. Early on, it wasreally psychology and sports that attracted me tocompetition and developing winning strategiesthat comes with that, which is very pertinent totrading today.

    At that time I was a field hockey player, and

    being a sports psychologist and going to collegethere, I was able to devote a lot of my time play-ing for Loughborough, Wales and Great Britain.

    As you said, I was on the Atlanta Olympics squad,but I had to pull out because of a serious backinjury early on. I will say that my passion hadprobably since passed, and if you are going to doanything well, then you need to be authentic andhave integrity, otherwise youre not going to giveyour best for it. It made me rethink my career,and I made that move from athlete to trader.

    It was a chance discussion that lead me to a fewdays work at Man Financial, which at the timewas a private commodity group, and Ive been bit-ten by the bug ever since. I think it was a manifes-tation of Could I do it? How would I have copedwith some of the famous crashes? I wasnt tradingin 1987, but how would I have adapted to it? Thatled me to make that shift. It was part forced, butpart that desire to pit myself against the market.

    FM: Where did you get your break into trading?

    BD: Its interesting having come from the back-

    It was a chance encounter after a back injury that turned Ben Davies attention from

    sports to the markets, but the same competitive spirit still drives him in advocating for

    monetary reforms. Cutting his trading teeth at Greenwich Capital, he saw firsthand

    the events and conditions that led to the 2008 financial crisis.

    Now having started his own firm, Hinde Capital, Davies is a champion for free markets

    and allowing them to [function] independent of central bank intervention, all while oper-

    ating a long-bias gold fund to protect investor purchasing power. We caught up with him

    to get his view on the gold market and the role of central banks.

    BEN DAVIES:

    Turning adversityinto gold

    INTERVIEWED BY MICHAEL MCFARLIN

    PHOTOGRAPHY BY JORDAN HOLLENDER

    Q & A

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    DIGITAL EXCLUSIVE

    Competition always has beena way of life for Ben Davies, only

    his opponents have changed. Now

    hes facing his biggest foe: Central

    banks and their fight for survival.

    futuresmag.com 15

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    DIGITAL EXCLUSIVE

    ground I had as an athlete just how many people wanted to hireme more for my sporting prowess than perhaps my academiccapabilities. Ultimately it was Greenwich Capital. That was mybreakthrough into trading markets at the macro fixed-incomelevel. I also was very fortunate to meet my now work partner,Mark Mahaffey, who co-founded the London office of GreenwichCapital. For people who dont know, Greenwich Capital was theNo. 1 primary dealer in U.S. government bonds, agencies andto some extent mortgages. [Mahaffey] was the chap who reallyinstilled in me the inquisitive nature you need to pursue the truth

    in developing your rigor and understanding of the markets.

    FM: What were some of the important trading lessons you

    learned throughout your time at Greenwich?

    BD: I started off as a market maker, and I think thats a greatplace for any young trader to start because you get an appre-ciation of risk. Often youre put into positions that are notconducive [to] a positive outcome, the risk/reward isnt nec-essarily conducive to a successful trade there and then. It wasvery much about mitigating loss rather than turning it intoprofit. The time horizons for a market maker are very differ-ent from [those of] a macro proprietary sort of longer-terminvestor where you can determine the timing of your trades,

    but nonetheless it gave me a huge appreciation for risk-taking.Trading for me ultimately is about having conviction andflexibility, which in many ways are at odds with each other. Ifyou allow your conviction to boil over too much, it can borderon hubris, but if your flexibility is too much that you cant riskat the first sign of trouble, then thats not successful either. A lotof the subjective and discretionary risk-taking that I first learnedat Greenwich Capital, and [from] my partner since, has beencodified in [the] systems, we use as our parameters to ensure wehave very good risk and dynamic money management.

    FM: You just mentioned Greenwichs position in the global

    securities market What did your time at

    Greenwich teach you about the global

    economy?

    BD: It gave us a very unique, inside track asto what one of the largest players in capitaland trade flows was doing, and that wasChina. In regard to the U.S., being the No.1 dealer in bonds, agencies and mortgages,I was able to see firsthand this buildup ofFX currency reserves, and see how theywere impacting and driving down long-end rates. By driving down long-end rates,the U.S. was supporting mortgages andconsumer credit, while at the same timecreating a dearth view for pension andendowment funds, the symptom of whichwas financial engineering.

    The sub-prime crisis really was a prod-uct of Bretton Woods II, which I refer toas a semi-fixed exchange rate where theU.S. is centric . In essence the Asian coun-

    tries are more or less pegging their currencies to the dollar with-out the backing of gold to maintain their relative competitiveability to sell things cheaply to the U.S. The defining natureof this whole international monetary system is financing theUnited States huge deficits, both fiscal and trade, and has donethose at low interest while allowing them to finance the exportboom of China. Really, its helped build up a huge amount ofcredit in the system. If we had been under a gold conversion orstandard, there would have been restraint on that build-up ofreserve currency, that would have been the natural equilibrating

    mechanism of the trade balance, but we havent had that. So,weve had this egregious proliferation of credit as a consequence.In many ways, this is what led us to setting up Hinde Gold

    Fund. It was our macro insight that led us to believe there isgoing to be an unraveling of the financial system or this creditbubble, and that the re-balancing of this vendor financingrelationship ultimately would lead to the collapse of the creditbubble and the recapitalization or monetization by the privatesector of gold. Thats what we are witnessing.

    FM: Was this view pervasive among other traders at Greenwich?

    BD: No, definitely not. Dont get me wrong, I do think therewas an inordinate [number] of people that understood there

    was something wrong with the financial system. All asset priceswere rising, and they hadnt necessarily put the macro picturetogether, which I felt that we had. And, certainly we had the con-

    viction to set up a business. We created a unique long-only man-aged gold fund that was backed primarily by allocated gold heldoutside the jurisdiction of the banking system, and it garnered alot of interest at the time. You have to remember that for CNBCand Bloomberg at the time, gold wasnt even a ticker on the TVscreen when we started, despite it being in a stealth bull marketprobably for about five years. Certainly the reaction from otherssuggested that this was a rather unique and insightful thoughtprocess, but I would say there were many who understood that

    16 FUTURES September 2013

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    DIGITAL EXCLUSIVE futuresmag.com 17

    Go tofuturesmag.com/davies

    for an unabridged version of this interview.

    something was fundamentally wrong.

    FM: Youve already mentioned that government securities

    are some of the largest and most-traded assets available;

    what made you go from trading bonds and securities to the

    comparatively much smaller gold market?

    BD: We perhaps were intellectually correct but commerciallynave. We thought that the boom of the gold market wouldcreate sponsorships of very big gold funds, and we wanted tobe part of that. But primarily, we wanted to protect investorsassets from what we saw as potential fallout from the finan-cial crisis, either from default risk or policy responses of cen-tral banks and governments, which would be to increase themoney supply to such a significant extent that they would tryand underpin the credit system. Thats what were continuing tosee today. That policy prescription probably is the definition ofinsanity; well keep repeating the same state over and over again.

    But it wasnt about moving from a big market to a small mar-ket. In fact, I would argue that we are in the process of witnessingthe great bond bubble, which is at the center of our financialsystem. You have to think about how fractional reserve bankingultimately is collateralized with sovereign debt. When you under-mine the credibility of sovereign debt by getting to a level wherethe country doesnt have the income to service its debt repay-ments, then you have to look to the growth of a new monetarysystem. I certainly think that gold is part of that new mechanism.

    FM: Obviously these views led to your forming Hinde Capital.

    Can you tell us a little about your fund?

    BD: We started Hinde Capital in 2007 and we set up a long-onlymanaged fund. It garnered enormous attention both from the

    media and from investors in our first few years, but ironicallythe 2008 crisis and forced deleveraging all the reasons whypeople should have gone into our fund suddenly meant thatit wasnt available to them because they were putting out fires.It was a very difficult couple of years.

    As people came to understand that gold is growing as an assetclass, we started getting a lot of interest from pension funds andsovereign wealth funds, and the firm grew in accordance. Despitethe recent correction in the gold market, the fund has returned morethan 40% [since inception] and weve outperformed our benchmarkgold price, perhaps not by as much as we had hoped because wehad an allocation to mining. Thankfully 18 months ago we had theforesight to reduce that almost to a zero holding because we saw a

    cost issue where, lets just say, the banking and mining industrieswere being disingenuous about what the true costs were. Our big-gest macro expression is a belief that the crisis is ongoing, and thedistortion in market rates is creating all sorts of opportunities andhence why a lot of our investors asked us to set up a global macrofund, which is what we are in the process of doing.

    FM: So your gold fund only trades in the gold markets?

    BD: We trade allocated precious metals gold and silver pri-marily and we can choose to have up to 20% in the miningsector as well.

    FM: You recently made some astute calls in the silver market,

    predicting both the markets takeoff and subsequent decline.

    Whats your trading methodology?

    BD: Its interesting you should mention those; when youre ableto make those sort of accurate calls, it does tend to put you onthe map. It was more important for us actually to create a returnout of both of those situations, rather than just be a mouthpiecefor what was happening. Thankfully we were able to achieve thatwith a very good risk vs. reward setup.

    We center everything around macro analysis, all in conjunc-tion with understanding the market dynamics. It doesnt matterwhat our macro conclusions are on a potential trajectory of aneconomy or marketplace, we have to wait for a signal genera-tion of whether to deploy risk in that asset class. As you know, ifthe marketplace isnt in a dynamic state to facilitate your view,you end up losing a huge amount of capital in terms of timepremium, opportunity costs and mental capital associated withthat. We always feel we need to know what phase the market isin is it trend ready, exhausted or in homeostasis?

    All of this is assessed within the bigger picture of BretonWoods II, which is a highly imbalanced currency system.It drives imbalances right across the global economy, and itimpacts right down to the micro level, like the silver market.Take the vendor financing relationship under Breton WoodsII, which financed the U.S. housing boom, and because thatarbitrage of interest rates was the same across Europe, it waswhy we had a housing boom there. So we like to look at andexamine supply and demand imbalances both at the macroand micro level. That can be a trade in capital accounts or allthe way down to these inconsistencies that we refer to in silverwhere there seems to be a huge imbalance, and definitely in

    my mind proves the efficiency of markets under [the efficientmarket hypothesis] (EMH) is a complete fallacy. Its fair to saythat is a disproven theory. We tend as a firm to observe moreheterodox economic theories, highly polarizing doctrines thatare in development of each other. In many ways its distastefuland perhaps born out of egotistical posturing, but we can learna lot [from] other economic theories.

    When we go through the macro observations, there are prem-ises that business cycles are propagated by excessive growth inbanking credits, vis--vis fractional reserve banking. This obvi-ously is being encouraged by central bank interest rates remainingbelow the natural rate of interest, i.e., this is where individualswould truly lend or borrow based on consumer or temporal pref-

    erences. It is this monetary intervention in the market that hascreated a distorted signal of demand, and has led to the misalloca-tion of capital in various sectors like precious metals. The factsdont support or match consumer preferences. What people seeas a rising price and think is rising demand in fact is an inflationdynamic of that business cycle or that industry.

    FM: So how do you model this in your trading?

    BD: When it comes to modeling, we look at the macro side, asIve alluded to, from the concept that the business cycle is thecredit cycle. In terms of the market dynamics, Albert Einsteinused to say a theory is more impressive the simpler its premises,

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    Q & A ontinued

    so my mantra is keep it simple, stupid or KISS. So, we distill everycomplex notion down into its component parts, ask the obviousquestions and build a hypothesis from there. For me, markets arelike nature they definitely are a complex system, which exhibitscomplex organizational behavior and similar dynamics to nature.

    You end up with ruptures brought about by plate tectonic shiftsand earthquakes; its the same principle when you see volatilecracks appearing in markets before a crash. Yet, systems are veryholistic. You have these observations where you can see stressesas the precursors for a rupture or movement in the market.

    The way theory is today and the way people model todayis based on trying to find order and equilibrium, which is an

    innate desire within people. One area that we use particularlyis fractal analysis and market behavior, i.e., that which has dis-credited EMH and the random walk concept. All these partici-pants are solving for the wrong question. Trying to understandwhy we are here why were on this planet or why the marketis where it is is an insolvable question. Markets for me arejust a function of life. It comprises decision-making by myriadpeople; its a combination of interactions and reflects as eitherrational or irrational in the eye of the beholder. So any crowdmaintaining order is extremely difficult.

    So, what we do is look to the market to tell us the state, ratherthan comprehend all the reasons it is in that state. We donttry and assign cause; we ignore our innate desire for order. We

    tend to look at the market in a more three-dimensional way. Forus, markets look the same on every time or scale. Most peoplelook just at price and time; we tend to look at four-dimensionalcomponents. We want to look at the phase changes that occurbefore a change in the state of the market.

    FM: Speaking of market states, the bear market in gold that

    began after the 1980 peak lasted for about 20 years. Where

    do you see us in the lifespan of the current gold bull market?

    BD:Were more interested in what the present state and dynamicof the market is. Certainly the four-dimensional components ofthe market that led to the down trade showed a scaled invari-

    ance to different time scales. The marketwas exhibiting some stress. Looking at par-ticipants in the market, there were somethat had been in the market for a longtime, and ultimately the market was trend-ing and was ready to make a move in oneway or another. In this case, stale longs orwhatever the trigger we can debate, but themarket had to release lower. I personallybelieve markets move from fair value, andthat isnt a mathematical value based onintrinsic values of cash flow, but is basedon supply and demand of participants inthe market having satisfied the conditionsfor exchange until such time as the marketbecomes out of balance with one or moreof those economic agents perceiving thateconomic value needs to be higher or lower.Then the market will start to trend. Now,when I talk about the market trending

    here, it was in regard to a short-term trend that was correctivein nature to the primary trend, which is still higher. This is avery healthy correction, and the market on our models has nowreached trend exhaustion, it has exhibited all of those signs.

    When we talk about the gold market, its actually two markets a physical market and a paper market. There is no doubt thatthere is a fractional reserve banking-esque element to the goldmarket whereby for every ounce that is traded, many multiplesof that are leased out or traded in some OTC construct. Thatleads to an unfair amount of potential supply at some pointson the marketplace that is not reflective necessarily of funda-

    mentals. Right now, weve satisfied the conditions of the shortsellers, and if anything the long-term holders in the market areextracting new value. As you can see, the market has started torebound and probably will find itself at a new trading rangein the next six months at around $1,400 to $1,600 [an ounce].

    FM: Youve already talked about some of the factors that

    are really affecting gold, but do you see traditional supply

    and demand factors at play or is gold being moved by larger

    geopolitical concerns?

    BD: Ben Bernanke pays very little lip-service to gold, he almostdoesnt mention the word at any point in any of his directivesor speeches. Its almost as if [it would] give some acknowledge-

    ment to an alternative currency, which lets face it, it potentiallyis. [Gold] was once money, and it could be again. It could be away of recollatoralizing the system either through a governmentgold standard or through the private sector creating some kindof payment system that uses gold as a backing for transactions,and perhaps in some countries, like the East, using it to exchangetheir U.S. dollar holdings. That definitely is the dynamic in play.China and the rest of the BRICS probably couldnt believe theirluck when they were able to purchase gold at these levels for someof the U.S. Treasuries and agencies that they already owned. So,yes, its part of a bigger dynamic indeed.Q & A: Ben Davies continued on page 45

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    20 FUTURES September 2013

    F O R E I G N E X C H A N G E

    Since Federal Reserve BoardChairman Ben Bernanke firsthinted back in May that the Fed

    at some point would reduce the amountof monthly bond purchases (QE3), talkof a taper and its effect has dominated

    all market sectors. Currencies are no dif-ferent. But the one constant in financialmarkets over recent years is a gnawinguncertainty. The economy has experi-enced slow, tepid growth and, just as therecovery looks to gain steam, there is adownturn. All Fed action is data-depen-dent and the data is screaming, ugh!Things are better but we arent out of thewoods yet.

    A consensus was building that the Fedwould begin tapering at this SeptembersFOMC meeting, which would be U.S. dol-lar positive, but weaker jobs growth in the

    July employment report may have pushedit back to the 50/50 range.

    The entire tapering debate is thebiggest catalyst for the dollar at themoment, says Andrew Wilkinson, chiefeconomic strategist for Miller Tabak &Co. LLC.

    George Dowd, head of Chicago for-eign exchange for Newedge, sees taperingoccurring earlier than consensus based onbetter employment numbers (we spokebefore the July report came out; one moreemployment report will come out before

    the Fed meets next). Dowd expects a taperin September and thinks it may be moresubstantial than expectations.

    You have to look at where they are goingto go with the purchases as well, he says.Currently they are purchasing $45 billionin Treasuries and $40 billion in [mortgage-backed securities]. The market consensusfor the September meeting is they go 35and 30; I think they can go 30 and 30.

    While the taper is generally bullishthe dollar, Wilkinson believes like theinitial reaction to taper talk the dollar

    rally may have gotten ahead of itself.What changed in [July] is that themarket has dealt with the distinctionbetween tapering and raising interestrates. It shouldnt be confusing. Priceaction tends to mislead investors andthat is exactly what happened. Risingbond yields immediately impacted thestock market and the logical conclusionwas that the Fed is tightening, and thatwasnt the case, Wilkinson says. Whathas transpired over the early part of the

    summer is that the dollar is not set tobenefit any time soon from rising yielddifferentials on account of official inter-

    est rate rises, so as the market discountsthat, investors appetite for dollarsbecome less.

    Sharpe + Signa Managing DirectorGaren Ovsepyan agrees. Fed tapering isdollar-positive in terms of market senti-ment; however, as far as money marketsare concerned, tapering is not necessarilya hike in rates, he says

    Ovsepyan points out that the dollarconsistently has failed to take out signifi-cant technical resistance at 83.50. If theDollar Index trades convincingly above

    83.50 at least on a weekly basis, we adjustour view from bearish to neutral or pos-sibly mildly bullish.

    Dowd, however, sees the dollars slide inJuly as an opportunity. It has had a nicelittle retracement down from where it hadbeen; you cleaned out a lot of weak longs,he says. The fundamental focus goinginto year end is going to be dollar-bullish; Iam expecting new highs in the dollar indexgoing into year end. You will see the dollartrading up around 85.50-86.00.

    For forex updates,go tofuturesmag.com/Forex

    recovery looks to gain steam, there is adownturn. All Fed action is data-depen-dent and the data is screaming, ugh!Things are better but we arent out of thewoods yet.

    A consensus was building that the Fedwould begin tapering at this SeptembersFOMC meeting, which would be U.S. dollar positive, but weaker jobs growth in the

    July employment report may have pushed

    Currently thin Treasuriesbacked securifor the Septeand 30; I thin

    While thethe dollar, Winitial reactio

    rally may havWhat chmarket hasbetween taprates. It shoaction tends

    The taper debate

    Carry trade divergence

    The U.S. Federal Reserve appears ready to begin tapering just as other central

    banks may be adding to their balance sheets. What will this mean for the global

    forex market? And remember, this is all data-dependent.

    MARKETS

    Dollar days coming

    as Fed prepares exitBY DANIEL P. COLLINS

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    futuresmag.com 21

    Jason Rotman, president of Lido IsleAdvisors, says the data needs to justify dol-lar confidence. A lot of people are lookingfor the U.S. dollar to start to go up againand break this years high of about 85,but it is not doing that, it is not comingclose, Rotman says. For the U.S. dollarto continue its 2013 bull trend, it will needseveral months of phenomenal nonfarmpayroll growth and even start to see thecore [Consumer Price Index] numbers[come in] consistently above expectationsbecause the Fed does not want to crashthis market with a premature statementof stimulus reduction.

    FXCM Chief Currency Strategist JohnKicklighter sums up the divergence ofopinion on the dollar: For the remainderof the year, one of the takeaways is that itis going to be extremely volatile.

    He adds, It is a game of competitivestimulus. It is going to have an impacton the dollar. If we see the taper occurin September, it is the thing that couldcause the dollar to continue higher.

    One reason why Kicklighter is expect-ing greater volatility is the divergencebetween the S&Ps and the carry trade.You have a strong correlation betweenthe S&P 500 and the carry trade index(see Volatility watch, right). Just over

    the past three or four months you haveseen a very substantial divergence in theirperformance, Kicklighter says. This isone of those early warning signs that youget when the markets [dont assume] thatthere is going to be very low volatility. Idont think there has been a carry tradebecause of these concerns. The carrytrade has a lot more room to unwind,especially if things get dicey.

    Another divergence Kicklighter pointsout is the dollar is a safe haven. Whilethat always will be the case, he points

    out that its correlation with the S&P hasbuilt in 2013 despite a strong equity rallywith low volatility (see Safe haven or riskasset? right).

    He says the dollar will get to 90 by yearend but not go beyond it. To make thetransition, you have to have extreme riskaversion and the dollar is already essen-tially at a three-year high so a lot of thetaper concern has been priced in. but Idont think you will get beyond 90 untilyou have the conversation that you are

    moving beyond stimulus.And therein lies the rub because as

    the U.S. central bank is debating whento take money out, others are looking to

    add more stimulus.You are talking about the Fed at the

    crest of its stimulus program while theBank of Japan just recently hit the accel-

    The S&P 500 usually is highly correlated to the carry trade. You can see the divergence

    between the Deutche Bank Carry Trade Harvest index vs. the S&P 500. Each represents

    a buy and hold philosophy, and they tend to be highly correlated.

    VOLATILITY WATCH

    Source: FXCM

    1800

    1600

    1400

    1200

    1000

    800

    600

    330

    310

    290

    270

    250

    230

    210

    190

    Carry trade market and yield value

    S&P 500

    DB Carry Trade Index

    7/1/2003

    7/1/2004

    7/1/2005

    7/1/2006

    7/1/2007

    7/1/2008

    7/1/2009

    7/1/2010

    7/1/2011

    7/1/2012

    7/1/2013

    Kicklighter says the risk-on/risk-off trade pattern has changed because historically we

    expect the safe haven to be on the opposite side of the spectrum of the investment

    benchmark. Here we see (in 2013) a high correlation despite subdued volatility as

    measured by the VIX.

    SAFE HAVEN OR RISK ASSET?

    Source: FXCM

    90.0

    80.0

    70.0

    60.0

    50.0

    40.0

    30.0

    20.0

    10.0

    0.0

    -1.0

    -0.8

    -0.6

    -0.4

    -0.2

    0.0

    0.2

    0.4

    0.6

    0.8

    1.0

    Correlation - Safe haven dollar and high return S&P 500

    VIX

    SPX -USD Correlation (60-Day, Inverse)

    1/2/2003

    1/2/2004

    1/2/2005

    1/2/2006

    1/2/2007

    1/2/2008

    1/2/2009

    1/2/2010

    1/2/2011

    1/2/2012

    1/2/2013

    S&P500

    VIX

    DB

    CarryTrade

    Index

    SPX-USDCorrelation

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    22 FUTURES September 2013

    erator, so they are at different phases oftheir programs, Kicklighter says.

    And it is not just the yen. New Bank ofEngland Governor Mark Carney is makingnoise that the BOE will add stimulus soon,as is likely with the European Central Bank

    (ECB) and the Reserve Bank of Australia.

    Euro conundrum

    The euro is in a curious place becauseon the one hand monetary policy looksset to ease in the Eurozone even as theeconomy improves, and as the economycontinues its improvement more peopleappear to be buying the euro, which ineffect is creating tighter monetary con-ditions, Wilkinson says. That in itselfargues for further easing from the ECB.

    Dowd says, I dont think the ECB is

    opposed to having the euro weaker. So ifthe dollar gets strong, the first step on thedownside [for the euro] after you get pastthe 1.2740 [2013 low] is 1.25. Germanyis the big question. It is really how muchGermany wants to continue to carry someof these peripheral countries.

    But the euro has shown resilience in2013 and may be in in a good spot wheregrowth is beginning to pick up, but notso much as to prevent further stimulus.

    The euro is really the weakest link,

    though one of those things that hashelped it is the fact that it is always introuble: Greece, Ireland and rest of the[peripherals], Kicklighter says. The eurois going to be interesting because it reallydepends on how robust risk trends are

    going to get. You probably will be downto 1.25 by end of year. The [British]pound will drop back to 1.48.

    The euro has been extremely strong,Rotman says. It has been in a rangefrom 1.27-1.34 throughout the summer.Now we are getting pretty positive eco-nomic confidence data coming out of theEurozone and Germany. Even though theEuropean officials have said that the jobgrowth is horrendous, you really couldnot tell that by looking at the euro. It isat 1.33 and approaching the range high

    of 1.34. Any time it has gotten to the bot-tom part of the range we have found sig-nificant buying. I could see 1.36.

    Wilkinson sees this, but says, My out-look for the euro is to fight the trend. Thetrend is very clearly upward and that istripping a lot of people up. Most peopleare not looking for monetary tightening,with many looking for easing. I dontthink improving growth prospects is asufficient factor to drive the currencyhigher at this point.

    Dowd also is skeptical of euro strength.The euro has some structural issues; we canget down to 1.2450-1.2500 before year end.

    Ovsepyan splits the difference, expectingthe euro to settle near 1.3000 by year end.

    So there you have it analysts are split

    between the euro making either a yearlylow or yearly high as 2013 comes to a close.

    Manipulation

    In our April currency outlook, we men-tioned there was some fear of a currencywar based on a statement from the Groupof 20 at its Moscow Summit expressingconcern over the level of central bankmachinations and a chance some coun-tries might be labeled currency manipu-lators. That seems to have calmed downand most view the various central banks assimply doing what they can on the mon-etary side to support their economies.

    Japan has been the [closest] exampleof manipulation that you are going toget, Kicklighter says. They dont labelthem a currency manipulator because ifyou label Japan a manipulator, then youwould have to label China a currencymanipulator and then you would haveto say the U.S. is a currency manipulatorbecause we moved our stimulus programto exceptional levels.

    He adds, The appropriate term iscompetitive stimulus gain. You haveto measure what their objectives are,they have to prove that you are trying tomanipulate the exchange rate simply forthe exchange rate sake rather than pro-moting domestic growth.

    Rotman says active central banks are apart of life today. That issue is so wide-spread and commonplace in todayscentral-bank-dominated currency mar-ketplace. Central banks overtly affect thecurrency markets on a daily basis. That is

    the reason the Aussie dollar went belowthe 90 level [at the end of July].Dowd sees the move down in July in

    the yen as more corrective. [The yen] isgoing to move up to 105. By year end theyen will be around 105-110.

    Dowd has the consensus opinion butthe yen has improved against the dollardespite the interventions of Abenomicsto weaken the currency based on JapanesePrime Minister Shinzo Abes policies.

    We are going to have a pullback in

    MARKETScontinued

    Whether you blame China or the Aussie central bank, correlation among commodity

    currencies has split.

    NO LONGER BEST BUDDIES

    Source: eSignal

    1.07000

    1.06500

    1.06000

    1.05500

    1.05000

    1.04500

    1.04000

    1.03500

    1.03000

    1.02500

    1.02000

    1.01500

    1.01000

    1.00500

    1.00000

    0.99500

    0.99000

    0.98500

    0.98000

    2013 16 Feb Mar Apr 16 May 16 Jun Jul 16 Aug

    1.08000

    1.07000

    1.06000

    1.05000

    1.04000

    1.03000

    1.02000

    1.01000

    1.00000

    0.99000

    0.98000

    0.97000

    0.96000

    0.95000

    0.94000

    0.93000

    0.92000

    0.91000

    0.90000

    0.89000

    0.88000

    AUD/USD Spot Forex (Daily)

    CAD/USD Spot Forex (Daily)

    0.90060

    1.04110

  • 7/29/2019 Futures Sept magazine

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    futuresmag.com 23

    the yen for the next month and a halfbut eventually end the year at 105,Kicklighter says.

    The pace of yen weakening hasstalled with the yen trading below 100,Wilkinson adds. I believe it is a cor-rection; ultimately the yen will tradebetween 104 and 110, whether that isbefore the end of the year I am not sure.

    Rotman pegs 105 in the yen by yearend. Ovsepyan is the outlier, pegging 98in the yen.

    Aussie

    A permanent concern in all markets andmarket sectors is China, and slow growthin China has been blamed for the extremeweakness in the Aussie dollar.

    I have been of the opinion that theChinese economy is slowing because ofwhat happened in the Eurozone. Yes, thereis some domestic slowdown in China butit appears the Chinese authorities will stepin to support growth even if it is slipping

    to a historically low level, Wilkinson says.Dowd says, Australia is going to be

    dependent on how things go in China butwhen you look at that chart it looks a littleoversold right here. If we can trade above95, the market gets back on a flat position.

    Wilkinson points out that China hasemerged and may see lower GDP num-bers as a result. As the Eurozone newsbecomes less bad, you will definitely see apick-up in Chinese activity. Whether thatis sufficiently strong to drive a rally in theAussie dollar is [debatable].

    Also debatable is whether weakness inthe Aussie dollar can be blamed on Chinaor if the reason is closer to home.

    Rotman says central bank statements,not Chinese weakness, is the reason forthe fall. It is because Australian centralbank chief Glenn Stevens blatantly saidwe still think our currency is too high.You cant get much more obvious thanthat. As soon as he said that the Aussiewent from 91 to 89.

    Whether you blame it on China orStevens, it has caused a split in the oncedependable correlation in the commod-ity currencies (see No longer best bud-dies, left).

    Wildcards

    Opinions are varied, and of course data-dependent. The one wildcard mentionedby most analysts is a significant change inthe expectations of a tapering, but moreimportantly the fundamental reasons forsuch a change. Dowd sums it up, The realwildcard would be if the [United States]turns down again. If we saw a real dete-rioration in the employment numbers orthe housing market in the [United States],that would be a game changer.

    The U.S. dollar appears strong becausethe U.S. economy is preparing to beginweaning itself from extraordinary accom-modation while the rest of the world is atthe trough. If the numbers dont justifyit, things could change.

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    YEAH... ITS THATDAMN OBVIOUS.

    Vs

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    op6rig%t 2t2res. . i3erside )a7at%oor%iago.

    %e ris( o# )oss in trading o**odit6#2t2res and options is s2stantia). e#ore trading6o2 s%o2)d are#2))6onsider 6o2r nania) position to deter*ine i##2t2res

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    Markets often experience long,smooth upward pushespunctuated by violent pull-

    backs, brought about by some fun-damental event. This isnt surprising,especially when we delve deeper into

    market dynamics.Market studies have shown that theseriousness of market metamorpho-sis could be decided by the buying andselling pressure. During a serious pricemovement, pressure gains momentum.Intensifying moves in an equilibrium ter-ritory may portend an exponential risein price pressure. Moves that become lessintensified may forecast a counter-trendrise in pressure.

    Expanding pressure brings with it amore colossal directional move, but youshould not overlook the seemingly refrac-tory nature of the financial markets. Themost crucial issue is that it is not just thepressure itself. With any given marketmove, dont assume there is a bear forevery bull; therefore, market pressure isineffectual. If this were true, the marketswould be caught in never-ending consoli-

    dation. Fear and greed of bulls and bearspropels the markets.

    Transaction pressure and marketmovements reveal price dynamics.Consider buying/selling pressure asa lopsided attempt, while the market

    action is the aftermath. If bears areinclined to close orders at all costs, theremight be a propensity to do so at the bidrather than the offer. If purchasing needis scantily situated beneath the price,then the markets would be propelledtoward the downside until bears get sat-isfied. Alternatively, if bulls are inclinedto act, they may purchase the offer andnot sit on the bid. If there is not muchresistance, the market may move higheruntil the bulls are satisfied.

    We can capture the tendency of the

    market to swing from one short-termextreme to the other with a technical-based trading strategy that brings withit the added benefit of simplicity.

    Swing strategy

    The 48-hour movement system uses asimple moving average (SMA) and therelative strength index (RSI), both ona 20-period basis. It is most effectivetrading currency pairs and crossrates(for example, EUR/JPY, AUD/JPY, EUR/

    USD, AUD/USD, EUR/NZD, EUR/CAD, GBP/USD, GBP,CHF). It trades onhourly charts. The rules are simple: Go

    long when the price is above the SMAand the RSI is above 60. Go short whenprice is below the SMA and the RSI isbelow 40.

    The trade triggers are just part of theplan, however. Just as important are posi-tion sizing and risk-control guidelines.Maintain a stop loss 90 pips from theentry price. Take profits 180 pips fromthe entry price. Move the stop loss tobreakeven once prices moves 50 pips inyour favor. As for size, smaller positionsare auspicious. Trade $2,000 lots.

    Finally, if the stop loss or the profittarget arent hit within 48 hourly bars,exit the position.

    Trade examples

    In the charts showing the trade exam-ples, the vertical red line on the rightshows where a position was opened. Thevertical red line on the left shows whereit was exited.

    On June 8, the major trend on theEUR/NZD was bearish (see Swinging

    Trading success is rooted in the consistent application of proven techniques.

    For most traders, that starts with the right strategy. Heres one swing-trading

    method that works.

    The 48-hour movement strategy

    BY AZEEZ MUSTAPHA

    EQUITY TRADING TECHNIQUES

    F O R E X

    26 FUTURES September 2013

    A short-term swing trading strategy

    Using technical tools for swing trades

    Finding opportunities in forex markets

    For more from Azeez, go to

    futuresmag.com/Mustapha

  • 7/29/2019 Futures Sept magazine

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    low, top right). The entry criteria weremet, and a short position was opened.There were minor pullbacks and a gapduring the course of this trade (whichcould test our emotions), but stickingto our exit rules paid off. We enteredthe trade at 1.6280, with a stop loss at1.6370 and a profit target at 1.610. On

    June 12, our profit target was hit for 180pips of profit.

    On March 13, a bullish signal wasgenerated in the GBP/CHF (see Swissopportunity, center right). This crossexperienced some prior consolidation,especially a few days before this par-ticular signal. This trading method canbe used to avoid a range-bound marketin that the RSI would neither be abovethe level 60, nor be below the level 40when there is consolidation. This tradealso worked well. We entered the tradeat 1.4400, with a stop loss at 1.4310 anda profit target of 1.4580. The target washit the following trading day for themaximum profit.

    In Breaking even (below right), wecan see our risk control at work. Theshort trade in the AUD/USD initiallywent our way but then it failed to reachits target. Luckily, it has moved farenough into profitable territory (50 pips)

    that we had moved our stop to breakev-en. Analytically speaking, the price hita major demand zone and shot higher.Our entry price was 0.9682 on June 1with an initial stop loss of 0.9772 and aprofit target of 0.9502. The stop, whichwe later moved to breakeven, was hitthe same day.

    Over time, this trading strategy works.As with all systems, though, its impera-tive to follow the rules and to alwaystrade small so you can stay in the game.If the system doesnt work for you, either

    because of your risk tolerance or yourtime frame, then move on, but dontmodify the system or ignore trades. Thetrade you skip may be the one that putsyou in the black. Above all, however, dontstop learning. Commit yourself to ongo-ing education and explore new opportu-nities with discipline and restraint.

    Azeez Mustapha is a professional forex trad-

    er, forex signal strategist, fund manager,

    researcher and coach.

    futuresmag.com 27

    During this short trade, there were some market developments that tested our

    discipline. As we can see, sticking with the rules paid off.

    Following an extended period of consolidation, this trade shot higher shortly after our

    criteria were met, making for quick profits and a great trade.

    Not all trades make money, of course. Thankfully, though, this one at least didnt lose

    money. Before the market moved against us, we had followed our rules and adjusted

    our stop loss to breakeven.

    SWINGING LOW

    SWISS OPPORTUNITY

    BREAKING EVEN

    Source: MetaQuotes Software Corp.

    Source: MetaQuotes Software Corp.

    Source: MetaQuotes Software Corp.

    1.6530

    1.6485

    1.6440

    1.6395

    1.6350

    1.6305

    1.6260

    1.6215

    1.6170

    1.6125

    1.6080

    1.6035

    1.4635

    1.4605

    1.4575

    1.4545

    1.4515

    1.4485

    1.4455

    1.4425

    1.4395

    1.4365

    1.4335

    1.4305

    0.9905

    0.9875

    0.9845

    0.9815

    0.9785

    0.9755

    0.9725

    0.9695

    0.9665

    0.9635

    0.9605

    0.9575

    100

    0

    100

    0

    100

    0

    Downtrend: A bearish signal

    A bullish signal

    An aborted trade

    2012

    2012

    2012

    6 Jun 7 Jun 8 Jun 11 Jun 12 Jun 13 Jun

    8 Mar 9 Mar 12 Mar 13 Mar 14 Mar 15 Mar

    29 May 30 May 31 May

    06:00 14:00 22:00 06:00 14:00 22:00 06:00 14:00 22:00 07:00 15:00 23:00 07:00 15:00 23:00 07:00 15:00 23:00

    02:00 10:00 18:00 02:00 10:00 18:00 03:00 11:00 19:00 03:00 11:00 19:00 03:00 11:00 19:00 03:00 11:00 19:00

    07:00 15:00 23:00 07:00 15:00 23:00 07:00 15:00 23:00 00:00 08:00 16:00 00:00 08:00 16:00 00:00

    1.6145

    2012.06.08 16:00

    2012.03.13 12:00

    2012.06.01 03:00

    2012.06.12 16:00

    2012.03.14 16:00

    2012.06.01 15:00

    60

    60

    60

    40

    40

    40

    4 Jun 5 Jun 6 Jun

  • 7/29/2019 Futures Sept magazine

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    The relatively smooth price trendsfor gold, silver and copperfutures that were in place when

    2013 began were interrupted by roughwaters in mid-February. As you can seein Futures price changes (right), values

    fell abruptly in the middle of April. Themetals showed signs of modest recoveryby the end of the month, but that processhas been slow to develop.

    Metals exchange-traded notes (ETN)followed much the same course as thefutures contracts through the first fourmonths of 2013. Metals ETNs veer fromfutures (far right) shows that although

    the overall patterns of price changes aresimilar, there are significant differencesbetween the ETN and futures markets.

    For example, the cumulative percentageprice change for the silver ETN (USLV) fellto negative 95% on April 16 as opposed tothe cumulative change of 30% for May2013 silver futures. This difference is notsurprising for an ETN that has the objec-tive of providing three times the daily per-formance of the S&P GSCI silver index,plus a daily accrual of three-month U.S.

    Treasury rates (less the daily investor fee).In other words, leverage may be sought forprice gains or losses, and it is obvious thatthe leverage is working as intended.

    The gold ETN (UGOLD) also is lev-eraged, and has the goal of producingthree times the S&P GSCI gold index.At the end of trading on April 16, 2013,the cumulative percentage price changefor June 2013 gold futures was downby 19% compared to 68% for the gold

    ETN, again demonstrating the power ofleverage.

    Copper futures and the contractscomparable ETN do not show the sameresults as gold and silver. The operativecopper ETN is iPath DJ-UBS CopperTR Sub-Idx. The note has the objectiveof reflecting the performance of copper

    The metals markets have experienced a big trend shift this year. Heres how the

    relationships among different contracts are evolving.

    Leveraging futures vs. ETN

    differentialsBY PAUL D. CRETIEN

    TRADING TECHNIQUES

    G O L D & S I L V E R

    28 FUTURES September 2013

    The metals market underwent a major shift this spring, when prices fell off the

    proverbial cliff.

    FUTURES PRICE CHANGES

    Source: Barchart.com

    Precious vs. industrial

    Breaking down the metals markets

    How metals relate in the new economy

    For more from Paul, go to

    futuresmag.com/Cretien

    10%

    5%

    0%

    -5%

    -10%

    -15%

    -20%

    -25%

    -30%

    -35%

    Jan

    3

    Jan

    8

    Jan

    11

    Jan

    16

    Jan

    22

    Jan

    25

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    30

    Fe

    b4

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    1

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    Cumulative percentage price changes(Gold, May silver and copper futures)

    Gold Silver Copper

  • 7/29/2019 Futures Sept magazine

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    futures contracts traded on the CMEsComex and is not leveraged. While theMay 2013 copper futures fell to a 14.30%cumulative change on April 16, the cop-per ETN had declined by 14.96%.

    For a trader interested in gaining fromleverage and willing to accept the risk,silver futures and silver ETNs are primealternatives.

    Leveraged opportunities

    Metals call options (right) shows Juneand December delivery dates for silver,gold and copper futures on April 16, 2013.The three higher price curves for December(square symbol) have silver above copperand gold because of silvers acceptance bythe options market as the most volatileand, thus, the most valuable option ofthe three calls having the same expirationdate. For June calls (triangle symbol), silveris still the highest curve, reflecting its supe-rior volatility. While copper has given upits position relative to gold, the two pricecurves are almost equal.

    Heights of options price curves, asmeasured by the ratio of the call value atthe point where the futures price is equalto the strike price, indicate the optionsmarkets assessment of relative (implied)volatility for each futures contract. For

    the calls on silver, gold and copper, thecurve heights for the December expira-tion are 8.77%, 6.34% and 7.18%. For Junefutures, they are 5.19%, 3.76% and 3.12%.

    The call price curve heights are deter-mined by the spread between upperand lower breakeven prices (at which aneutral delta spread will return neitherprofit nor loss at expiration). Accordingto the options markets forecast on April16, 2013, December breakeven prices forsilver, gold and copper are $29.64-$20.61,$1,657.28-$1,257.62, and $3.88-$2.91,

    respectively. These price ranges comparewith the December futures prices onApril 16: silver, $23.665; gold, $1,378.40;and copper, $3.34. As always, the optionsmarket does not forecast a direction ofprice change. It only cares about volatil-ity and time to expiration in determiningcall and put prices.

    Descriptions of the gold and silverETNs indicate that they are an easily trad-ed pair, priced as exchange-traded securi-ties not too far apart in dollars and cents.

    After slowly gaining with respect tosilver over the first three months of2013, UGLD plunged by $13.03 fromApril 9 to April 16, while USLV fel l$8.64. Gold has led the recovery fromthat short-term trough, rising by $4.78vs. $1.23 for the silver ETN through

    April 30. Based on past experience, sil-ver eventually should narrow its pricespread with gold; however, at the end ofApril 2013 this had not occurred.

    The copper ETN DJ-USB is not lever-aged but is based on an index of copperfutures contracts. On April 30, 2013, theindex consists of one futures contract oncopper, currently the high-grade copperfutures contract traded on the Comex.The ETN is balanced with copper futuresby dollar weighting. This creates the pos-

    sibility of a shadow price in the sameway that the COW agricultural ETN wasshadowed by a combination of agricul-tural futures contracts (see Tradingcattle, hogs and ETNs, November 2012).

    A cha rt of cumulative percentageprice changes for May copper futures

    and the copper ETN would illustratehow closely their prices move togeth-er, with apparently little chance for aprofitable spread trade between thetwo. However, we will look at the dailydifferences in percentage price changesbetween the futures contract and ETNto investigate trading potential.

    As shown on Differ ences in per-centage price changes (page 33), thereare many one-day shifts between plus

    futuresmag.com 29

    The price drop as measured by ETNs is similar to the futures, although there are some

    differences due to the leveraged nature of the gold and silver products.

    METALS ETNS VEER FROM FUTURES

    Source: Barchart.com

    20%

    0%

    -20%

    -40%

    -60%

    -80%

    -100%

    Jan

    3

    Jan

    8

    Jan

    11

    Jan

    16

    Jan

    22

    Jan

    25

    Jan

    30

    Fe

    b4

    Fe

    b7

    Fe

    b12

    Fe

    b15

    Fe

    b21

    Fe

    b26

    Mar

    1

    Mar

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    Apr

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    Apr

    23

    Apr

    26

    Metals ETNs

    (Cumulative percentage changes)

    Gold Silver Copper

    All else equal, silver options are priced higher due to that markets higher volatility.

    METALS CALL OPTIONS

    Source: Barchart.com

    0.09

    0.08

    0.07

    0.06

    0.05

    0.04

    0.03

    0.02

    0.01

    0.000.75 0.80 0.85 0.90 0.95 1.00

    Futures price/Strike price

    Callprice/Strike

    price

    Silver June Silver Dec Gold June Gold Dec Copper June Copper Dec

    Trading Techniques: Cretien continued on page 33

  • 7/29/2019 Futures Sept magazine

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    Price charts are a technical tradersportal to the markets and a pri-mary means of making trading

    decisions. Todays market analysis plat-forms offer traders a variety of optionsfor viewing price data on a chart, from

    chart style to interval. The style of thechart determines how price is displayed;for example, bar and candlestick charts.The chart interval dictates which data are

    used to construct the display. Here, wetake a look at popular chart styles andintervals, including time, tick, volumeand range bar charts.

    Chart stylesWhile there are many different chartstyles, the two most common ways todisplay prices are bar and candlestickcharts. These two styles show the sameinformation: The open, high, low andclosing prices for a specified chart inter-

    val. Visually, however, bar and candlestickcharts are quite different. On a bar chart(also called an OHLC chart), the highand low prices for each specified intervalappear as a vertical line, and two, small

    horizontal lines that represent the barsopening and closing prices appear oneither side, as shown in the left chart ofTwo styles (above).

    Candlestick charts show the sameopen, high, low and closing prices with adifferent display. Here, the opening andclosing prices form the body of the can-dlestick, and the high and low prices forthe interval are represented by the wicks

    thin lines that appear above and belowthe body, as shown in the right chart inTwo styles. The body of the candlestickappears black if the close is lower than theopen and white if the close is higher thanthe open. Its common for traders to sub-stitute colors for black and white. A green

    Understanding how prices are represented on your computer screen is critical to

    seeing market moves clearly.

    A closer look at price

    chart choicesBY JEAN FOLGER

    TRADING TECHNIQUES

    C H A R T I N G

    30 FUTURES September 2013

    Bars and candlesticks

    Visualizing market moves

    Putting prices in perspective

    For more from Jean Folger,

    go tofuturesmag.com/Folger

    Two common chart styles are OHLC bars and candlesticks. Both convey the same

    information: The open, high, low and closing prices for a specified interval.

    TWO STYLES

    Source: NinjaTrader

    15500

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    Mar Apr May Jun JulMar Apr May Jun Jul

    Candlestick ChartOHLC Bar Chart

    up bar up bar high high

    low low

    close close

    open open

    down bar down bar high high

    low low

    open open

    close close

    14895

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  • 7/29/2019 Futures Sept magazine

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    body, for example, means that price closedabove its open (showing strength), while ared body often indicates that price closedbelow the open (showing weakness).

    Some traders use candlestick chartsto spot price patterns that may indicatea reversal or a weakening of the trend.Patterns can be formed within the samecandlestick by comparing the size of thebody to the wick, or across several adja-cent candlesticks. A bullish engulfingpattern, for example, is a reversal patternthat occurs when the body of an up-can-

    dle bar completely covers, or engulfs, thebody of the prior bar, signaling the end ofa downtrend, as shown in Time to turn(above). Candlestick charting often worksbest when combined with other technicaltools or indicators for confirmation.

    Time-based charts

    Most investors and traders are accus-tomed to viewing price charts that arebased on time, such as daily, 60-minuteor five-minute intraday intervals. With atime-based chart, one bar be it a can-

    dlestick or OHLC bar prints at the endof each specified time interval, regardlessof the amount of trading activity thathas occurred. On a five-minute chart,for example, a bar will print at 9:35, 9:40,9:45, 9:50 and so forth until the end ofthe trading session.

    There always will be an equal numberof bars per trading session when the sametime interval is applied. Time-based chartscan be as small as a few seconds to as largeas weekly, monthly or yearly intervals.

    A traders style often determines thesize of the chart interval. Longer-termtraders, such as swing and position trad-ers, might use hourly, daily or even week-ly charts. In contrast, short-term tradersmay prefer 30-second or one-minutecharts to see the details of price action.

    Activity intervals

    While time-based charts are perhaps the

    most widely used, activity-b