Key reversal 63 . At that precise moment when a trend is reaching its end, you often get trend followers pushing the going price trend to an extreme against value players who subsequently gain the upper hand. This results in a new high (say), combined with a lower range for the day than the previous dayas a"i.e. the price range for the day is aoutsidea the previous dayas. The same thing applies the other way round, with a new contract low.
You can see it best on a chart. This is a relatively rare phenomenon, which happens more often in a reversal than in a continuation of the trend.Key day 64 reversal. when the above happens in a single day.Key week 64 reversal. when the above happens in the course of a week, compared with the previous week, as seen in retrospect.
Kroll , stanley. engaging writer on futures, and successful trader. author of kroll on futures Trading Strategy; Business One-Irwin, 1987, ISBN 1 55625 033 8 a" and other books on trading.
Kovnor, bruce 54,83,88-9. as of 1990, one of the most successful living traders, particularly active in the currencies. Heads the futures fund management group Caxton Corporation.
Koy, kevin 68 . Popularist ofPeter Steidlmayeras original ideas. author of The Big Hitters.
Lao-Tzu 11 . Chinese thinker of 5th century BC; credited with being the an originator of Taoism and author of the seminal text Tao Te Ching. Died 479 BC.
Lateral thinking 1 1 3 . Phrase popularised by Edward de Bono , to denote the opposite of logical, step-by-step, averticala reasoning. Like right-brain thinking, often the best kind for financial markets.
Lefvre, edwin 6 8 . Admirable author of cla.s.sic aautobiographya of Jesse Livermore, Reminiscences of a Stock Operator (see book list) Livermore, jesse 8,76,88,107,115 . aThe Boy Plungera, who started trading stocks in bucket shops and moved on to make and lose several big fortunes in stock and commodity markets in the 1920s and 30s, finally shooting himself.
Long . having bough and holding a security or future: opposite of short.
Margin 93 . The deposit put up by a futures trader a" initially on opening a position (initial margin) and further (variation or continuation margin in the event of a loss on the position exceeding the initial margin.Margin call 94. a call for more (variation) margin. If it ever happens to you, close at least two thirds of your position and trade at the lower level in future.
Market Action 56 .The way the price of a currency or other instrument behaves in relation to to news and other background data. A price is said to be aacting wella when it rises in bearish circ.u.msances and aacting badlya when it falls against a bullish background.
Market Vane 54 . A sentiment-polling service, surveying the opinion of a large selection of commodity pros. The interpretation is contrarian: a highly bullish reading is seen as unfavourable; a low bullish reading s favourable.
Market Wizards : interviews with Top Traders 68,82-90 . By Jack Schwager (see book list).
Mindsets 15 . The pre-judgements and a.s.sumptions we carry with us which are not derived from an objective a.s.sessment of the available data but from education, convention, herd opinion.
Mint investment Corporation 71 . A highly successful futures management firm, which uses a computerised trend-following trading system, and managed a.s.sets of around $1bn in 1990.
MIT amarket if toucheda a" an order to deal at a specific target price, if touched even if not exceeded.
Neckline 6 2 . The low point either side of the head of a head and shoulders pattern.
New Investment Way 91,94-5 .
Ornstein, robert. author of The Psychology of Consciousness (see book list).
Open interest (01) 51 , The number of futures contracts remaining open at the end of each trading session. The largest number is usually found in the nearest maturity month (athe nearby montha). As this comes to expire, some positions are rolled over into the next months but many are closed out (for expire, in the case of options contracts). The result is a sharp drop in the total open interest. In the currency contracts this occurs on the third Tuesday of March, June, September and December. The open interest figure becomes available at the start of business on the subsequent day (normally 1.15pm GMT).
The OI is a proxy for the total weight of speculation in a contract. As a matter of fact, it has always tended to rise in line with the perceived price trend a" be this up or down. This makes the OI a valuable sentiment gauge: the OI tends to peak at price extremes. But you have to make a mental adjustment for the sudden drop at contract expiry. Clearly this does not imply a proportionate drop in speculation. Equally clearly there will tend to be a gradual rise in the open interest from the day after expiry to the day before expiry 3 months later. So an OI in the D-Mark of 65,000 in late March can denote higher speculation than an OI of 85,000 in early June. Back copies of Currency Bulletin will give you a historical view.
Option 95-6m102 . The right to buy (call option) or sell (put option) without the obligation to do either is worth something. In the currencies it usually costs about 2 to 3% for 3 months to buy this right a" at about the current market price ( at-the-money ). the greater the volatility of prices, the greater the value of the option: when things are volatile options tend to cost a bit more. If you buy and option, the cost is the extent of your possible loss a" which is why beginners often like to start here a" and why not?
In the currency markets there are 3 types of option you can buy (or sell). 1) Options in the IMM, which give you the right to buy or sell futures. 2) Options in Philadelphia (or some other places like Amsterdam) which give you the right to buy or sell forward interbank currencies.
Speculators and investors can stick to IMM options. Others can go for one of the other two, if they wish. Use options when you have little idea how big you adownsidea is a" e.g. when bottom fishing.
Overbought 47,54 . What CB means by aoverboughta or aoversolda is more precise than what others mean. CB means that speculation in the direction of the trend (usually measured by open interest ) is notably high.
Oversold 47,54 . The opposite of overbought, meaning that speculation is high on the short side.
Overtrading 79 . Two kinds. 1) Trading too often. 2) Trading too big. We probably spend our whole trading lives learning not to do either. You lose money regularly if you fall for 1). You lose a lot if you fall for 2), mainly because you canat think straight.
Pack 102 . Maybe 7 times our of 10, the acurrenciesa move together like a wolf pack against the dollar. The other three times, the lagging members of the pack usually catch up over time, but itas sometimes a long time.
Par 45 . Of securities, 100% redemption value e.g. $1,000 or 100.
Pirsig, r o b e r t 7 2 . Author of the wonderful cla.s.sic Zen and the Art of Motorcycle Maintenance, a philosophical novel.
Pennant 65 . Self-descriptive chart pattern: a narrowing wedge pattern following a sharp rise.
PPP 22 .Purchasing power parity. Where inflation differentials are huge, as between hyper-inflating countries and hard-currency countries, the natural tendency of a currency to move towards its purchasing power value against other currencies is the most important determinant of its exchange rate. If you can establish the valid PPP (which must be done on the basis of a comparable basket of goods), it will pay to a.s.sume that big divergences from PPP will narrow in due course.
Where inflation differentials are small, PPP comparisons are unhelpful: the trick is to antic.i.p.ate the divergences rather than the narrowings. The divergencies can be monitored by the use of real inflation-adjusted exchange rates.
Psychology of Consciousness ,The 114 . By Robert Ornstein. (See book list).
Price-led (trader) 30,51 . Price-led buyers a" sellers are those who are induced to buy after a rise in price and sell after a fall. Their opposite is value-led traders.
Quantum Fund 9 1 . Amazingly successful geared (leveraged) fund investing in currencies, financial futures and major commodities. Founded by George Soros in the 1960s, it grew to near $3bn in 1990 mainly by performance.
Real yield (s) 4 2 . Yield, at any maturity, adjusted for inflation. In chronic high-inflation countries, such as many in Latin America, it has long been common practice for most interest rates to be indexed to consumer price inflation a" in tacit recognition of the notion that interest rates must at least compensate for inflation, otherwise they would not be offering a real return.
Reminiscences of a Stock Operator 76. by edwin lefvre. the story of the trading experiences of the great Jesse Livermore a" larry livingston in the text.
Reserve currency 44 . The five major currencies which have historically been used as foreign currency reserves by the central banks: US dollar, D-Mark, SF, Yen and pound.
Revulsion 106 . Term used to denote an unusual nadir of sentiment, a.s.sociated with a major price trough.
Right brain 66, 113-5 . The pattern-recognising and intuitive function of the mind takes place in the right hemisphere of the brain, often called aright braina for short.
Rogers , james 86 . Brilliant long-term investor and one-time partner of George Soros in the $3bn Quantum Fund. Author of aInvestment Biker.a Schwager, jack 68, 82 . Admirable author of the 1989 cla.s.sic, Market Wizards (see book list) a" and other investment books, including A Complete Guide to the Futures Market.
Sentimen t 5 0 . Arguably the prime determinant of price change in financial markets; surely the most useful area of a.n.a.lysis for antic.i.p.ating price change.
Sentiment gauges 50 . CBas checklist of 4 indicators of sentiment as applicable to currency a.n.a.lysis.
Seykota , ed 83, 87-8, 102, 117-19 . Prodigiously successful American futures investor and sage.
Set-up conditions 29 . The specific set of circ.u.mstances which precede major price moves. Most of these circ.u.mstances are to do with the emotional condition of market partic.i.p.ants.
Short. having sold what was not previously held, with the obligation to repurchase. The idea is to sell (forward) at a high price and buy back lower, at a profit. Of course with currencies you have to sell a currency in order to buy one; so every forward currency purchase involves a short sale.Opposite of long .
Soros , george 68, 91 . Legendary investor, author of The Alchemy of Finance, and founder of theQuantum Fund which rose 500-fold from inception in 1969 to Spring 1991.
Spot 39 Cash currency, as opposed to forward or future. From acash-on-the-spota.
Spread (s) 17 . The difference between buying and selling (offer and bid) prices. Equals the market-makeras turn.
Steidlmayer, peter 74,86-7, 118 . Very successful futures trader and well-known market a.n.a.lyst, who invented a new theory of market mechanics incorporating a price and volume recording system which goes under the name of Market Profile. PS bequeathed the system to the Chicago Board of Trade which runs a widely used Market Profile database. Author of 3 best-selling books, the latest of which is New Market Discoveries. The heart of Steidlmayeras theory is that value is determined by volume, and price a" just as the value of real estate, for example, or used cars, is generally determined at any time by the number of sales recorded at axa price. Thus the price at which volume is highest represents correct value at any given time.
Stop (s) (order) 65, 74-6,96 , A stop is an order left with a broker or dealer which is executed automatically at a given price. Most frequently used to close an existing position, and most frequently to limit a loss on said position a" but not necessarily.
The IMM exchange rules ensure that a traderas stop, if left awith the marketa, will be executed in the IMM if the price moves through the stop level. In the interbank market there is no such a.s.surance. If you wish an order to be executed in the event a price is touched, even if not exceeded, you can give a amarket-if-toucheda (MIT) order a" normally for a profit-target rather than a loss limit.
a" Crawling stop. some traders like to move their stops along in the direct of the price movement a" to lock in the profit or minimisedrawdown.
a" Stop buy. an order to purchase in the event the price rises to a specific level. An order to purchase in the event a price falls to a specific level is usually called a alimit buy a order.
a" Stop-loss. an order to buy or sell in the event of an adverse price movement to a specific level.Trailing stop 103. same as crawling stop.
Strike (price) 96 , or aexercise pricea. The price at which an option can be exercised. A favourable price move beyond the exercise price puts the option ain the moneya. At that point it has intrinsic value: before that point, when it has no intrinsic value, it is said to be aout of the money a. See also At-the-money.
Tao 49 . The core notion of the ancient Chinese philosophy referred to as Taoism, which developed alongside Buddhism, meaning aThe Waya a" i.e. the way things are. The original test-book of Taoism, the Tao Te Ching by Lao-Tzu exists in hundreds of translation a" all very different.
Light and dark, and up and down, and left and right, and good and bad are all polarities invented by the human mind. They are thought of as separate opposites whereas they are really complementary poles of unities. They may be helpful distinctions and then again.
In financial markets some of the opposites we see turn out to be circular. For example an extreme of bullishness is obviously the most bearish possible moment. From a top, prices can only fall. And in the currencies there is an extra twist in the fact that any currency parity is a two sided coin: e.g. a top for the dollar is a bottom for the D-mark.
The so-called yin and yang symbol of the Tao (the Taai-chi Tau) has been modified to serve as a logo for Currency Bulletin. You will find it at the top of the back page of CB a" and on the front of this book. In the logo, the interface between light and dark sides of the yin-yang symbol is made by a dollar sign a" noting that the tail of each tadpole interfaces with the head of the other. Such is athe waya of the dollar.
aThe yang returns full circle to its beginning; the yin attains its maximum and gives place to the yanga a" Kuei Ku Tzu, 4th century BC.
Taoist 1 1 4 , one who practices the Tao (see Tao). The Tao, incidentally, is central to Zen buddhism and to the practice of such j.a.panese crafts as Bushido swordplay, judo, archery and the tea ceremony. The essence of all these crafts lies in the abolition of the aIa: the consciousness of the partic.i.p.ant is absorbed by the action.
Technical 60 Opposite of fundamental. atechnicala data are all those concerning price movement (charts) and volume and any other data which relates to trader activity a" such as open interest. In the US stock markets, much more technical data is available than elsewhere including odd-lot activity and open interest: corporate insider activity; block trades and so on. The atechnical a.n.a.lysta believes that the technical data are the only kind that are helpful for antic.i.p.ating price action; and that afundamentala data, concerning economic and financial events is unhelpful or even positively misleading.
A chartist is a technical a.n.a.lyst who places all or most of the emphasis on past price action as opposed to other technical data.
Teweles, richard, author with Frank Jones ofThe Future Game, a useful overview of futures trading (see book list).
The Man who Mistook his Wife for a Hat 114 . Riveting series of essays by psychotherapist Oliver Sachs.
Time-frame, time horizon 70 . 1)Our own: the duration we a.s.sume for any given trade. Itas crucially important to define it a" in weeks, months or years, or days. 2) The marketas. The time-frames of the individual traders out there a" from the intraday time-scale of dealers, locals and other market-makers to the multi-year horizons of strategic investors and corporate hedgers a" result in certain rhythms of price fluctuation reflecting the build-up and dismantling of speculative positions.
Total return 34, 45 . The combined return of income and capital. Maximising total return is a.s.sumed to be the motive for every rational currency trade.
Trampolining 64 . A graphic description of volatile price ranging, often seen at reversal points.
Transaction costs 82 , or dealing costs. Includes the overall costs of commission and spread between selling and buying price (bid and offer). Also called aslippagea. In the interbank market, spreads can only be ascertained by obtaining a bid-and offer quotation from a bank that has no idea whether you wish to buy or sell.
Transactional a.n.a.lysis 1 1 1 . See Berne, eric.
Treasury bill 3 9 (T-bill). A Treasury promissory note to repay at par specific maturities up to 12 months. Bond (t-bond). A Treasury obligation to pay interest and repay princ.i.p.al at par on a maturity which was originally over 10 years (T-note, less than 10 years).
Trend 5 5 . CB distinguishes between a trend such as might be defined by lines drawn on a chart, and the general feeling among partic.i.p.ants about the on-going direction of prices, which it calls the aperceived trenda.
Tudor Jones , paul 83,88-9 . An astonishingly successful futures trader, thought to be the only fund manager on record as having achieved 100% gains for 5 consecutive years in a public fund.
Underlying rationale 34 . Fundamental driving force behind a multi-month or multi-year price trend. Thereas usually only one.
Underlying trend 34 . Multi-month or multi-year price trend.
Undertrade. to trade smaller positions than you are tempted to, and trade less often.
Value-led (trader) 30, 51 . One who tries to buy low (after a fall) and sell high (after a rise). As opposed to price-led trader.
Vertical thinking 114 : see Lateral thinking.
Wedge 6 5 . A self-descriptive chart pattern, more often making a pause in a trend (a acontinuationa) than a reversal.
What Do You Say After You Say h.e.l.lo? 112 . By Eric Berne. The popular basic text-book of Transactional a.n.a.lysis.
Weinstein, Mark 83-5 . Fabulously successful American wizard trader, interviewed by Jack Schwager.
Yield curve 43 . Denotes the shape of interest yields along the spectrum of maturities, as it were plotted on a chart. It may be a straight line rather than a curve.
Yield differential 3 9 . The difference between one yield and another a" particularly between yields at similar maturities on one currency and on another currency.
Yin and yang 49 . Originally the shady and sunny (respectively) sides of a mountain a" as symbolic of polarity in nature.
Yin represents the female, the earth, the moon, the intuitive, the dark; Yang the male, the sun, the strong, the rational, the light. The complementary nature of these polarities lies at the heart of ancient Chinese philosophy and of Taoism.
It also seems to have been fundamental to the thinking of the 6th century BC Greek philosopher Herac.l.i.tus, whose most famous saying was aEverything flowsa. Another remnant of his thought was aThe way up and down is one and the samea.
Zen. just flick a scrunched-up ball of paper into a bin, and it will probably go straight in: think about it, and youall probably miss. There is much more to Zen: for the amost explicit and orderly accounta in Englisha, as one critic put it, look to the Way of Zen by Alan Watts. In the context of trading. 1) the discarding of the aIa (as in aI am righta), and 2) the emphasis on ajust doinga without worrying, when you can see what to do, these are two gold nuggets of Zen thought.
Zen & the Art of Motorcycle Maintenance 72 . Master-piece by Robert Pirsig.
Zen in the Art of Archery 90 . Masterpiece by Eugene Herrigel.
Zero-sum (game) 47 . In most investment games, like real estate and stock markets, and like precious metals and art markets, investors can win or lose because of the expansion or contraction in the size of the cake. The only way all of them a" or indeed most of them a" can win is if the cake expands: and most players in these games believe the cake will expand over time for ever.
In a zero-sum game, the only way players can win is by taking a larger slice of the same cake. To most people, the disadvantage of the zero-sum situation is that you can only win, over time, if you have expertise. The advantage is that you cannot lose over time if you have expertise. In variable-sum games, like stock markets, you can lose everything, with or without expertise, as many investors did in the 1930as a" and in recurrent property busts throughout history.
The currency markets are a pure zero-sum game, the only one in fact.
SHORTLIST OF MUST READING.
Alchemy of Finance, The 68 . An original account of the anew investment waya. By George Soros. weidenfeld, London, 1988, ISBN 0 297 79331 4.
Big Hitters, The 68, 86-7 . By Kevin Koy, Intermarket Publishing, Chicago 1986. ISBN 0 9374 5300 5. Worth reading for its interview with Peter Steidlmayer alone.
Market Wizards: interviews with top traders 82 . Masterpiece. By Jack Schwager. new york inst.i.tute of finance 1989. ISBN 0 13 556093 4.