FXstreet.com Live Sessions Archives

Live Market Analysis

Date: September 30, 2005 13:00GMT

Expert: Richard Lee, Currency Analyst of FXCM

Topics:
Market reaction to news!
- This week's data and events
- Key support and resistance for major markets
- Richard's insight on the week inreview and the week to come

Who is Richard Lee?
Richard Lee is a Currency Strategist at Forex Capital Markets. Employing both fundamental models and technical analysis applications, Richard contributes regularly to DailyFX, Yahoo Finance and Comtex. Prior to joining the research team, Richard was one of the senior instructors for the FX Power Course, teaching thousands of traders the basics of currency trading, technical analysis and how to implement trading strategies. He has extensive experience in trading the spot currency markets, options and futures. Richard previously traded FX, equity and equity derivatives for a private equity consortium prior to joining FXCM. He holds a BA in Economics as well as a BS in French with an emphasis in International Business from the Pennsylvania State University

Speech Material:

FX street.com is delighted to bring a new informative, analytical, review of the market week. We are delighted to have the Richard Lee an expert from FXCM on board weekly to bring you spontaneous updates on the goings-on in the Forex market, specialising on signals or measures that tell us how the economy is performing & economic indicators. Weekly meet with the the expert, listen to their thoughts and inside view on the market as they see it.

Join us every Friday to get up to hot hints on how to trade in the week ahead. FXstreet.com has through hard-work, honesty and credibility listened to the wants of clients and combined with our Live Q&A Sessions we hope to erase the fears of our cliental and bring them up to speed with the latest happenings in the market.

***Please note that this session is not a lecture format chat session. To ensure success, please actively participate thorughout, ask REAL time questions, post points of view, queries, doubts and concerns and recieve immediate feedback and the opinion of our expert.***

TOPICS FOR TODAY'S SESSION:
Market Reaction to News:
Dollar moves higher across the board. Japanese yen breaks topside resistance briefly at 113 on further carry trade potential while euro suffers over political unrest.

Key support and resistance for major markets:
Will USDJPY break considerably above the 113.50 topside resistance while pound consolidates above $1.2000?

Insight on the week in review and the week to come:
With a schedule full of greenback based data, all eyes are focused on Chicago PMI in capping the week. Will US manufacturing decline again?

Currencies/Economic Indicators:
Euro- Traders look ahead to political unrest in both Germany and Italy in lieu of improving figures.

Dollar- Durable orders vaulted 3.3 percent higher, adding to recently dollar bullish data. Repatriation of corporate profits also contributing to support.

Pound- Housing prices stabilize as consumers turn interest from individual spending to residential investment.

Yen- With retail sales soaring above consensus estimates, will further indicators confirm consumer consumption underpinning the world’s second largest economy?

How to Differentiate a Breakout from a Fakeout?

Date: September 29, 2005 14:00GMT

Expert: Sam Shenker, Technical Currency Analyst of FXCM

Topics:
- Breakout Confirmation
- Follow through
- High Probability Breakout Setups

Who is Sam Shenker?
Sam Shenker is a Technical Currency Analyst for Forex Capital Markets (FXCM). Sam is the author of the Daily and Weekly Technical Research reports at FXCM. His reports include: Daily Technicals, Daily Crosses and the Weekly Chart Analysis. Prior to joining FXCM, Sam spent a number of years on Wall St and has traded many different products, including: equities, equity derivatives and futures. He also specialized in research and analysis of high yield bonds, corporate bankruptcies, restructurings, reorganizations and venture capital. He holds a Bachelors degree in Finance and Business Management from Pace University and is an active currency trader. Sam is frequently quoted on FXStreet, and his research can be found daily on Bloomberg.

Speech Material:

Breakout trading is one of the most alluring trading strategies that draw’s beginners and professionals alike.

Breakouts epitomize the price action as it moves fast and entry point does not have to be exact and profits just pile in, that is where most traders find the other side of breakouts, a condition that I like to call a “fakeout” or more commonly known as a whipsaw.

Breakouts:
There are two types of valid breakouts that I would consider trading.

Pattern Breakout
HH (Higher High) / LL (Lower Low) Momentum Breakout

Pattern Breakouts:
Pattern breakout is the most common form of breakouts as it’s based on the pure price action and a breakout from the reversal/consolidation patterns.
The most common patterns consist of triangles, channels, wedges, pennants, flags and less common pattern is Head and Shoulders.
Also breakout trader must keep in mind the timeframe he or she is trading on, as lower timeframes will have a higher number of potential breakouts and higher number of failure. Also a trader must keep in mind that the profit potential will be different for different pairs and different timeframe, the higher the timeframe the higher profit potential, but on the flipside the higher the potential loss if the breakout turns into a fakeout.

HH/LL Momentum Breakout:
Momentum breakouts occur when the price breaks above the high or breaks below the low of the most recent short-term price range.

Example:
Following is a great example of recent price action as it encompasses breakout, fakeout and a momentum breakout.

Image:

British pound daily chart has the GBP/USD swinging within a large channel, with the swing to the downside finding the lower boundary. Here is the dilemma facing most traders, do I swing the price the other way, or will the price breakout and head lower. The trading tactic is to wait and observe the price behavior, if the price flashes a turnaround than I will swing for the channel’s upper boundary, if the price flashes a potential breakout than I will trade in the direction of a breakout.

Image:

Next day showed the indecision from both sides with the price closing at the channel’s lower boundary. So the best thing to do during the days of indecision is to remain on sidelines.

Image:

Following day the price opens below the channels and slowly moves to the downside. The breakout is far from decisive and lacks momentum.

Image:

The next few days the breakout turns into a fakeout and the price rallies back toward the channels boundary, thus causing most traders to close their initial positions.

Image

The next day the action turns around as the price fails to climb back into the channel and with subsequent turnaround seeing the price breaking below the three day range

Image:

Resulting momentum gave the pair additional 300 pips after the momentum breakout occurred, that is what I call momentum follow through

Image:

As demonstrated earlier this is one of the variants of a fakeout, a price breaks the pattern, than fakes out the traders who traded the initial fakout. The best way to avoid the fakeout is to be patient, have sound money management rules and emotional control.

Image:

Triangles are some of the most common patterns, as they confine the price within a shrinking range. As the range shrinks and tighter it becomes, the further the subsequent breakout will travel, which will reduce the chance of a fakeout.

Image:

Wedges are primarily consolidation and continuation pattern, and the wedge seen on the 4HR GBP/USD chart was a pause during the summer dollar rally that divided the move in two large parts.

Technical Viewpoint of the EUR/USD

Date: September 28, 2005 14:00GMT

Expert: Justin Strausbaugh, Currency Analyst CMC Markets

Topics:
- In-depth analysis of the key/support resistance levels
- Short, Medium, Long-term Technical Viewpoint
- Will look at momentum, trend indicators, & candlestick patterns

Who is Justin Strausbaugh?
Justin Strausbaugh serves as the in-house Analyst at CMC Markets in New York. CMC Markets was established in 1989 and has evolved into a market leader in real time Internet trading. After launching the world's first real-time Internet Foreign Exchange trading platform in 1996 the firm has evolved and now services clients in over 100 countries, offering them real-time internet trading in thousands of products.

Speech Material:

In-depth analysis of the key/support resistance levels.

- Short, Medium, Long-term Technical Viewpoint.
- Will look at momentum, trend indicators, & candlestick patterns.

Chart 1 Momentum

Click to enlarge:

Chart 2 Candlestick Pattern

Click to enlarge:

Chart 3: 1 year Support/ Resistance with MACD

Click to enlarge:

Chart 4 Momentum

Click to enlarge:

FOREX Live Open Forum

Date: September 27, 2005 14:00GMT

Expert: Adrian Aquaro, Head of Trader College LLC and True Market LLC

Topics:
- LIVE Open Forum with Adrian Aquaro
- Open floor discussion on what are the future trends in the Fx market?

Who is Adrian Aquaro?
Adrian Aquaro has been a trader for the last 3 years, specializing in the International Foreign Exchange Market and acting as an Introducing Broker for the Latin America market. He heads True Market Services LLC and is also the director of Trader College LLC. He has vaste experience in forex education, making of him a leader in this particular part of the financial services industry.

Speech Material:

Live Open Forum with Adrian Aquaro Head of Trader College LLC and True Market LLC.

***Please post all questions related to the Fxmarket and Adrian will be happy to answer them***

Live Perspective Broadcast

Date: September 26, 2005 14:00GMT

Expert: Derek Frey, Head Trader Of Odom & Frey Futures & Options

Topics:
Market reaction to news!
- This week's data and events
- Key support and resistance for major markets
- Derek's insight on the week inreview and the week to come
Currencies
- Euro
- Dollar
- Pound Sterling

Who is Derek Frey?
Derek Frey has been a futures trader since 1989 and is Head Trader and partner at Odom & Frey Futures & Options, a firm that specializes in high probability, defined risk option spread trades for the futures markets. Derek is also co-author of O&F News & Views, a weekly newsletter that is published by several publications and over 20 financial websites including FXStreet.com.

Speech Material:

FX street.com is proud to bring you a NEW informative, analytical, overview of the Market. We are delighted to have Derek Frey of Odom & Frey Futures & Options as our guest to give a fly on the wall insight to the happenings in the FOREX & Futures market for the past & coming week.

We hope you enjoy the Live Perspective Broadcast and get up to date tips on how to tackle the week ahead.
Bring your thoughts and doubts to the table by participating throughout the session actively and challenge the speaker with your questions, & concern's for the week ahead.

FXStreet.com has spoken with and listened to the needs and wants of thousands of clients and combined with our Live Q&A Sessions hope to erase the fears & woe's of our cliental and bring them up to speed with the latest happenings in the market.

***Please note that this session is not a lecture format chat session. To ensure success, please actively participate throughout, ask REAL time questions, post points of view, queries, doubts and concerns and receive immediate feedback and the opinion of our expert.***

Don’t miss the chance to pick his brains and be well informed for the week to come.

The week ahead **** Please refresh page******

The week ahead 09-26-05
With Hurricane Rita now behind us the markets will hopefully start to focus on real economics rather than chasing these storms. With more refineries down, energy prices could continue higher but since the damage is less than anticipated look for price stabilization more than anything. At this point stable prices would be the best thing for the market…even if they are still high.

Euro:
The Euro continues to struggle. If 1.2000 does not hold then 1.1866 is the last line of support before we break to new lows for the year. Personally I will be going long the closer we get to 1.1900 with stop and reverse orders in around 1.1850.

US Dollar:
I continue to look at this rally in the dollar as suspect. I would not expect new highs in the Dollar above 90.00. The Fed’s rate cut was part of the excuse to rally last week but now with that behind us the real economics should shine through and when the do the Dollar will fall.

Swissy:
Look for a move in the swissy to and through 1.3100 later this week. The swissy is likely to become a strong leader in the weeks to come.

Pound Sterling:
After a brief pullback last week the Pound should be poised to resume rally mode. 1.7500 support should hold this week and a target of 1.8500 is not unrealistic.

Yen:
The Yen continues to be stuck in the current range. We are now approaching the top of the range at 113.74. Fade this move by getting short as close to the top as you can with tight stop and reverse orders above 114.00. Target 110.00.

Live Market Analysis

Date: September 23, 2005 13:00GMT

Expert: Boris Schlossberg, Currency Analyst FXCM

Topics:
Market reaction to news!
- This week's data and events
- Key support and resistance for major markets
- Boris's insight on the week inreview and the week to come
Currencies
- Euro
- Dollar
- Pound Sterling

Who is Boris Schlossberg?
Boris Schlossberg serves as Fundamental Analyst at Forex Capital Markets. He has been an independent trader since 2000. He is also a frequent contributor to SFO Magazine with articles focused on risk management.

Speech Material:

FX street.com is proud to bring you a NEW informative, analytical, overview of the Market. We are delighted to have Boris Schlossberg of FXCM as our guest to give a fly on the wall insight to the happenings in the FOREX & Futures market for the past & coming week.

We hope you enjoy the Live market Analysis and get up to date tips on how to tackle the week ahead. Bring your thoughts and doubts to the table by participating throughout the session actively and challenge the speaker with your questions, & concern's for the week ahead.

FXStreet.com has spoken with and listened to the needs and wants of thousands of clients and combined with our Live Q&A Sessions hope to erase the fears & woe's of our cliental and bring them up to speed with the latest happenings in the market.

***Please note that this session is not a lecture format chat session. To ensure success, please actively participate throughout, ask REAL time questions, post points of view, queries, doubts and concerns and receive immediate feedback and the opinion of our expert.***

Don’t miss the chance to pick his brains and be well informed for the week to come.

China Widens Band on Yuan Pushing Yen Higher
The currency market which has been warily keeping an eye on the satellite imagery of Rita in the Gulf of Mexico was momentarily rocked out of its storm watch slumber when the Bank of China announced that it was widening yuan’s trading band against the euro, yen and the Hong Kong dollar. The yuan will be allowed to move as much as 3% against those currencies versus the prior limit of 1.5%. The move verticalized all of the majors but within 20 minutes the euro, pound and the franc returned to their pre-news levels and only the yen retained most of its gains. The yen, of course is the primary beneficiary of any yuan appreciation for two reasons. First, China is Japan’s biggest export market, so any increase in the yuan will generate larger profits for Japanese businesses through currency appreciation. Secondly Japan actively competes against China in global markets and any yuan strength will make Japanese products more attractive against their Chinese counterparts. The move comes on the eve of the G-7 summit meeting and is most likely intended to dissuade any protectionist policy moves against China.

After the momentary flutter the market settled back to the nights ranges with dollar generally stronger against all currencies. Concerns about Rita abated somewhat when the Hurricane was downgraded to category 4 and appeared to be headed east of Houston. At this point every FX trader has become an amateur meteorologist with satellite imagery sharing desktop space with price graphs. However, the true impact of Rita will not be known until landfall this Saturday and with no economic data from US on the calendar today, the market is unlikely to become to aggressive ahead of the weekend. One nasty possibility, projects Rita stalling in front of the Texas coast for several days, pelting the area with 80 mph winds and torrential rainstorms. With German elections still unresolved, the market remains at a standstill as neither US nor Europe offer much of a reason to be long.

FX Spot Overnight
- EUR at 2129 as dollar strength return
- JPY at 111.55 off lows on Yuan reval news
- GBP at 7850 still selling as M & A slowdown fears weight.
- CHF at 2828 ahead of important vote this weekend.

Upcoming Events

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Building a winning trading plan

Date: September 22, 2005 14:00GMT

Expert: Jay Lakhani, Professional trader author of The way to trade Forex

Topics:
- What is a Trading Plan?
- Benefits of a Trading Plan
- Building the Perfect Master Plan

Who is Jay Lakhani?
Who is Jay Lakhani? Jay Lakhani is a professional trader and has been involved with markets since his early twenties. He has extensive experience of both the US and UK stockmarkets - trading in derivatives, forex, index and stock futures, and commodities. Jay uses Technical Analysis in his trading, and believes that successful trading is based on your strategies and techniques, psychology and having a disciplined money management.

Speech Material:

What is a Trading Plan?
90% of traders fail, and the common factor amongst these failed traders is that they do not have a trading plan. In my book The Way To Trade Forex, apart from strategies, I also focus on trader psychology, and especially creating a winning trading plan. I offer a free evaluation report. A trading plan is a complete set of rules that covers very aspect of your trading life. A trader with a plan starts with an edge, as he will perform a lot better than someone without one.

A Trading Plan will not guarantee you success, but when things go wrong you will be able to react to possible outcomes. It will enable you to respond positively and will measure your success. This is why a plan is essential. You control the only thing you can control yourself.

Benefits of a Trading Plan
- It will make trading simpler as you have rules to follow before you pull the trigger.
- It will act as a road map for your trading journey, so that monitoring of your trades becomes easier.
- If you are having a string of losses, it could be either that one of the component of trading plan is not working or you are not following the plan, it is time to review
- Relaxed and emotional free trading.
- The plan will instil a measure of discipline in your trading.
- The plan will enable you to control yourself!

Building the Perfect Master Plan
The trading plan should be tailored to suit your personality, ability and resources. It should be your plan and unique to your style of trading.

Take into account your emotional and psychology side of you. Do not pretend to be some one you are not; be honest with yourself when creating your trading plan.

What are the components of a good trading plan? During the Q & A Forex Showroom, I will give you a step-by-step guide, on how you can organise a winning plan.

Keys to Trading Intraday Breakouts

Date: September 21, 2005 14:00GMT

Expert: Edward Ponsi, FXstreet.com FX Educator

Topics:
- Putting the Odds in your Favor
- Optimal Breakout Patterns
- Optimal Breakout Times

Who is Edward Ponsi?
Edward Ponsi has been recently appointed new FXstreet.com FX Educator and is the president of FXEducator LLC.

Speech Material:

Hello everyone, my name is Ed Ponsi of FXEducator and I’m happy to present this lesson to you today.

When trading intraday breakouts, or when engaging in any type of trading for that matter, it is important for the trader to use every type of advantage possible. In all forms of trading, no matter if the vehicle is the equity, futures, or forex market, there are many instances of false breakouts. In order to reduce the negative effects of these events, let’s take a closer look at intraday breakouts and how to trade them.

Ascending and descending triangles are excellent breakout patterns, because the pattern itself establishes a directional bias for the trade. An ascending triangle is formed by a combination of diagonal support and horizontal resistance; a descending triangle is formed by a combination of diagonal resistance and horizontal support. In the case of an ascending triangle, the bulls are gaining strength and buying at higher and higher levels, while the bears are merely trying to defend an established level of resistance. In the case of a descending triangle, the bears are gaining strength and selling at lower and lower levels, while the bulls are merely trying to defend an established level of support.

In the case of ascending or descending triangles, the trader can gain an edge by looking to the direction of the currency pair prior to the formation of the triangle pattern. This is because it is not unusual for currency pair to trend, then consolidate, and then resume trending. The directional bias of a triangle is to break the horizontal support or resistance, and if the pair was trending in the same direction prior to the formation of the pattern, the trade becomes all the more compelling.

For example, on the hourly chart of the EURUSD pair, we see the formation of a descending triangle.

(see figure 1) Click to enlarge:

The first thing the trader needs to ask is, what was the trend prior to the formation of the triangle? If we take a longer view of the pair.

(see figure 2) Click to enlarge:

We can see that the pair has been trending steadily lower. It’s important that we use the power of this trend to our advantage, to reduce the occurrence of false breakouts. As a general rule, traders should always trade with the trend, and never fight the trend. It is essentially the difference between swimming with the tide or against the tide, and traders that fight against trends often regret their actions.

Another edge that we can put to use when trading intraday breakouts is the time of day. Perhaps you are familiar with the trading axiom that a breakout is considered significant if it occurs on high volume, and is considered less significant if it occurs on low volume. While forex traders are not able to easily access accurate volume figures, we do know that trading is not equally liquid at all time of the day, and there are certainly times of day that generate more volume than others. Let’s take a closer look at the forex trading day to see how we can use this to our advantage.

When we’re dealing with a vast, liquid market like the Forex, which trades the equivalent of US$1.9 trillion on a daily basis, it’s important to understand which times of day are the most active and most liquid. Because this market follows the sun around the world, trades take place literally all day and night. Let’s take a closer look at the Forex trading day, to gain a better understanding of the market and of its optimal trading times.

The Forex trading day is considered to begin at 5:00 PM Eastern U.S. time. Because Forex trades 24 hours per day, the trading day also ends at 5:00 PM Eastern. Why is this particular time used? Consider that when it is 5:00 PM on Sunday in New York, it is Monday morning in places like Australia and New Zealand. Overall, volume is low at this time of day because the three biggest Forex volume centers – Great Britain, the United States and Japan – are mostly inactive at this time. However, the Australian dollar and the New Zealand dollar (also known as the “Kiwi”) may see some price activity during these hours.

A few hours later, around 7:00 PM Eastern U.S. time, Japan awakens and the Forex markets begin to stir. Japan is the third largest Forex trading center, and comprises about 10% of all Forex trading volume, as many major banks have offices in Tokyo. The Japanese Yen is particularly active at this time, especially vs. the Euro, the U.S. dollar, and the Great Britain pound. Most of the volume occurs during the early part of the Japanese session, and the liquidity lessens considerably as the trading day continues.

As the Japanese trading day winds down around 3:00 AM Eastern U.S. time, European markets open for business, and the London trading day begins soon afterward. Great Britain is by far the most important and influential Forex trading market in the world. The dealing desks for many of the world’s major banks are run from London, and the market is responsible for roughly 30% of all spot foreign exchange volume. London tends to be the most orderly foreign exchange market due to its tremendous liquidity.

About midway through the London trading session, U.S. Forex traders come to life. New York is the second most important market in Forex trading. New York trading is very liquid and accounts for about 20% of the world’s total foreign exchange volume. Trading is especially active early in the New York session, as the London session is still ongoing. U.S. Economic news releases often occur early in the New York session, and can cause a tremendous amount of volatility.

Trading often becomes choppy after midday in New York as the London market winds down, and liquidity and volatility begin to dissipate. By mid to late afternoon New York time, London traders have gone home for the day, and it is late at night in Japan. New York traders, while still active at this time of day, have already finished with the bulk of their trading. Friday afternoons in the U.S. are generally the least active, because for much of the trading world, it is already Saturday.

Finally, as the U.S. markets close, a new trading day is just about to begin in the western Pacific, as the Australian and New Zealand markets begin to stir, starting the process once again. The cycle continues all week, with most dealing desks closed from Friday afternoon until Sunday afternoon, when trading resumes.

Now that we have a greater understanding of the forex market’s liquidity as it relates to various times of day, let’s see how this can affect our trading. Just like an equity trader, I’ll assume that a breakout that occurs at a time of high volume is legitimate, and a breakout that occurs at a time of low volume is suspect.

For example, let’s take a look at the daily chart of EURUSD. The pair had formed strong support in the summer of 2004 at 1.2000, which is also a number that takes on psychological significance because it is a large round number. In fact, the pair could not close below 1.2000 and then trended higher, before returning to the same area of support in the summer of 2005, when it cautiously hovered near 1.2000

(see figure 3) Click to enlarge:

Finally, during the August 24 session, the pair suddenly tries to break support. However, we can see in the five-minute chart

(see figure 4 ) Click to enlarge:

that the break was short-lived, a classic example of a false breakout. A trader who pays attention to the time of day would have noted that the break occurred late in the Japanese session, a time of day that is notorious for low volume and for false breakouts. Such a trader would have considered the timing of this event to be suspicious and would have refrained from entering a trade.

One week later, on July 1, the pair tries to break the support level once again, only this time the breakout occurs at approximately 1430 GMT

(see figure 5) Click to enlarge:

At this time of day, the London session is ongoing, and the New York session is well underway. As a result, this is a time of high volume and the trade is more likely to succeed. The pair finally breaks 1.2000 and drifts as low as 1.1865 over the next few days.

As we can see, there are steps we can take to alleviate the problem of false breakouts. These are just a few of the subtle nuances that traders use to gain an edge.

Polarized Fractal Efficiency

Date: September 20, 2005 14:00GMT

Expert: Erik Long, President of Tetrahex and Principal of Ceres Capital LLC

Topics:
- We will discuss this useful indicator
- How it can be applied to all trading markets.

Who is Erik Long?
Erik Long has been active in the study of evolutionary feedback systems since his university days at UCLA and CSU from 1987-1992. After obtaining a Bachelors in Bio-Anthropology and Economics, Erik went on to study evolution of markets with the accomplished academic and entrepreneur Dr. Gerald Fecht and notable mathematician Dr. Viktor Fontaine. Erik founded Tetrahex in 1996 as a forum to discuss evolution, entropy, and later fractals in financial markets. In the process Tetrahex later formed into a corporation, offering it's services to private industry. In 1998 Erik studied for his Post Graduate Diploma in Economics at the University of London. Since that time Erik has developed proprietary trading systems for Altea Trading from 2000-2002. Erik has also consulted in non-linear methodologies for Nexbridge Inc., 2000-2002. Erik is one of the founding members of the System Select Group at Peregrine Financial Group, 2002-2004. Mr. Long became a founding principal of Ceres Capital LLC in 2004. Erik Long has been published in Futures magazine and Stocks & Commodities magazine. Mr. Long has been a sponsored member of the New York Academy of Sciences since 1997 and listed in Who'sWho in America since 2003. Erik is available for presentations on a case by case basis.

Speech Material:

There has been much talk lately about Chaos theory, fractals and financial markets. Although large amounts of information are available about the theory of these subjects, there is little in terms of practical application. Previous research has determined that most chaotic systems produce some form of graphic representation. A common example is the turbulent flow in a stream producing swirls, eddies and vortices. Unfortunately it has also been discovered that standard Euclidean geometry does not accurately represent chaotic events, so a new type of geometry is needed.

Benoit Mandelbrot recognized the problem and decided to formulate a new type of geometry that could solve the problem of describing chaos. In his pursuit, he realized that many of the problems being researched had a common graphic representation, the squiggly line. So he asked himself the question, “What is the dimension of a squiggly line?” His answer was the creation of a new type of geometry known as fractal geometry.

The problem can be represented in figure 1.

Click to enlarge:

A straight line has a dimension of one. A plane surface has a dimension of two. A squiggly line has a dimension of between 1 and 2, depending on how much squiggle is in the line. The dimension of the squiggly line is actually a fraction of a dimension between 1 and 2. This fractional measurement is commonly known as the fractal dimension of the line. More importantly, others discovered that systems with the same fractal dimension had other properties in common. This of course led to the importance of the fractal dimension as a tool in chaos work.

This is all very interesting, but as traders we are mainly concerned with the application of the fractal dimension to price motion. Fractal dimensions can be used to analyze the price action of any stock or commodity. Depending on the application, fractal dimensions can measure how trendy or congested price action is. In order to do this we must have a tool based on the fractal dimension. To develop this tool, we will look at a problem that interested Mandelbrot. The question is, “How long is a coastline?” The surprise answer is an infinite answer. In other words it can be measured over and over again with different scales of measurement.

To present this more clearly, please look at fig. 2

Click to enlarge:

Which depicts an island and two ways to measure the coastline. In this diagram, the coastline is measured with two different rulers. You can clearly see that the longer ruler will not measure the coastline as accurately as the smaller ruler. Because of this, the larger ruler will indicate a shorter length around the coast than the smaller ruler. Progressively shorter rulers will produce progressively greater distance. Theoretically this can be carried on indefinitely.

In an effort to find a relationship that he could quantify, Mandelbrot plotted the data on log-log charts. The outcome was a relationship between the length of the ruler and the length of the coastline that had a constant slope on the log-log chart. This relationship held up for any coastline. Because of his discovery, Mandelbrot was able to determine that the slope of the log-log chart was one minus the fractal dimension.

Please see figure 3 for a graphic example.

Click to enlarge:

Why is all of this important you may ask?
The answer is that price movement creates a graphical representation that is similar to coastlines. Based on this similarity, it only makes sense to measure price movement with the same approach as the coastlines. Simply put, price movement is a bunch of squiggly lines. A very squiggly line is symptomatic of congested price movement. A less squiggly line is characteristic of more “efficient” price movement. If I measure price from A to B and the price is a straight line, the price efficiency is 100%. Prices rarely do this however, and are usually some degree or fraction of a dimension between a 2d plane and a 1d line,

figure 4. Click to enlarge:

If we wish to measure price efficiency, all that we need to do is divide the length of the straight line by the length of the squiggly line. If we add a plus sign when it is moving up and a negative sign when it is moving down, we have polarized fractal efficiency (PFE).

Please refer to figure 5 to see how this is measured on a stock or commodity chart. We can measure directly from C1 to C2 to get distance B, or measure along each closed bar to get distance A. If we take distance B and divide it by distance A, the efficiency would be 36%. The fractal efficiency equation expresses this efficiency using logarithms. In terms of the coastline example, the measure along each closed bar represents the short ruler. The C1 to C2 distance represents the long ruler.

The mathematical equation for computing PFE is derived in figure 6. Each close to close line is treated as the hypotenuse of a triangle, the length of which is computed as the square root of the squares of the sides. Length A is the close to close length added together. Distance B is the hypotenuse of the triangle between the first and last close.

Applying the PFE is simply a matter deciding what lookback length to use in the chart and then working the calculation for PFE. Traders may also use filter techniques to remove noise caused by trends switching directions. As an example, Tetrahex has used wavelets, adaptive moving averages and non-linear regression with various degrees of success. The filtered PFE is easily plotted under a price chart in most common charting packages such as MetaStock or TradeStation. Dr. Al Larson, the inventor of PFE has found that a five-period exponential moving average is also useful for filtering market noise. Figure 7 illustrates his use of the PFE on the OEX index with a 10-day PFE. According to Dr. Larson, this is a reasonable compromise between computational delay, which is half the span, and usability of the indicator information.

Please note that Dr. Larson has discovered that all stock indices have approximately a 43% maximum efficiency going up or down. Other stock or commodities markets have various maximums, but a maximum is always observed. Bear in mind that the maximum is a commonly observed event, but is not a hard/fast rule. Variations are always possible. You will also see in Figure 7 that the PFE generally has a smooth transition from trending up to down or vice versa. It is possible however, for the PFE to bounce or hover around the zero line in the indicator. This zero level signifies a balance between the forces of supply and demand. Whenever the PFE maintains this zero state, the market is in a congestion zone.

Dr. Larson has made two other observations about the PFE. When the efficiency passes the 66% level in the OEX market, it tends to move sharply to 80%. In many cases the time from the sharp rise to the next top or bottom is a constant time period. This implies that maximum price velocity can only last for X amount of time.

The other behavior is a hook toward maximum efficiency right before the end of an efficient period. See point B in figure 7. This hook usually appears too late to be tradable, but may be used as a confirming indicator with other indicators. When using PFE to trade it is also advisable to place a stop at the point just beyond the hook and watch the PFE. If the PFE begins to trend and then starts to lose traction around the zero level, you may want to exit the trade. On the other hand, if it continues through the zero line, stay with the trade until it reaches efficiency on the other side. Stay in the trade until efficiency starts to reverse again.

Please bear in mind that PFE is not a leading indicator like the Fractal Dimension Index discussed in previous Q&A sessions. PFE is a measure of past price activity. It is recommended that this indicator be used with other indicators and/or with trailing stops. I have found personally that trailing stops and an adaptive moving average work well with this indicator in the forex markets. I encourage experimentation with PFE. You will find that it is easy to use and offers valuable information about any tradable market.

For your convenience I have included MetaStock code for creating the PFE indicator.

Erik Long and Tetrahex would like to give special thanks to Dr. Al Larson and Stocks & Commodities magazine for references in this Q&A presentation.

MetaStock code for creating the PFE indicator:

Polarized Fractal Efficiency

Mov(If(C,>,Ref(C,-9),Sqr(Pwr(Roc(C,9,$),2) + Pwr(10,2)) /
Sum(Sqr(Pwr(Roc(C,1,$),2)+1),9),-
Sqr(Pwr(Roc(C,9,$),2) + Pwr(10,2)) /
Sum(Sqr(Pwr(Roc(C,1,$),2)+1),9))*100,5,E)

Click image to enlarge:

Live Perspective Broadcast

Date: September 19, 2005 14:00GMT

Expert: Derek Frey, Head Trader Odom & Frey Futures & Options

Topics:
Market reaction to news!
- This week's data and events
- Key support and resistance for major markets
- Derek's insight on the week inreview and the week to come
Currencies
- Euro
- Dollar
- Pound Sterling

Who is Derek Frey?
Derek Frey has been a futures trader since 1989 and is Head Trader and partner at Odom & Frey Futures & Options, a firm that specializes in high probability, defined risk option spread trades for the futures markets. Derek is also co-author of O&F News & Views, a weekly newsletter that is published by several publications and over 20 financial websites including FXStreet.com.

Speech Material:

New Live Perspective Broadcast
FX street.com is proud to launch a NEW informative, analytical, overview of the pre-week Market. We are delighted to have Derek Frey of Odom & Frey Options and Futures as our guest to give a fly on the wall insight to the happenings in the FOREX & Futures market for the coming week.

We hope you enjoy the Live broadcast and get up to date tips on how to tackle the week ahead. Bring your thoughts and doubts to the table by participating throughout the session actively and challenge the speaker with your questions, & concern's for the week ahead.

FXStreet.com has spoken with and listened to the needs and wants of thousands of clients and combined with our Live Q&A Sessions hope to erase the fears & woe's of our cliental and bring them up to speed with the latest happenings in the market.

***Please note that this session is not a lecture format chat session. To ensure success, please actively participate throughout ask REAL time questions, post points of view, queries, Doubt’s and concerns and receive immediate feedback and the opinion of our expert.**

Don’t miss the chance to pick his brains and be well informed for the week to come.

Lets discuss Market reaction to news!

This week's data and events:
The week ahead 09-19-05:
Hurricane Katrina is barely in the rear view mirror and now we have another new storm Rita heading towards the Gulf. This could spell more problems for the already troubled Energy industry there. Energy fears and prices continue to dominate the worlds markets. Look for a resumption of the uptrend but this one is unlikely to break out to new highs unless we have another direct hit from Rita. The other big event this week will of course be Tuesday’s FOMC meeting. The Fed is still expected to raise rates by .25 points but for the first time n quite a while it is less of a sure thing.

***All Numbers are based on December Futures Contracts

Euro:
The Euro continues to struggle with the surprisingly strong Dollar. Look for the Euro to stabilize later this week and then we should turn back higher from there. Support at 1.20 must hold or the bullish case will be gone.

US Dollar:
Continued optimism about the future of the Dollar gives it a boost. While the strength in the dollar is nice to see here in America this move is short term. Do not expect this rally to turn into a real trend. This is a counter trend move to the real Bear trend that is still in place, unless the Dollar can rally above 90.

Swissy:
The Swissy like the Euro continued to be pressured by the Dollar last week. Support at 77.50 must hold to keep the bull argument intact. Aggressive traders could buy at the current level and run stops below the 77.50 support.

Pound Sterling:
The Pound had a bit of a pullback last week, which is healthy in the overall bull run the Pound is in. The Pound need to turn very soon to keep the current uptrend intact.

Yen:
The Yen continues to be range bound. The Yen should stay in its current range and could be bought as it approaches the next support level at 90.

- Key support and resistance for major markets
- Derek's insight on the week inreview and the week to come