The difference between the bid and ask price of a currency.

The current market price. Settlement of spot, or cash, transactions usually occurs within two business days.

The current market price. Settlement of spot, or cash, transactions usually occurs within two business days.

When settlement of a currency position (long or short) is rolled forward to another date. Rollover fees are based on the difference in interest rates between the two currencies.

The second currency in a currency pair is referred to as the quote currency. For example, in a USD/JPY currency pair, the Japanese yen is the quote currency. Also referred to as the secondary or counter currency.

A currency’s minimum price fluctuation, or tick, which is usually the fourth decimal place (0.0001). Japanese yen is the second decimal place (0.01).

The standard trade size of 100,000 units, measured in the base currency. For example, a U.S. dollar/Swiss franc lot costs $100,000, but a euro/U.S. dollar lot equals 100,000 euros. Some brokerages offer trading in “mini” lots of 10,000 units.

A market-maker’s price that can’t be acted upon immediately. An FX dealer may quote an indicative price, but offer another, sometimes less attractive price to execute a trade.

The exchange rate between any two currencies considered non-standard in the country where the currency pair is quoted. For example, in the U.S., a GBP/JPY quote would be considered a cross rate, but in Great Britain or Japan it would be one of the primary currency pairs traded. Currency pair: The two currencies that make up a foreign exchange rate. For example, U.S. dollar/Japanese yen (USD/JPY) is a currency pair. Trading a currency pair involves the simultaneous buying of one currency and selling of another.

Dealer expression referring to the first few digits of an exchange rate. These digits rarely change in normal market fluctuations, and are omitted in dealer quotes, especially in times of high market activity. For example, a USD/JPY rate might be 107.30/107.35, but would be quoted verbally without the first three digits (i.e., “30/35”).

In the FX market, the U.S. dollar is normally considered the base currency, meaning quotes are expressed as a unit of $1 per the other currency quoted in the pair. The primary exceptions to this rule are the British pound, the euro and the Australian dollar.

The parabolic stop is a trailing stop technique developed by Welles Wilder and explained in his book New Concepts in Technical Trading (Trend Research, 1978). It’s the primary component of what he calls the “Parabolic Time/Price” trading system. The basic principle behind the parabolic stop is a calculation that automatically raises (in the case of a long trade) or lowers (in the case of a short trade) a stop-loss order that protects existing profits in a trade.

For simplicity, the following discussion is given in terms of long trades — the rules are inverted for short trades.

Calculation

The formula for calculating the parabolic stop level for tomorrow’s trading day (when using daily price bars) is:

Ptomorrow = Ptoday + AF * (EPtrade - Ptoday)
where

Ptoday = Today’s parabolic stop value

AF = Acceleration factor; the default value which begins at .02 and increases by .02 increments (for each bar that establishes a new high during the trade) to a maximum of .20

EP = Extreme price since the trade was initiated (highest high if long, lowest low if short) To walk through the calculations, assume a long trade was established yesterday in the Euro/U.S. dollar rate (EUR/USD) at 1.1965, with an initial stop-loss of 1.1870 that is still in effect today. Today’s high of 1.2084 was higher than yesterday’s high, which means it is the extreme price (EP in the previous formula) since the trade began. This changes the formula slightly:

Ptomorrow = Ptoday + AF * (Htoday - Ptoday)
where

Htoday = Today’s high (the extreme price)

Because this is the first day of the calculation, there is no parabolic stop level. This means we must use the initial stop for the trade (1.1870) as Ptoday in the formula. Plugging in these values results in:

Ptomorrow = 1.1870 + .02 * (1.2084 - 1.1870)

Ptomorrow = 1.1870 + .0004 = 1.1874

If tomorrow EUR/USD rallies to a new high of 1.2250, the parabolic stop level for the following day would be:

Ptomorrow = 1.1874 + .04 * (1.2250 - 1.1874)
Ptomorrow = 1.1874 + .0015 = 1.1889

Notice here the acceleration factor increased from .02 to .04 and the previous day’s parabolic value is now used in the formula. The greater the acceleration factor, the more “tightly” the stop will track prices. The AF increases by .02 only for a bar that establishes a new EP (high price) in the trade. If the stock had not made a new high, the previous high of 1.2084 would have been used as the EP and the AF would have remained at .02.

By default, the upper and lower Bollinger Bands are placed two standard deviations above and below a 20 period simple moving average (SMA) of closing prices:

Upper band = 20-period SMA + 2 standard deviations

Middle line = 20-period SMA of closing prices

Lower band = 20-period SMA – 2 standard deviations

The upper and lower bands encompass the price action because the calculation of the bands uses a statistical measurement called standard deviation, which measures the how far the closing prices stray from the SMA of closing prices. Statistically, 95 percent of values will fall within two standard deviations of the average value, which means 95 percent of price action should occur within the upper and lower Bollinger Bands.

The relative strength index (RSI) is a momentum oscillator designed to identify short-term momentum extremes (so-called “overbought” and “oversold” points). J. Welles Wilder, developer of the RSI, provides step-bystep instructions for calculating and interpreting the indicator in his book, New Concepts in Technical Trading Systems (Trend Research, 1978). Wilder described the indicator in terms of daily price bars, but the RSI can be used on any time frame.

The relative strength index should not be confused with the concept of relative strength, which is a comparison of the price action of one instrument to another — most commonly, an individual stock to its group, sector, or the overall market. Other well-known indicators similar to the RSI include stochastics, momentum and rate of change, and the Commodity Channel Index (CCI).


Calculation

The basic RSI calculation is a ratio of the average up closes (those bars that closed higher than the previous close) to the average down closes (those bars that closed lower than the previous close) over a certain period. The ratio is then normalized to have a range of values between 0 and 100 using the following formula:

RSI = 100 – (100/[1+(U/D)])
where

U is the average of the up closes over a given period;

D is the average of the down closes over a given period.

For example, to start the calculation of a 10-day RSI, the close-to-close price changes of all the up closes over the most recent 10 days would be summed and divided by 10, resulting in U in the formula. Similarly, the close-to-close price changes of all the down closes over the most recent 10 days would be summed and divided by 10, resulting in D. (Wilder actually used a modified exponential smoothing calculation to simplify calculation from day to day.) The RSI measures price momentum by measuring the strength of up days (or bars) to the weakness of down days (or bars) over a given period. If there are more (or larger) up days than down days over a given period, the RSI will rise; if there are more (or larger) down days than up days, the indicator will fall.

Wilder’s default “look-back” period for the RSI is 14 days, although no time period is better than any other — it depends on the market conditions and the trader’s time frame. The fewer days or bars used to calculate the indicator, the more sensitive it will be to shorter-term price fluctuations.

Bollinger Bands are a type of trading “envelope” consisting of lines plotted above and below a moving average, which are designed to capture a market’s typical price fluctuations.

The indicator is similar in concept to the moving average envelope (see Indicator Insight, Active Trader September 2002, p. 84), with an important difference: While moving average envelopes plot lines a fixed percentage above and below the average (typically three percent above and below a 21-day simple moving average), Bollinger Bands use a statistical calculation called standard deviation to determine how far above and below the moving average the lines are placed. As a result, while the upper and lower lines of a moving average envelope always move in tandem, Bollinger Bands expand during periods of rising market volatility and contract during periods of decreasing market
volatility.

Bollinger Bands were created by John Bollinger, CFA, CMT, the president and founder of Bollinger Capital Management (see Active Trader, April 2003, p. 60).


Calculation

By default, the upper and lower Bollinger Bands are placed two standard deviations above and below a 20-period simple moving average.

Upper band = 20-period simple moving average + 2 standard deviations

Middle line = 20-period simple moving average of closing prices

Lower band = 20-period simple moving average – 2 standard deviations

Standard deviation is a statistical calculation that measures how far values range from an average value — in this case, how far prices stray from a 20-day moving average. Statistically, 95 percent of values will fall within two standard deviations of the average value, which means 95 percent of price action should occur within the upper and lower Bollinger Bands.



Interpretations and use

Bollinger Bands highlight when price has become high or low on a relative basis, which is signaled through the touch (or minor penetration) of the upper or lower line. Put another way, price is seen as relatively high (overbought) on a touch of the upper band and relatively low (oversold) on a touch of the lower band.

However, Bollinger stresses that price touching the lower or upper band does not constitute an automatic buy or sell signal. For example, a close (or multiple closes) above the upper band or below the lower band reflects stronger upside or downside momentum that is more likely to be a breakout (or trend) signal, rather than a reversal signal.

Accordingly, Bollinger suggests using the bands in conjunction with other trading tools that can supply context and signal confirmation.

The simple moving average (SMA) is the standard moving average calculation that gives every price point in the average equal emphasis, or weight. For example, a five-day SMA is the sum of the most recent five closing prices divided by five.

Weighted moving averages give extra emphasis to more recent price action. The exponential moving average (EMA) weights prices using the following formula:

EMA = SC * Price + (1 - SC) * EMA(yesterday)
where

SC is a “smoothing constant” between 0 and 1, and EMA(yesterday) is the previous day’s EMA value. You can approximate a particular SMA length for an EMAby using the following formula to calculate the equivalent smoothing constant:

SC = 2/(n + 1)
where

n = the number of days in a simple moving average of approximately equivalent length.

For example, a smoothing constant of .095 creates an exponential moving average equivalent to a 20 day SMA (2/(20 + 1) = .095). The larger n is, the smaller the constant, and the smaller the constant, the less impact the most recent price action will have on the EMA. In practice, most software programs allow you to simply choose how many days you want in your moving average and select either simple, weighted or exponential calculations.

The U.S. Commerce Department’s Census Bureau and its Bureau of Economic Analysis (BEA) jointly release the International Trade in Goods and Services report each month, which is a snapshot of the U.S.’s trade balance, or the gap between its imports and exports.

The trade balance report is one of two releases that focus on foreign trade, but unlike the current account balance report, which also includes foreign investment, the trade release only tracks the goods and services imported to and exported from the U.S.

The report isn’t as relevant as other economic indicators because its statistics are delayed by two months (i.e., January’s report contains November’s data), but its monthly release is more popular than the quarterly current account balance report. It hits the Street at 8:30 a.m. ET the second week of the month.

Traders tend to concentrate on the overall figures for each month (total imports and exports as well as the trade gap, or difference between them), but the report contains 18 detailed tables that break down U.S. trade in a variety of ways.

First, the announcement divides both imports and exports into either goods or services, and provides three-month moving averages of all four categories. The report then divides these groups further into smaller categories including six types of services, petroleum or non-petroleum goods, and dozens of industrial supplies and consumer products that range from nuclear materials to fruit. Finally, the trade balance report breaks out U.S. imports and exports by nearly 40 countries.

The Commerce Department directly tracks monthly changes in imported and exported goods, but it uses business surveys to compile its services data. The release provides both seasonally adjusted and raw data as well as nominal and real, or inflation-adjusted, statistics. Each report contains revised data from previous months, and annual revisions are released each June.

Replicates the trading actions of an active manager and thus attempts to provide a more realistic benchmark for active currency traders.

A performance-based benchmark that measures both the reported and the risk-adjusted returns of global currency managers. It is the first index to analyze unleveraged, or risk-adjusted, manager performance to calculate their alpha, or incremental performance added, of managers. It is equal weighted to preclude unrepresentative distortions from large-manager performance. The Parker FX Index currently includes 66 programs managed by 45 firms located in the U.S., Canada, UK, Ireland, and Switzerland. These programs manage over $15.7 billion in currency assets split between 46 systematic and 20 discretionary traders.

Measures the average performance of the above set of advisors.