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DOES YOUR BROKER SEGREGATE YOUR FUNDS AT TIER-1 BANKS FOR SAFETY?

 

You enjoy forex trading. Your skills match nicely with the demands of this medium. You understand that it involves high risk, but you are the adventuresome type. You like to experiment with new approaches, such as digital options, but it seems that the brokers that favor this new vehicle are either in the Caribbean or Cyprus. You have checked them out and chosen one on Cyprus. Your strategy has produced immediate gains, so you transfer more funds to your account. After more favorable trading results, you log on to find out that your account has been frozen. Your broker claims that Cyprus is in crisis.

 

Does this scenario sound plausible to you? Many currency traders awoke in March and were greeted by this very reality, through no fault of their own. For brokers that followed good business practices, their client account balances were held offshore, far from the possibility of seizure. For other brokers, many of them may never be able to restore the full balance of their customer accounts, leaving you holding the bag for their incompetence and attempting to assert your legal rights in a foreign jurisdiction.

 

The recent events in Cyprus have shaken the forex industry, which is doing everything it can to repair its battered image and reputation. Many brokers did follow best business practices by segregating their client account balances offshore in Tier-1 banks, leaving only operating funds for the local subsidiary in Cyprus. For the others, they are scrambling to save their collective lives, searching for additional outside capital or support, or winding down their presence entirely in Cyprus.

 

What exactly happened in this thriving island community of 1.2 million people, revered as a global financial center for the past decade? This story may soon be included in all forex tutorials to illustrate another aspect of risk that must be addressed, but this basic principle could apply to brokers of stocks, commodities, and other securities, as well. In this case, the financial crisis had nothing to do with currency trading, but forex brokers were suddenly impacted by mismanagement at the two largest banks on the island.

 

The Bank of Cyprus and the Laiki Bank were guilty of investing far too heavily in Greek bonds. Remember those? Remember the bondholders receiving a major “haircut” when bailout agreements demanded that they be devalued? These two banks had not been prudent investors, and local regulators had not questioned their actions or demanded that capital adequacy standards be met with new rounds of capital funding. The result was that enormous losses on the bonds put both banks in jeopardy.

 

The terms of the subsequent bailout agreement were draconian. The Bank of Cyprus was to be re-structured. The Laiki Bank was to be closed. Supporting funds were to be seized from all accounts over 100,000 Euros, suggesting a 40% “haircut” by most estimates. For forex brokers, totaling some 80 in number on Cyprus, the ones that combined operating and client funds in a single bank account were immediately impacted. They had chosen to use bookkeeping reports as a form of segregation, an unwise choice.

 

The reason why brokers of all forms locate in the Caribbean or Cyprus is due to tax breaks given, the flexibility of local laws, the willingness of the local governments to work with them in return for jobs for their inhabitants, and, unfortunately, for a regulatory environment that may be more easier to work with than in larger countries, where regulators are determined to enforce compliance and safety and soundness principles.

 

A good resource for forex broker information can be found at Forextraders.com. If you would like to read more on this topic, please click here.

 

Is your broker segregating your account balances with Tier-1 banks?

 

 

“USD/JPY” CURRENCY PAIR TREND ANALYSIS

 By Tom Cleveland

 

Stocks are down 38% as Housing Bubble bursts.  Housing prices fall 90% in some cities as consumers and businesses alike are underwater on mortgage debt.  Bank balance sheets balloon with toxic assets awaiting write-downs.  Consumer confidence is eroding.  Sound familiar?  But these are not our news headlines from a few years back.  These were the news headlines in Japan in 1990, some twenty years ago.

 

Japan Incorporated, the model for super successful business strategies, was in full economic breakdown.  The stereotype of the “Salaryman” working five and a half days a week for one company for a lifetime was in jeopardy.  Newer generations wanted no part of this work ethic, nor did they procreate enough to support future social security and tax liabilities.  The resulting recession lasted fifteen years, ending in 2007 when the rest of the world found itself hanging on a precipice similar to Japan’s 1990 version.

 

To many, the “Great Recession” has replayed many of the same scenarios as in Japan some twenty years back, but on a global basis this time around.  Advanced economies of developed nations have been mired in tepid recovery plans, trying every monetary and fiscal trick in the playbook to turn their respective economies around.  As Japan sat on the sidelines, most analysts expected the U.S economy to pull out of its ditch and speed past Japan.  However, the "USD JPY" (click to view live chart) currency chart depicted below does not bear out these sentiments for the past year:

 

 

 

The Dollar actually peaked back in 2007 at 123 Yen, but has been on a decline ever since the Lehman Brothers failure.  For eighteen months from 2009 into early 2010, the Yen tested the “90” level, finally falling to new record lows and forming the descending triangle illustrated in the above chart.  The anticipated breakout from that pattern materialized in November, but a new channel quickly formed, only to witness another brief upward breakout as shown. Enthusiasts of forex trading hat have gone long on the Yen have profited handsomely from that strategy for the past several years.  The question now is where will this currency pair head next?

 

Japan recovered from its prolonged recession without major structural reforms and was only recently passed by China as the number two economy in the world.  The country still imports basically all of its energy and commodities.  Japan’s land mass is smaller than California, and only 15% of that is inhabitable, which must also be shared with agriculture.  Effeciency and effective use of all resources, though emblimatic of the culture, are more a necessity than a way of like. 

 

Although officials were slow to respond to the latest global recession, Japanese businessmen have been quick to adopt Western ways.  Personnel budgets have been slashed at unprecedented rates, including summer bonuses.  Supply chains and distribution channels have been restructured.  Corporate Japan is leaner and meaner these days, and more than ready to face new competitive challenges around the planet

 

Although most believe the strong Yen has bottomed, it is never wise to underestimate the prowess of the Japanese to adjust to new economic situations.  The experience gained during their prolonged “balance sheet recession” is immeasurable.  The fact remains that the “79” level was never tested during recent pricing behavior, and the market’s inability to gain ground is worrisome.  Sideways market action is too reminiscient of last year’s long-playing record.

 

While the United States wallows in high unemployment and ever-increasing budget deficits, one has to wonder why this pair would ever move north.  Another round of quantitative easing will not help either.  Be cautious if lows are tested again.

 

 

 

 

FX BACKTESTING

By Jennifer Gorton

 

Successful traders swear by it.  In fact, many claim it to be the most important habit that they have developed over time to ensure their success.  What is deemed to be a habit that you cannot do without?  Backtesting is the consistent reply by those in the know.

 

A straightforward definition of the word from an Internet dictionary is as follows:

“Backtesting is a process, usually performed with aid of computers, by which traders try to estimate how financial instruments would have performed in the past had a particular mechanical trading system been employed to trade them.”

 

Ever since commodity traders observed pricing patterns tied to the seasons centuries ago, the art of technical analysis has evolved to a level of sophistication that has produced thousands of signal indicators for the purpose of prudently guiding a trader’s entry and exit in any market.  Everyone, including those involved in currency trading, seems or wants to believe that there is a Holy Grail out there that will produce instant wealth, if only it could be found.

 

Forex price behavior never moves in a straight line, but in zigzag patterns that resemble waves.  These waves, like all waves that occur in the natural world, are produced by the ebb and flow of buying and selling forces in the market, searching for a balance point.  Technical analysts have studied these waves and can predict with a high degree of probability the future direction of such prices when certain conditions exist.  The objective then becomes finding the right “system” or combination of signal generators that give accurate guidance more times than not.

 

Traders could obviously test out their theories using broker demo accounts and real time trade data, but that process could take years to perfect.  If going forward takes too long, then going backward must be the answer.  By testing a “trading system” with historical data, a trader can fine tune his parameters, measure his success rate, and prepare for a real time test using real money.  Sounds like a logical plan of attack, but does it work?

 

To begin with, it would help if you had a programming background.  The first task is to assemble a database of historical forex trading data.  This task is not as easy as it sounds.  The forex market is not centralized.  Various data reporting services “buy” their data from a variety of banking participants in the interbank market.  There are no reliable sources for accurate data.  The data you get is reflective of the point of access, nothing more, nothing less, and variations are to be expected.  In fact, there may be gaping holes in the acquired data, and depending on the timeframe, you will have millions of items to deal with, thereby requiring something a lot more sophisticated than an Excel spreadsheet.

 

 

Some traders accept the historical data that their forex broker can provide, usually two years worth, but only for a few trading pairs.  The highest volume pair is the “EUR/USD”, but traders tend to prefer the “GBP/USD” pair since there is more volatility and opportunity for profitable trades.  Assuming that you get past the historical data requirement, there are three basic methods for backtesting:

 

         Manual Testing:  Yes, the old tried and true manual approach is one way to go.  It does take time, as you have to bring up the data elements one at a time, allow your system to generate signals as you scroll through data, and then record your results.  It is time consuming, but you are building valuable trading experience as you slog through the data;

         Software Testing:  The preferred method is to use software designed for the process.  It produces results as if you were in a real trading environment.  The product mentioned most in review articles is “Forextester”;

         Programmed Approach:  OK, if you are not a programmer, this is not an option.  But if you are, then you can design something that appeals to your personal needs.  However, the automation of trades does not always replicate how you might react in a trading environment, so there are more variables to consider.

 

The primary issue with backtesting is that the past is no guarantee of how the future will unfold.  For example, if you had chosen to use data over the May/June period of this year, the European debt crisis would have skewed the test data enormously and given mixed results for backtesting. 

The fact is that situations are always changing and shaping price behavior accordingly in our markets.  However, the general experience and confidence that can be gained in a trading system by backtesting are benefits that most likely make the process worthwhile.  Confidence leads to consistency, the primary goal in every trader’s plan of attack.

 

Read more on back testing at ForexTraders.com

 


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