Central Banks

Bank of England

• Monetary Policy Committee (9 mbmers)
  • Governor: Mervyn King
  • 2 Deputy Governors: Charles Bean, Paul Tucker
  • Executive Directors: Spencer Dale, Paul Fisher
  • External Members Andrew Sentance, David Miles, Adam Posen, Martin Weale
• Current rate of inflation in UK 3.20%
• Interest rate = 0.5%
• MPC meetings: 1st Thursday of the month, announcement at 12:00GMT

European Central Bank (22 members)

• Governing Council:

• ECB meetings: once a month to set interest rates, announcement at 12:45 GMT
• Interest rate = 1.0%

US Federal Reserve

• Federal open market committee (10 voting, 15 total members):
  • Chairman: Ben Bernanke
  • Vice Chairman: William Dudley
  • 5 Board of Governors: Elizabeth Duke, Daniel Tarullo, Kevin Warsh, including the two above
  • Current members: Charles Evans, Jeffrey Lacker, Dennis Lockhart, Janet Yellen
  • Alternate members: James Bullard, Thomas Hoenig, Sandra Pianalto, Eric Rosengren, Christine Cumming(alt. VP)
  • Retired: Donald Kohn
• Interest rate = 0.25%

• If you are spreading and you are only outright in one contact you are unhedged .
• If you are a calendar spreader you are trading intramarket spreads.
• If you trade Euribor vs Shatz then you are trading intermarket spreads.
• Even if you are trading uncorrelated markets and you have the correct ratios you are still hedged .

• hit↓ → seller → short → fixed price/cost
• lift↑→ buyer → long → profit&loss
• If you lift the offer and then immediately hit the bid, what would it do to your P&L? The ask minus the bid which means you lost money.
• Contango: future price > spot price
• ECB I/R ↑ → Euribor ↓ → Equities ↑
• Bond downgrade → price ↓ → I/R ↑
• I/R difference narrows at contango → buy the spread, sell (I/R products)
• Combinations (risk hedged): Outright > Spread > Fly > Box
• Schatz/Bobl/Bund fly: 4-3-1 ratio
• hawks→prone to ↑I/R
• doves→prone to ↓ I/R

Futures

• Futures contract the obligation to buy or sell a specified product at a specified price at a specified date

Exchange a marketplace in which securities, commodities, derivatives and other financial instruments are traded. The core function of an exchange - such as a stock exchange - is to ensure fair and orderly trading, as well as efficient dissemination of price information for any securities trading on that exchange. Exchanges designs the contract to meet the needs of the market and give companies, governments and other groups a platform to sell securities to the investing public.

• Open interest: the number of outstanding contracts in a particular future delivery month for a specific future; measure of liquidity
• Short position can either deliver the underlying asset or offset the position
• Arbitrage
• Clearinghouse: becomes the legal counter-party to the original transaction; guarantees the performance of contracts
• Market Maker: a company or individual that quotes both a buy and sell price in a financial instrument or commodity to make a profit on the bid/offer spread.

Yield Curve correlation between yield and remaining lifetime

• inverted~ : lower yield for longer term

Trade management: follow-up observations and analysis of buy orders made

• Risk Ratio: risk :: predicted return
  • Leverage: use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment; amount of debt used to finance a firm's assets
• Fundamental analysis: reflected upon demand and supply
• Liquidity preference hypothesis: investors prefer liquidity and accept lower return for it
• Expectations hypothesis: yield curve reflects peoples expectations
• Market segmentation hypothesis: several discrete segments impact
  • Short-term: banks, money market dealers
  • mid-term: mutual funds, corporations and casualty insurers
  • long-term: pension, insurance, property

Orders

• Costs: Commissions, news & chart packages, desk fees.
• Outright: a position in a futures contract that is not offset; an investor has decided against a spread strategy. Instead, he or she will be only either long or short a particular futures contract
• Hedge: Making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.
• Spread: The difference between the bid and the ask price of a security or asset.
• Initial Margin: The percentage of the purchase price of securities (that can be purchased on margin) that the investor must pay for with his or her own cash or marginable securities.
• Variation Margin: A variable margin payment that is made by clearing members to their respective clearing houses based upon adverse price movements of the futures contracts that these members hold.
• Scratch trade: Enter & exit a trade at the same price for zero P&L except commissions
• Daily Stop: A daily stop allows traders who need to make split-second judgments flexibility in their position sizing decisions. A daily stop means the trader sets a maximum amount of money they can lose in a day (or week, or month). If they lose this predetermined amount of capital, or more, they will immediately exit all positions and cease trading for the rest of the day, week or month). A trader using this method must have a track record of positive performance.
• Market order: sale at market price, with limit boundary
• Stop order: like interrupt system, at specified price
• Limit order: an order to buy/sell a contract at a specific price or better that is not guaranteed
• Good ’Til Cancelled (GTC) order: buy/sell order which remains in effect until executed or canceled
• Trailing Stop order: a stop is set at a fixed number of ticks/percentage below the market price and therefore moves in the direction of a profitable trade to lock in profits.
• Limit up
  • exchange sense: A contract has moved up a certain amount in price in a trading session so that the exchange stops trading for a set amount of time.
  • trading sense: a trader has reached their trading limit size and cannot enter any more trades
• Chasing losses: gambling larger amounts of money to try to make back previous losses
• Overtrading: excessive broker trading in a discretionary account

Acronyms

• CBOT: Chicago Board of Trade
• CTD: Cheapest To Deliver
• FOMC: Federal Open Market Committee
• OAT: Obligation assimilable du Trésor (French Treasury Bond)
• BTP: Buoni del Tesoro Poliennali (Italian government bond)
• MOO: Market On Open
• NFP: Non-Farm Payrolls
• OCO: One Cancels Other

Technical Analysis

historical trend(market data) processing; method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.

• primary indicators: price, volume
• support: price at which a market bottoms out and buyers start to purchase
• resistance: higher limit price, broken at uptrend
• candlestick charts: include daily h/l, open/closing prices; graphical representation of the market's state of mind
• trend confirmation → must touch the trend point 3 times
  • Moving averages → direction, short term avg. vs. long term avg.
  • Bollinger bands: tracks overbought/oversold volume, must be aware of whether in a sideways or a trading market

CQG chart codes format

• my computer → documents and settings → all users → shared documents → CQG Net → delete the ‘private’ folder
• start menu → CGQ net program
• horizontal menu bar → right-click → popup → click ‘restore defaults’ → then ‘close’.
• horizontal menu bar → click ‘more’ → select ‘dom trader’.
• vertical menu on left → click ‘setup’ → untick ‘demo trading’.
• vertical menu on left → ‘logon’ option, select 'this' → enter username/password
• horizontal menu bar → click ‘chart’ → enter a respective chart code

e.g. QOZ0 Ice Brent Dec. 10, QOS2?1 Ice Brent 2-month spread Dec.10-Feb.11, QOS1?2-QOS1?1Ice Brent fly Dec.10-Jan.-Feb.

• Customization
  • Chart replication: left-click on CQG icon in upper-left corner → click ‘replicate’
  • Time-frame adjustment: right-click on chart window → 'intra-day' → choose time-frame
  • Market index quotes: horizontal menu bar → 'Quote' → 'quote box' → enter product code e.g. YM(Mini-Dow), QFA(FTSE100)
  • Chart-type: horizontal menu bar → right-click → 'chart-type' → 'candlestick'
  • add a study: chart window → right-click → select 'add study'
  • Candlestick fly BAR((QOS1Z0-QOS1F1),1)
• click 'save' on the upper right menu bar

CQG product code

OPEC

• Organization of the Petroleum Exporting Countries
• 12 participants

• Chairman: Abdalla Salem El-Badri

Commodities

Seasonality trends in agricultural markets

• Grains: price↓ at harvest

• Market impacts
  • flood/drought in Midwest→grains
  • freeze in Brazil→coffee, soybeans
  • Silver miners' strike in Mexico→Silver
  • South Africa→Gold
  • OPEC meeting→energy prices
  • Cote d'Ivore→cocoa beans supply

Bonds

refer to CFA section for details

Equities

FTSE 100 81% of London Stock Exchange

• top 10 companies: HSBC, Royal Dutch Shell, BP, Vodafone Group, GlaxoSmithKline(pharmaceuticals), AstraZeneca(pharmaceuticals), Barclays Bank, British American Tobacco, Rio Tinto Group(mining), BHP Biliton(mining)
• market capitalization: £1.7 billion
• continuous trading 08:00-16:30

Dow Jones Industrial Average 30 large, publicly owned companies based in the United States

• top 5 firms: IBM, 3M, Chevron, Caterpillar, McDonalds

Swiss Market Index(SMI) Switzerland's blue-chip stock market index

• top5: Nestlé, Novartis(pharmaceuticals), Roche(pharmaceuticals), UBS, Credit Suisse
• 90% of Swiss market, CHF 783.1 billion

Deutscher Aktien IndeX(DAX) blue chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange

• market capitalization: €442.5 billion (end 2008)
• top12: E.ON(multi-utilities), Deutsche Telekom, Allianz, Siemens, RWE(multi-utilities), Munich Re(insurance), Volkswagen Group, Daimler, Bayer(specialty chemicals), BASF(specialty chemicals), Deutsche Bank

CAC quarante(CAC 40) a benchmark French stock market index

• market capicatlization: €1.031 trillion
• top5: Total oil, Sanofi-Aventis(pharmaceuticals), BNP Paribas, GDF Suez(gas distribution), France Télécom

EURO STOXX 50 Index Futures(FESX) a stock index of Eurozone stocks designed by Stoxx Ltd.

• top10: Total S.A.(FRA), Nokia, Telefonica(ESP), Banco Santander(ESP), E.ON(DEU), Siemens AG, Daimler AG, UniCredit(ITA), Allianz, ING Groep(NED)
• goal: to provide a blue-chip representation of Supersector leaders in the Eurozone

NASDAQ a modified market value-weighted index of 100 of the largest non-financial companies listed on the NASDAQ

• top10: Apple(AAPL), Microsoft(MSFT), Cisco Systems(CSCO), Oracle(ORCL), Intel(INTC), Google(GOOG), Qualcomm(QCOM), Amazon.com(AMZN), TEVA Pharmaceutical(TEVA), Amgen(AMGN)

S&P 500 a free-float capitalization-weighted index published of the prices of 500 large-cap common stocks actively traded in the United States

• top10: Exxonmobil(XOM), Proctor & Gamble(PG), Bank of America(BAC-I), Wal-mart(WMT), HSBC Holdings(HBC), IBM, Johnson&Johnson(JNJ), General Electric(GE), J.P. Morgan Chase(JPM), AT&T(T)

Daily Records

Announcements

• Forex event outcomes

Reference recap

Market Wizards

• be aware of consecutive limit-ups
• look for repeating patterns
• predetermined stop before putting order
• correlations of all positions
• imagine alternative scenarios
• be a contrarian
• do not average losers, cut it and take a break
• Bonds factors - inflation expectations, dollar, trade balance, budget deficit
  • Invest against the central banks; central banks try to prop up a currency, go the other way
• Stocks: quarterly comparisons for acceleration in earnings growth rate
  • I/R↑exp. → utilities → stocks
  • giant blue-chips tend to lead the market trend
• traits: discipline, patience, courage, willingness to lose, desire to win
• set up a loss limit
• crisis→arbitrage opportunity, going back to the original position
• daily preview and review
• continuously experiment and analyze new strategy

Jesse Livermore quotes

• All through time, people have basically acted and reacted the same way in the market as a result of: greed, fear, ignorance, and hope. That is why the numerical (technical) formations and patterns recur on a constant basis.
• The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.
• Don't take action with a trade until the market, itself, confirms your opinion. Being a little late in a trade is insurance that your opinion is correct. In other words, don't be an impatient trader.
• Money made in speculation came from commitments in a stock or commodity showing a profit right from the start. Don't hang on to a losing position for very long.
• It is foolhardy to make a second trade, if your first trade shows you a loss. Never average losses. Let this thought be written indelibly upon your mind.
• When you are doing nothing, those speculators who feel they must trade day in and day out, are laying the foundation for your next venture. You will reap benefits from their mistakes.
• When a margin call reaches you, close your account. Never meet a margin call. You are on the wrong side of a market. Why send good money after bad? Keep that good money for another day.
• Pivotal points: (1)Price levels at which the stock or market reversed course previously--in other words, previous major tops or bottoms; and (2)psychological price levels such as 50 or 100, 200, etc. I would buy a stock or commodity that saw a price breakout above the Pivotal Point, and sell a stock or commodity that saw a price breakout below a Pivotal Point.
• Successful traders always follow the line of least resistance. Follow the trend. The trend is your friend.
• I absolutely believe that price movement patterns are being repeated. They are recurring patterns that appear over and over, with slight variations. This is because markets are driven by humans -- and human nature never changes.
• When you make a trade, you should have a clear target where to sell if the market moves against you. And you must obey your rules! Never sustain a loss of more than 10% of your capital. Losses are twice as expensive to make up. I always established a stop before making a trade.
• The big money is made by the sittin' and the waitin' -- not the thinking. Wait until all the factors are in your favor before making the trade.

Market Data

• ECN Broker
• Bloomberg markets
• Reuters business news
• Zero hedge - blog
• ICE Brent Crude futures