Ichimoku Charts by Nicole Elliott

Author:Nicole Elliott
Language: eng
Format: epub
Publisher: Harriman House

Study 2: Short Sterling interest rate future

For those of you who are not familiar with money market interest rate futures contracts, the price of these is 100 minus three-month LIBOR (London Inter Bank Offered Rate). These contracts were devised so that pit traders could make money by buying the futures when yields went down, and selling them when yields went up.

For example, if rates are currently 5.00%, the futures contract would be priced as 100.00-5.00 = 95.00. If rates were then to drop to 4.00%, the contract would be priced at 100.00-4.00 = 96.00. The trader would have made 100 basis points (1.00%) by buying at 95.00 and selling at 96.00. Just like many novice FX traders, some people find it difficult to buy, say, Swiss francs at CHF 1.2600 to the US dollar, and make money by selling them out again at 1.2500. Now you can see why almost every time bonds are mentioned in newspapers, the words “as prices go up yields go down” are usually added.

In the Short Sterling example (chart below) I have chosen to use weekly candles to see if this makes the wave count any easier. So that readers understand what happened before this picture was snapped, the market had traded up from a low at 94.00 in June 2002, to a high at 96.00 in June 2003, then back down to 94.20 in June 2004. In other words, expectations for where interest rates would be in March 2006 have fluctuated wildly between 6.00% and 4.00%.

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