Top Five Currency Trades of All Time

5. George Soros vs. The Thai Baht (1997) 
In the years running up to 1997 there were a number of signs that it would be trouble with a number of Asian economies. A number of economists including Paul Krugman attacked the supposed ‘Asian economic miracle’ publishing papers as early by 1994. From 1985 to 1996 the Thai economy had grown an average of 9% every year while keeping inflation in check, however by 1996 times were changing. Many felt the Thai Baht which was pegged against a basket of currencies with the main component being the US Dollar was vastly overvalued. Soros who in 1996 sent members of his hedge fund out to Thailand to undertake research agreed. On the 14th and 15th of May 1997 their Thai Baht was hit by a number of speculative attacks including ones undertaken by Soro’s Quantum Fund. On June 30 1997, Prime Minister Chavalit Yongchaiyudh made a public announcement stating that his government wouldn’t devalue the Thai Baht. Many of the speculators including Soros held that the Thai government were ill-equipped to defend the overvalued Thai Baht triggering a huge sell off of the currency. By the 2nd of July 1997 the Thai government were forced to let the Thai Baht float freely, with the Thai Baht swiftly losing almost half its value. 

4. Andy Krieger Vs. The Kiwi 
The year is 1987 and Andy Krieger is a 32 year old currency trader at Bankers Trust who was about to make one of the greatest currency trades of all time. Krieger was actively monitoring the currencies which had rallied against the dollar following the Black Monday Crash. As investors and multi-national corporations rushed to pull their currency reserves out of the US and into other currencies that had suffered so badly in the market crash, Kreiger came to the realization that some of the rallying currencies would become fundamentally overvalued creating the perfection arbitrage opportunity. The currency which Krieger decided to target was the New Zealand Dollar also known as The Kiwi. Using new techniques developed in part due to the rise of options Andy Krieger took on a massive short position in the currency worth several hundred million dollars. It has been said that the position was in fact larger than New Zealand’s total money supply, this selling pressure and the overall lack of currency in circulation led to a sharp drop in the value of The Kiwi. Which made Bankers Trust then Krieger’s employer millions of dollars, later on Krieger left Bankers Trust to go work for the infamous George Soros. 

3. Stanley Druckenmiller Shorts the Deutsche Mark 
In 1989 the Berlin Wall fell as the Eastern bloc and the Soviet Union began to crumble eventually leading to a Europe free of Soviet oppression. While others were celebrating these events and talking about The End of History some speculators were out to make a fast buck. The fall of the Berlin Wall also signal the reunification of Germany and this had led to a depression in the value of the German Deutsche Mark. This was perfect understandable with East Germany having an economic output of half of the more developed West. However Stanley Druckenmiller took a long position on a possible future rise in the price of the currency. Soros then told to Druckenmiller to increase the bet, buying a total of 2 billion German Marks. The bet payed off and helped the Quantum Fund have a bumper year posting huge returns. 

2. Soros against the British Pound 
The EU treaties of the early 90’s forced members of the European Union into the Exchange Rate Mechanism in order to align the various economies together in order to prepare Europe for the introduction of the Euro. Members of the Exchange Rate Mechanism had to keep their respective currencies above a certain price level against the German Deutsche Mark. Britain’s membership of the ERM was on the condition that the British government kept the value of the British pound above 2.7 Marks. Britain’s attempts to achieve such a feat led to high levels of interest rate and equally high rates of inflation. Many Speculators including Soros thought such an arrangement would hold out in the long run and they were right. This led to many aggressive speculators taking up large short positions in the pound with Soros borrowing heavily in order to take up a huge position in the British Pound. This all came to a head on the 16th of September 1992 when the British Government attempt to prop up the pound Sterling against the currency speculators, raising interest rates to 12% (with further promises to raise the rate to 15%) while also buying billions worth of Pounds. However by 7pm that evening the Government were forced to withdraw from the Exchange rate mechanism meaning that Soros pocketed an estimated $1 billion dollars. 

1. Joe Lewis vs. The British Pound 
Joe Lewis, a reclusive billionaire and owner of British football team Tottenham Hotspurs is said to have made even more than Soros during the Black Wednesday Crash, with some estimating that Joe Lewis made a total of around $1.2 billion Dollars that day. Joe Lewis began currency trading in the 1970’s after selling the family business and is also well known for having lost an estimated $1.1 billion on Bear Stearns in 2007.

Documentary: Quants: The Alchemists of Wall Street


Quants are the math geniuses who have helped Wall Street create algorithms and mathematical models which drive much of the trade and activity on The Street. Some have blamed the Quants for 2008 financial crisis and the 2010 flash crash. This documentary takes a look at the increased role these geniuses play in creating the models that Wall Street and the financial sector increasingly lean on. This documentary gives the viewer a good insight into the huge role algorithmic trading and complicated models now play in the financial services sector. 

An Introduction to Trading Gold

Gold has been greatly valued by humans due to it’s aesthetic qualities and it’s general malleability. Gold has been at the center of human commerce since the beginning of recorded history and their is bountiful evidence to suggest that Gold was used as currency in ancient Middle Eastern Societies over 2,500 years ago. This makes Gold the oldest form of currency that is still in use today. Thus Gold has a long historical track record of being a store of value, with its value having endured through periods of war, famine and other great historical events. This is why Gold is often seen as the ultimate safe haven asset. In addition, Gold also has a number of important industrial applications.

Since the financial crisis of 2008, the interest in trading Gold has risen significantly with Gold prices skyrocketing as investors and individuals look for a safe haven. With Gold prices hitting an all time high of above $1900 in late 2011. This short introductory post will discuss some of the basics of Gold trading and the factors that affect Gold prices. 

Physical gold is generally held to be valuable due to the fact that it has many of the key qualities one would want from a currency. Gold is scarce, durable, portable, uniform and widely accepted. This wide acceptance is part due to the fact that Gold has a long history of being widely accepted. The majority of people who trade Gold never take delivery of their Gold bullion but rather focus on the current spot gold price, which is based on the price of the nearest futures contract on the New York COMEX (Commodity Exchange). This means the most common way to trade Gold is either through futures contracts themselves or through derivatives based on the price of future contracts.  

In Europe, the most popular way to trade Gold is through a type of derivative known as CFD or Contract for difference. CFD’s are a leveraged instrument meaning that it is possible to trade several thousand euros worth of Gold with a much smaller initial margin deposit. This leverage works in your favor when things go your way multiplying your profits, while working against you when things don’t go your way multiplying your loses. This makes risk management and stop losses very important.  

Gold is one of the most difficult assets to value, this is due to the fact that in someways Gold is similar to a currency and in other regards it much closer to commodities such as Oil or Corn. Unlike normal currencies and stores of value, Gold is not supported by the strength of an underlying economy. Gold is also unlike Oil or Natural Gas, as it fluctuates independently of industrial supply and demand.   

A very reliable determinant of what will happen with Gold prices is the level of real interest rates. The real interest rate is the rate of interest minus inflation. When real interest rates are low or negative investments such as Cash savings or Bonds tend to have a low or negative real rate of return. This in turns pushes investors to seek alternative ways protect their wealth with Gold being seen as a good store of value. On the other hand when real interest rates are strong investors tend to move their money out of Gold into other assets in order to take advantage of the strong real interest rate.  

Short term traders have often found that technical trading strategies can be very effective when it comes trading Gold. A number of different strategies can be easily adapted to the Gold market and many have found the durable trends which Gold tends to form to be very profitable. Those looking to trade Gold with a longer term perspective may want to monitor Gold prices against the rate of real interest rates.

How do Market Makers make money?

For those who don’t already know a Market Maker is a CFD brokership model where the brokerage takes the positions of those trading with them onto there own books, not necessarily placing a trade in the physical market for that particular instrument. It is often asked how a brokerage can make money from such a business model especially if they have a number of successful customers on their books. However a Market Maker has a number of different ways in which they can alleviate and control their internal risk. 

Firstly, a lot of the time a broker can offset different client positions against one another meaning that they profit the spread as commission. 

Client # Instrument Buy/Sell Lot Size
1 EUR/USD Buy 1 Lot
2 EUR/USD Sell 1 Lot

Suppose that there are two different clients who both simultaneously open positions in the EUR/USD. One Buys a Lot while the other sells a Lot, meaning that until one of the traders closes their position the brokerage is not exposed to any risk. As any profit made by Client #1 will be offset by the same loss in Client #2’s account, this remains true until the 2nd Client closes his position leaving the brokerage exposed to any continuing profits that the first client’s position makes. This may not be a major problem as by now a third client may have opened a position selling the EUR/USD therefore again covering the brokerage from any risk. 

The problem for Market Makers comes when there is a huge number taking on positions in one direction. But again there are still ways in which a Market Maker can deal with such risk, as explained in the following example.  

Client # Instrument Buy/Sell Lot Size
1 EUR/USD Buy 2 Lots
2 EUR/USD Buy 2 Lots
3 EUR/USD Buy 2 Lots
4 EUR/USD Buy 1 Lot
5 EUR/USD Sell 1 Lot

In the above example you can see that clients have opened 7 Buy Lots, while one other client has opened one Sell Lot. This means that the Market Maker is exposed to 6 Lots of risk, which presents them with a significant risk. Supposing these positions look like there going to be profitable due to some or other breaking news, the broker could either take the losses providing they had the required funds. Alternatively the brokerage could open positions in the underlying physical instrument to mirror that of its clients reducing its risk to zero, while there would be some costs in this by going into the markets with a physical brokerage the broker would get a much a lower spread than the broker offers to it’s clients. This allows them to make some limited profits. This is also the reason that brokerages widen their spreads during high volatility periods, the bigger the spread the more profit that can be potentially made. 

There are other more complicated ways that Market Makers can do to manage their risk. Due to the fact that they can see the Open Profit & Loss balances, they can offset profits being made by some traders against the losses being made by others. Normally this isn’t particularly problematic due to the fact that it is estimated that around 80-85% of retail Forex traders lose money. Meaning that a lot of the time the Market Maker doesn’t really need to be to concerned about risk management, often only having to take an active interest in risk management when large positions are taken out in one particular direction. Meaning that being a Market Maker can be a very profitable.

Spread Betting and Leverage

Spread Betting allows you to be involved in financial trading with a much smaller outlay than with other forms of financial trading including traditional share trading. This is because financial spread bets are a leveraged instrument. Financial Spread betters don’t buy the underlying asset they are speculating on, instead they speculate on the movement of the asset price. The movements in price positive or negative in percentage terms can be considerably larger than that of the initial stake. Spread bets are meant to be the instrument that provide traders with the most bang for their buck, with leverage allowing individuals to make a big profits or losses with only a modest initial outlay. 

Anyone who is currently speculating with spread betting is most probably quite significantly leveraged. Leverage involves either using borrowed money or using derivative instruments such as CFD’s or financial spread bets. These means that many Spread betting transactions require only a modest outlay in order to gain exposure to a much larger sum. A Spread bet that gave you £10,000 worth of exposure but only required an initial margin of £1,000 would make you levered 1:10. The extra £9,000 is being effectively lent to you by the Spread betting company and this is typically why you are charged on an overnight ‘rolling’ charge to keep the position open into the next day of trading. This interest is typically charged in accordance with some base rate, most typically the LIBOR. 

Your are still exposed to £10,000 worth of risk. However if the price of the instrument moves in your favor you will never need to deposit the additional £9,000. However, if things happen to move against you’ll have to provide the additional funds as needed or close the position. This is called a margin call. Making leverage a double edge sword helping you when things go in your favor and hurting you when they go against you. Using Spread Bets or CFD’s you will have at least 10 times exposure to price movements (some regulated CFD brokerages leverage up to 1:888).  Assuming ten times leverage and a buy order, if the price rises 10% the trader would have doubled his original capital, however if the price had fallen by 10% he would have wiped out and received a margin call. 

Imagine a situation where you had £500 deposited in your Spread betting account. And you were about to put down a £5 per point bet on a company whose shares where valued at 100p a share, if you were levered 1:10 then a 10% fall in that particular companies share price would wipe your account out. This demonstrates the importance of using leverage carefully, if you had only £500 in you account it would be much better to have only placed a £1 bet which would have only lost you £100 if the companies share price had fallen by 10%.  

The ultimate cost of higher leverage is higher potential losses, but it does come with the possibility of higher returns which is one reason so many people are attracted to trading leveraged financial products. Traditional investors who undertakes margin Share trading can expect to make huge profits during bull periods as the leverage would massively multiply his profits, but in bad years he would either have to accept huge losses or escape the markets. However the spread bettor has the option to trade both bull and bear periods due to the fact it’s easy to trade both long and short. While a margin stocks trader does have the option to short sell it is generally more costly as it involves borrowing stock often at quite a high rate of interest. 

Leverage can quickly wipe out your deposits, and this is why you should probably lean on the side of caution when its comes to how much leverage you expose yourself too. If you have only a £1000 in your account you probably want to limit the size of your spread bets to a couple of pounds. There are a number of different tools which can help you deal with the looming specter of highly levered losses. Both stop losses and guaranteed losses can help you set limits to your losses. But leveraged trading doesn’t necessarily need to be more risky if traders take the required precautionary measures. Leverage means that with a small additional deposit huge profits can be made for example, it may be possible to make a £1,000 profit from only having deposited £500 provided you have the required leverage and the position goes in your favor. Because of this there have been rare cases where people have been able to grow a £1,000 deposit into a million within the space of a couple of months. 

Leverage and risk shouldn’t be too much of a problem, as long as you keep the bets small as a total percentage of your capital. Implementing guaranteed stops and stop losses will also help you control the risks associated with high degrees of leverage. The real problem many will have with leverage is psychological there is always the temptation to ramp up the leverage in the hopes of making your losses back which can put your account on a real tilt and lead to even greater losses. Which is why setting trading limits is a very important aspect of trading and is something that everyone should do. 

A Brief History of Binary Options

Over the last few years Binary Options have risen to prominence online and are often marketed as the latest and greatest way to trade the financial markets. A Binary Option is a type of option where the buyer receives a fixed payoff or nothing at all. Binary Options are known by a number of different names including all-or-nothing options and digital options. There is some confusion among the public around Binary Options this is due to the fact that there exists both exchange traded binary options and non-exchange traded Binary Options.  

Binary Options have been available over-the-counter (sold directly to the buyer) for a number of years now. However these were general seen as an exotic instrument due to the fact there was no market for trading these over the counter options, between the dates they were issued and expired. These Binary Options were generally embedded in more complicated option contracts and were normally only purchased by extremely sophisticated buyers. An interesting development began in mid 2008 with a number of companies beginning to offer Binary Options online to prospective clients. The binary options offered by these companies were essentially a dumbed down version of exchange traded binary options. By January 2012 it was estimated that 90 of these platforms existed including white label platforms. The proliferation of these sites is unsurprising due to the fact the odds are stacked significantly in the houses favor. The instrument also differs from other financial derivatives (such as CFD’s) in the fact that a binary options provider cannot profit unless his customers on the whole make a loss.  

These kinds of options have rightly been criticized by many including Gordon Pape who wrote a very damming article in Forbes magazine. I myself have personally criticized Binary Options a number of times aiming to show that Binary Options offer a raw deal to those who trade them. In one of my investigations into Binary options using Monte Carlo simulations I showed that in order to be profitable at trading Options which offered a 70% rate of return you would have to predict an instruments movement correctly over 60% of the time. While I’m sure there are a few unique and talented individuals who could do predict the movement of financial instruments with such accuracy, they would still be better off trading other financial derivatives such as Financial Spread bets or Contracts for difference.

Another problem with these dumbed down options is that for much of their existence they have been completely unregulated. Initially a number of financial regulators including Cysec of Cyprus came out to say that Binary Options were not covered under their remit due to the fact that they were not properly financial instruments. It was widely thought that Binary Options as offered by these providers would become regulated as a form of gambling, in fact a number of providers most notably OneTwoTrade went down the route of becoming regulated by gambling authority. However, in 2012 Cysec made the decision to regulate Binary Options as financial instruments becoming the first MiFID regulatory authority to do so. However, I believe that they will later rue this decision, as it will weaken their reputation as prudent financial regulator. I’m not against Binary Options but what I do resent is them being represented as a financial product when they are really a form of fixed odds betting. Though I would go on to say that if you want to make bets on financials their are better alternatives including a number of bookmakers and if you reside in the UK in the form financial spread bets. 

Real money can be made from Binary Options, not the dumbed down pseudo Binary Options offered on these platforms but in real exchange traded Binary Options where there are significant arbitrage opportunities to be had due to Options miss pricing. I suggest that those who are interested in trading the financial markets look into other instruments including Contracts for Difference, Margin Trading and if your jurisdiction allows it financial spread betting.  

Understanding the Difference between a Direct Market Access Brokers and Market Makers

Contracts for difference are the most popular over-the-counter financial derivative and a vast number of brokerages have been set up to provide CFD’s. Contract for difference providers operate under two very different models which have implications on the cost of trading.  

Market Makers
The most popular method for providing CFD’s is by taking the role of a Market Maker (sometimes shortened to MM), this is the way that majority of both regulated and unregulated brokerages operate. What does it mean to be a Market Maker? A Market Maker makes the price for CFD based on the underlying asset value and takes all orders onto its own book. These positions are then hedged based on the brokers using their own risk models. How the brokerage hedges these positions differs hugely between brokerages, the most simple way being to buy or sell the underlying asset. But more complicated ways of managing risk include things such a portfolio hedges and the offsetting of different clients who are trading the same instrument, short and long. This doesn’t effect the CFD itself as no matter what the Brokerage does with its own internal risk, a CFD is a contract between a trader and the brokerage. It can however effect the quoted spreads on offer as a Market Maker may have to take into account the positions of other traders. Brokerages who are Marker Makers generally tend to offer wider spreads as this is one simple way to minimize internal risk. 

Direct Market Access 
The Direct Market access model was created in response to concerns about the Market Maker model of CFD provision. A Direct Market Access brokerage provides a guarantee to its clients that it will undertake a physical trade which matches each CFD trade. For example, if a trader open a 500 Share Buy order on BP, the CFD provider goes into the physical market a buys 500 Shares of BP itself. The trader doesn’t take on share ownership with the Contract still being between the trader and the CFD provider. This guarantees the price the trader receives is the same as the price quoted in the physical market and ensuring that they won’t be requoted. Being a Direct Market Access provider is easy from a risk management point of view with the provider making a profit as long as their spreads are wider than the spreads offered in the physical market. These DMA providers often also charge a commission to cover their transaction costs. The Direct Market Access model does have a number of drawbacks as it only works for instruments where one can easily sell or buy the underlying instrument in the quantities needed. For this reason the DMA access model is used primarily for Share CFD’s. The DMA model is much closer the traditional broker model and for this reason is preferred by many professional and institutional traders.

How Do CFD’s Work?


CFD is short hand for Contract for Difference. A Contract for Difference is a type of financial derivative which allows one to trade a wide range of financial instruments without actually owning the underlying asset. A CFD is classed as a derivative as the price of the instrument is derived from the price of the underlying instrument. CFD’s have become the most popular over-the-counter financial derivative, though CFD’s are off limits to Americans due to certain CTFC and NFA regulations. CFD’s were first developed in the early 1990’s and became quickly popular with hedge funds who were able to cheaply hedge their positions, due to the low margin requirements associated with Contract’s for Difference. It wasn’t until the late 1990’s that CFD’s were first heavily promoted to retail clients. Since then the Contract for Difference has become that the number one way to for individuals to trade the financial markets with a huge proliferation of brokerages fighting for a piece of the pie. 
How Does a CFD Work
A Contract for Difference is an open ended contract between two parties based on the underlying price of a particular asset or instrument. The contract stipulates that the seller (typically a brokerage such as eToro or will pay the buyer the difference between the current asset price and the asset price as stipulated in the original contract. However, if the difference between these two values is negative then it is the buyer (typically an individual trader) who has to pay the seller. This may sound terribly complicated but it can be explain better with reference to a number of examples. 
Instrument Price at Opening of Contract Bid (Sell) – Offer (Buy) Spread Number of Contracts (Buy/Sell) Price at Close of Contract Profit/(Loss)
Struggling Supermarket Plc. 11p 10p-12p 100 (Buy) 24p £12
Struggling Supermarket Plc. 11p 10p-12p 100 (Sell) 24p -£14
In the first example our trader, let’s call him Loaded Larry decides that the share price of Struggling Supermarket Plc, is going to rise so Buys a 100 Shares (strictly speaking Contracts, as no physical exchange of asset takes place). In order for Loaded Larry to make a profit the share price must rise above 12p, with 12p being his breakeven point. As you can see when Loaded Larry did eventually decided to close his position Struggling Supermarket’s share price had risen to 24p. Netting Loaded Larry a handsome profit of £12 (0.24-0.12 x 100=£12) the profit being difference between the offer and the close price multiplied by the number of contracts (or shares) traded. 
Our second trader, let’s call him Hapless harry decides instead to sell shares in Struggling Supermarket Plc at the same time as Loaded Larry decides to buy. For Hapless Harry to make a profit the share price must drop below 10p, had the share price dropped to 10p he would have broken even.  However the share price rose to 24p meaning that Harry made a loss of £14 (0.24-0.10×100=14) the difference between the bid price and the closing price when Harry decided to cut his losses multiplied by the number of contracts traded.  

Margin Requirements and Leverage 
In the above examples some who wanted to undertake those particular trades using a traditional stock broker would have at least needed £12 in capital undertake the trade. In fact you may struggle to find a stock broker who would undertake a short sale for a small retail customer, due to the complexity of a physical short sale. However CFD brokerages typically have very low margin requirements which can be as low as say 0.5%. Say the particular brokerage in the above example has a margin requirement of 10%, this would mean that Loaded Larry would only need to have £1.20 of capital in order to open this particular position, giving Larry a leverage ratio 1:10, this means that if he had £1,000 deposited in his account he could trade a volume of instruments typically worth £10,000. Leverage such as this both increases rewards as well as elevating risk, for example Loaded could have theoretically made a profit ten times greater than the amount of money in his account. Whereas Hapless Harry could have theoretically made a loss over ten times as great as the money he had in his account. If a trader racks up a loss bigger than the available capital in their account they will be on the receiving of a margin call where they will be forced to either close the position or deposit more funds into the account in order to keep the position open. It is in this way that a CFD trader can lose more money than he initially deposited.  

Overnight Payments & Costs 
While a Contract for difference is essentially an open ended contract there are certain financing costs that need to be taken into account when holding positions open for longer than one trading day. When holding a long position (a buy position) overnight, you will be charged an overnight fee this is typically calculated using a benchmark rate such as the London Overnight Interbank Rate and the broker margin per cent. These overnight fees can really eat into your profits and are something that CFD traders need to be aware of. However it is not all bad news as often when you hold a short position (a sell position) you will be receive an overnight payment again often calculated in the same way as the overnight fee. However not all brokers work this way with some brokerages charging overnight financing costs regardless of whether your position is short or long.  

Occurs in one of three ways, either it is calculated into the spread on offer which is the most transparent way of operating as the client can always see what the costs of opening a trade our. Secondly, it can be charged at a flat rate of say £7 per trade or position opened, this is often the case with brokers who offer direct market access. Finally, commission can be taken as a percentage when closing a trade typically around 0.1% of the total value of the closed position. Again commission is something that traders need to keep an eye and take notice of, as a flat rate of commission will really eat into the profits of anyone who is opening relatively small size trades. How a broker charges your commission may ultimately be a deciding factor in deciding which brokerage to pick, for example someone who is undertaking very big trades they may prefer to pay a flat commission rate than pay 0.1% commission on these trades. With brokerages who calculate commission into spreads you generally end up paying by being offered wider spreads than elsewhere. 

What is MiFID? The Guide to Understanding MiFID

MiFID stands for The Markets in Financial Instruments Directive. MiFID is a European Union law first implemented in 2007 with the goal of harmonizing regulation for investment services across the 30 member states of the European Economic Area (the 27 European Union members and Iceland, Norway and Lichtenstein). It was hoped that the legislation would increase competition as well as increasing consumer protection, replacing the previous Investment Services Directive. 
The Markets in Financial Instruments Directive maintained the principles of the EU Investment passport introduced by the Investment Services Directive. But increased emphasis on home state regulation, this so called ‘MiFID’ passport is for example what allows Cysec regulated brokers to operate throughout the European Economic Area. MiFID aimed at maximum harmonization in an attempt to ensure that individual states did not ‘gold plate’ EU financial regulations at the cost of the fair playing field. Though it should be noted that different regulatory regimes within MiFID do offer different levels of protection.   
The MiFID regulations have a very wide scope including all ‘investment services and activities’. If a firm is deemed to provide investment services and activities, it is subject to the MiFID regulations for these services and any ancillary services they provide. However if a firm provides only ancillary services they do not need to be regulated under MiFID. Firms covered by MiFID will be regulated in the home state which tends to be whatever country they have their offices registered too. Once a firm has gained MiFID authorization it will be able to offer services to individuals in other EU states, while being regulated in their home state.  
The Future of MiFID? 
Consultations into future financial regulations building on MiFID began in 2010 with a day of open hearing in Paris. Later in that year following a public hearing in September, the European Commission released a public consultation relating to the review of MiFID (often referred to as MiFID II). This consultation was released alongside a press release and FAQ, which can be found here. In October 2011, the EU Commission adopted formal proposals for a directive which would repeal the original MiFID II regulation and for new regulation which would also amend EMIR. EMIR is currently the piece of regulation responsible for the regulation of OTC derivatives (i.e CFD’s), central counter-parties and trade repositories.   
During March 2012, Markus Feber MEP suggested a number of amendments to the Commission’s proposals to further regulate high-frequency trading and commodity price manipulation. However these proposals have cause a number of concerns within the financial community and new regulation may still be awhile away.

Understanding the Stochastic Oscillator

Widely promoted by Dr. George Lane in the 1950’s the Stochastic Oscillator is a momentum indicator which uses both support and resistance levels. Stochastic refers to the current price in relation to the price range of the instrument over time. The idea behind the method that one can predict turning points by comparing the close price of the instrument in question to the value of the Stochastic Oscillator. 

The Stochastic Oscillator measures the last close relative to the high and low range over a certain period of time. Interpreting the Stochastic Oscillator is a relatively easy task even if calculating it is not so simple. The Stochastic Indicator measures the last close relative to the high-low range of a certain period of time giving us a numerical number which is often displayed on a graph below the instrument; a reading of above 50 means that the instrument is in the upper half of its set historical range while a reading below 50 means that instrument is trading in the lower half of the historical range the trader has chosen. Readings above 80 show that the instrument is near its high in the given time period while readings below 20 show that the instrument is near to lowest close. 

The Stochastic Oscillator often comes in three different varieties; fast, slow and full. With the Fast version being the closest to Dr. George Lane’s original formula for calculating the stochastic oscillator. When using the three different varieties you will notice some minor differences between the graphical depiction of the indicator with the fast line appearing more choppy than the others. 

Using Stochastic Oscillator as Overbought and Oversold Indicator 
Being a bound indicator, the Stochastic Oscillator can be used easily to identify overbought and oversold levels. The Oscillator ranges from 0 to 100 regardless of any sharp declines or increases in price, making it a simply to use when determining whether an instrument is oversold or overbought. Traditional settings use 80 as the overbought threshold and 20 as the oversold threshold, however these levels can be adjusted to suit the particular instrument you are trading. In regard to the traditional use, readings above 80 for a 15 day Stochastic Oscillator would indicate that the underlying instrument was trading towards the top of its 15 day high. Conversely readings below 20 suggest that the instrument is trading towards its 15 day low point. 

However it is important to note that overbought and oversold are not necessarily bearish or bullish. For example instruments can become overbought and stay overbought during a strong upward trend. If you notice a trend of closes that keep the oscillator towards its upper bounds, it is a good sign of sustained buying pressure. Therefore it’s important to identify the bigger trend and then trade in the direction of the trend. 

Bull & Bear Divergences 
A divergence forms when a new high or low price is not confirmed by the Stochastic Oscillator. Bullish divergences occur when a price drops lower but the Stochastic Oscillator forms a higher low. This is meant to show less downside momentum and is meant to foreshadow a price reversal. Bearish divergences occur when the price records a new high but the Stochastic Oscillator records lower highs, this suggests less upside momentum and is meant to foreshadow a dip in price. In traditional analysis a bullish divergence is confirmed with Stochastic Oscillator break above 50 and bearish divergence is confirmed when the Stochastic Oscillators drops below 50. All this is very difficult to explain and is best illustrated through the use of charts.  

When using the Stochastic Oscillator 50 is a very important level to watch. As 50 is the center line between the two extremes, therefore a crossover is something to look for as it shows that price either trading in the upper half of the range or it is trading in the lower half and can signal movement one way or the other.  

Oscillators are best suited for determining trading ranges, though they can also be used with securities that trend. The Stochastic Oscillator is great for determining opportunities in line with the underlying trend. The exact setting to use on a Stochastic Oscillator is really down to what your personal preferences are and what instrument you are trading. A shorter look back indicator will produce a more choppy oscillator with more overbought and oversold readings. As with many technical indicators its important to use it conjunction with other technical indicators to either confirm or deny the trends.