Forex Questions and Answers With Ed Ponsi
The mailbag is full, and as usual we've received many great questions from our readers. I'd like to thank everyone who participated, and invite all of you to send in your questions. Let's get right to it…
Q) Ed, thank you for the newsletter. You have been very bullish on the Canadian Dollar, congratulations. I keep reading that it is hitting new highs. So why is it that when I look at the chart of the Canadian Dollar, it is going down down down?
Ed Ponsi) Thank you, it's nice to see that someone is paying attention! Just kidding, in fact quite a few of you mentioned this in your emails, thank you one and all and congratulations to all of you who have been long the ‘Loonie'. When you look at a chart of the Canadian dollar, you are not looking at a chart of that currency alone, because there are two currencies on every Forex chart. It is understood that if someone says they are looking at a chart of a single currency, they are looking at that currency vs. the U.S. Dollar. So, when you hear someone say they are trading the Euro, it's understood that they are trading Euro vs. the U.S. Dollar, and if someone tells you they are trading the Canadian Dollar, it is assumed that he or she is trading the Canadian Dollar vs. the U.S. Dollar.
Here's why the USD/CAD chart is trending downward instead of upward: the chart of every currency pair tracks the first member of the pair. So, since the first member of the USD/CAD pair is USD, the USD/CAD daily chart is indicating that the USD is falling vs. CAD (see figure 1).
Figure 1: USD/CAD daily chart indicates that USD is falling vs. CAD. Source. Saxo Bank
Conversely, the Canadian Dollar is the first member of the Canadian Dollar / Japanese Yen (CAD/JPY) pair. So, the direction of the CAD/JPY chart indicates that the Canadian Dollar is strengthening vs. the Japanese Yen (see figure 2). So, even though the two charts are moving in opposite directions, they both indicate strength in the Canadian currency. As we can see from the charts, the Loonie continues to run roughshod over the competition. For more on the Canadian Dollar and the reasons behind its continuing rally, please check out my article from May 22, titled Blast From The Past.
Figure 2: CAD/JPY daily chart indicates that CAD is strengthening vs. JPY. Source. Saxo Bank
Q) In your last newsletter you stated that the forex market is very liquid, allowing the trader to implement strategies for entries and exits and walk away. What are some of the drawbacks of a liquid market, and to what extent can a trader leave a strategy in place without being actively involved?
Ed Ponsi) Thank you for your question. The Forex market does have tremendous liquidity, and is much larger than any stock market. This allows traders to enter and exit with relative ease, and creates "price certainty" – meaning that the market will not gap past my stop, and that I'll never get a partial fill. The disadvantage of highly liquid markets is that they tend to move more slowly than illiquid markets. In reality, exchange rates do change very slowly, but currency traders compensate for this by using the tremendous buying power afforded to them by Forex brokers and market makers.
For example, the daily Average True Range (ATR) of the EUR/USD currency pair is currently 66 pips per day based on the past 14 days of activity (the commonly used default setting of the ATR indicator is 14 periods). A move of 100 pips in the EUR/USD pair is equal to approximately one penny, so we could say that EUR/USD moves less than one penny per day on average (see figure 3).
Figure 3: EUR/USD shows a current average daily range of 66 pips. Source: Saxo Bank
By using the available leverage, we can turn a move of one EUR/USD pip – worth approximately 1/100th of a penny – into a gain (or loss) of $10. This allows Forex traders to profit from even the tiniest change in exchange rates, and also allows traders who have limited capital to participate in the Forex market.
Longer-term Forex traders do not have to constantly monitor their trades, because they have reliable stops and exit points. This makes Forex less "labor intensive" than other forms of trading.
Q) Dear Ed, I am going to start Forex trading very soon on a full time basis. I love it, studied a lot with a bit of live practice, have a trading plan, spent a lot of time on the mindset & money management. I think I am as ready as someone who is getting married (that's how I feel about it and I hope it works).
My main issue now is, how many currency pairs can one possibly monitor at a time? I am monitoring 5 at present, waiting for a scenario / setup, but it feels a bit too much. Any thoughts would be most appreciated. I read your articles regularly, well written and easy to understand.
Ed Ponsi) Wow, thanks for that great question – I can tell you are taking this very seriously, and that is a prerequisite for success in my opinion. I'm going to divide this into two parts – how many currency pairs to monitor at one time, and how many to trade at one time.
How many currency pairs a person can monitor really depends on which time frame you are using to select your trades. The shorter the time frame, the more difficult it becomes to monitor numerous pairs. This is because the shorter time frame charts change quickly, while the longer ones change more slowly. I tend to use longer time frames than most traders, and I can tell you that it has made my life easier – for instance, imagine that you're trading USD/CAD and using the daily chart as your guide. When a pair is in a wicked downtrend like USD/CAD is right now, you don't have to constantly worry about changes in the trend – although there may be a rally within the trend, you can be reasonably assured that the trend will continue for some time. Eventually it will end, but for as long as the trend is in effect, I won't trade against it.
Since everybody has different limitations, there is no "correct" number of pairs to monitor but if you feel that five is too many, then you're right – try monitoring three at a time. If you feel comfortable after doing this for a week, try using four currency pairs. If at any point you feel that four is too many, go back to three pairs. You'll find your "comfort zone" soon enough!
I don't like to trade more than three currency pairs at a time; I find that when trading more than this, it's difficult not only to give the proper attention to each trade, but also to keep the pairs non-correlated. This is important because if the pairs are too closely correlated (meaning that they move in the same direction at the same time), the risk is magnified. Our job first and foremost is to manage risk, with making money coming in second place. If we manage risk well, making money will usually follow. Since you are paying a great deal of attention to risk already, as you mentioned in your email, I want to congratulate you. Please keep up the good work!
One final thought – try not to get frustrated if you are not getting a lot of entry opportunities. I've found that it runs in cycles; too few opportunities, followed by more opportunities than I can possibly trade. That's just the nature of trading. The important thing is not to get frustrated and then chase after inferior opportunities out of a desire to "do something". Sometimes, the best trade is to do nothing at all.
Have a question about Forex trading? Send an email to eponsi@tradingacademy.com and we may use your question in an upcoming newsletter. Until next time, best of luck to you in trading. |
Ed Ponsi is a globally recognized name as a lecturer and teacher and is the former Chief Trading Instructor for Forex Capital Markets. An experienced professional trader and money manager, Ed has advised hedge funds, institutional traders, and individuals of all levels of skill and experience. He is a regular contributor to TradingMarkets.com, SFO Magazine and FX Street, and is currently writing his first book for Wiley Finance.