More Forex Q&A With Ed Ponsi
Greetings from New York! Continuing with our recent theme, this week we're going to focus on your questions. Please keep them coming! Let's get started.
Q) Sir, your articles have been a source of education for me, they have corrected several of my initial errors and I now have clear perspective about what a trend is in a more scientific sense. I have a broad question about the best way to trade Technical Analysis with the help of Fundamental Analysis as against the usual warning that one should exit market during important economic events and/or news. Thank you.
Ed Ponsi) Thank you for your question, and for your words of kindness. Yes, it's true that traders should avoid placing trades just prior to major economic news and events, but the aftermath of a news release is another story. While investors cheer bull markets and live in fear of the bear, many Forex traders thrive on the chaotic conditions that arise from these economic events. Traders are like surfers, constantly in search of the next big wave. The only thing that can spoil our day is when the ocean – in this case, the market – is totally flat. Needless to say, events that can cause a tsunami–like reaction, such as the U.S. employment report or an interest rate decision, are off limits.
I always encourage traders to think of technical and fundamental analysis as different sides of the same coin; while these two forms of analysis are often miles apart in the world of stock trading, they are joined at the hip in the world of Forex. For example, last year's rally in commodities prices drove oil and gold prices higher, a fundamental event. This helped to create a technical event, the continuing downtrend in the U.S. Dollar – Canadian Dollar (USD/CAD) currency pair (see figure 1).
Figure 1: USD fall vs. CAD coincides with the rally in gold and oil. Source: Saxo Bank
Another good example of a currency pair that is trending due to its underlying fundamental picture is the Euro – U.S. Dollar currency pair (EUR/USD). While the Federal Reserve in the U.S. has made it clear that they are willing to make substantial additional cuts in interest rates, the European Central Bank has not reduced its benchmark rate, holding firm at 4.00% for now. This is because the European economy has held up nicely in comparison to the U.S., and under these circumstances it's not surprising that the Euro has performed well vs. the USD (see figure 2)
Figure 2: The Euro continues to outperform the U.S. Dollar. Source: Saxo Bank
Lastly, we can see that anticipated interest rate cuts are weighing heavily on the British Pound, as the U.K. housing market slows due to credit issues and expected declines in housing values (see figure 3).
Figure 3: GBP/USD falls as the U.K. housing market erodes. Source: Saxo Bank
So, if I can see that a currency pair is in a strong trend, I look for situations where a news event has driven that currency pair's exchange rate 'against the grain'. The market's over-reaction to news events often creates temporary price anomalies that can be used to create superior entry points into ongoing trends. Best of luck to you in the New Year!
Q) Hi Edward, I am currently trading Forex beginning trader; I trade with software called (names two brands of signal trading software – E.P.). Can you give me your opinions for these software and suggest the software should I use for Forex trading.
Ed Ponsi) Thank you for your question. I'm getting many questions similar to this one - I realize that many people were unaware of the Forex market until they saw infomercials that depict Forex traders using signal software that flashes red and green arrows. The only software worth using to place trades is the grey matter between our ears! I want everyone out there to know that there is no commercially available signal software that can outperform a well trained, disciplined trader. Here's the reason why – those "black box" systems do not adjust well to changing market conditions, they tend to perform well in one type of market (either trending or range bound) and then fall to pieces when market conditions change. These signal systems also have no ability to interpret comments from central bank officials, are not able to account for news or economic indicators, and have no "feel" for the market, something that individual traders can develop with years of experience.
We'd all like to believe that trading could be as simple as reading green and red lights, and the companies that create these systems exploit the public's desire for a way to make easy money. I'd like to tell you that it's all that simple, but the truth is, if you really want to succeed at trading forex or anything else, you're going to have to get in there and learn technical analysis, fundamental analysis, and especially risk management. The good news is all of these skills are learnable, and thousands of successful traders use them every day. Good luck!
Unbelievable! That's the only word to describe the January 9th free Forex seminar and book-signing event at the Online Trading Academy New York office! Thanks to everyone who came out and made it a special night, and special thanks to the great crew at Online Trading Academy New York for making this event a huge success! The next big event will be at the brand new Online Trading Academy Washington D.C. office – we have a tentative date for a free seminar and book signing on Feb. 29. Check back soon for more details, and I'll see you in Washington!
Q) Hi Ed my name is Victor, I trade stocks but I find your articles very informative and believe that if one learns how to trade charts one can trade any market. My question how do you approach the market from a top down approach? Keep up the good work.
Ed Ponsi) Thanks for your question Victor. I'm one of the many stock traders who made the switch from stocks to Forex, and although I still trade stocks on a limited basis, the currency market suits my style of trading best. When stock traders refer to a top-down approach, they mean that first they view the overall economy, and then look to the strength or weakness of the market they are trading. Then, if the market is strong, they look for a strong sector within that market and finally search for a strong stock within that sector. If the market is weak, they seek a weak stock from a weak sector to trade. Economy first, then market, then sector, and then stock.
Since there are far fewer currencies in the world than there are stocks, the sector approach is somewhat limited for Forex traders. After all, each economy has just one currency; in fact, there are over a dozen European countries that use a single currency, the Euro, with more countries scheduled to join. Because of this, it is difficult to break currencies down into sectors, but there are exceptions. For example, the Canadian Dollar and the Australian Dollar both fall into the category of "commodity currencies" – currencies that tend to benefit from strength in commodities such as gold and oil. These two currencies have outperformed most of the pack during the big rally in metals and energy prices that we've seen over the past few years. However, most currencies do not fall into such areas of easy categorization, making it difficult to assemble them into sectors. Thanks!
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.
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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. Ed has appeared on CNBC, CNN International and TheStreet.com, and has recently written his first book for Wiley Finance, "Forex Patterns and Probabilities" (which you can purchase through 