The Ultimate Indicator (Book Excerpt)

In Chapter 10 of his book, Forex Patterns and Probabilities: Trading Strategies for Trending and Range-bound Markets, forex specialist Ed Ponsi introduces what he calls "The Ultimate Indicator." Given the hundreds of technical indicators available to traders, which one is the "ultimate"? Ponsi's answer might surprise you. Ponsi is a professional trader and money manager who is the president of FXeducator.com. He has been the advisor to hedge funds, institutional investors and individual traders alike.

People often ask: what is the best indicator to use in forex trading? Is it the relative strength index (RSI), or exponential moving averages (EMAs), or perhaps Bollinger bands? Or is it something more esoteric? New indicators are being created every day, as market technicians attempt to leave their mark on the trading world. What is the ultimate forex indicator?

CLICK HERE TO READ THE ARTICLE

Not Exactly Margaritaville

Warren Buffet, the world's wealthiest person, is on the road searching for new acquisitions for Berkshire Hathaway. The twist is that he is searching in Europe, so that he can increase his company's exposure to the strong Euro and avoid investing in companies whose value is measured in the weak U.S. Dollar. Berkshire Hathaway has $35 billion in cash, and Buffet wants to put the money to work where he will get the biggest bang for his buck, so to speak. Ironically, he's decided that those dollars will go farther if they're invested in companies that don't earn dollars at all, but Euros instead. Buffet has shorted the greenback at various times for most of this decade, and made his first non-U.S. acquisition in 2006 when he purchased Iscar Metalworking Co., a tool manufacturer based in Israel.

Buffet is not shy when it comes to predicting further U.S. Dollar weakness. "The U.S. is going to continue to follow policies that make the dollar weaker,'' he said at Berkshire's recent annual meeting, which has become something of a financial Woodstock. This year's meeting was attended by an amazing 31,000 shareholders and Buffet fans. Usually when you hear about 31,000 people packing an arena to see a man named Buffet, his first name is Jimmy.

Just Kiss Already!

Two weeks ago, I wrote about how the proposed Microsoft – Yahoo merger wasn’t really dead, and how Microsoft would eventually come back to the table after stomping away from the negotiations like a spurned suitor. With Carl “the Matchmaker” Icahn pushing to get these two back together, now we hear a report from the Associated Press that "Microsoft Corp. says it is talking to Yahoo Inc. about a transaction that won't involve a full buyout." MSFT says it’s no longer trying to acquire YHOO, but that it "reserves the right to reconsider that alternative depending on future developments and discussions that may take place with Yahoo! or discussions with shareholders of Yahoo! or Microsoft or with other third parties."

Yeah, right! Mr. Softie is trying to snuggle up to Yahoo again, but I guess he’s a little bit shy after getting shot down in flames a few weeks ago. Rather than risk another humiliating public display of affection, Microsoft is now trying reverse psychology to win the heart of Yahoo. “Remember two weeks ago when I said I loved you? Well, I don’t really love you; now I just want to be friends. But I reserve the right to declare my love for you again in the future.”

This is pathetic. Microsoft, we all know that you’re in love with Yahoo. Just kiss already and get it over with!

Is Gold Losing It's Glitter?

Here's a great question from a reader...

Q) Hi Ed, I read you in the Singapore newspaper today and have interest in the things you wrote. You said in today's paper that we should not hold USD but hold things that are valued in U.S. Dollars. I also listened to the CNBC interview in April, about gold possibly dropping to $800 per ounce. I am new to gold investments and am curious and want to learn why you said that because the two pieces don't seem to fit together in my mind.



Ed Ponsi) Thank you for your question. I think the recent fall in the price of gold is just a pullback within a larger uptrend; the question in my mind is how far will the pullback run before the uptrend resumes? Gold has been a terrific investment for the past few years, and if Bernanke and the Fed continue to cut interest rates and pump liquidity into the markets, the U.S. Dollar should continue to fall and conversely, gold should continue to rise. On CNBC, I was asked for a shorter term perspective, and I was presented with a chart that reflected that. Gold is still well off of its highs, and could pull back further in the short run. A quick look at the gold daily chart reveals what appears to be a head and shoulders topping formation, a bearish reversal pattern that foreshadows a potential deeper pullback. Gold is also maintaining its position solidly beneath its 20-day exponential moving average, another sign of weakness. There are several potential support levels, with one of them being the technical and psychologically significant level of $800.

I still think a break of the $850 level could result in a pullback to the $800 area, because very little support was created during the quick run higher. The March spike above $1000 proved to be short-lived, leading to profit taking and a pullback, but in the long run, gold and other commodities probably will continue their ascent. Thanks and good luck!

Will the US Dollar Rally Continue?

Pundits everywhere are in an uproar over the recent strength of the U.S. Dollar. Could this be the end of years of USD weakness? Is there finally light at the end of this tunnel? Is the greenback about to make a comeback?

OK, it's time for a reality check. Here is a daily chart depicting the past 12 months of activity in the Euro – U.S. Dollar currency pair. In currency trading, the chart follows the first member of the pair, so you are seeing the Euro climbing relentlessly vs. the U.S. Dollar. No indicators are needed to show the damage heaped upon the buck by its European counterpart over the past year. When we step back and look at the recent activity in this perspective, the pullback is a shallow move indeed.

Is it possible that the USD could continue to strengthen and turn this into a major retracement move? It's possible, but it hasn't happened yet. The next time you see or read about the mighty greenback, take a look at the chart to gain perspective. Sometimes, we have to take what we read and hear with a grain of salt.

The Straits Times Interview Pt 1

On April 25, I was interviewed by the Singapore Straits Times. We had a wide-ranging discussion dealing with topics such as my worst trade ever, my best trade ever, and what's next for the currency markets. The following is an excerpt

His best investment move: short-selling the US dollar

Forex trader is bearish on greenback and suggests holding instruments that will rise when dollar falls, like gold or other currencies

By Lorna Tan Finance Correspondent

Ask professional foreign exchange (forex) trader Ed Ponsi for his view of the United States dollar and his forecast is that it will continue to decline.

In fact, he believes that benchmarked against the greenback, the Singdollar will strengthen to $1.30 from the current $1.35, the yuan will rise to six, while the euro will strengthen to US$1.70 to US$1.75 by the end of the year.

This is why the American is shorting or selling dollars and buying other currencies like the yuan, euro and, in particular, the Hong Kong dollar, as he believes the Hong Kong government will strengthen the HK dollar by re-pegging it against the US dollar within the next one to two years.

Mr Ponsi was in Singapore recently to publicise his latest book, Forex Patterns And Probabilities. In it, he provides strategies and discusses specific mechanics of currency trading such as the best ways to enter, exit and manage trades.

Besides carrying out his own currency trades and trading on behalf of institutional clients, he is the founder and president of educational firm FXEducator.

'Don't hold greenbacks, as the value of the dollar will go down. Instead, hold things that are valued in US dollars that can appreciate when it falls, like gold and other currencies.

'If you think the dollar will continue to fall, which I do, short it. One way of doing so is to buy a contract on the US dollar Index, which means that you are betting that the dollar will fall against a basket of currencies,' said Mr Ponsi.

However, he cautioned that whatever currency bets investors make, they should never risk more than 2 per cent of their wealth on the bet.

Forex was not his first love. He said he became interested in investing because he used to own a food distribution business that allowed him free time in the early afternoon.

'I would get home and turn on the business channel, and I was fascinated by this whole new world. I decided that I wanted to learn everything I could about trading and the markets,' he recalled.

Egged on by his new passion, he sold his business and traded stocks for almost a decade before he discovered the exciting world of forex trading in 2002